Israel has not historically had a large resource base, and has instead focused on technology, research, services and tourism, and associated sectors for development. Additionally, there have been external influences to Israel’s development – immigration and direct external aid. It is difficult to correlate different factors of development with how sectors ‘drive’ the economy, but it is still important to look at potential avenues for development, particularly regarding the extraction of natural gas off the coast of Israel and its likely sale to world markets.

Israel’s foundation had both Jewish and socialist roots, but it has since developed into a liberal market economy with strong capitalist tenets – albeit with some remaining welfare for its citizens. Immigration transformed the country – increasing its population near tenfold – and further isolated Israel from its neighbours, with the new population often doing business with ‘back home’ rather than the regional Middle East.

Israel’s immigration was fortunately highly-skilled, and was a key component of Israeli success. At the present, Israel is facing a worrying trend of talent going elsewhere in the world. Whilst expats can still contribute to their original economy through investment or simply sending money back to their families, the government should prioritise retaining talent domestically so that they can fully contribute to the nation’s development. Though immigration has historically been a driver of development in the past, its future is currently far from certain.  

Direct foreign aid is a contributor to Israeli development, making up around 2% of the country’s economy. At the same time, this aid mainly goes to war efforts, and does not cover the level of military expenditure that the state accounts.

Innovation and advanced technology are important factors of the country’s development. Industrial production share has nearly doubled since the foundations of this sector were formed in the 1980s. Whilst the sector can be vulnerable to external events such as worldwide recession, it is a crucial factor of economic resilience overall – dealing with Israel’s human capital and lack of resources most efficiently. This is a strong driver of economic development.

Tourism, on the other hand, is not a current driver of economic development. There are barriers to further tourists such as language and fears of insecurity. If Israel could overcome these barriers then it would have huge potential for tourism. Tourism is not currently a driver of development, but has potential to be a crucial driver of development in the future.

The discovery of natural gas off Israel’s coast has also given Israel the potential to ‘jumpstart’ its economy once more. There are obstacles to exploiting this, and the extraction of resources may be stalled, but it is inevitable that natural gas will become a driver of economic development.

HISTORICAL CONTEXT

Geographically, Israel is situated in the heart of the Middle East, yet appears to be more socially and economically intertwined with the West. A nation where natural resources and raw materials are scarce has responded to such an issue by becoming a highly qualified labour force with a highly technologically advanced market economy. Strong ties with Western markets, especially with the United States of America, insulated Israel from the spillover of the Arab Spring, and also lent to a more stable recovery from the global financial crisis of 2008-09.

A notable peculiarity regarding Israel is its status as an example of an island economy, whereby despite being surrounded by Middle Eastern nations, comparatively little trade is done with their neighbours as opposed to large scale trading with Europe and the United States. Clearly, a number of reasons for this peculiarity exist, from socio-historical, segregational and cultural rationales, to the sometimes obvious imbalances in mutual interests. This also facilitates ties with states further afield, resulting in high levels of immigration and emigration. Of course, there are advantages and disadvantages to be found as a consequence.

According to the Israeli Ministry of Finance, Israel has ‘cultural advantages’ in its political economy, these being:

“Challenging norms and ‘out of the box’ way of thinking; Creative at working under limited resources; Direct, informal and task oriented approach”.

Israel was historically socialist, but has since transformed into a liberalised and open market economy with key tenets of capitalism as well as some aspects of welfare. Over this time period, major privatisation of state assets were enacted, and government spending was reduced. This coincided with the rise of an entrepreneurial society. Up until 1973, the modern state of Israel experienced a growth rate of around 8.9% annually. From 1973 to 2007, this impressive growth rate lowered to a still significant rate of 3.8%. Following this, Israel also proved resilient to economic crisis.

Finally, Israel has experienced dramatic population shifts as a result of favourable demographics, but primarily immigration to the country from across the world. Israel grew from only slightly over 800,000 in 1948, to just under 8,000,000 at the end of 2010 (representing a near tenfold expansion). This population growth was largely through waves of diaspora Jews, with ‘spikes’ appearing in the 1950s as the Jewish state began to form and the beginning of the 1990s with the collapse of the Soviet Union.
In summary, Israel was originally founded as a socialist Jewish state that transformed itself over the 20th century and beyond to become an open and liberalised market economy. With high levels of immigration that saw the population grow tenfold since 1948, Israel experienced extremely strong levels of growth from its formation – and proved resilient to crises. However, Israel is economically isolated from its neighbours, which highlights a dependency on the Western world – though this may be more related to its primarily European immigration.

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