Is Israel Really an Economic Miracle?

Israel is one of the youngest countries in the world. It has been in existence for only 72 years. While many of its peers such as India and Pakistan are still developing nations, Israel has quickly climbed the ladder. Israel is not considered a developed nation. This is because the per capita income in Israel is one of the highest in the world.

It is even more impressive to know that just like other countries, Israel too started on the back foot. In the early years of its existence, Israel witnessed very high inflation rates. In fact, the country was being devalued so fast that many Israelites would sign contracts with each other, which were denominated in foreign currency. In fact, the economy of Israel was under the constant threat of hyperinflation. At one point in time, inflation rates in Israel were hovering between 400% and 900%!

Therefore, Israel has reached where it is in less than 70 years and has overcome many obstacles to do so. Many economists all over the world consider Israel an economic miracle. They use it as a textbook example of an economy which has done things right.

In this article, we will have a closer look at some of the things that Israel has indeed done right. However, we will also look at some of the problems facing the Israeli economy to actually determine whether Israel really is an economic miracle.

Is Israel a Resource Rich Country?

Israel is certainly not a resource-rich country. If anything, the country is situated in the middle of a desert. Hence, just like all other desert nations, it faces a problem with the water supply. It is interesting to note that the population of Israel has quadrupled in the past few decades. However, the amount of water being used has remained the same. This can be attributed to the stellar economic policies which have now become the highlight of the Israeli economy. The government has used a combination of technology and elevated prices to ensure that the people consider water to be a scarce resource and use it accordingly. This is just one example of the Israeli entrepreneurial culture, which is often highlighted.

Israel’s Secret: Reduced Government Spending

The secret to Israel’s success has been reduced government spending. During the inflationary period, the Israeli government was plagued with high government spending. The government used to account for almost three-quarters of all the spending that would take place in Israel. This was largely because Israel had just come off a massive war in 1973.

However, the Israeli government was quick to realise the detrimental effects of government spending. As a result, the Israeli government was willing to voluntarily reduce its share of the economy. Israelis believe that free markets do the most important task of allocation of resources in the most efficient manner. They attribute a large portion of their success to the government’s decision of enabling the free markets to do their job.

Using Immigration Wisely

The Israeli government has used immigration wisely and to its advantage. During the 1990s scores of Jews left the Soviet Union and migrated to the shores of Israel. Instead of opposing them, Israel welcomed these immigrants with open arms.

The immigrants accepted by Israel were highly educated and skilled. More than 60% of these workers had a college education. The population of Israel increased by as much as 15% because of this immigration. This meant that the size of their market increased since there were more people who wanted to buy stuff, pay taxes, and hold jobs. The size of the entire economy grew because Israel used immigration in a strategic manner.

Start-Up Culture

Israel has been referred to as being the start-up nation by several political and economic observers. This was because of the fact that Israel had a highly educated workforce and the Israeli army was perennially on the lookout for more advanced technology. In order to encourage these start-ups, the government set aside a $100 million fund. The government used this money to lure foreign investors because it promised to match the investments made by them. As a result, Israel today has a well-developed startup ecosystem. Stories of Israeli start-ups being valued at billions of dollars is not rare at all.

Challenges Facing the Israeli Economy

Growth and development have brought about some problems as well. For instance, income inequality in Israel is staggering. Even though per capita income is very high, the reality is that this income is concentrated within the hands of a few people. About 20% of the population of Israel pays 90% of its taxes. More than 50% of the people don’t make enough money to pay any taxes.

This problem is compounded by the fact that the Israeli cities have become very expensive. Urban centres like Tel-Aviv and Jerusalem have sky high prices. Also, since the land mass is limited, there is no option to stay at faraway places and commute.

Lastly, all of Israel’s start-ups are concentrated in the area of security. The country spends 5% of its GDP on research and development. However, it spends very little money on the development of actual infrastructure, which will make the life of its citizens easier.

The fact of the matter is that Israel’s economic progress has actually been nothing short of commendable. However, there are still a lot of challenges that need to be successfully navigated.