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The Israeli Economy from the Foundation of the State through the 21st Century

Author(s):Rivlin, Paul
Reviewer(s):Halevi, Nadav

Published by EH.NET (June 2011)

Paul Rivlin, The Israeli Economy from the Foundation of the State through the 21st Century.? New York: Cambridge University Press, 2011. xviii + 288 pp. $32 (paperback), ISBN: 978-0-521-15020-0.

Reviewed for EH.Net by Nadav Halevi, Department of Economics, Hebrew University of Jerusalem (emeritus).

For the author, who has written several books on various Arab economies, this is a second economic history of the Israeli economy.[1]? However, the present volume is not just an updating of the material in the first book, which covered developments through 1991, but presents? a much wider and deeper analysis of many aspects and problems, including political and social, some unique to Israel.[2]

After an introduction, the book presents a brief discussion of the pre-State period, mainly the development during the British Mandate, justified by the fact that the new state inherited an economic base, what had been a Jewish government-within-government apparatus, and strong ideology, all of which affected future economic developments. This is followed by two chapters covering economic developments, with emphasis on macroeconomic policy, first for 1948-1985, and second from 1985. A chapter is devoted to the opening of the economy to globalization and the development of high technology industries. Another chapter deals with the costs and benefits of defense expenditures. The author correctly points out that the real defense costs include many not included in the defense budget, and estimates a major one, the loss of income from the army reserves system; however, this is only a partial correction, and one major item — the costs connected to settlement activity in the occupied territories — is deferred to a later chapter. After a chapter on economic relations with the Palestinians, come three chapters on major specific aspects of the Israeli economy: the problem of religion, focusing on the role of the large ultra-orthodox Jewish community; the Arab minority; and one on demographic and social divisions, stressing the growth of poverty and the widening of income inequality. A concluding chapter summarizes the previous material and focuses on what the author sees as the main problems facing Israel in the (at least) near future and necessary economic reforms: ending the Israeli-Arab conflict, dismantling settlements in territories which may be given over to a Palestinian State, and how to integrate the ultra-orthodox and Israel-Arab communities into the productive labor force.

The introduction states that the main theme of the book is what is contained in the phrase ?As Israel?s economy has strengthened, its society has weakened.? The book describes this effectively, though the issue of growing income inequality, thoroughly discussed in Chapter 10, does not get detailed treatment in the suggested reforms. Nor does the book discuss, except for one paragraph, the implications of the growing economic dominance of a small group, and how the process of privatization has resulted in monopolistic competition and lack of internal competition in many sectors, such as communications, banking and others, including foods, not subject to effective competition from imports.

The book gives references to a very large body of literature in English but rather little reference to the large Hebrew literature on the subjects covered. There are also some surprising omissions even in the English literature. For example, the discussion of monetary policy and inflation would have been richer by reference to an important Bank of Israel study,[3] and the analysis of capital liberalization could have benefited by reference to an article in volume II of that publication.[4]? In places, reliance on particular references leads the author to state as fact points that are not exact. For example in the discussion of economic relations with the Palestinians the author states the Paris Protocol provided for free movement of Palestinian labor into Israel, except for limitations due to security considerations. This point is made by some Israeli economists and many Palestinian ones (most even ignore the security element), but it is not accurate: Though restrictions on entry of Palestinian workers into Israel were indeed generally placed for security reasons, a reading of the Protocol itself would reveal that the correct wording gives both parties the right ?to determine the extent and conditions of the labor movement into its area.?[5] ???

Though the choice, the order, and the attention devoted to particular subjects are obviously a matter of personal preference, the book may be criticized for a lack of balance, in two ways. First, if it is to be regarded as an economic history, then the earlier periods are treated in a cursory way, sometimes giving data for a decade or more, implying much more homogeneity than actually existed, whereas in later periods detailed attention is given to one or two year periods. For example, the role of linkage of capital to a price index is discussed as a contributor to inflation in the later period, but there is no discussion of the widespread use of linkages of almost everything — a particular Israeli experience — and its role in inflation, a subject of major debate in the first thirty years. It appears that the author is mainly concerned with pointing out the more recent developments, germane to more immediate problems and the reforms he believes are needed. There is a danger in this, because books focusing on economic changes and problems can never be up-to-date. For example, though some data are presented for 2009, it is clear that most of the book was written earlier, as there is no mention of the implications for Israel of the 2008 world financial crisis, and the effective way that Israel handed them.? A second lack of balance is between technical material, that economists can appreciate but non-economists would find difficult, and interesting and important chapters from which all can learn.

The author is sometime careless with figures and choice of words. Just two of many possible examples: In the first, mass immigration years, a majority of immigrants was not from the Middle East, as stated on p. 2; in fact, through 1951 half were displaced persons from Europe. The table on p.42 would puzzle anyone who knows balance of payments accounting, until examination of the data source shows that the author neglected to include trade in services in his export and import figures.

More problematic are true, or partially true statements, which may be misleading. Again, just two examples: On p.153 it is stated that imports of the Palestinian economy were almost exclusively from Israel. Twenty percent were imports destined directly to it, and of the rest it is not known exactly how much was merely through Israel — since the Arabs had no port of their own — or had minimal Israeli value added. The discussion of settlements notes Jewish building in East Jerusalem, and beyond the previous borders, but the political issue of Jerusalem would be more clearly understood had the author mentioned that after 1967 Israel annexed previously Arab areas to Jerusalem which virtually tripled the municipal area. This carries over into the discussion of ethnic minorities, since fully three of the twenty percent of Israel?s population which is Arab consists of Jerusalem Arabs.

Despite the above criticisms, this book is a welcome addition to the literature on its subject. In fact, even the less technically interested reader would gain much knowledge and important insights from many chapters, and simply by reading only the introduction and concluding chapter.

1. The first book was The Israeli Economy, 1992, Boulder, CO: Westview Press.
2. The wording of the book?s title would be better as ?into? rather than ?through? the twenty-first century.
3. H. Barkai and N. Liviatan, The Monetary History of Israel, Vol. 1. The Bank of Israel: Fifty Years of Striving for Monetary Control, Hebrew edition, 2004, Bank of Israel, Jerusalem.? English edition, 2007, Oxford University Press.
4. M. Michaely, ?The Liberalization of Israel?s Foreign Exchange Markets, 1960-2002,? pp. 67-97, Volume II of the study cited above.
5. Article VII of the Paris Protocol, signed 29 April, 1994.? See also, E. Kleiman, ?The Economic Provisions of the Agreement between Israel and the PLO,? Israel Law Review, No. 2-3, 1994.

Nadav Halevi is Chilowich Professor (emeritus) of International Trade at The Hebrew University of Jerusalem. He has published extensively on the Israeli economy and on empirical subjects of international trade, and is currently working on trade in services.

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Subject(s):Economywide Country Studies and Comparative History
Geographic Area(s):Middle East
Time Period(s):20th Century: WWII and post-WWII