|
|
|
|
Middle East Review of International Affairs
Israel's Economic Growth: Success Without Security
by Linda Sharaby
*
Abstract
While economic development theorists generally hold that security is a prerequisite for economic growth, Israel's war-torn history has not prevented it from creating a strong, modern, and diversified economy, one which rivals European countries instead of its neighbors in the region. This article considers the factors that allowed for Israel to succeed economically despite its persistently poor security situation. It specifically cites the importance of the location and type of violence Israel has faced, the consistent arrival of highly educated immigrants, the influx of foreign capital driven by political motives, and the development of a robust domestic military-industrial complex.
Since independence in May 1948, Israel has fought six wars, two intifadas, a continuing terrorism threat, an economic boycott, and intermittent diplomatic isolation. It is currently in a formal state of war with two of its neighbors (Syria and Lebanon) and has only a cool peace with the other two (Jordan and Egypt), despite peace treaties. In effect, all of its land borders are relatively closed to trade. More generally, it is an outcast in the Middle East, deprived of any opportunity to benefit from the commerce generated by regional oil wealth but having to bear the costs of living in a neighborhood characterized by arms races and instability.
Nonetheless, Israel has a strong, modern, and diversified economy that in 2000 posted an annual Gross Domestic Product (GDP) of $104.1 billion, 40 percent of which consisted of exports of goods and services. Growth for 2000 reached six percent. 1 Israel's per capita Gross National Income (GNI) for 2000, at almost $17,000, placed the state ahead of Spain, Portugal, Greece, and New Zealand. 2 No longer classified as a "developing country" by the World Bank, 54-year-old Israel now ranks as a high-income economy and was identified as one of the most global emerging markets by Foreign Policy magazine's Globalization Index. 3 Over the past decade, Israel's high-technology industry, second only to California's Silicon Valley in concentration of firms, powered economic growth and attracted massive Foreign Direct Investment (FDI) to the country, a figure that reached $4.4 billion in 2000. 4
Israel today ranks third in the world in the number of university graduates per capita, after the United States and the Netherlands. 5 It possesses the highest per capita number of scientists in the world, with 135 for every 10,000 citizens (compared to 85 per 10,000 in the United States), 6 and publishes the highest number of scientific papers per capita. 7 According to one recent survey, almost 81 percent of Israelis own cell phones, placing it sixth in the world. Another survey found that 54 percent of Israelis own personal computers, in comparison to only 42 percent of U.S. respondents. 8
Measured against the performance of other countries that gained independence after World War II, Israel's economic success has been nothing short of remarkable--and highly unexpected. In creating a modern industrial economy rivaling those of several Western European countries, Israel has defied a host of conventional predictors of sustainable economic development, most conspicuously the premise that security is a necessary, if not sufficient, prerequisite for economic growth. Given its historic lack of security, how has Israel managed to achieve such high levels of economic prosperity? What accounts for Israel's unexpected economic success?
It is essential at the outset to define what "security" means in the Israeli context. Generally, threats to a country's security can be divided into two categories: internal and external. Internal threats refer to issues of law and order, and include demonstrations and street violence connected to political instability and regime illegitimacy. External threats are those posed by foreign armies or militant groups and can range from occasional cross-border raids to full-scale invasions. For this article's purposes, the term "security" will be used expansively to encompass both internal and external threats to Israel's continued existence and well-being. Moreover, in keeping with the multifaceted reality of the Arab-Israeli conflict, this paper will discuss threats to Israel's security on both the military and economic fronts. 9
This article argues that a combination of conventional and unconventional factors, economic and otherwise, allowed Israel to overcome the barriers posed by an enduring lack of security. Foremost among them is the fact that until the advent of Palestinian suicide bombings in 1990s, much of the violence associated with the Arab-Israeli conflict never entered Israel proper (i.e., inside the Green Line dividing Israel from the West Bank and Gaza Strip), so the physical infrastructure of Israel's economy remained largely unharmed.
Second, the lack of security did not deter successive waves of Jewish immigration to the state -- immigration propelled mainly by non-economic forces. Although the task of absorbing so many immigrants drained the country's budget, especially in its early years and then again in the 1990s, the influx of so many people, including highly educated and skilled workers, created an instant domestic market and a rich reservoir of human capital.
Third, partly because of its precarious military position, resource-poor Israel attracted large amounts of foreign capital driven by political, rather than economic, motives. Foreign loans and outright transfers in the form of donations from Jewish communities, reparations from Germany, and military and economic aid from the United States facilitated the country's development as well as its citizens' relatively high living standard.
Last, and perhaps most important, Israel's urgent defense needs gave rise to a domestic military-industrial complex that became an unmatched engine of economic growth, spurring technological advancement and netting significant export income.
Of course, these were not the only factors responsible for Israel's unanticipated economic success. But they are the most salient in the context of the country's economic development in the absence of security. By historical accident, many of these elements are specific to the post-Holocaust emergence of a Jewish state, casting doubt on whether Israel's experience can be replicated by other emerging markets. However, several contributing factors that will not be discussed at length in this paper can potentially be applicable elsewhere, chiefly Israel's adoption of a democratic form of government and its strong base of social capital.
Part I of this article provides a brief overview of the literature linking security and market-building and discusses its relevance to the Israeli case. Part II will explain the history of Israel's economic development and examine the discrete challenges that the country faced. Part III will elaborate on the above-mentioned reasons why Israel was able to surmount those challenges. And Part IV, the conclusion, will consider what lessons may be gleaned from Israel's economic history that could be applied to other similarly situated developing economies.
Full PDF Document, 17 pages, 91kbs
Endnotes
Note *: Linda Sharaby is completing a law degree at Columbia Law School. She was previously an assistant editor of MERIA and an editorial assistant at Foreign Policy magazine. Her recent publications include a book review entitled "Sadat the Strategist" in the Foreign Service Journal (June 2001).Back
Note 1: World Bank Israel data profile, available at http://ww.worldbank.org. Back
Note 2: Note that the CIA World Fact Book (2001) estimated Israel? 2000 per capita GDP (measured in purchasing power parity) at $18,900. The World Bank Development Indicators data is available at http://devdata.worldbank.org/external/CPProfile.asp?SelectedCountry=ISR&CCODE=ISR&CNAME=Israel&PTYPE=CP Back
Note 3: Available at http://www.foreignpolicy.com/issue_janfeb_2002/global_index.html.Back
Note 4: Ibid. Back
Note 5: Shoshana Neuman, "Aliyah to Israel: Immigration Under Conditions of Adversity," Discussion Paper No. 89 (December 1999), Institute for the Study of Labor (IZA), Bonn, p.22. Back
Note 6: See Clement M. Henry and Robert Springborg, Globalization and the Politics of Development in the Middle East (Cambridge: Cambridge University Press, 2001), p.202. Back
Note 7: Yair Aharoni, The Israeli Economy: Dreams and Realities (London: Routledge, 1991), p. 3. Back
Note 8: The cellular phone statistic comes from a UN report on global human development, reported in Shahar Ginosar, "Am Bchira: Totzaot ha-Emet" Yediot Ahronot, August 2, 2002, "7 Days" section, pp. 14-22, 86. The survey on computer statistics was conducted by the Global TGI market research company in New York and was reported in Hani Barbash, "Israel outranks U.S. in home computers and cellular phones," Ha?retz, January 24, 2000. Back
Note 9: A third aspect -the diplomatic front- will not be addressed. Back