Capitalism and socialism in the Israeli economy

In Israel there are two ideologies that seem to constantly be colliding and contrasting. These ideologies are based around Judaism, one of which being the 100 year old ideology that places faith in a socialist rule and the rejection of capitalism, the free market , idealism, self sacrifice for the construction of a Jewish homeland and a sense of partnership. This ideology had a central role in the early days after Israel was founded and also it the forming of Zionism; it created ‘Kibbutzim’ and gave laid a foundation for the first Prime Minister David Ben Gurion’s Socialist government. The second ideology is even more ancient, 2000 years to be specific. This belief springs from the ability to survive exile and hardships, the survival tactics of Jews that have faced persecution around the world and the individual relying on themselves as an individual and not on the government or their fellow citizens. It is also based around individuals taking advantage of opportunities in the local market, working hard and not expecting the world to provide for them. If you haven’t guessed these ideologies are Socialism and Capitalism. The conflict between the two exists in the present and is very noticeable in Israel, a society that is not entirely one or the other, it is debatable as to whether they can work in harmony together.

An overview of the Israeli economic system and situation throughout the years.

David Ben Gurion, the first prime minister of Israel after the country’s establishment was a socialist and managed the government under  a left wing ideology from the years of 1951 until 1953. Ben Gurion faced many hardships and difficulties during his time as prime minister due to the fact that Israel was a brand new country trying to make its way in the world. The levels of almost crippling immigration during the first few years of the country’s birth caused Israel a lot of strain. The young state also faced a lot of financial difficulties as one would expect owing to the situation. In 1954 West Germany finally provided Israel with reparations, a sum of 2 billion marks was given to the Jewish state as compensation for the horrors and oppression Jews had faced in Germany under the Nazi regime, East Germany also provided a total of 1 billion marks.  During this time Israel on average had grown 7% of the GDP per year until 1966. In the year of 1966 Israel’s economy was suffering from a sharp recession; however this dire situation was resolved quickly in 1967 just after the Six Day War that saw a return of rapid growth at 8% per year.  In 1973 Israel was once again in the midst of a severe economic crisis, this time it was owing to the huge amounts of expenditure during the Yom Kippur and the 6 day war, huge amounts of money had been poured into the army and into the country’s security measures, also the oil crisis that was affecting various countries worldwide also put pressure on the Israeli economy. The year of 1977 saw huge reforms and changes to the once socialist approach that dominated Israel in the years after its establishment, changes were made to the way the economy was dealt with, this revolution reduced the government’s intervention in the economy, the approach of Professor Milton Friedman was well and truly put into practice within Israel’s parliament. At the start of the 1980s there was a fatal increase in inflation by several hundred percent. The first Lebanon war in 1982 also added to these huge increases in the rising levels of inflation. At this time Israel took emergency action in an attempt to curb the constant rises in inflation, a program was laid out which included budget cuts and topping wage and price controls. At the same time Israel did however benefit in terms of the security budget due to the peace agreement with Egypt, meaning that certain cuts to security could be made owing  to the decreased threat from neighboring hostile countries. The emergency program that I mentioned gave a lot of power to the Ministry of Finance who led and oversaw this economic policy,  in accordance with the neo-capitalist economic concept of a small government, privatization reforms to lower barriers and to create competition in the market and also the fact that public expenditure fell from an average of 42.% of GDP to an average of 32.8%. Looking at the history of the Israeli economy it is clear to see that the country has experienced ups and downs, however since 1978 the country has never been able to maintain a level of sustainable growth in the GDP as it has been constantly fluctuating post 1978.  The average growth found in the last 36 years (between 1978-2014) was less than 2%. In recent years the levels of poverty found in Israel is also on the increase, these levels are in fact worryingly high, Israel is recorded as being one of the three most unequal countries in the OECD.

One can ask the question ‘why hasn’t the Israeli GDP experienced a large increase in recent years?’’ There is an explanation for this that can be found in a certain economic model;  the Solow model. According to the Solow model the younger and newer economies grow faster and the more mature and established economies grow at a slower rate. Israel in its early years, as I mentioned, had absorbed copious amounts of immigrants, this meant a lot of  money invested in education,  academia, enterprises, businesses and technology. Israel has experienced great growth in terms of GDP and also a higher standard of living and has evidently become a developed country because of this,  therefore it is natural that the growth rate of a developed country would be the same as what has been experienced by the Israeli economy.

Socialism or Capitalism?

Israel has two major political parties. These parties include the current ruling party, Likud which is led by Benjamin Netanyahu who believes in and practices a neo-capitalist ideology, Likud have been in power frequently since the year of 1977. The other major political party is The Labor Party that is led by Isaac Herzog, The Labor Party is based on primarily socialist values and principles. Many capitalist characteristics can be seen in Israeli politics, with the current increase of social inequalities and the reduction of the middle class, it is easy to see that Israel is currently leaning more towards capitalism rather than socialism. In the past few years Likud has managed to keep the rates of unemployment at a low (not including the ultra orthodox Jewish communities or the Arab community) and managed to successfully move away from the 2008 global economic crisis that brought many countries to breaking point. It is questionable as to whether Likud really are a neo-capitalist party. The incumbent Likud government intervenes in the Israeli market, making massive regulation. This economic approach is based on socialist ideology. Benjamin Netanyahu’s Likud party has had to work with the strong labor unions, government monopolies and a once socialist Israeli economy that are a result of former socialist governments. The electoral system is one of the reasons; the Likud party forced because of the electoral system in Israel gives in to blackmail coalition, lobbyists and business moguls.

Netanyahu also has many allies in the Socialist ultra-Orthodox parties and of course this impacts the government’s overall economic policies. In addition to this the sensitive security situation in Israel has resulted in some members of the Knesset joining parties according to the subject of military/security and not because of economic opinion, this means that several socialist MKs pledge allegiance to neo-capitalist parties such as Likud. Netanyahu who believes in the agenda of Milton Friedman is evidently exposed to attacks from opposition Knesset members, coalition socialists and even from Likud.  The Likud party is well aware that many of their supporters vote for them purely because of their military/security agenda and not because of the party’s economic policies and stance. This neo capitalist party that holds the intent to reduce welfare and maintain a government that will mostly benefit the upper classes has a large amount of voters from the lower classes that are more interested in the country’s overall security and safety rather than economic interests and how they will be personally affected by such economic policies. It is obvious to conclude that in general Israelis are more concerned with the country’s safety than economic matters, security comes first.

Therefore Israel is a country that frequently shifts between socialism and capitalism but currently has a tendency to embrace capitalism.

About the Author
Nisan Avraham is an Israeli citizen who has served in the IDF in the Golani unit. He currently works in the ministry of Finance and also studies Economics at The University Of Tel Aviv. He has a keen interest in politics and economics around the world but especially in Israel. Nisan is also a political activist passionate about LGBT issues and is a supporter of feminism. Nisan's political leanings are towards the center and supports liberal politics.
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