The Israeli economy began in pre-mandatory Palestine, as the Jewish economy in Ottoman Palestine. The British gained control of Palestine from the Ottomans in 1917 and established their mandate in 1920. The Jewish economy grew rapidly during the period of the British mandate, averaging 13.2 percent growth over the whole period, through 1947. While initially much of the economic development was in the agricultural sector, starting with the German immigration of the 1930 and with them the arrival of significant capital, substantial industrial capacity developed in the cities, especially in Tel Aviv. In 1947, the Jewish economy was 2.5 times the size of the Arab economy.
In 1948, when Israeli independence was declared, the Jewish population of the country was 600,000. Over the next year, an additional 350,000 Jewish immigrants arrived in the country, with an additional 300,000 arriving in each of the following two years.
Between 1950 and 1965, the Israeli economy grew rapidly, at an annual rate of 11%. The per capita GNP grew by 6 percent per year, on average, during that time. The growth was facilitated by significant outside capital inflow, coming from a combination of German reparations, money raised by world Jewry, and the sale of Israel bonds. This allowed for large investments in infrastructure. The government also implemented a strongly protectionist trading policy, which facilitated the development of local industries, during this period —especially in the textile industry.
By 1965, transfer payment from Germany had ended and this led to a government cut back, that resulted in a serious recession. Unemployment reached 12.5 percent, and the GNP only grew by 1%. The joke at the time, was — “the last person to leave the country should turn off the lights”.
The Six Day War ended the recession. Over the course of the next six years, the economy expanded — thanks to the availability of cheap labor, increased government spending, and a rise in tourism. The Yom Kippur War of 1973 negatively impacted the economy, as government spending was forced to skyrocket. Government spending increased even more due to the Lebanese War. This resulted in rapid inflation, and an increasing government deficit. In 1983, the stock of the major banks in the country collapsed, and the government was forced to nationalize the banks. By 1984, inflation had reached 450% and the next year 1000%.
The government took decisive action in 1985, with an economic stabilization plan that radically cut government spending, imposed wage and price controls, and devalued the shekel. The radical changes were effective, and inflation was brought under control.
Following the grave financial crisis, the country began a series of economic reforms that lessened government involvement in the economy, eliminated most foreign currency restrictions, and ended the direct involvement of the government in capital markets. At the same time, many government-owned companies were privatized.
In the meantime, other events took place that provided the basis for the country’s recent economic success. Even before the establishment of the state, the Jews of Palestine began producing weapons. Those efforts continued after the establishment of the state, with the production of munitions and guns — including the world renowned “Uzi” Submachine gun. After the French arms embargo that began in 1967, Israel put greater emphasis on developing its own aircraft. Israel started to produce its own versions of the French Mirage Jet, and put significant effort into developing its own avionics capabilities.
In 1974, marked an important milestone in Israel’s economic development, when Intel opened a development center in Haifa. By the mid 80’s, Israel’s high-tech industries were developing rapidly. Most Israeli innovation took place in the military industries. However, some, like Scitex were private civilian endeavors. The first Israeli companies started to go public on the NASDAQ during this same period.
During the 80’s Israel had also moved from development of airplanes based on French designs, to developing its own aircraft called the “Lavi”. However, the Lavi program was abandoned, after the United States pressured Israel to do so. At the time, the decision was considered a major setback for the Israeli economy. While there are still people who believe that to be the case, most economists believe the impact of the elimination of the Lavi program provided the economy with many highly skilled people, who went on to help found the new businesses that became the foundation of the “Startup Nation”. An additional factor that helped Israel transform into a high-tech center/wellspring was the large influx of highly educated Soviet immigrants.
In the 1990’s, foreign direct investment in Israel began to grow rapidly. From a few hundred million dollars per year in the early 90’s, foreign investments in Israel have grown to nearly $20 billion in 2018. As a result, over this period Israeli transitioned from a developing country, to a developed country, joining the OECD in August 2010.
Israel’s GDP increased from $2.599 billion in 1960, to $60 billion in 1990, and to $350 billion in 2017 — While Israel’s population grew from 2 million to 8.7 million, during that same period.
Today, beside being known as the “Startup Nation,” Israel is a worldwide center for research and development. Over 350 companies maintain R&D facilities in Israel, including almost all of the major tech-giants including: Google, Apple, Facebook, Amazon, Intel, and Microsoft.
|GNI, Atlas method (current US$) (billions)||56.7||120.74||226.1||362.97|
|GNI per capita, Atlas method (current US$)||12,170||19,200||29,660||40,860|
|GNI, PPP (current international $) (billions)||68.34||147.43||215.68||367.96|
|GNI per capita, PPP (current international $)||14,660||23,440||28,290||41,420|
|GDP (current US$) (billions)||59.22||132.34||234||370.59|
|GDP growth (annual %)||7.3||7.5||5.6||3.5|
|Inflation, GDP deflator (annual %)||15.9||3.6||1.6||1.2|
|Agriculture, forestry, and fishing, value added (% of GDP)||..||1||2||1|
|Industry (including construction), value added (% of GDP)||..||23||21||19|
|Exports of goods and services (% of GDP)||30||36||35||30|
|Imports of goods and services (% of GDP)||35||36||33||29|
|Gross capital formation (% of GDP)||20||23||19||22|
|Revenue, excluding grants (% of GDP)||35.4||37.8||32||31.9|
|Net lending (+) / net borrowing (-) (% of GDP)||-3.7||-1||-3.7||-3.4|
|States and markets|
|Time required to start a business (days)||..||18||18||11|
|Domestic credit provided by financial sector (% of GDP)||..||..||..||..|
|Tax revenue (% of GDP)||26.7||27.1||22.5||23.1|
|Military expenditure (% of GDP)||12.4||6.3||5.9||5.3|
|Mobile cellular subscriptions (per 100 people)||0.3||74||124||127.7|
|Individuals using the Internet (% of population)||0.1||20.9||67.5||83.7|
|High-technology exports (% of manufactured exports)||..||..||19||23|
|Statistical Capacity score (Overall average)||..||..||..||..|
|Merchandise trade (% of GDP)||49||52||50||37|
|Net barter terms of trade index (2000 = 100)||..||100||98||106|
|External debt stocks, total (DOD, current US$) (millions)||..||..||..||..|
|Total debt service (% of exports of goods, services and primary income)||..||..||..||..|
|Net migration (thousands)||452||103||19||50|
|Personal remittances, received (current US$) (millions)||812||182||572||1,022|
|Foreign direct investment, net inflows (BoP, current US$) (millions)||151||8,048||6,985||21,515|
|Net official development assistance received (current US$) (millions)||1,371.90||..||..||..|