Immigration
There are many countries worldwide that have taken in a great deal of immigrants, but it is doubtful that any other country doubled its original population within three years (by 1951) as a result of immigration. The immigrants that came to Israel were not young, educated people with capital or a profession - the kind preferred by most countries. Rather, these were primarily refugees from the Nazi death camps in Europe (most of whom were broken in body and spirit) and, later on, immigrants from the developing countries of Asia and Africa.
By 1997, more than 2.6 million immigrants had come to Israel, with the overwhelming majority arriving during the first two decades of the country's existence. This number is four times the amount of Jews that lived there at the time of the establishment of the state. The absorption of these immigrants necessitated tremendous resources, from shelter (tents in the early years, followed by shacks, caravans and small apartments and then larger ones - all according to the country's economic ability at the time), and education, health and welfare services (including buildings for the provision of these services) to vocational training and the creation of jobs. A very large proportion of the public expenditure was allocated for this task.
Economic Infrastructure
In "ordinary" countries, the economic infrastructure - roads, railroads, ports, airports, water carriers and sewage removal, electricity generation stations and lines for delivering electricity and communication systems - is built over the course of the history of the national economy, at the rate of development of their economies. However, after 400 years of Ottoman rule, the land of Israel was a backward territory. While there was significant improvement in this area during the 30 years of the British mandate, the infrastructure inherited by the State of Israel was minimal. In order to create a modern economy, capable of absorbing millions of immigrants in productive labor, first and foremost in industry, it was necessary to set up a suitable physical infrastructure, starting almost from scratch. In addition, in the absence of accumulated capital - either private, from previous generations, or imported from outside - the public purse had to finance the establishment of economic enterprises. After all, even among those who lived in Israel prior to the establishment of the state, 80% were the first or second generation of immigrant families. Obviously, attaining these objectives called for large amounts of money.
Welfare
This requires a great deal of public resources in all countries. However, in Israel's case, the resources required were even greater. This was not because the needs of immigrants were greater, but also because it became clear by the end of the 60s that it would be necessary to make efforts to rescue from poverty quite a few of the immigrant families that had arrived during the early years of the state. As a result of the lack of funds available when these immigrants arrived in Israel, their physical and social absorption had not always been successful. Thus, the Israeli economy had to allocate resources to deal with a variety of issues in the areas of housing, education, health and social rehabilitation. Again, the cost was high.
The ability to simultaneously meet the four challenges described above constitutes an impressive economic achievement of the Israeli economy, second only to its ultimate achievement of establishing a strong flourishing economy.
The Economic Miracle
This achievement entailed, or at least so it would seem, contravening a law of economic theory (based on the principle of the "scarcity of resources") - allowing the consumption of only as much as is produced - because throughout Israel's existence the economy has used more resources than it produced, despite the rapid growth in its national product. In national accounts terms, this is illustrated by the fact that the value of Israel's imports has constantly been greater than the value of its exports. It was only due to the ability to finance this deficit (the annual difference between imports and exports) that the Israeli economy was able to meet all of the challenges cited above. How did it do this? Basically, it financed this annual deficit through tremendous financial assistance that the country succeeded in raising around the world. The annual trade deficit increased from $220 million in 1949 to about $12.9 billion in 1996 (all in nominal terms). Each year, Israel's Finance Minister would recruit resources to cover this annual deficit. A small portion of this money came in the form of investments by foreigners in businesses in Israel; an even smaller amount came from pensions and other income from abroad of individuals in Israel; a significant amount came from appeals organized by Jewish institutions, and a large part came in the form of loans from individuals (primarily in the framework of Israel Bonds), banks and governments. More than half of the required amount came from grants from friendly governments (first and foremost, the United States). Over the years, this imported capital - to cover the annual deficits in foreign currency - has totaled more than $120 billion (in nominal terms).
Growth of the National Product
Growth - producing more and more - is of great importance to any national economy, as, indeed, it is to every individual and family. This is because the more that is produced, the more resources the country as a whole and individuals have to use to satisfy their varied needs and wants. Since it is people that are behind production, the more people active in a private or national economy, the greater the product. However, more important than the number of people participating (the size of the economy's work force), is the equipment available to them for performing their work. The more sophisticated this equipment, the more can be produced. This equipment can take the form of work tools, fields, animals, machines, or even education. What is common to all these is that they can be purchased with money. Thus, the more capital an individual (or an economy) has, the more and better equipment they will have, and, thus, the greater their product will be. Those who referred to what was happening in the Israeli economy as an "economic miracle" were not amazed by the fact that it successfully met the challenges described above, nor by the ability to raise resources worldwide for this purpose. Most of these economists were not even aware of this. Rather, what amazed them were the statistics that Israel recorded: an unprecedented achievement of rapid growth of the national product over the period of a generation, with an average rate of 10% in the years 1948-1973. There have been economies with higher growth rates, just as there were economies that maintained long periods of growth. But there was no other country that was able to maintain such high growth rates over so long a period.
Thus, we can now appreciate the nature of the "miracle": the rare combination that took place in Israel of rapid growth of the work force, as a result of mass immigration, and a massive influx of capital that the country succeeded in raising. Each wave of immigration, whose initial absorption represented an economic burden on the Israeli economy, turned into a blessing when these immigrants joined the circle of production - thereby contributing towards increasing the national product - in a relatively short period of time, thanks to the capital that could be made available for this purpose The rapid growth that characterized the country's first twenty-five years came to an end with the Yom Kippur War in 1973, due, among other things, to the drop in the rate of growth of the population. The average annual number of immigrants to Israel fell from about 42,000 in the years 1970-1973 to about 22,500 in the remaining years of the decade, and to about 12,500 in the 80s. The growth rate of the national product dropped accordingly, falling to an average of 3.6% in the remaining years of the 70s and 3% in the 80s. Then, the collapse of the Soviet regime led to the opening of the gates of the former USSR for Jews who wished to emigrate and they came to Israel at a rate reminiscent of the early years of the state. Again, proof was provided for the Israeli link between immigration and economic growth, the latter doubling to an average rate of about 6% - the highest rate of growth in the Western world in the first half of the 90s.
Exports
The rapid growth of the national product allowed the Israeli economy to register another important achievement, an increase by a factor of many hundreds in the export of goods and services, from $41 million in 1949 to $31.3 billion in 1996 - reaching the highest per capita exports in the industrial world. Even after allowing for inflation's effect on the American dollar (amounting to a fall of 7.874 times in the years 1948-1995), there is still a 97-fold real increase in Israeli exports over the years of its existence. Furthermore, it is clear that the national product could not have grown as fast as it did, had a large part of the increase in manufacturing not been earmarked for export. The single firm strives to increase its exports in order to expand business and increase profits. But from the point of view of the economy as a whole, the importance of increasing the country's exports lies in the desire to achieve economic "independence" or viability - a situation in which the foreign currency received for exports is sufficient to pay for all the goods and services that are imported. On this front, too, the Israeli economy has recorded significant achievements: While in 1950, income from exports financed only 14% of the country's imports, this figure increased to 51% in 1960, 73% in 1980, and 78% in 1990.
Unemployment
The ills of unemployment are not limited to the economic and morale-related effects on the individual and his family. Unemployment also affects the economy as a whole. Non-involvement in production represents a total waste: the economy can never recover the product lost for every day of unemployment. It is a serious problem that the industrialized nations face, and an even greater problem in countries in the midst of a transition to industrialization. One almost always finds a clear correlation between high rates of unemployment and low rates of economic growth. Obviously, waves of immigration bring with them a certain degree of unemployment - very few immigrants find work immediately after arriving in their new country. Thus, most of the immigrants who came to Israel had to endure periods of unemployment, some longer, some shorter, before finding work.
The situation of relatively rapid growth in periods of massive immigration indicates that most of the immigrants were unemployed for only a short time. Accelerated growth of the national product in itself indicates an increase in the number of people employed. The comparatively quick absorption of tens of thousands of immigrants into the labor force is another noteworthy achievement of the Israeli economy.
The unemployment rate in Israel rose from 7% in 1950 to a high of 11.3% in 1953. This was the only year in the history of Israel that the national product decreased. This is not surprising in light of the fact that in that year immigration to Israel reached an all-time low (11,500 people, less than half of the number of immigrants in 1952 and less than 7% of the number of immigrants in 1951). From this point on, the rate of unemployment dropped continuously, reaching a low of 3.3% in 1964. In the next two years (again correlating with a drop in immigration) the rate of growth of the national product dropped, and unemployment climbed to 10.5% in 1967.
In the following 18 years, unemployment rates ranged from 2.6% to 6% (an enviable level of unemployment relative to most Western countries) and from 6% to 11% in the following decade, after 1985. The highest rates were registered at the beginning of the 90s - a period that saw waves of immigration the likes of which had not been seen since the early 50s. In this case, it took an average of a year for the immigrants (the majority of whom were the most educated and professional in the history of immigration to Israel) to find appropriate employment. The economic support given to these immigrants today, above and beyond the unemployment insurance benefits to which all unemployed citizens are entitled by law (since the end of the 60s), allows them to search for employment relatively unpressured.
In 1997, the level of unemployment was 7.8%(estimate).
Inflation
Like unemployment, rising prices are an obstacle to healthy economic development, since inflation limits the ability of any consumer, producer, investor, debtor, or government to plan economic steps for the near or distant future. As was the case with unemployment, the achievement of the Israeli economy lies in its success in overcoming these and associated difficulties. This was done through the refinement of the tool of linkage. The Israeli economy turned this tool into an art, and used it in an impressive manner unmatched by any other country. At first, workers' wages were linked to the Consumer Price Index (CPI) to ensure that inflation - large or small - would not hurt their purchasing power. Later, banks began linking their customers' savings to the CPI or to foreign currencies (usually the U.S. dollar) so that these customers would not be tempted to spend their money before its value dropped. For the same reason, insurance companies followed the banks' lead and began using linkage. Many with debts to collect, usually those who were selling goods or services on payment plans, also resorted to the linkage system to avoid losing on transactions as a result of the value of future payments dropping when prices rose. Linkage received formal approval when the government began linking its contractual payments to suppliers as well as its receipts from various taxes to the CPI. Even the income tax brackets are updated according to increases in the CPI. Hence, while large and powerful economies worldwide were straining under the havoc caused by annual inflation of 2%-7%, Israelis went about their business almost undisturbed despite inflation rates dozens of times higher than this. For almost forty years, Israelis were completely protected by the linkage mechanism, something that can be seen as an impressive achievement in itself. Indeed, the standard of living (per capita private consumption) rose by an annual average rate of almost 4% during this period.
The Israeli economy has witnessed inflation for all 50 years of its existence. In the early years, when burning problems led the captains of the economy to disregard the need for a monetary policy, inflation was high, reaching 66.4% in 1952. The "new economic policy" introduced in that year brought, among other things, a reduction in the rate of inflation, to a level of 19.1% in 1953. From that point on, for a period of eighteen years until 1970, inflation remained single-digit, with a 2.1% low in 1959 and a 10.2% high in 1962. The annual rate of price rises turned double-digit in the 1971-1979 period, and in the 80s, this became triple-digit inflation, which reached a peak of 445% in 1984, and threatened to reach four digits.
This is where the party ended. It became evident that under this type of hyperinflation, the linkage mechanism could not provide a sufficient solution. Too high a price was being paid, in terms of the national product, on the daily adjustments required to use (and attempts to improve) this mechanism. In addition, the linkage mechanism itself was adding fuel to the fire of inflation, something that had always been true, but with a negligible effect when inflation rates were at lower levels.
In July 1985, when it became clear that there was no other choice, the government decided to adopt an economic stabilization policy, taking extreme steps, some of which are considered "reactionary" in economic thought. Ordinances were issued compelling a total freeze of prices of all goods and services in the economy, including all wages, public budgets, exchange rates and linked prices specified in various agreements. This policy, in fact, was a temporary suspension of the linkage mechanism.
Indeed, in 1986, the inflation rate dropped by more than half (to 185%), and in 1987 it dropped to about a tenth of this rate (19%). In the ten years since then, annual inflation has never surpassed 20%, and there were a few years during this period in which inflation was even single-digit. In 1997, inflation was 7%. The linkage mechanism was reinstated (with stricter monetary supervision by the central bank), and the waves of criticism and doubt expressed by many economists worldwide with regard to the steps taken in the summer of 1985 turned into applause.
The "economic stabilization policy" and the determination shown in implementing the policy won admiration as an extraordinary achievement of the Israeli economy and today they are studied in economic faculties worldwide, as is still the case with the linkage mechanisms.