The Economy of the Yishuv and the State of Israel
Zionist/Jewish Economic Development in Palestine before 1948
By 1939, Jewish physical growth in Mandatory Palestine in the period that was known of the New Yishuv acquired from Arabs sufficient Jewish territory for a state in the making. In this period before the outbreak of World War II in Europe, few Jewish immigrants moved to the land. In addition to building a broad scaffolding for the Jewish state, Jews developed a significant economic center that supported a population of some 400,000 by that time. Arab leaders in 1938 in Damascus acknowledged that a Jewish state was already virtually existing in Palestine. Evidence for Jewish demographic, territorial, and economic growth is repeated stated in multiple British, American, and Hebrew sources. Ample proof is found in statistical and economic indicators revealing Jewish industrial development, capital investment, the impact of Jewish immigration on Palestine’s economic growth. Jewish contribution to British tax revenue collection significantly the British administration in Palestine to that date and afterwards, despite the restraints that the British put on the development of the Jewish national home from 1939 forwards.
Land purchase and Jewish immigration were essential for economic growth (both are explained and depicted in Forming a nucleus for the Jewish state, 1882-1947 and Zionist Land Acquisition; a core element in establishing Israel, These publications not only describe the regularities in the quantities of Arab land offered to Zionists, but their whereabouts in different parts of Palestine allowed Zionists to choose the acquisition that met desired needs and reflected purchase of land for strategic requirements of creating contiguous land areas, and ownership of land near the head waters of the Jordan River, along the coastal plain, on the Jerusalem to Tel Aviv Road, and in Beersheba.
The 1947 United Nations decision to Partition Palestine into an Arab and Jewish state, with an economic union between the two states, and the creation of an independent autonomous governance structure for Jerusalem reflected the outline of Jewish land acquisition of the previous 70 years, indeed stretching back to the 1880s. In the maps below, the background green area shows where Jewish villages, urban areas, and rural settlements were established before the UN drew up the map for two states. The UN made its decision on the tentative outline of the proposed future Jewish and Arab states based on where the Arab population was most heavily concentrated, namely in the central mountainous range stretching from the Galilee in the north, going south along the central spine of Palestine from Tulkarem and Nablus through Ramallah, Jerusalem through Bethlehem to Hebron and beyond. The concentration of the Jewish population before the UN map was drawn stretched from Metula and Tel Hai in the north, south past the Sea of Galilee and then running along the Jezreel Valley to Haifa’s environs, and then south along the coast to Gaza.
Jewish immigration to Palestine before and after World War II was a vital element if there was to be a Jewish state. Immigrants’ contributions to the economy, industry, education, and political organization grew the infrastructures needed for a viable Jewish state, as did funds from abroad. As the historian of Zionism and Israel noted (the reference is below), three quarters of the cost for sustaining the 1948-1949 war was born on the backs of Jewish living in Palestine at the time.
Immigration
The preponderance of single male Jewish immigrants in the 1920s, along with their high literacy levels and ideological commitments, created a reasonably well-organized and highly motivated population that engaged in state building. This included their engagement in rural agricultural and industrial development, the building of industries, in the health care field, education, culture, finance and banking. These were supported financially by immigrants themselves, who often had to pay fees to immigrate to Palestine. Those fees went into the revenue coffers of the British administration.
The impact of single male immigration was highly significant for the state in the making’s development. This phenomenon began after World War I, especially with the Third Aliyah (1919-1923) and continued through the 1920s and 1930s. The preponderance of males aided labor needs in agriculture, construction, and industry. They became a valuable labor force for the Zionist objective of state infrastructure development which focused on making some land areas capable of sustaining newly arrived immigrants. Women too participated in amelioration of land areas, but not to the extent that males did in this segment of the Jewish work force. Many of the young men who immigrated were committed to the Zionist cause, or at least open to being swept into a dynamic of contributing to a newly evolving enterprise in as yet a fully defined Jewish homeland. This ideological drive was central to the success of the Zionist movement. Again women played highly significant roles in defending Jewish demographic locations, while single males served in the emerging Jewish military organizations.
Jews in the industrial sector
By 1927, Jews were already major participants in Palestine’s industrial sector, despite Arabs owning a majority of industrial establishments. While Arabs owned 67% of industrial establishments, representing 56% of the total output, Jewish investments accounted for two-thirds of the output, highlighting the disproportionate role Jews played in economic activity. The scholar, Barbara J. Smith highlighted the rapid development of a modern industrial sector driven by Jewish immigrants. The industrial growth she noted was largely shaped by the needs of Jewish settlers, not the Arab population. By the late 1920s, she wrote, “a modern, Western-style industrial sector had emerged, focused on consumer goods and providing employment for Jewish workers. (The Roots of Separatism in Palestine British Economic Policy, 1920-1929, Syracuse University Press, 1993, pp. 178 and 179.)
By 1939, the Jewish industrial sector had expanded further. The Jewish economy dominated industrial activity, with 872 Jewish firms employing 13,678 workers and additional small businesses providing employment to another 18,000. Jewish industries also accounted for a staggering 86% of total industrial output and 79% of the workforce (Survey of Palestine, 1946). The capital invested in Jewish industries surged from LP 4.39 million in 1939 to LP 12.09 million by 1942, reflecting a robust industrial growth Issa Khalaf, Politics in Palestine Arab Factionalism and Social Disintegration, 1939-1948, State University of New York at Albany, pp. 48-49.
During the Second World War, local demands for food, raw materials, and manufactured goods for the British World War II military effort in the Mediterranean area spurred the local economy forward. The British military needed textiles, food processing, and munitions manufacturing. Additionally, infrastructure needs expanded for the railroad, roads and airfields. Already by 1935 the Haifa port was the destination outlet for Iraqi oil through the pipeline from Mosul. Increased economic activity led to higher employment, particularly in sectors tied to the military supply chain. Jewish businesses and industries expanded, especially those in the agricultural, manufacturing, and construction sectors. Jewish entrepreneurs took advantage of the demand to expand their investments in Palestine despite immigration restrictions and the disaster unfolding for Jews in Europe. The Arab labor sector had fewer skills, yet Arab employment and the Arab economy in Palestine grew notably, though to a lesser degree. During the war years, Jewish industrial output doubled. In 1945, Jewish industries were responsible for 85% of Palestine’s total industrial production, with over 600 new enterprises founded during the war (Zionist Organization, 1946).
Capital Investment and Financial Contributions
All the evidence shows that from 1920 to 1945, Jews played a pivotal role in financing the development of Palestine. A portion of the investment came from abroad, with the Keren Hayesod (Zionist fund raising organizations) alone raising over L14.5 million by 1945, primarily from the global Jewish community (Kaplan, 1946). By the end of the Mandate, Jewish capital accounted for 60% of Palestine’s overall fixed capital formation, adding to industrial expansion. In the inter-war years, Jews invested 39.3% of their Gross National Product (GNP) annually into the economy, far exceeding the Arab sector’s 12.2% (Jacob Metzger, The Divided Economy of Mandatory Palestine, 1998). The investments fueled economic growth without reliance on taxpayer funds coming from Great Britain. (Eliezer Kaplan, “Private and Public Investment in the Jewish National Home,” in J.B. Hobman (ed.), Palestine’s Economic Future A Review of Progress and Prospects, London: Percy Lund Humphries and Company, Limited, 1946 pp. 112-115.)
In 1948, during the War of Independence, Israel’s economy was bolstered by contributions from the Jewish diaspora, amounting to $250 million, yet some 75% of the war’s cost was raised domestically, demonstrating the strong financial support from Jews in Palestine. (Derek Penslar, “Rebels Without a Patron State, How Israel Financed the 1948 War,” in Rebecca Kobrin and Adam Teller (eds.), Purchasing Power: The Economics of Modern Jewish History Jewish Culture in Contexts, Philadelphia: University of Pennsylvania Press, 2015.pp. 186-187, 188, 191.
Arab state and Palestinian leaderships’ actions and inactions notably impacted the development of the Jewish intent to build a state. Jewish land purchases put large sums of money into the hands of Arab sellers, particularly Arabs living in Palestine and not absentee landowners after 1931. Arabs in Palestine collaborated or engaged with Jews in multiple areas that directly benefitted Jewish state building, carefully, chronicled by Hillel Cohen in Army of Shadows. Arab state leaders, primarily those in Egypt tried in the early 1940s to raise funds to prevent Jews from purchasing more land in Palestine, but the Committee for Rescuing Arab Lands in Palestine (Central Zionist Archives, S25/6554) failed to entice political or financial support. The Arab League boycott of the Jewish economy in Palestine and Israel proved to be the most successful and longest lasting Arab state effort to hamper Jewish and Israeli economic life. The goals and purposes of the boycott were to cut off trade to the Jewish economy and pressure other states to do likewise. Established in 1945 by the Arab boycott office against Israel remains active. Though it impacted Israel’s economic losses in the hundreds of millions of dollars by denying it markets in the Arab and Muslim world, primarily in sales of agricultural, citrus, textile, and industrial goods, Israel was driven to shift export focus to Europe, North America and other parts of the world, where hard currency earnings ultimately benefitted Israel’s young economy. By the 1970s, Western Europe had become Israel’s most important trade region.
Jewish Contributions to British Revenue and Potential for a Jewish state economy
Throughout the Mandatory period, the Jewish community played a significant role in contributing to the British administration’s revenue. In 1928, despite making up just 17% of the population, Jews contributed 44% of the revenue, a share that significantly outpaced their demographic proportion (House of Commons Debates, 1930). By 1944/45, Jewish contributions to government revenue increased to 65%, despite Jews representing only 32% of the total population, further reflecting the Jewish community’s economic importance in Palestine (Zionist Organization, 1946). The British used 80% of revenue collected to build roads, ports, and infrastructure needs to support their administrative control over Palestine; when they left in May 1948, the infrastructure that remained fell under Israeli control, yet it had been a majority of tax and other revenues from Jewish sources that fueled the Britain administration there.
By 1948, the economic nucleus necessary for the establishment of a Jewish state was already in place. The Jewish economy had achieved significant industrial growth, capital investment, and a robust workforce. Despite the economic dominance of the Jewish sector, geographic separation between Jewish and Arab communities had solidified, with Jews primarily residing along the coast and in the valleys, while Arabs inhabited the interior (Yossi Katz, Partner to Partition The Jewish Agency’s Partition Plan in the Mandate Era, Frank Cass, 1998, p. 19.) The Jewish economy had become somewhat but not totally self-sufficient, particularly in industrial production, capital investment, and revenue generation, and was ready to support the establishment of a Jewish state.
The development of a semi-independent economic base provided the Jewish community an economic scaffolding to transit to the statehood in 1948. The Jewish Agency for Palestine that represented the Jewish community to the British had evolved to be functioning as an autonomous state apparatus before the state. Jewish Self-empowerment under the British was relatively constant in growth bounded by degree of British imitations placed on Jewish communal growth. Zionists almost always circumvented the boundaries placed upon them by the British, whether through buying land in restricted zones or immigrating Jews illegally. Palestine’s Jewish population was driven by collective efforts to adapt, innovate and cope with restrictions and obstacles placed in the path of growth. Self-defense forces, financial institutions, an incipient economic and industrial core, and collective commitment to push forward to a state through massive volunteerism, notably without the force of law demanding the population’s actions drove the Zionists forward. Indeed, anguish from the destruction of European Jewry from 1939-1945 and the UN suggestion in November 1947 to partition Palestine into Jewish and Arab states with an economic union between them, catalyzed state building that was significant half a century already in the making.
The early state’s lean years
Israel may have saved itself from destruction in the First-Arab Israeli war, but the survival of the newborn state was far from certain. Together with the threat from its neighbors, which was defused only until the war’s next round, Israel faced uncertainties on multiple economic fronts. By just about any metric of economic health, Israel had enormous priorities to meet. At the state’s establishment it had to provide for its own oil, defend its borders, import foodstuffs, avoid insolvency in its currency, absorb hundreds of thousands of new immigrants, secure weapons for national defense, and much more after losing one percent of its total population in the independence war.
And so, to meet its needs and ensure the country’s survival, the government undertook a great many construction projects, building infrastructure, housing, factories, power stations and much else throughout the country. The scale of the building was staggering and the rate at which it unfolded dizzying. In Israel’s first three years, nearly as many new communities were established–nearly 300–as had been built between 1882, when the first Zionists struck roots in Palestine, to 1948, when the state was established.
To pay for this building bonanza, the revenue-deprived government resorted to deficit spending –in effect, printing money to spend money. But since increasing the money supply inevitably leads to inflation (i.e., too much money chasing too few goods), the government sought to limit consumption of those goods. To this end, the government instituted rationing in 1949.
Quite apart from this rationing, government interventionism was enough to make Americans and other evangelists of the free market wince. The Israeli government set the terms and interest rate of all loans, individual and corporate, it taxed citizens for international travel, and it banned possession of foreign currency. But during the three-year period of rationing from 1949 to 1951, known as austerity (or tzena in Hebrew), the reach of the Israeli government touched the everyday lives of all citizens.
In the era of austerity, Israeli citizens were given coupons for limited quantities of food and assigned to certain grocery stores where the coupons could be redeemed. Nor was it only food that was limited. Furniture, footwear, and clothing were also subject to rationing. Israelis, as they would many times, thereafter, were constrained to make do with the little they had. Ovens were a rarity, so Israeli kitchens were equipped with a makeshift alternative–the “wonder pot”–that would forever be the iconic symbol of austerity. This tube pan with a vented lid would be placed atop a gas burner and used as an all-purpose cooker for Israeli rations.
Although austerity was short-lived, its culinary influence in Israel is enduring. Since rice, for instance, was a luxury, David Ben-Gurion called on the Osem food company to contrive a wheat-based substitute. Thus was “Ben-Gurion rice” born, better known outside of Israel as “Israeli couscous. Another iconic Israeli food, falafel, owes its rise to popularity to its use as a high-protein substitute for meat when animal products were, like rice, a luxury.
Rationing anywhere hardly ever escapes public outrage, and Israel was no exception. Running on a slogan of “let us live!,” the anti-austerity political party, the General Zionists, made headway in the 1951 Knesset election, garnering the second-highest number of seats. But it wasn’t only popular discontent that undermined austerity; popular circumvention did too. An illegal market flourished throughout tzena, as Israelis looked to this underground trade to supply them with goods that austerity removed from beyond their reach. To the relief of the public, austerity was relaxed in 1952. It still applied, albeit in limited fashion, until 1959, when Minister of Trade and Industry, Pinchas Sapir took to the airwaves to proclaim a message that was music to Israeli ears, “Here comes the day we have been hoping for.” Rationing was over at last.
Estimated Dollar Volume of Israel’s Exports (1948–2025), with geographic
destinations in millions of dollars, Israel Central Bureau of Statistics
| Year | United States | Europe | Latin America | Asia | Eastern Europe | Total all Exports- some not shown here |
| 1948 | $20M | $5M | $1M | $1M | $1M | $28M |
| 1950 | $30M | $10M | $3M | $3M | $3M | $49M |
| 1955 | $40M | $15M | $4M | $4M | $4M | $67M |
| 1960 | $55M | $30M | $5M | $6M | $5M | $101M |
| 1965 | $70M | $60M | $8M | $8M | $7M | $153M |
| 1970 | $150M | $150M | $15M | $20M | $10M | $345M |
| 1975 | $250M | $300M | $35M | $40M | $20M | $645M |
| 1980 | $450M | $900M | $60M | $120M | $50M | $1,700M |
| 1990 | $2,400M | $3,000M | $250M | $500M | $200M | $6,350M |
| 2000 | $5,500M | $6,500M | $700M | $1,300M | $500M | $14,000M |
| 2010 | $8,000M | $10,500M | $1,200M | $3,000M | $1,000M | $23,000M |
| 2020 | $11,000M | $16,500M | $1,800M | $6,000M | $1,500M | $35,800M |
| 2025 Est | $14,000M | $20,000M | $2,500M | $8,000M | $2,000M | $50,500M |
Israel’s economic boom, 1953-1965
1952 was a year that brought Israelis much relief from the growing pains that had, until then, afflicting the country. The so-called “New Economy Policy” launched by the government that year not only loosened the rationing restrictions, but it also introduced several deflationary reforms. The printing of money was curbed, the currency was devalued to make export prices more competitive, and the Palestine Pound was swapped out with a new currency, the Israeli Lira. Some liberalizing measures were also adopted, making the centrally planned Israeli economy marginally freer.
But the stabilization and, indeed, growth of the Israeli economy owed less to the New Economic Policy than to cash infusions from abroad. Until then, money from abroad had come primarily from the United States in the form of loans and grants. Also from the United States came donations and, after Israel Bonds was established in 1951, bond purchases. The reparations agreement with Germany in 1952 was a significant financial injection into what was then still an infant economy. In 1953, foreign aid from abroad from all sources contributed to almost 25 per cent of Israel’s total GDP which hovered around $2 billion in then current prices.
Ironically, although the 1952 Reparations Agreement between Israel and the Federal Republic of Germany partially rescued Israel from a deeper economic crisis, it also precipitated a social crisis. The agreement was fiercely opposed by much of the population, so fiercely that demonstrators stormed the Knesset in protest. Menachem Begin’s protest against receiving German reparations was as notable as it was acrid. But as the acrimony over the reparation’s agreement subsided, the economy, fueled by much needed capital when the agreement took effect in 1953, boomed. All manner of projects were launched as Israelis “built the new homeland, like wild hornets in crazed swarms,” as Yehuda Amichai put it. Economic growth reflected this surge of activity. For the next 12 years, Israel averaged ten percent annual growth–and this while keeping inflation in the single digits. For part of this period of galloping economic growth, Israel had even boasted the world’s fastest-growing economy. The lean year of the state’s infancy had finally given way to fat years.
The Israeli building frenzy continued into the 1960s. The port of Ashdod, built on the open sea, was inaugurated, becoming the country’s second-busiest port. The nuclear reactor in Dimona was completed and brought online. But of all these projects, none required as much expense and as much labor as the National Water Carrier. At a cost of almost five percent of GDP, the National Water Carrier was originally intended to channel water from the Kinneret/Sea of Galilee to irrigate the Negev, but it morphed into an elaborate country-wide water grid that integrates all of Israel’s water works. Completed in 1964, the National Water Carrier stood as a monument to Israel’s successes in Israeli hydraulic engineering and water management.
In the mid-1960s, around the same time such massive public works projects were winding up, the almost 14-year disbursement of German reparations came to an end and population growth dropped off. Meanwhile, the government of Levi Eshkol pursued a policy of mitun or “restraint” under which state-sponsored projects were paused or delayed and taxes were raised. Enacted in 1964, these policies were especially ill-timed, and they, compounded by the completion both of the reparation payout and construction projects, combined to plunge the country into a recession in 1966.
But then came the Six-Day War, and, with it, the reversal of this economic downturn. But while runaway growth returned to the Israeli economy, the prewar recession wasn’t so much ended as postponed. The reckoning would finally come after the next war, the Yom-Kippur War. But in the interval between these two wars, amid the euphoria that swept the nation, few Israelis could see the black clouds gathering on the horizon. By every indication, all was well. Population growth accelerated, and highly skilled immigrants from Poland, the Soviet Union, South Africa, and even the United States made aliyah. Capital inflow came not only from the wealth of these immigrants, but from unprecedented levels of foreign investment.
Meanwhile, after Israel lost France as its foremost arms supplier in 1967, its military industrial growth surged, as the Jewish state turned inward and devoted its energies to native defense industry. Israel’s territorial gains in the war also had a significant effect on its economy, as Palestinians found employment as low-wage laborers and Israel found new opportunities for construction, building military installations and infrastructure throughout the territories.
The numbers alone tell the story of Israel’s post-war boom. In 1968, the Israeli economy grew by 15 percent, and until 1973, posted, on average, 11 percent annual growth. Economic attitudes shifted after the war, as Israel underwent “embourgeoisement,” that is, the elevation of a population into the middle class and the adoption of its values. In these years of bounty, the appeal of socialism waned, much to the regret of those who still clung to the old collectivist ways. No less distressing to the socialist old guard was the rise of consumerism, and with it, American-style individualism.
The Lost Decade (1974-1985)
But if the Six-Day War grew the Israeli economy, the Yom Kippur War wrecked it. Even before the war, the false alarm in April and May 1973 that persuaded the government that war was imminent brought about a call-up of the reserves, dealing a crushing blow to the economy. But the ill effects of this mobilization were nothing compared to the economic devastation wrought by the war itself. Numbers vary, but it is generally estimated that the cost of the war hovered somewhere between $8 and $9 billion dollars.
The economic fallout from the Yom Kippur War was enduring. In Israeli economic history, the period from 1974 to 1985 is known as Israel’s lost decade. This was a bleak period characterized by sluggish economic growth and hyperinflation. Unemployment, inflation, foreign debt, and the balance of payments deficit soared while economic growth, foreign currency reserves, and the standard of living declined. Israel lost export markets after nearly every country in Africa, under Arab pressure, severed relations with Jerusalem. The global oil shock, which brought about the four-fold increase in oil prices in 1974 alone, was acutely felt in Israel. Israel’s oil woes only grew worse after 1975, when, under the September 1975 Egyptian-Israel Agreement, Israel returned Sinai oil fields to Egypt. Royal Iran picked up the slack, supplying Israel with 70 percent of its oil needs thereafter, but Israel now had a much higher oil import bill. The flow of this oil, moreover, would stop altogether in 1979, with the establishment of the Islamic Republic.
A rare bright spot in an otherwise dark time was Israel’s first-ever free trade agreement, which it concluded with the European Community (EC, the EU’s predecessor organization) in 1975. Under this landmark agreement, duties on goods of Israeli origin and manufacture were abolished in EC countries.
While the election of Menachem Begin in 1977 and the ouster of the Labor Party took Israel in a different direction economically no less than politically, different did not mean better. Menachem Begin, contrary to popular misconception, was no free marketeer. Like his mentor Ze’ev Jabotinsky, he believed in a robust welfare state. Thus, under his stewardship, welfare spending and the size of government increased. That said, Begin did appoint finance ministers, Simcha Ehrlich most notably, who sought to liberalize the Israeli economy. To this end, foreign currency restrictions were repealed and a floating exchange rate was instituted, among other laissez-faire measures. But for Begin’s liberalizing policy to succeed, he also needed to cut government spending substantially, privatize government assets, and reduce a public sector that employed almost 30 percent of the country’s labor force. This he wouldn’t do.
Consequently, Begin’s economic policies miscarried, leaving the Israeli economy in such a state that Moshe Dayan remarked, “The world already sees Israel as an economic cadaver.” For his part, the celebrated Jewish-American economist Milton Friedman looked at the Israeli economy and quipped that the state of Israel exploded many stereotypes about Jews, including the one that held that Jews were “good economic managers.” Meanwhile, inflation soared to as-yet unreached heights, eventually climbing to 450% by the middle of the decade, the value of the lira plunged, Israel’s foreign debt per capita was the highest in the world, and the Israeli stock market crashed.
Back from the Brink and the liberalization of the Israeli economy
In 1985, as Israel’s economic fortunes were sinking to their lowest ebb, the national unity government headed by Shimon Peres tackled the economic crisis head on. In a marathon 24-hour cabinet meeting in June 1985, Peres and his ministers formulated the parameters of what would be called the Economic Stabilization Program. The far-reaching plan aimed to redress the balance of payments and reduce inflation. To this end, sweeping budget cuts totaling $750 million were instituted; subsidies for basic commodities and appropriations for specific ministries were slashed; the currency was devalued and the Old Israeli Shekel introduced in 1980 was supplanted by the New Israeli Shekel; the exchange rate, wages, and prices were frozen; and a law imposing monetary discipline was enacted to prevent such inflation as had occasioned the crisis in the first place.
The Peres government’s basket of emergency regulations saved the day, and by year’s end, inflation has plummeted from 450% to 20%. Relief also came from the United States, which provided Israel $1.5 billion in aid weeks before the fateful cabinet meeting that launched the Economic Stabilization Program. The Israeli economy received a further boost from the trade agreement signed with Washington that year.
The Economic Stabilization Program also set in motion the process by which the Israeli economy would become a full-fledged market economy. A campaign of large-scale privatization of government assets got underway and even affected some of the most iconic prestate socialist institutions like kibbutzim, moshavim, and the Histadrut.
The mid-1980s proved to be a turning point in the history of the Israeli economy, not only because of the economic turnaround engineered by Shimon Peres. Israel charted a new economic course that would set it on a new path to prosperity, embracing a market economy and turning its back on the centrally planned economy that characterized the 1950s.
As the 1980s wore into the 1990s, the Israeli economy grew, and deregulation and the liberalization of foreign trade and capital markets proceeded apace. Further stimulus was given to the economy by the immigration of Jews from the Soviet Union and the influx of many highly skilled, well-educated Israelis-to-be. The fall of the Soviet Union was a boon for Israel in other respects. Israel established relations with dozens of countries, the former Soviet Republics, India, and China among them, and so gained access to new export markets. With the launching of the Israeli-Palestinian peace process, the Arab League relaxed its decades-old economic boycott of the Jewish state. It was also in the 1990s that technology would take its place as Israel’s leading industry, thanks to the proliferation of knowledge-intensive high-tech firms.
Significant for Israel’s economic growth was the signing of the 1993 Oslo Accords whereby the PLO and Israel recognized each other. Many states that did not have much trade with Israel because of taking a pro-Palestinian stance toward the conflict, opened up their markets to Israeli goods. In 1992 Israel’s trade with India was estimated at $200 million annually; by 1995 trade with India grew to $1billion annually, and by 2025, the trade between the two countries topped $7 billion. By the end of the 1990s, Israel emerged as the “Start-Up Nation.”
Yet in the late 1990s also brought an economic downturn, caused by ill-conceived deflationary policies. To be sure, Israel didn’t relapse into the economic straits of the first half of the 1980s, but growth slowed to less than three percent, which in light of the immigration-generation population explosion, is more accurately viewed as stagnation rather than growth. Israel’s economic malaise was exacerbated by two events in 2000: the dot-com bust and the outbreak of the Second Intifada.
The Israeli economy began to rebound in 2003, and soon became one of the world’s fastest-growing economies, growing by more than a quarter until the global recession of 2008. As finance minister, Benjamin Netanyahu launched his Economic Recovery Plan, which called for considerable retrenchment in government spending and considerable privatization of state assets. On the one hand, Netanyahu’s reforms produced steady growth and lowered government deficits. On the other hand, income inequality widened and poverty increased.
It was Israel’s good fortune that it, for the most part, escaped the ill effects of the 2008 global recession. Since then, the Jewish state’s economic fortunes have risen, with its per capita income growing by more than half. Other blessings have come by way of Israel’s discovery in 2009 and 2010 of vast natural gas reserves offshore. Whereas 60% of Israel’s electricity had, until then, been generated by coal, today seventy percent of Israel’s electricity is fueled by natural gas. What’s more, Israel is now a natural gas exporter. It was also in 2010 that Israel was invited to join the prestigious Organization for Economic Co-operation and Development (OECD), a kind of exclusive club for high-income democracies in the developed world.
Today Israel boasts the world’s 26th-largest economy, and on the eve of the global pandemic, its unemployment rate fell to a record-low 3.4%. But the war Hamas unleashed on October 7, 2023, has been devastating to the economy. With hundreds of thousands of Israelis mobilized into active duty, a large swath of the Israeli labor force has been out of commission. Foreign investment has plummeted amid the reluctance of investors to plow capital into the markets of a war zone, and tourism has likewise dropped off, with major airlines suspending flights to Israel. (This is summarized in a CIE webinar on Economic Disruption from the War) For their part, the three major American credit-rating agencies–Standard & Poors, Moody’s, and Fitch–have all downgraded Israel’s credit rating. Rocket attacks have curtailed industrial and agricultural production in the north and the Gaza envelope, and Houthi attacks almost bankrupted the Port of Eilat by March 2025. The on-going war has had multiple impacts upon the economy: foreign investment has declined, there are 100,000 fewer foreign workers in Israel, by January 2025, inflation rose to 3.8% the highest since September 2023, and the economy has been bolstered by foreign aid that has been channeled into military expenditures.
Finally, Israel’s per capita income has increased more than fiftyfold from $1,000 in 1948 to more than $55,000 in 2024; Israel’s GDP has grown from $1.3 billion at the end of 1948 to more than $500 billion in 2024, driven by industrialization, a highly educated work force, innovation, and integration into the global economy. In 1948, Israel spent 30-40% of its national budget on defense, while in 2024 it devoted 15-20% of its total national budget on defense. In 2024, Israel ranked 30-35th globally in terms of GDP and 20-25th globally in terms of per capita income. For comparisons, in 2024, Israel’s GDP was ranked closely to that of Belgium and Argentina, and in per capita income for 2024, closely ranked to South Korea, the United Kingdom, and Japan.