Flashback Friday: Looking at the Israeli economy from 1948 to the present 

In the midst of the growing conflict between Israel and the Palestinian militant group Hamas, global financial markets are challenged with uncertainty fuelled with concerns regarding inflation and geopolitical risks.  

Recent reports highlight this unease, showing that a significant amount of inflows have been taken out of the iShares MSCI Israel exchange-traded fund (ETF), which is the largest ETF with investments in Israeli stocks, due to the ongoing situation in Gaza. Additionally, the Israeli shekel has reached its lowest value in nearly eight years compared to the U.S. dollar. 

Israel’s economy, once considered one of the strongest in the world, is now in a precarious position. The stability and growth it has built over the years are at risk as the country’s central bank grapples with the challenging task of predicting the economic consequences of the ongoing conflict. 

In this edition, we explore the history of Israel’s economic development since its independence in 1948 to the complex challenges it faces today. 

Post-Independence struggles (1948-1967) 

The immediate years following Israel’s declaration of independence in 1948 were marked by a host of complex economic challenges. The country was embroiled in a war with its Arab neighbours, demanding substantial financial resources for military efforts. Simultaneously, Israel faced the formidable task of absorbing a massive wave of immigrants and providing for the basic needs of this growing population. 

To meet these demands, Israel implemented strict austerity measures and turned to inflationary government finance, which was kept in check through price controls and rationing of essential goods. However, addressing the housing crisis and employment shortages brought on by the population surge proved to be prolonged endeavours. 

The early Israeli economy was fundamentally shaped by two pivotal factors: immigration and military expenditures. The influx of immigrants brought not only human capital but also substantial capital inflows, contributing to economic growth. Concurrently, Israel actively pursued self-sufficiency and embarked on a journey of industrialisation, laying the foundations for a more resilient economy.  

Post-Six-Day war boom (1967-1980) 

The Six-Day War of 1967 had a profound and, in many ways, positive impact on Israel’s economy. The acquisition of new territories, including the West Bank and Gaza Strip, significantly altered the economic and political dynamics in the region. Israel assumed responsibility for both the economic and political life in these areas, resulting in the establishment of Jewish settlements and the unification of the Arab sections of Jerusalem with the Jewish sector. 

This period witnessed substantial growth in high-tech and defence industries, with foreign aid and investments, particularly from the United States, playing a crucial role in sustaining Israel’s economy. The post-war boom fuelled the nation’s economic development, and the construction of Jewish settlements in the occupied territories emerged as a critical element of the region’s economic landscape. 

Economic crisis and stabilisation (1980-1990) 

The 1980s were marked by significant economic turmoil in Israel, characterised by high inflation and mounting budget deficits. To counter the inflationary spiral and bring economic stability, Israel embarked on a comprehensive economic stabilisation plan in the mid-1980s. This ambitious program included exchange rate stabilisation, budgetary restraint, wage and price freezes, and tight monetary policies that succeeded in significantly reducing the inflation rate. 

Technological advancements and export-orientation (1990-2000) 

Starting in the 1990s, Israel began a transition towards a more market-oriented economy. The emphasis on innovation and technological advancements resulted in the rapid growth of the high-tech sector. Israel’s contributions to the global technological landscape gained international recognition, making it an attractive destination for investors and entrepreneurs alike. During this period, trade liberalisation and globalisation played an increasingly pivotal role as Israel sought to establish a solid presence in the global economy. 

High-tech hub and economic growth (2000-2010) 

The 21st century brought the emergence of Israel as a global high-tech hub, renowned for its innovation and entrepreneurial spirit. The booming tech industry, characterised by start-ups, cutting-edge research, and technological breakthroughs, played a central role in driving economic growth. Israel’s success in attracting venture capital and fostering entrepreneurship solidified its place on the world stage. 

However, the global financial crisis of 2008 did have an impact Israel’s economy, leading to a period of economic uncertainty and necessitating adaptability. 

Contemporary economic landscape (2010-present) 

Israel’s economy has continued to evolve. Its reputation as a hub for start-ups and innovation has grown, with the nation consistently at the forefront of technological advancements. However, Israel still faces challenges, including income inequality and soaring housing costs.  

With the war at hand, media reports say that The Bank of Israel and the Ministry of Finance are making economic forecasts. Uncertainty on how long the conflict will last persists. The main scenario expects intense fighting in the south for up to six months, involving a large number of reservists. This will hurt the economy, causing a 1 per cent drop in GDP, mainly due to reduced consumer spending. 

To cover the cost of rehabilitation and compensation, the government may have to reallocate funds from other budget areas. As a result, the Bank of Israel is expected to lower interest rates by at least 50 basis points to counter the economic impact of the conflict.