Steven Robnak12-12-12

The Israeli Economic Miracle

How did Israel become a developed country amidst near

constant conflict? Israel was a country founded out of the

devastation of a brutal war for independence following the

recent tragedy of the Holocaust. Israel has very few natural

resources, is mostly arid, and had minimal infrastructure

and industry at its founding. Today Israel is the most

developed country in the region with an HDI of .888

(undp.org) ranked 17th in the world.

To understand how Israel could go from an

underdeveloped country worse off than its neighbors to one

of the most developed economies today, it is important to

have a comprehensive background on the economic history of

Israel. The Israeli economy can be defined in three distinct

economic stages, (1948-1972) the underdeveloped period,

(1972-1988) the developing period and (1988-2010) the

developed period. The underdeveloped period is when Israel

started to build up its industrial base with some ISI and

export oriented industrial development guided by the state,

as well as when Israel built up most of its infrastructure.

The developing period is when Israel had developed its basic

industry and infrastructure and started to transition from

an industrial economy to a research and development economy.

The developed period is when Israel developed its research

and development economy, and then opened up to larger

foreign investment in the country. During these development

periods, there were several wars fought between Israel and

its Arab neighbors. Israel fought several full-scale wars.

In the underdeveloped period it fought its war for

independence in 1948, the Suez Crisis in 1957, the Six Day

War in 1967. During the developing period, Israel fought the

Yom Kippur War in 1974, the First Lebanon War (1982-2000)

and the start of the First Intifada ( 1987-1993). In the

developed period Israel fought the Second Intifada (2000-

2005) , 2006 Lebanon War, and the the Gaza War (2008-2009).

In this paper, the most popular time tested scholarly

arguments will be analyzed followed by several newer

unorthodox theories that have emerged within the past few

years. The three prominent theories for Israeli success are

Pelzman’s theory of industrialization and state planning,

where Israel had a successful government guided economic

policy for development and industrialization; Brecher’s

argument that Israel was dependent on foreign aid to balance

its books and help with many of the problems it faced as a

nation, as well as to finance economic growth and immigrant

absorption; and Halevi’s argument that immigrants were the

most important factor to Israeli growth. For Halevi Foreign

aid was needed to supplement immigration in the early years,

but the uniqueness of Israeli open immigration is what gives

it higher growth compared to other developing nations. The

three unorthodox explanations to more modern Israeli

development compared to other developing nations supported

by Senor are Israel’s ability to prevent brain drain and the

uniqueness of the Israeli defense establishment in promoting

economic confidence within Israel as well as giving Israelis

the audacity to become a start up economy. Lastly I will

throw my own theory that scholars don’t talk about which is

the role of Lekem in Israeli development and the start up of

the arms industry.

The first years of Israel’s existence economically

speaking were difficult. The newly founded state had no

natural resources, no financial resources, no monetary

reserves, little economic infrastructure, few public

services, and many poor Jewish refugees (Metz 141). In 1948

many refugees from the Holocaust who were in Europe or in

displaced person’s camps as wells as Arab Jews poured into

Israel after the war for Independence. The population grew

by a conservative estimate of 1.1 million from this mass

immigration.(Brecher 95) Before the immigration rush into

Israel, 1/3 of the Israeli Jewish population held secondary

and institutes of higher degree educations (Brecher 97).

With the influx of refugees, the European Jews were mostly

educated while the Arab Jews were not. Israel from the

start had to provide these refugees with basic needs such as

food, clothing, shelter, employment, community services, as

well as set up a foreign exchange, monetary and fiscal

system. Israel was short on private capital in the 1940s and

1950s, the burden of dealing with all these problems had to

fall on the state (Metz 142). The French and Israeli

relationship only strengthened after Israel aided the French

and British in the Suez War of 1957.

Early on, what financed this early crisis was high-

level domestic savings, foreign loans and grants, foreign

private sector investments {Israeli bonds and donations form

Jews abroad}(Metz 142). In the 1950s, German War

reparations and French development assistance and military

aid on-top of American aid were helpful in maintaining a

negative balance on the current account.( Senor 178-182) The

French aid at this time is most important in the the covert

cooperative construction of nuclear programs, Intelligence

gathering, educational cooperation, and the French buildup

of the Israeli defense forces pre 1967.(Senor 179-81)

At this early stage in the 1940s and 1950s, the

Israeli government decided to promote investment projects in

agriculture and housing using public funds rather than

private capital markets. This initial investment by the

government in agricultural development and housing is the

start of Histadrut.

Histadrut is an important government institution in the

economy of Israel. Histadrut ( Hahistadrut Haklalit Shel

HaOvdim B’Eretz Yisrael { General Federation of Laborers in

the Land of Israel}) was an umbrella organization of trade

unions and also the government agency responsible for

Israeli economic enterprises.(Metz 142-143) Histadrut owned

enterprises functioned and behaved much like privately owned

enterprises, in such that failed businesses were quickly

shut down, and inefficiency was not tolerated(Metz 142).

Profit maximization was the primary goal of Histadrut run

corporations.

Histadrut was dominant in Israel from the start of the

nation up until the privatization of industry in the late

80s and 90s. During the development period, Histadrut was

dominant in the service sector. Histadrut had monopoly

status in areas such as public transport, production and

marketing of agricultural products, controlled Israel’s 2

major banks, and controlled the insurance agency (Metz 142).

It is important to note that Histadrut did not control a

majority of the industrial sector early on and ownership of

industries could be a mix between private Histadrut and

other government offices. Histadrut didn’t really come to

control industrial assets until after 1967.

While Israel spent most of the first decade (~1948-

1960) taking care of refugees, building up some

infrastructure, fixing the damage caused by the war, and

planting the seeds for some industrial growth, there was

substantial growth in GNP. The average growth rates averaged

10% in real terms for the time period of 1949-1964.(Brecher

98) This growth came from subsequent employment of the

refugees who provided much of the human capital needed for

early industrialization efforts. The first major industries

in Israel during the first decade were diamonds, chemicals,

clothing and textiles, transportation and communications.

Though Israel had no diamond deposits, it had a large

percentage of the European diamond cutters immigrate during

the Yishuv (pre 1948 immigration). The Israeli chemical

industry in the first decade consisted of extraction of

potash and bromine from the Dead Sea. Israel started a

clothing and textiles industry much like other developing

countries and depended on exporting to Europe and the United

States (Metz 157-158). The Agricultural industry in the

first decade was very interesting The Israeli government

invested heavily in research, training, improved crop

varieties, and better organization. (Metz 162) Israel had

started a basic arms assembly industry that was expanded

during this time and the Israeli government helped to create

Bedek( Israeli Aircraft Industries) in 1951(Senor 140-144).

Israel was carefully developing this industry from the start

and trying to specialize in profitable export crops,

agricultural production and processing, sophisticated

marketing mechanisms. Israel being a mostly desolate barren

arid wasteland and technically at war with all of its

neighbors had to devote significant capital into developing

the agricultural industry to feed its people and become self

sustaining agriculturally. By the mid 1950s, the Israeli’s

were leading experts in the agriculture industry and were

exporting technology to other countries and leading in

research and development, especially in agricultural systems

for poor growing conditions.

To recap before 1967, Israel started off barren and

rough. Its population more than doubled, its growth rate

averaged an astronomical 10%. The Government started

implementing ISI at the start of the state in the 1940s

while slowly scaling back ISI in the mid 1950s emphasizing

export oriented industries. Israel had a largely educated

base from its Ashkenazi (Germanic Western European) Jewish

immigrants, and a largely uneducated influx of Sephardic

(Mediterranean/Middle Eastern) Jews. The Israeli current

account budget was always negative, but German reparations

for the holocaust and some developmental aid provided for by

France and the USA counteracted this imbalance.

The start of 1967 is when the Israeli economy was

starting to show signs of a slow down. The French right

before the 1967 war had cut off all foreign aid to Israel.

(Singer 180). The Six Day war though it only lasted for six

days, had an economic impact that lasted for years. The

Israeli landmass managed to triple in size with the

occupation/annexation of Golan Heights, Gaza Strip, West

Bank, and Jerusalem. With annexing this territory, 60,000

laborers were added to the economy (Rivlin 42) and Israel

acquired some natural resources like oil in the Sinai and

fertile farmland in the Golan Heights. The war also brought

in over $620 million dollars in reserves through donations,

which helped to service the external debt to manageable

levels despite the massive defense imports for the war.

(Brecher 108-109).

The 1967 War changed Israeli defense policy. With the

French abandoning Israel for its own interests, this left

the Israelis in a similar fear state for acquiring arms that

occurred during the War of Independence. In the Israeli

mindset they couldn’t rely on a major power to arm them

(though the US had been selling them arms since the 1950s)

“so after the War Israel decided to move quickly in

producing major weapons systems, such as tanks, fighter

aircraft , and other advanced weapons, though no other small

country had successfully done so” (Senor 181). Israel was

able to quickly construct the industry (for example Israeli

Military Industries) expand what arms industry already

existed (for example Raphael) and produce military products,

with the help of technological espionage contra the French

(Senor 180-181). It is important to note that the Israeli

arms industry can get rather complicated because as well as

military production, the arms industries produced civilian

products as well. An example would be the Tadiran Electronic

Industries, Israel Chemicals Limited. (Metz 142-143) The

industry was owned by several different sectors such as

Histadrut, the Defense Ministry, the Internal Ministry,

Ministry of Finance, the private sector, though military

production was guided by the Defense and the Science and

Technology Ministries. (Metz 144).

After the War Israel increased military spending to

over 25% of GNP( Metz 143) Israel was able to maintain a

stable functioning economy until 1972. 1972-1974 was the

start of a downturn for Israel. Israel was implementing a

confusing policy of protectionist policy, trade

liberalization, and import tariffs during this time (Rivlin

46-47) To finance the balance of payments deficit in the

current account, Israel was depending on gifts and loans to

cover its deficit. Though Israel was exporting and had an

import surplus that started in the 1960s, this could not

cover the repayment of the loans (Rivlin 46)

As Israel was nearing an economic downturn, the surprise of

the Oil Embargo in 1973 and the Yom Kippur War threw Israel

into an economic “lost decade”. Israel had to import a

majority of its oil , and thus had 40% increase in cost

incurred in one year (Rivlin 47). This resulted in an

increase of over $600 million dollars in energy costs for

Israel by 1975.(Revlin 47). This Oil Shock helped to

increase inflation in this period and after the war. Israel

would have had 100% inflation in 1980 vs 130% if oil prices

did not rise.(Revlin 47).

More detrimental to Israel than the oil crisis was the

Yom Kippur War in 1973. This War took Israel by surprise,

causing more than 3000 casualties, enormous damage to

infrastructure, the mobilization of the work force for up to

six months(Senor 117). Israel had incurred a War cost that

exceeded 75% of its GNP.(Rivlin 46).

If war was not enough, recovery was made impossible by

the government monopoly on the capital market. The

government set the terms and interests rate for every loan

and debt instrument for consumer and business credit. (Senor

116) Israel had to devalue its currency by 43%. Restraints

and reforms were made between 1973-1976.

1977 was when Menachim Begin , leader of Likud,

defeated the long standing rule of the Labor party in the

Knesset elections. Begin’s policies are what sank Israel

from 1979-1985 into hyper-inflation and deep recession.

Begin decided to honor parliamentary coalition commitments

and expand Jewish settlement in the West Banl and Gaza

(consisting of 3% of GNP), making budgetary restraint near

impossible (Rivlin 50). Begin also liberalized the economy

in from 1977-1980. He implemented reform by abolishing

travel taxes, foreign exchange controls were eased, customs

duties were reduced.(Rivlin 51) Israelis were also allowed

to buy assets linked to foreign currencies {These were

previously limited to foreign trade, banking, recipients of

foreign income, new immigrants, non-residents}(Rivlin 51)

The Lira in October of 1977 devalued another 47%. Israel at

the time also made peace with Egypt in 1979. Israel had to

give back the Sinai as a requirement for peace. This was

very expensive for Israel because it had to deconstruct and

reconstruct its military fortifications and move them

because the borders changed, and Israel lost all of its oil

production, increasing its energy burden (Rivlin 51). The US

subsidized the Israeli withdrawal by a billion dollars

(Rivlin 51).

The peace with Egypt and the 1977 policies increased

inflation in 1985. Devaluations in the currency increased

cost of imports, and Israel’s indexing of cost of living to

income helped to fuel price rises and more inflation (Rivlin

52). Between 1979-1985 Israel was in an economic panic

though the economic growth between 1973-1984 averaged 1.2%

(Easterly 218). Finance ministers were replaced fairly often

and policies were adopted discontinued, readopted and

discontinued. Taxes were increased and decreased,

consumption was discouraged and encouraged, exports were

encouraged, Histadrut was politically weakened then

strengthened, subsidies were increased and decreased, all

pending which Finance Minister was in power( Rivlin 54).

If the economic panic and start of hyperinflation were

not enough, the 1982 Lebanon War added to the economic

wound. Many had lost confidence in the Israeli economy

because of the rapid changes and flip-flops in Israeli

economic policy. By 1983, there was further devaluation of

the currency, and with increased taxes and war expenditures,

the public lost confidence with the Israeli governments

management of the economy( Rivlin 55). The elections in 1984

would bring a start to the end of the Israeli hyperinflation

episode. The parliamentary elections were deadlocked between

Likud and Labor, which ended up forming an alliance. The

coalition government tried to tackle the inflation by price

freezes wage freezes, decreased spending on subsidies,

restrictions on imports, these efforts only raised inflation

to 546% in the third quarter of 1984 (Rivlin 57). In 1985,

it became clear that the government couldn’t reduce the

inflation by the methods it was already employing. Foreign

exchange reserves were dangerously low at this time. In July

the Cabinet leaders held an all night meeting where they

adopted a plan to stabilize the economy. The aim of this

plan was to improve the balance of payments and

simultaneously reduce inflation. The program required a

further devaluation of the Shekel by 18.8%, freeze against

the dollar, prices subsidized goods were increased by 35-75%

and non subsidized items by 17%(Rivlin 57-58). Employees

were to only be partially compensated for erosion of wages,

the budget was decreased by $1.5 billion (Rivlin 59)

Incentives were given by the government to hold onto shekels

vs. acquiring dollars on the black market, the US government

helped by granting emergency aid and increasing defense aid

(Rivlin 59). Israel adopted the new Shekel later that year

(1 NIS=1,000 old shekel). Israel had managed to stop

inflation and have prices lower by 1986. Israel also managed

to acquire a current account surplus in 1985 because the

dollar declined in value against European currencies, making

Israeli import costs go down and reducing export costs

(Rivlin 60). After 1985 the Israeli economy between 1985-

1989 grew by an average of 3.8%(Rivlin).

Though the period of 1977-1985 were called “the

lost decade”, Israel didn’t entirely loose out. Israel

during the mid 1970s-to 1987 had been developing certain

industries. The Israeli diamond industry grew immensely to

become 24% of exports, or $1.7 billion dollars in value

(Metz 156). Israel had developed a chemical rubber and

plastics industry, and a research and development program in

Chemical production and engineering (Metz 156). The Israeli

chemical industry by the late 1980s had become one of the

worlds largest chemical producing industries in the world

and employed 11% of the labor force and accounted for 15.6%

of exports. (Metz 158) Tourism became a major industry.

Israel had invested in alternative energy industries to

counter the demand for oil in places such as coal to oil

conversion and solar energy. During the late 1970s and 1980s

time, Israel invested heavily in the electronics industry.

This high technology industry was competing worldwide and

leading in its field. In 1985 the electronic industry

represented 4.5% of industrial establishments, 12% of

industrial employment, and almost 13% of industrial revenues

(Metz 155). Starting in the 1960s and picking up more

funding in the 1980s, the Israeli biotechnology industry

grew significantly. Israeli universities were given

incentives to for research in its leading industries and

biotechnology, leading the Israeli pharmaceutical industry

and the first 1980s venture capitalist investments in Israel

(Metz 155).

Israel recovered nicely from its hyperinflation with an

average growth rate of 3.4% from 1985-1988 and brought the

inflation down to 20% by 1986(Easterly 219). During this

recovery period, the Israeli government ceased funding to

several defense initiatives such as the Lavi that cost

several billions of dollars to develop (Senor 181) and the

US began offering more arms credits helping to maintain a

balance in the Israeli budget.

The third period of economic growth from 1988-2010 is

very unique to Israel compared to all the other nations who

experienced hyperinflation and a “lost decade”. Israel

experienced an immigration boom from the Soviet Union and

Ethiopia. This immigration wave accounted for roughly

1,000,000 new immigrants to Israel (Senor 123-127) The

Ethiopian Jews were much like the Sephardi counterparts and

had very little education or industrial skills, while the

Russian immigrants were mostly doctors, scientists,

engineers, and intellectuals (Rivlin 125-127). During the

late 1980s-eaerly 2000s, the Israeli government started to

sell off state owned industries and promote private

development and investment. In the mid 1990s, the Israeli

ministry of Finance wanted to promote a strong venture

capitalist and foreign investment movement in Israel in

start up enterprises. The Finance ministry created a program

called Yomza {Initiative in Hebrew}(Sinor 166) Yomza

required investors to come up with $16 million dollars for

every $8 million that the government would invest in a

project(Senor 166). Three parties had to be represented in

the Yomza grant, Israeli venture capitalists in training,

foreign venture capitalists firms, and an Israeli investment

company or bank(Senor 166). The government would initially

hold a 40% ownership in the investment, but after 5 years if

the fund was successful, the Israeli government would sell

out its shares cheaply, leaving investors all the reward

while leaving the government a share of the risk (Senor

166).

During the Economic boom, Israel had made several

initiatives to peace with the Palestinians and Jordan. The

Israeli government signed the Oslo accords in 1993 and peace

with Jordan in 1994. Not only were there peace arrangements

but also some more wars. Israel had to deal with the first

and second intifadas, as well as being bombarded by Saddam

in 1990-91 , the Second Lebanon War, and rocket bombardments

from Lebanon and Gaza Strip/ West Bank.

To recap phases two and three of the economic history

of Israel, Israel faced a major economic crisis starting in

the early 1970s because of the sharp rise in oil prices, the

Yom Kippur War, and government mismanagement of spending and

economic policy. Israel experienced an economic panic that

lasted nearly a decade with the worst of the inflation

occurring in the 1980s at the start of the Lebanon War.

Israel quickly and effectively tackled the crisis after the

worst of it in 1984 by implementing sound economic policy.

Also while this was occurring, Israel was investing heavily

in research and development/production of several advanced

industries such as biotechnologies, advanced arms

production, chemicals, and the electronics industry. Just as

Israel made it out of the hyperinflation period, there was a

massive immigration wave that added around a million people

to its population of less than 7 million. Israeli growth was

massive at this time, because of the implementation of new

economic policies such as Yomza, liberalizing trade, and

selling off government held industries to the private

sector. Israel was able to leave its international isolation

by signing the Oslo accords, and continue strong economic

growth despite subsequent wars and being bombarded by rocket

attacks and targeted by terrorists.

Now that we have a comprehensive historical background

of the Israeli economy and industry, we can look at the

popular scholarly arguments as to how Israel become a

developed country amidst near constant conflict. There are

several theories as to why Israel developed. Many of the

theories overlap and compliment each other, and several of

these theories were written over the course of Israeli

history going as far back as 1969 and as late as being

published in 2012. Because there is such a range of sources,

many of the later sources will reference/cite the older

sources in their arguments, so I chose the more original

authors of the respected theories. The literature review

will be divided into what are the three most supported

scholarly arguments. Joseph Pelzman argues that

industrialization and state planning/guidance was the most

important element in the development of Israel. Brecher

argues that foreign aid given to Israel is the most

important factor in the successful development of Israel.

Nadav Halevi argues that immigration to Israel was the most

important element to the successful development and growth

of the Israeli economy.

Pelzman claims that Israel was dependent on government

intervention in the economy and industrialization at the

start of the state. With Israel starting up barren and a

majority of the population being poor refugees, private

capital was hard to find, so the government had to use state

funds to care for the immigrants and build up the industry

so it could provide jobs (Metz 142). Pelzman also argues

that the government has always been involved long term

projects, such as the construction of the arms industry and

industries associated with it (Metz 143). Though the

government had some obvious inefficiency from inappropriate

project selection or policies that crowded out business

investment, there was a generally high success rate with

state industries as they were competitive on world markets

(Metz 147, 156-159)He argues that without government

intervention, most of these successful industries would have

never existed, such as the arms industry which would lead to

the future success of the chemical industry and electronics

industry. Though he mentions the importance of immigration

to economic growth, Pelzman believes that the immigrant

growth rate can be substituted with investment in science

based and high technology industries (Metz 146) Pelzman also

comments that Israel will eventually face a problem of brain

drain with the success of the developing silicon valley in

California and the much higher wages there (Metz 155). Metz

also makes an interesting comment that Israel invested in a

lot of industries and research and development that were

cost effective considering Israel’s distance form its export

markets.

Brecher claims that Israel was dependent on the west,

especially their aid, for their state to be remotely

successful ( Brecher 109). For Brecher, “Israel was

compelled to finance her rapid economic growth by a massive

import of surplus of foreign exchange assets”(Brecher 103).

The German reparations throughout the 1950s and private

inflows of revenue are what kept the Israeli current account

deficit manageable into the 1970s, and it is also what

covered a significant amount of cost for the Six Day War.

Israel was being funded largely by world Jewry and the

purchase of Israeli bonds. Jewry accounted for 68.7% of

total long term capital transfers to Israel from 1949-1965,

Bond sales comprised of nearly 70% of it (Brecher 106).

Brecher also mentions that governments like the United

States were very helpful with their direct Grants in Aid

programs beginning in the 1950s and continuing afterwards

(Brecher 106). With Israel being embargoed in its region,

and foreign trade being far away and costly, Israel needed

this aid to balance its current account deficit so the

government could fund industrialization projects and

subsidies to protect its exports.

Halevi argues that Israel was able to develop rapidly

for two reasons compared to other developing countries, the

“transplanted population” (immigrants), and second the

massive capital inflow (Halevi 83). Halevi claims that the

massive immigration boom in the first economic period was

needed to fuel the increased need for supply of labor

(Halevi 91). Halevi argues that as well as providing labor

for the work force, the population of Israel was second in

the world in terms of percentage of population with college

degrees (Halivi 92-93). The Israeli policy on immigration

was that all Jews were welcome to immigrate to Israel, and

before 1953, Israel had financed immigration (Halevi 88-

89)Halivi also argues that the large capital inflows from

foreign Jewry, loans granted by the US, and the German

reparations were what helped to fund immigration absorption

programs, as well as balance the current account budget/

provide funds for the Israeli government. Though the funds

were helpful, Halevi claims the immigration is the most

distinctive feature of the Israeli economic growth rates

after the war of independence (Halevi 86). Halevi’s journal

article is comparative to other developing countries at the

time of writing it.

Now that we have a concise introduction to the three

primary arguments, an analysis of the orthodox scholarly

arguments will be presented followed by my personal analysis

and the modern unorthodox theories that will be drawn upon

in my analysis. I will draw on other sources and relate the

Israeli success to why the neighboring countries didn’t

attain it.

In regards to government intervention in the economic

affairs of Israel, Pelzman’s point is mixed in the help it

provided Israel and the damage it caused Israel. Pelzman

wrote his article right before the 90s economic boom for

Israel. In the post 1980s era with Israeli economic reform

and the immigration wave that came with it, the government

approach at present to take a hands off approach to

enterprises has been the most successful economic policy

Israel has implemented to date. Israeli implementation of

liberalization and grant programs such as Yomza have grown

the economy substantially, and the success of the program

for the government has left Israel as a net lender economy

vs. a net debtor nation holding $60 billion dollars in

surplus or 3% of GDP vs. the net negative it has held before

the 1990s. (www.bankisrael.gov.il). At present the private

sector and foreign investment is large enough to where the

government can take its hands off directing the economy, but

as he mentions, this was not possible in the past. Israel

didn’t have much private capital. Most private investment

was in pre existing industries in Israel before 1948 such as

agricultural communes known as Kibbutzim or in industries

such as the diamond industry or the textile industry and the

construction industry (Metz 150-160). The private sector

didn’t have the funds to start up and incubate industries

that Histadrut and other government ministries invested in.

In the first period of the Israeli economy, foreign

investment in Israel was not possible because the

international expectation was that Israel wouldn’t be there

much longer, and that it was too dangerous too invest there

because of the heated conflict in the region. This was also

strengthened by the fact that Israeli infrastructure was

destroyed in the 1948 war, and the Israeli government was

highly protective of infant industries. Though Israel was

not unique in using the state to direct industry and build

it up, what made it rather unique compared to its neighbors

and other developing nations was that Israel was able to

develop successful research and development industries early

on and a successful entrepreneurial boom in the 1990s and

2000s and continue the rate of entrepreneurial growth.

Brecher’s argument for the development of Israel

through foreign aid is a similar argument to Pelzman’s

argument of state sponsored growth. Israel was entirely

dependent on this aid for most of its existence for

balancing its books. Though Israel depended on the aid for

balancing its books, I don’t think foreign aid was entirely

unique to Israel’s success. Looking at developing countries

as a whole, Israel was not unique in that it received

foreign aid. The only unique part of the Israeli aid

received was that a majority of it was from the private

sector vs. a foreign government. Many private actors,

predominantly Jews were investing in Israel by giving

donations through organizations such as the Jewish National

Fund, or directly buying Israeli bonds. The unique thing

about Israel with foreign aid compared to other nations is

that Israel arguably spent it better than most countries,

since corruption in the government is relatively non

existent, and Israel used the aid money to develop

infrastructure or industry, or to create foreign reserves or

balance the current account deficit. As we could see in the

late 1970s and early 80s, foreign aid didn’t keep Israel

from collapsing, it only slowed the collapse of the Israeli

economy. Israel was still capable of misusing funds and

overspending much like other developing countries. Though US

aid was instrumental in the rapidity of the recovery, Israel

was able to get a hold of its budget. At present, the

Israeli surplus is much larger than the roughly 3.1 billion-

dollar total aid package the US is giving it in 2013 (Sharp

30). At present, Israel could survive without foreign aid

from the US and function relatively decently.

In regards to foreign aid, US aid in recent times has

not been directed to keep Israel from collapsing as much as

to protect the US defense industry. Brecher is more than

accurate in the time he was writing, but in the present, aid

is helpful but not imperative to the survival of the Israeli

economic system. As Senor points out, US aid to Israel after

the 85 collapse required Israel to drop the Lavi fighter jet

project and promote joint development projects with the US

(Senor 181-183). The US in its aid policies required Israel

to purchase US military products. As Senor argues, the US

with its foreign aid was trying to prevent Israeli

competition with American defense contractors, as well as

have some control over who Israel could sell advanced

technologies to( to prevent other powers such as China or

India from acquiring sophisticated weapons). From being an

industry insider with tank sales, the Israeli government

mandates the removal of US technologies and co-developed

technologies from surplus 1980s tanks before they can be

exported to select foreign markets as is required by

contractual obligations for foreign aid.

In regards to immigration, this is the soundest theory

supported by most scholarly experts such as Halevi.

Immigration for all of Israel’s history has corresponded to

an economic boom. Immigration for Israel has always been a

strong factor unique to Israel for growth. Compared to other

developing countries, Israel is the only one to receive a

large amount of educated migrants. The current economic boom

as several scholars such as Senor and Bichler argue is from

the influx of Soviet intellectuals and experts coming to

Israel in the 1990s. The Israeli government implemented

programs to promote research and development programs such

as Yomza and funding absorption programs for Soviet

immigrants to get research jobs in existing industries. To

compare to the rest of the Middle East, the Arab countries

do not allow for easy migration. As Senor points out in his

argument for why Israel has been far more successful than

the Arab nations recently, Israel is completely open for

Jewish immigration, while the Arab nations are not (Senor

194-200). For example, looking at the UAE, it is near

impossible to acquire Emirati citizenship. Though there is a

lot of international investment in the UAE, there is nothing

keeping it there long term. Most foreign investors have gone

to Dubai to made money, and then when they have made it they

have left (Senor 201-202).

Looking at Israel’s success compared to the Arab

nations, there are still a few factors that mainstream

scholars have tended to dismiss that I feel are imperative

to the success of the Israeli economy vs. other developing

countries. There are three more significant factors that are

relevant and unique to Israeli success. Israel does not

suffer from brain drain like most developing countries,

Israel is unique in that it has a diaspora population (Jews

abroad) that is represented all over the world in which it

can draw on for support, and the Israeli mindset built from

the defense establishment.

Brain drain as mentioned in Pelzman’s argument is not

an actual problem Israel faces much like the other

developing countries. Senor mentions and names the Israeli

phenomenon as “brain circulation”. Brain circulation is”

talented people leave , settle down abroad, then return to

their home countries and are not lost in either place”(Senor

138) Israel has gained foreign investment in Israel because

people like Michael Laor of Cisco or Fov Forhman of Intel

wanted to go back to Israel, and the companies did not want

to loose their primary developers, so they followed their

developers to Israel and invested there( Senor 139). Intel

was early on the Israel scene building a research and

development center there in 1974(Senor 119).

Related to the brain drain argument is the Jewish

diaspora. While Israel is able to retain its intellectuals,

it has a large population abroad to draw on. The diaspora

community is important for several reasons. As we can see,

the diaspora population has largely immigrated to Israel and

has become part of the research and development boom. One of

the most prominent uses for the diaspora population that no

prominent scholars really talk about is their relation to

the Lekem, or the Bureau of Scientific Relations. Lekem

functioned as an agent for technological and scientific

espionage into the 1990s and has since been disbanded by US

pressure. Though much of the activity of Lekem is largely

unknown, the largest blowup of Lekem was the Pollard

operation in the United States and the Schwimmer affair to

acquire French blue prints for jet propulsion engines.

Israel was using Lekem since the 1950s to steal

technological secrets from other nations and then use these

secrets for production in Israel. An example of this is the

Kfir fighter based off of stolen blueprints of the French

Mirage jet fighter (Senor 181). How could Israel develop an

advance arms industry breaking ground in 1967 that was

producing successful weapons that were being used before the

Yom Kippur war of 1973 if it had to come up with designs by

scratch? Israel was able to field Kfir fighter jets during

the Yom Kippur in 1973, while domestic designs such as the

Merkva tank took much longer to design and produce. Its well

known that other research and development nations at the

time were stealing each other technological secrets( USA and

USSR for example), why couldn’t Israel do the same? In

short, Israel sped up production of advance military

technologies that would eventually trickle to the civilian

sector by acquiring some designs through Lekem. In other

words, where Easterly talks about “leaks” from the private

sector, Lekem was a government sponsored program to acquire

“leaks” abroad.

Lastly, unique to Israel was the defense establishment.

Israel has never lost a war. All Israelis are required to

serve in the Israeli Defense Forces. Senor makes an argument

that Israel’s military organization and defense

establishment are critical to the entrepreneurial nature of

Israel. Senor makes a valid argument along the lines that

Israeli military structure is different because lower ranked

officers are bountiful (Lieutenants) while upper level staff

above majors are severely understaffed for a military its

size (Senor 45). One other important factor is that lower

ranking military unites can remove a higher-ranking officer

if they feel him unfit for leading a unit. There is no

unwavering obedience to superior officers unlike most other

militaries. Israeli junior unite can argue and can petition

to remove upper level staff (Senor 44-48). This unique

structure leaves Israeli junior officers who are college age

with the responsibilities of higher-ranking officers, and

are often left making command decisions and frontline

decisions on their own vs. consulting superior officers

(Senor 45-50). This level of being able to confront

commanding officers and functional independence creates the

notorious cultural trait of Chutzpah {Audacity, willingness

to challenge the norm) within Israeli culture. Most Israelis

who serve in the defense forces go to University after their

mandatory service, and their military experience continues

with them. As Senor points out, all Israelis are required to

serve a few weeks of reserve duty a year, and many Israelis

will do business with other reservists during reserve duty

or if they become engineers or go into the field of research

and development, they can apply their field experience to

the arms industry unlike most foreign engineers or military

developers. Israelis can also rely on military connections

for their professional careers.

There is a counter argument to the defense

establishment that the high cost of maintaining a constant

military readiness has cost Israel much over the years and

has hurt investment and development. Though Israel has

gained significantly from recent “peace” with the

Palestinians and Jordan and Egypt, being in a constant state

of war hasn’t prevented economic growth or investment

either. As Senor shows with two unmarked diagrams that he

latter explains, as the rocket attacks/destruction of

Israeli infrastructure have increased, local and foreign

investment has increased even more {Israeli FDI tripled from

2000-2005 and Israeli share of total venture dollars doubled

as rocket attacks on Israel have more than tripled} ( Senor

148-149). Senor tells a story about Intel and how Israel’s

response to the rocket attacks and economic performance

while being attacked have strengthened investor confidence

in Israel. “Israel has managed to divorce the security

threat from its economic growth opportunities, Israeli’s and

foreign investors are confident that start ups will survive

during war and turbulence”(Senor 149). As we can see from

growth figures correlated to rocket attacks, the constant

state of war hasn’t had a negative correlation to growth or

economic improvement but a positive correlation, unlike most

countries that come under attack.

In short, the Israeli economic miracle in the present

is most dependent on several factors that separate it from

its neighbors. It is dependent on intellectual resources

that immigrants have brought to Israel. Israel has depended

on Jewish help abroad through private capital inflows and

work with Lekem. Israel has benefited from the defense

establishment’s unique structure and successful defense of

Israel and promoting investor confidence in Israel. Israel

in the past was dependent on foreign aid coming form

governments such as France the USA and West Germany in its

earlier economic stages, and at present doesn’t need the

level of assistance it once did. The Israeli government was

needed early on to guide industrial development devoted to

export oriented industries, but has reversed course in the

1990s and 2000s with far more successful growth. Israel has

also managed to maintain and foster a “brain economy” and

prevent brain drain to other parts of the world.

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