When it comes to nuclear weapons, powerful countries like Russia or the US are probably the ones which come to mind first. It would then be perceived as unexpected that, among the nine countries which have access to nuclear weapons in the world, there is one which has a population of only 9 million inhabitants and is only 22.145 km2 big (about the size of the state of New Jersey), namely Israel. Taking a closer look, the Israeli army did not become so powerful by chance: it is one of the consequences of the incredible economic growth which has been taking place in this country for 40 years. Indeed, data describes clearly such growth: from a GDP of $24.9 (billion of dollars) in 1980 to $488.5 in 2021, and from a GDP per capita of $6356 in 1980 to $52.151 in 2021, the Israeli economy is becoming one of the most successful in the world. Nonetheless, it’s interesting to understand how did Israel manage to develop its economy so much.
Scholars agree that the key to a country’s development are institutions, defined as the written and unwritten rules that shape a society. Then, as Douglas North theorized, the more a country’s institutions are favourable to economic growth, the easier it will be for that country to develop. Indeed, in England the first industrial revolution took place, also thanks to the institutions present there in the 18th century, which turned out to be more efficient than other countries’ in terms of economic growth. Among many, it is worth mentioning England’s government form – the parliamentary monarchy – which gave a lot of freedom to merchants, which therefore were allowed trade, its banks, which were able to arbitrarily finance economic activity, and its clever mercantilist policies, that protected the country’s economy.
According to this model then, countries who are seem to be developed to a lower extent than others still have the possibility to catch up. They can fill the gap by giving birth to adequate institutions, able to stimulate economic growth. This model can then be used to analyse the extraordinary growth of many European countries in the 19th century, like Belgium, with its innovative banks, considered to be the first financial holdings, which bought multiple stocks of Belgian companies, giving a considerable boost to economic growth. Another country that can be analysed under said model is Germany, with the so-called “mixed banks”, able both to lend money and to offer important services to the large German corporations.
Israel also has worked on its institutions, in order to boost its economy. Indeed, before the 1990s, the country was going through a deep crisis: in 1984, inflation almost reached 400% and the Israeli currency was so weak that most payments took place in dollars. It was then thanks to Shimon Peres and his leadership that everything changed, through a strategy of cutting of unnecessary costs, incentivising the local currency and preventing the central bank from arbitrarily printing more money, causing hyperinflation. As a result of the implementation and enforcement of these three rules, most public expenses were reduced and less money was printed. The central bank became an independent institution, with no government ever influencing its activity in the future. Consequently, the local currency started being considered much more stable and became more and more used.
Furthermore, it’s interesting to explain the meaning behind Israel’s nickname of “startup nation. The country had the goal of further developing its economy, however there were not enough investors that could allow Israel to grow. Therefore, the government created a $100 million state-owned venture capital fund, able to partly make up for the lack of investors. Said venture not only was able to finance existing startups, but it also attracted many foreign investors. A virtuous circle was then born: the more investors believed in Israel, the more start-ups were created and vice versa.
Another cultural aspect which contributed to the country’s economic growth is the openness to migration. After the Soviet Union collapsed, many Jews decided to migrate to Israel, with more than 710,000 Soviet immigrants entering the country between 1990 and 1997, boosting the working age population by 15 percent. It is interesting to remark that around 60 percent of the new arrivals had a college education, as opposed to 30-40% to 40 of the native population. Israel benefited highly from the presence of high-skilled workers, like professors, engineers and scientists (essential in the strategic field of high-tech, which was skyrocketing at the time).
From the analysis drawn up until this moment, one might think that Israel is bound to grow exponentially and perpetually in the future, however there are several reasons why the Israeli “economic miracle” could stop.
Firstly, the Israeli economy relies heavily on the tech sector, which contributes to 20% of its GDP. One one hand, it is undeniable that the high-tech area experienced a “miraculous” development in the country, while on the other said growth might not last forever, with the consequences of a crisis in such a sector largely affecting the country’s entire economy.
Secondly, the disparity of importance between high-tech and the other sectors gave birth, inter alia, to social inequality. It is enough to consider that most of Isreal’s wealth concentrated in 10% of the population, namely held by those who work in the high-tech sector. Moreover, the high GDP pro capita does not entail a high purchasing power: in Tel Aviv the cost of life is on of the highest in the world.
Another factor that is going to slow down the growth of Isreal’s economy is the war which recently broke out. First of all, a lot of effort had been made in the last years in order to create a peaceful situation between Israel and Palestine, resulting in the trade between the two countries increasing, with many Palestinians working in Israel. The end of this rapprochement then leads to considerable economic damage.
In addition, the war is inevitably going to hit one of Israel’s strategic sectors: gas production. Even if Hamas didn’t attack any gas fields, Israel would nonetheless have to invest much more in defence to prevent further economic loss. The instability caused by the conflict will then lead to many other negative effects. For instance, many workers had to temporarily quit their jobs in order to join the army, reducing the country’s workforce. In addition, Israel appears now less attractive to investors, slowing down the proliferation of startup activities.
In conclusion, when inflation reached the astonishing level of 400% in 1984, no one could have even imagined that Israel would have become one of the most successful economies in the world. That is then why scholars define the development of Israel a “miracle”. However, it must be kept in mind that miracle will have to deal with multiple future challenges in order to become norm.