It's no secret that since its founding in 1948, Israel has faced the hostility of its Arab neighbors. Its severe economic crises are not so well known. In 1952, for example, Israel was bankrupt after its terrible war of independence. In 1966 it suffered a "planned" recession that left 10 percent of the work force unemployed. It suffered yet another serious recession after the 1973 war claimed 2,666 lives and the equivalent of one year's Gross National Product (GNP). And today, Israel is confronted with its worst economic crisis since statehood.
What saved Israel in the past? Help from elsewhere. Israel weathered the 1952 problems with a massive influx of donations and aid from the United States, Jews around the world, and West Germany. Some $700 million worth of emergency aid from world Jewry bailed Israel out in 1966, enabling it not only to survive then but to win the Six-Day War the following year. And the 1973–74 crisis was alleviated only with aid from the United States. Altogether, Israel and Zionist enterprises before Israel became a state have received aid from abroad worth some $64 billion.
The pipeline is far from running dry. Washington's economic aid is expected to be at least equal in nominal dollars to last year's $1.2-billion gift, and Congress is currently considering whether to increase that figure by as much as a half-billion dollars. Moreover, Congress recently passed legislation requiring that each year's aid to Israel at least cover what Israel owes the United States that year on previous loans!
Despite all this, Israel's situation is worse than ever before. Since 1982, the total worth of the nation's public and private assets has plummeted because of Israel's 1982 Sinai withdrawal and the 1983 crash of the Tel Aviv stock exchange. Last year, Israeli government bonds were caught up in an avalanche of selling on the Tel Aviv exchange—an ominous development, since many private citizens and companies have their savings in these bonds.
There are other danger signs. US Secretary of State George Schultz, a former economics professor, noted with disbelief in 1983 that Israel's government budget reached 90 percent of the GNP. In 1984, though, the budget actually exceeded the GNP by 6 percent. Work productivity and profits are alarmingly low, taxes soak up 51 percent of the national income, and the GNP is astoundingly small relative to private financial assets.
What's caused Israel's huge problems? Not a lack of raw materials. The Negev and the Dead Sea, for example, have vast reserves of oil and other minerals. As for human resources, Israel has an abundance of capable people working in medicine, industry, and technology, and it's experiencing an incredible revolution in computers and microtechnology.
The causes for the economic problems lie elsewhere. One is the enormous costs of defense. However, with Israel's neighbors explicitly committed to its destruction, massive defense spending has been seen as necessary to survival.
But there's another reason for Israel's economic woes. Even before independence, the Zionist movement was heavily influenced by European democratic socialism. In Israel's first 30 years, the most influential political force was the Labor Party that carried on that tradition. Much of the Israeli economy has thus been structured on a democratic-socialist model. The government today controls 93 percent of the land. It employs two-thirds of the nation's workers—some on the government payroll, others working for Histadrut (the quasi-governmental labor-union federation that owns a vast number of businesses) or the Jewish Agency (a social-service and economic enterprise concerned mainly with recent Jewish immigrants). The government has a large degree of control over three-fourths of Israeli business, and it completely controls all of the financial assets that flow legally into Israel from abroad.
The state's control of Israel's economy and the nation's dependence on aid from abroad are rarely linked or challenged. All of the members of Menachem Begin's coalition of right-wing parties—including the tiny Liberal Party—quarreled with the Labor-led coalition only over the forms of state intervention in the economy, not over its extent. Begin's government certainly made the economic situation far worse. When he assumed power in 1977, inflation was running at 35 percent. But when US aid was increased after the 1978 Camp David accords, his treasury began to print money so quickly that by 1982, inflation was approaching 111 percent. In 1983, inflation reached 190.6 percent, and in 1984, it hit 449 percent.
What should be done? The government's role in the economy should be cut drastically. Even limiting it to defense, police, and social services would be a huge improvement. The income tax, which is the biggest constraint on economic activity and has been used to subsidize politically influential industries, should be abolished altogether. Agriculture should be freed from the pervasive influence of the government and Histadrut, with collective and cooperative farms becoming completely private. Telecommunications, the postal service, utilities, banking, insurance, and oil companies should also be privatized.
Israel is not exempt from the laws of economics. Years of dependency and a tightly managed economy have exacted their toll. Israel now needs to begin the task of normalization—and that means not only seeking peace with our neighbors, but building a free and prosperous economy. Ultimately, that's the only way to avert calamity.
Oded Yinon is a free-lance writer and lecturer in Jerusalem.