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Israel
OVERVIEW OF THE 1948-72 PERIOD
The years immediately following the state's creation in 1948
were difficult for the Israeli economy. The new state possessed
no natural or financial resources, no monetary reserves, little
economic infrastructure, and few public services. A sizable portion
of the existing Arab population fled the new state, while impoverished
and afflicted Jewish refugees poured in from the European displaced
persons camps and, later, from the Arab countries. In contrast
to the 1930s, when Jewish immigrants to the Yishuv (or prestate
Israel) had arrived with ample financial and human capital, after
1948 most immigrants lacked the wealth and skills needed by the
new state.
The new state had to supply food, clothing, shelter, and employment
for its new citizens; set up civil and community services; and
establish an independent foreign exchange, monetary, and fiscal
system. Given the shortage of private capital, the burden of dealing
with these problems naturally fell upon the public sector. The
financial capital needed to deal with the influx of immigrants
was drawn either from the high level of domestic savings, or from
capital imports (such as foreign loans and grants), or foreign
private sector investments (such as Israeli bonds). The government's
solution to the capital shortage included an austerity program
of stringent price controls and rationing. The government also
decided to promote investment projects in agriculture and housing
through the use of public funds rather than through private capital
markets. The public sector thus gained control over a large part
of Israel's investment resources and hence over the country's
future economic activity.
The result of this long-term state intervention was the development
of a quasi-socialist economy, which, in terms of ownership, was
divided into three sectors: private, public, and Histadrut (see
Glossary), the abbreviation of HaHistadrut HaKlalit Shel HaOdim
B'Eretz Yisrael (General Federation of Laborers in the Land of
Israel). The Histadrut, the umbrella organization of trade unions,
quickly became one of the most powerful institutions in Israel.
Although Histadrut-owned enterprises generally behaved like privately
owned firms, the collective nature of the labor organization precluded
the timely demise of economically inefficient enterprises. Public
sector firms were owned by local authorities and quasi-governmental
bodies such as the Jewish Agency (see Glossary). As in the case
of the Histadrut-run corporations, criteria other than profit
maximization dominated the economic operation of these firms.
The Israeli service sector, therefore, became totally dominated
by the government and the Histadrut. Histadrut-affiliated cooperatives
achieved a near monopoly in such areas as public transport and
the production and marketing of many agricultural products. The
Jewish Agency acquired Israel's two major banks, which together
made up 70 percent of the banking system; and the two largest
insurance companies were (and in 1988 continued to be) owned by
the Histadrut (see Financial Services , this ch.).
The importance of the government and the Histadrut was not limited
to the service sector. They became increasingly involved in the
industrial sector as well. Whereas the percentage of plants owned
by the public and Histadrut sectors in 1972 was less than 2.5
percent, their share of total industrial employment was 27 percent.
Similarly their share of total industrial output in 1972 was 34
percent. This situation continued until 1988, when discussions
were initiated to decrease government control of business activity.
The major factor accounting for the increased role in industry
of the public and Histadrut sectors was the development of Israel's
defense industry. After the June 1967 War and the French arms
embargo that followed, the Israeli government decided to build
as many domestic weapons systems as it could. In the 1980s, companies
such as Israel Aircraft Industries and Israel Military Industries
continued to be state owned and among the largest firms in the
country. The Histadrut-owned Tadiran Electronic Industries became
a major defense contractor and the state's largest electronics
firm. Similarly, the government-owned Israel Chemicals Limited
and its subsidiaries held the sole rights to mine potash, bromine,
and other raw materials in the Dead Sea area. The oil refineries,
as well as the retail gas distributors, were also mostly government
owned.
Data as of December 1988
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