Israel is a rich country, richer than Spain or any of its neighbors in terms of GDP per capita. The difference between Israel and its neighbors is absolutely spectacular. Moreover, until 2009 it had hardly any natural resources available. How did Israel become rich?
Surely some will think it is because Jews handle a lot of money and support Israel. While it is true that Israel has had support in its development that other nations have not had, that international support has been far from the only condition for Israel to exist. If not perhaps it would live on international aid and tourism, instead it has an economy that is the envy of many in the world. A GDP per capita higher than that of many European countries and a focus of innovation like no other, make Israel a very interesting place economically speaking.
Israel’s beginnings
On May 14, 1948, Israel launched its declaration of independence following the end of the British Mandate. On May 15 a coalition of Arab countries began invading the land dedicated to the state. By March 10, 1949 the war had ended with Israel controlling more territory than it had been allotted. But it was clear to this young nation that if it wanted to survive it would have to develop more than its neighbors. Between 1949 and 1959 Israel needed a policy of austerity. Receiving millions of refugees on the one hand and the war on the other meant that they were in a very precarious economic situation, with hardly any reserves in a territory that basically had two resources: people and desert.
Like many other countries, Israel developed a textile industry that little by little has ceased to be important. It also had an aid that many poor countries have not had, the reparations from Germany that delivered three billion marks between 1953 and 1966 (which would be about seven billion dollars in today’s terms). In 1956 this amounted to almost 90% of Israel’s income. They also launched Israeli bonds to be traded among Jews in the US and Canada and had help from the United States, Israel’s main ally.
Israel used this money to develop agricultural and industrial projects, with the aim of developing the country’s economy. Textiles started to become a relevant export, as well as polished diamonds. Israel reached growth rates of 10% per year. However, the Yom Kippur War in 1973 led Israel into a lost decade from which it would emerge in the mid-1980s, just in time for the collapse of the Soviet Union and begin to welcome its well-educated citizens, as well as to end the hyperinflation it suffered in the 1990s.
The Israeli economy today
While it is true that Israel is known for its agricultural capacity having managed to grow crops where nothing was expected to grow, agriculture today accounts for about 2% of Israel’s GDP. The Israeli economy today depends on other sectors. The diamond cutting and polishing industry accounts for about one-fifth of its exports and is one of the three major world centers (the others being New York and Antwerp).
But the star sector of Israel’s economy is technology. More than 400 multinationals have R&D centers in Israel, including giants such as IBM, Motorola, Google, Meta, Cisco, HP and Apple. Israel attracts them with a strong investment in R&D (5% of its GDP, the highest in the world) and a highly educated population. Israel also uses the three-year compulsory military service for its citizens to train them and give them a questioning mentality that makes them different from any other army and which they then take into business. Israel also has three universities among the three best in the world according to the Shanghai ranking (the Weizman, the Technion and the Hebrew University of Jerusalem).
Israel is not only a country of foreign multinationals, but it is also one of the countries with the highest number of start-ups per capita. It has come to be called the “Start-up nation”. The coastal plain, where the capital Tel Aviv is located, has been called Silicon Wadi, and together with Shenzhen is perhaps the only one that can compare, even if it loses out to the Californian one. Israel is one of the world’s largest exporters of circuit design.
Alongside this high-tech industry has grown the financial industry, which channels funds into the hands of Israeli entrepreneurs who need them to build “the next big thing”. Israel also excels in other products sectors, such as biomedical sciences, water efficiency, agricultural products, etc. It is a small nation of about ten million people, but has achieved unparalleled prosperity in its region.
On the other hand, Israel’s need to be able to defend itself against external attack means that it has a strong defense products sector (armaments). It also has a strong tourism industry, attracting pilgrims from all over the world due to its importance in Judaism, Christianity and Islam. However, due to recent events it is to be expected that this industry will suffer, there are many destinations in the world where one can feel safe.
Moreover, this instability may end up making investors hesitant. If foreign investment suffers, we may see another lost decade for this state. Which is not only bad luck for Israelis, but for its main trading partners and also for surrounding countries that will not be able to earn income so easily by selling to their neighbor.