IN THE task of creating a national home the Israelis have been faced with economic problems that would have led them to despair had they not been possessed of unbounded hope, great imagination and resourcefulness, and many generous friends abroad. Much has been said of the economic miracles that have been wrought in Israel. The face of the land has indeed been changed. Nonetheless, some of the impressive accomplishments appear to be without sustaining economic substance, and fundamental policy changes are needed if Israel is to solve her problems in the sense of producing by her own efforts sufficient goods and services to maintain the health and vigor of her people within the present democratic political structure. Some of these policy changes are now in the making.

The core of Israel's economic problems is that she is at this time desperately poor in resources. The poverty in natural resources is well known. Only about two-thirds of an acre of arable land is available per inhabitant, and yields on most of this are exceedingly poor unless it is irrigated at great initial and operating costs. Although there are traces of many minerals, the only large known deposits which give firm promise of being commercially workable (even assuming that real wages demanded by both labor and management are significantly less than at present) are phosphates, potash, salts of the Dead Sea, limestone, gypsum, sands and clay. At least for many years to come the nation will be for all practical purposes without forests; and the nearby accessible fishing grounds are extremely poor.

Less commonly recognized but no less important is the present economic poverty in human resources, if it be accepted that in an economic context the labor force must be assessed in terms of its ability and willingness to make use of the other available factors of production. To appreciate this aspect of the problem one must glance back. The economy of Palestine during the mandatory period could, for present purposes, be divided into the Arab sector and the Jewish sector. Nearly two-thirds of the Arab working population in Palestine in 1946 were farmers. They tended sugar fruit trees, raised sheep, grew bread grains, picked olives, and, in general, tilled, by arduous and primitive methods, the hillside farms. Over half of the Jews gainfully employed in Palestine at that time provided services of one kind or another --professional, merchandising, financial, communications, etc. Less than one-fifth were engaged in agriculture, and most of these were on large, heavily mechanized farms in the fertile plains and valleys. A small number of both Arabs and Jews were busy at industrial and craft occupations. Together, the two groups created a rough sort of national economic balance in the area at a low, and partially subsidized, level of consumption.

Between 1947 and the present something like 900,000 Arabs left the area now included in Israel, and over 800,000 Jews entered. But most of the workers leaving were farmers and most of those entering were producers of commercial, personal and professional services. Less than 5 percent of the newcomers who had been working had been engaged in agriculture. Further, the incomplete data available indicate that less than one-quarter of the immigrants had been gainfully employed at all before coming to Israel--the percentage of aged and of children in the total was high. It must also be kept in mind that most of the immigrants brought little or no productive capital with them and that over 95 percent of them came from the Arab States, Africa, Asia, the Balkans, and Central and Eastern Europe--areas where the services performed and the commodities produced were often not of the type requiring labor talents which could be easily transferred or made use of in the Western European-North American type of economy which the Government of Israel, the Jewish Agency, the old settlers, and most of the foreign investors have been trying to create in the new homeland.

The hostility of the surrounding Arab States has added greatly to the burdens resulting from Israel's poverty. High on the list of resulting costs is that of maintaining a larger military establishment than would otherwise have been necessary. Perhaps equally burdensome and more permanent, if less obvious, have been the costs associated with the policy of attempting to make the frontiers secure by creating new settlements along them. This often involved heavy expenditures on housing, irrigation, roads, farm machinery and equipment, as well as the use of men's time, which would have yielded more goods had they been in other parts of the country. A third major group of costs has resulted from the Arab economic boycott. This has not only denied Israel nearby markets and sources of supply, but has forced her to pay out many millions of dollars extra each year on transportation.

In spite of these difficulties, investment in Israel has been large, perhaps as much as 20 percent of total national income. Equally impressive to the outside observer are the living standards that have been maintained. The consumption levels in Israel are austere indeed as compared with those in the United States or with the aspirations of the Israelis. But in terms of such essentials as food, clothing, housing and medical care, consumption in Israel is not only much higher than that of the surrounding nations, but the average probably exceeds that of Greece, Turkey, Jugoslavia and Italy. More important, it appears to be well above the pre-1948 levels of many of the citizens and is certainly far beyond the present capacity of Israel to maintain by her own efforts.

These levels of investment and consumption have of course been made possible by huge amounts of outside help.[i] Currently, and for the past few years, it may be estimated roughly that something like one-fourth of the total value of goods and services available to the Israelis (that is, about four-fifths of all imports) have been provided as gifts or loans. World Jewry and the United States Government have been the principal contributors. Private foreign banks and commercial suppliers have extended large short-term credits, saddling Israel with a particularly difficult and expensive debt management problem. Within the last few months Israel has begun to receive goods under the reparations agreement which provides that the Federal Republic of Germany shall pay to the State of Israel three billion Reichsmarks ($714,000,000 at the current rate of exchange) during the period ending in 1965-1966.

II

Apart from Israel's poverty, much of the explanation for her failure to become more self-supporting is to be found--as in many nations--in the preoccupation of policy makers with the immediate economic well-being of the people. During the mandatory period, the Jewish residents in Palestine, by dint of hard work, sacrifice, entrepreneurial ability and imaginative application of their energies, buttressed with help from world Jewry, had created for themselves a relatively high standard of living. With the birth of Israel and the accelerated "ingathering of the exiles," the responsible officials deliberately decided that for social and political reasons it was undesirable to have two large groups in the country with widely divergent living standards. Rather than attempt to force down the existing levels of the pre-1948 residents, they decided to concentrate on raising those of the newcomers.

This policy in the first instance took the form of heroic efforts to provide the immigrants on their arrival with food, shelter, medical care and various amenities which, meager as they were, were often superior to what some of them had been accustomed to. Virtually nothing was demanded in return, and the recipients knew that if they did nothing the government would make every effort to care for them. More important were the government's policies of setting high monetary wages for the newcomers; providing them with opportunities for employment in public works; and attempting to improve the individual's economic position by selling imported goods at low prices and by placing price controls on many locally produced foodstuffs and clothing. These policies, together with the large expenditures on defense and investments, resulted in a serious inflation. Among other effects to be noted later, this left much cash in the hands of the residents and thereby created a demand for many personal and commercial services which the new citizens were willing and able to sell but which added little to the nation's capacity to support itself. The immigrants were not trained at the start to do much of the arduous work that the departed Arabs had performed and that self-support demanded; on top of this, the government's policy, resting in important part on aid from abroad, served to decrease their willingness to accept such employment.

Some of the consequences of these policies were not unrecognized, and in 1952 sharp changes took place. The local prices of many imports were raised by devaluing the Israeli pound, and price controls were removed from many locally produced goods. Officials of the General Federation of Jewish Labor, which also has extensive interests as an employer, agreed to show restraint in demanding increases in basic wages. The government undertook to engage in no inflationary financing of the budget, to restrict bank credit and to reduce certain of the public works expenditures. These stringent policies, heroically administered, have had fundamental and beneficial effects. The most publicized has been a doubling or more of the number of unemployed. Undesirable as this in itself is, it has encouraged some of those affected to seek a more menial sort of work on the land and in the factories than they had hoped for, but which will add more to the national income than did their earlier work, Further, the threat of unemployment is operating in many instances to increase labor productivity greatly. The anti-inflationary task is far from completed. Prices are still rising, though less rapidly than before. The pressures to return to the old ways are strong, especially from the unemployed, the merchants and the industrialists. Nonetheless, these new financial policies are the most encouraging single economic development of the past two years, for they are laying the groundwork for a basic reorganization of agriculture and industry.

III

The importance of farming has received much stress from the very beginning of the organized Zionist movement. The general proposition is widely accepted in Israel that for economic, political, social and security reasons the nation must devote much of its energies to farming, even though the crops be wrested from the soil at great cost in time and energy. Since 1948 the government and the Jewish Agency have repeatedly appealed to the newcomers to move onto the land, especially to the areas formerly farmed by the Arabs. Many new homes have been built in the rural areas. Elaborate and extensive irrigation schemes have been constructed and many more are planned. Loans and credit have been available on generous terms. Great efforts have been made to provide seeds and machinery to the new settlers. Many new agricultural settlements have been created and the resulting increase in agricultural production between 1948 and the present has been no mean accomplishment. But the fact remains that less than 20 percent of the people now live on farms; that the total acreage under cultivation during 1953 was some 12 to 15 percent less than it was in the same area during the latter years of the mandatory period; and that the production of many basic agricultural products, notably meat, wheat, olives, eitrus and sugar fruits, is probably still less than half what it was in the years just before the new state was created.

We have already noted the major reasons for Israel's failure to increase even more the area under cultivation and the number of people engaged in agricultural pursuits. In view of their backgrounds, the newcomers have a strong disinclination to go to the land; and let no one underestimate the tremendous sociological difficulties of converting a large group of urban people into farmers. Other policies of the government, springing from the desire to treat the newcomers well, served to defeat the "to the land" program. Farming, especially in the hill land, promised hard work and uncertain returns. It is not surprising that few chose to farm when the government offered the alternative of life in the towns or in camps near urban areas, where medical attention, public services, social life and probably even food consumption, temporarily at least, were superior to those in the countryside, where employment could be found on road construction, afforestation and other public works; and where all sorts of miscellaneous services could be sold to the older urban residents who had ready cash. Furthermore, so long as the government followed a policy of insuring the people a reasonable standard of living by importing many foodstuffs and selling them at heavily subsidized prices, and at the same time enforced rigid price controls on many local products, it was often economic nonsense for a person to leave a camp or a socially unproductive job in the towns for a farm.

The removal during the past several months of many price controls on local foods, the devaluation of the Israeli pound with a consequent rise in the price of imported foodstuffs, and the more stringent internal financial policies have made life in the towns more onerous and have, on the other hand, increased the profitability of farming. The result has been a widely-hailed movement of a few thousand families to the land. This transfer has only just begun. It will be necessary to intensify the unpopular anti-inflationary measures, to curtail further the imports of agricultural products, and to extend elaborate and expensive irrigation works, before Israel produces as much of her foodstuffs as she is both physically and economically able to do. All this will take time. It must also be expected that for a few years many of the new farmers will have to be subsidized if they are to survive. The cost of this, and of additional irrigation, will be great; and there seems no alternative but that these costs be borne in large part by Israel's foreign friends. However, such assistance, if stringently administered, holds great promise of being terminable, for it will greatly increase the local production of goods that are now imported.

Aside from the question of the extent of agriculture in Israel, it must be said that past policies have encouraged farming methods that do not appear to be supportable by Israel on her own. She was confronted with the fact that there were only a few experienced farmhands; she was under great pressure to increase production quickly; she was aware of and impressed by the techniques used in the richest and most industrialized agricultural areas--especially the United States; she was disdainful of the primitive methods used by the Arabs who formerly farmed the land and free of any pressure from vested interests to maintain those methods; and she was determined, as a matter of principle, to do things in the most "scientific" and "modern" way. With all this in mind, Israel proceeded to mechanize her farms to an extent not seen in many sections of the United States or Western Europe. This was made feasible by large-scale aid from abroad. It was economically wise from the point of view of the individual farmer, even though yield per acre increased little if at all, so long as foreign exchange was one of the cheapest commodities in Israel and labor one of the most expensive. The consequence, however, has been that the value contributed by Israel to a given unit of locally produced farm products has progressively declined. At the same time her agriculture has become increasingly dependent on imports of fuel, spare parts and replacements without thereby increasing appreciably her ability to export. Stated in another way, the one resource Israel has in abundance now, and probably will have for the indefinite future, is labor, much of it underemployed and little of it currently producing goods or services that the rest of the world is willing to buy. Yet an agricultural structure has been created which relies heavily on the import of the labor of others. Surely this is the road toward perpetual dependence.

It is easy to underestimate the political and social difficulties of reverting to somewhat more primitive methods of cultivation, in particular to a greater use of manual labor and animal power. To those directly affected, such a course will doubtless seem to be a step backward and an indication of failure on the part of the authorities. Still, until some as yet unforeseen opportunity for other productive employment is found, it is along this path that Israel will find opportunities for increasing her ability to support herself. It is not suggested that the crude techniques of the departed Arabs should be adopted, though some of these may still be the most efficient for a nation with lots of people and little else. Methods common in the United States a generation ago, and on many farms still, would permit Israel to make a greater use of her own particular resources. There are, after all, methods of farming which lie between the camel, the small wooden plow and the flail at the one extreme and the crawler-type tractor pulling a seven-bottom plow or a huge combine at the other.

Self-support also seems to call for changes in the kinds of goods produced on the land. The considerable increase in total output during recent years has not resulted in anything like a comparable reduction in imports. Rather, it has served in large measure to improve the quality of the diet. During the mandatory period, a large part of the basic foodstuffs--bread cereals, olive oil, vegetables and range-fed mutton--were produced by the Arab farmers. The Jewish settlements concentrated heavily on producing animal products--eggs, milk, veal and pond-grown fish, the animals themselves frequently consuming imported feed. The departure of the Arab farmers dramatically altered the task of Jewish agriculture, but the fact was not fully appreciated and in important respects the agricultural settlements established since 1948 have been along lines similar to the earlier Jewish farms. The result has been, as thoughtful Israelis point out, that the present composition of agricultural production is that of a rich country, while the food basket is--and must continue to be, if Israel is to be viable--that of a poor country.

The Israelis are becoming more and more aware of this third aspect of their agricultural problem and are making a start, but only a start, to correct it, frequently with the help of Point Four and United Nations technicians. A program for rehabilitating the virtually abandoned olive trees is under way. Picking olives is menial work; but edible oil is an essential in the diet, and in recent years it has been provided by Israel's friends abroad rather than from her own hillsides. Plans are under way once again to graze sheep on the hills, without animals since the Arabs left, and to do it in a way which will preserve rather than destroy the ranges. Great hopes are held out for the current experiments in growing certain industrial crops--peanuts, sugar beets, carobs and castor beans--which are designed to replace some food imports and provide raw materials for local industry. Successful cultivation of these crops will necessitate some drastic reforms in the physical and social organization of the agricultural settlements and will require much hard manual labor. These changes will not be easy but they will permit a greater use of the resources which Israel herself possesses and therefore will be in the nation's long-term interest--unless, that is, she can safely assume that by not doing them the resulting shortages will merely because there are shortages, result in more help from the outside.

IV

In view of Israel's limited land and large population, many persons there, often with encouragement from their friends abroad, have nurtured the hope that their nation will become a great manufacturing center. Little rigorous and systematic thought seems to have been given to just what Israel has to contribute to the maintenance of such an economy. For some time, at least, many persons even in responsible positions accepted the mischievous notion that there is a clearcut and one-way cause-and-effect relationship between manufacturing and prosperity. The government offered many inducements to both foreign and local investors, and very large investments indeed have been made--by private Israelis, by the Government of Israel, by the all-embracing Jewish Federation of Labor, by private foreign investors, and from funds supplied by the United States Government. By and large, the government reserved its blessings and encouragement for industries which in its view would reduce imports and expand exports. In applying the criterion of reducing imports, however, it usually assumed implicitly that all the goods being provided during the period of largescale aid from abroad, and more, were "necessary;" whereas the argument being made here is that if Israel is to become viable she must for some time at least learn to do without many of the goods which her friends have supplied in the past. In applying the criterion of increasing exports, the record unfortunately indicates that hope was substituted for a careful analysis of costs, of potential markets, and of what part of the exports were simply previous imports, now carrying heavy transportation charges.

An exhibit of the current output of Israel's factories is very impressive: automobiles, tires, electric refrigerators, radios, fine shoes and excellent textiles, nylon hosiery, steel pipes, plastics, chemicals, cement, polished diamonds, jams and fruits, chocolates, to name a few. On inspection, however, the economic foundations of many of these industries appear fragile indeed. Many of the new enterprises are close replicas of those found in the United States and Western Europe, the assumption having been made that the particular processes and techniques which had proven successful in countries with quite different amounts and combinations of physical and human resources, employment alternatives, markets, and sources of supply could be easily and economically transplanted in Israel. Relatively little of the investment has been in expanding and improving the modest undertakings which had proven successful during the mandatory period. This reflected in part a tendency to favor speculative new undertakings with possible large returns as against modest investments which would build on what previously existed and were reasonably certain to yield moderate, but only moderate, returns. Admitting some exceptions, the most significant aspect of the new industries is that they are built almost entirely of imported equipment, consume imported raw materials and semiprocessed goods, are powered by imported fuel, rely on foreign producers for replacements and spare parts, and employ only small numbers of relatively unskilled, but highly paid, local labor. That is to say, Israel's contribution to the value of the final product is very small as these things go.

So long as the internal inflation created a large and continually expanding domestic market for the output, and generous foreign assistance provided the means for obtaining the fuel, raw materials and machinery, these industries were, or promised to be, profitable from the individual investor's standpoint. But much evidence has been accumulating during the last year or so that raises grave doubts as to the contribution many of these investments are likely to make to Israel's ability to support herself. Thus, in spite of the huge amounts of outside financial aid which Israel has been receiving, and the various special arrangements permitting the retention of foreign exchange earnings, the shortages of imported raw materials in the past year have restricted the output of the existing industries to something, on the average, of half of their rated capacity. Faced with increasing competition by Western Europe and Japan, and burdened by high wages in terms of output and the high costs that go with operations at perhaps half of capacity, only token exports have been made. As a result of the more stringent internal monetary policies of recent months many of the industrialists are also finding the domestic markets much smaller than they had anticipated.

These developments are leading to a serious reëxamination in Israel of the past industrial investment policy. Harsh realities are being faced as they have not been before. Some reforms are being made, and if they are vigorously pursued, they hold out promise that some of the plants will be able to contribute to a solution of Israel's economic problems by reducing costs and increasing the national share in the value of the final product. Many of the industrialists are for the first time actively seeking out export markets. Efforts are being made to increase labor productivity. Growing numbers of people are concluding that perhaps men can perform some of the tasks previously planned for imported machines. Greater emphasis is being placed on producing more local raw materials. The experts hold out promise for industrial farm crops, but many view with great skepticism the current plans to make huge investments in facilities for processing the mineral resources of the Negev. The possibility of finding large deposits of raw materials in that desolate area must of course be fully explored. But until the mining engineers, the geologists and the businessmen have satisfied themselves that the mineral deposits are of sufficient size and quality to be commercially exploitable there is grave danger that investments in such processing facilities will prove to be at best premature, with returns long delayed, and at worst completely wasted. Israel is too poor to take such risks, especially when there are attractive though unspectacular investment projects in irrigation, in small hillside farms, in agricultural research, in animals, in piecing out, improving and expanding those few existing manufacturing plants which are doing well, and, above all, in training people.

It may well be that unless foreigners continue to carry the burden, many of the past industrial investments will have to be abandoned in order to cut losses. This is not to say, however, that there is no future in Israel for industry. In the present gloomy picture two industries--citrus byproducts and diamonds --stand out as eminently successful from the point of view of their owners, the value of their exports and their contribution to the viability of Israel. It is perhaps not just chance that the first relies on local raw materials, the second on great technical skills, and that both are small-scale flexible operations employing relatively simple and inexpensive machinery.

The one economic resource which Israel has in abundance is her intelligent, receptive and imaginative people, respectful of high-order skills and eager to teach and to be taught. Surely the industrial and agricultural future of the nation lies in taking advantage of these resources, that is, in producing goods with a large content of labor that becomes progressively more skilled. Returns to Israel from this sort of investment will be slow, and it must be accepted that while these new human skills are being created earned living standards will be low. A perplexing aspect of Israel's economic policies is that the effort to insure the people a decent standard of living at once should have made so many of her economic problems more difficult, but that so little has been done to develop and use the people's potential talents.

V

It is sometimes assumed that once the Arab boycott is ended many of Israel's present economic problems will disappear. The costs of the boycott have been heavy and the lifting of it will certainly lighten some of Israel's--and the Arab States'--burdens. Given time, the advantages accruing from a greater international division of labor can be impressive. Also, peace will facilitate the execution of joint development programs, especially in the all-important fields of irrigation and hydroelectric power in the watershed of the Jordan and in the exploitation of the Dead Sea salts. But it is easy to overestimate the economic benefits that seem likely to be felt in the first several years. The biggest immediate gain to Israel will be in the saving of transportation costs on her imports, especially fuel and bread grains. Peace should also permit some reduction in defense expenditures, though the amount of such savings seems likely to be small in view of the interest of Israel and her Western friends in the regional defense of the area. No doubt additional exchange will be received from tourists and the services that Israel can provide in connection with transit trade. There is an easy assumption afoot that the Arab countries will provide eager and lush markets for the industrial production of Israel. This may be so, but in assessing this potential benefit we must not forget that many of the goods which the new factories of Israel produce must be regarded as luxuries by poor people and are therefore not well designed for large sales in the Arab markets. Further, it must be recognized that in these markets Israel will be competing not just with local Arab manufacturers but also with the products of Western Europe, the United States and Japan. The record to date is not encouraging on this score.

Altogether, it will be surprising if the net savings plus net earnings total more than $25,000,000 to $30,000,000 a year during the first few years. This would be equal to less than one-seventh of the international deficits in recent years. And against these possible early gains from peace and the opening of trade channels must be set the obligation Israel has assumed to pay compensation for the property left in Israel by the former Arab residents. The effective honoring of this obligation has not been formally tied to the end of the boycott. It would not be surprising, however, if, at least indirectly, such payments absorbed a very large part indeed of any net economic benefits accruing to Israel for a great many years. In sum, the end of the boycott will not constitute that hoped-for miracle which is to take the place of the fundamental reorganization of economic life which is here held to be necessary if Israel is to become self-supporting.

Israel's economic problems are difficult, and will remain difficult for a long time. Thoughtful Israelis do not believe that perpetual dependence on foreign friends to anything like the present extent is a satisfactory answer; the dignity and independence of their valiant democracy and of themselves as individuals rule that out. The other foreseeable solutions will be painful, for they will involve at best a long period of lower real wages, of harder and more irksome physical work, and of drastic occupational readjustments. Some elements of these alternative solutions are now being charted. To apply them will not be lacking in danger, for subsidized living standards can quickly become the minimum standards which are socially and politically acceptable. Israel's friends can take hope, however, in the fact that her people have only too frequently in the past demonstrated a capacity for making sacrifices and enduring hardships.

[i] It must not be assumed that international deficits are a recent development. How deep-rooted this problem is in the area is shown by the fact that during the last decade of the British mandate in Palestine exports paid for less than half the imports, the balance being financed by private capital movements (in large part owned by the incoming immigrants), the national Jewish funds, and the Mandatory Government. Huge payments were received during most of this period from the foreign armed forces in Palestine (largely British), but most of this income served to increase the assets abroad of the territory. A part of these assets was subsequently made available to Israel and was used during the early days of the new state to finance imports.

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  • GARDNER PATTERSON, Director, International Finance Section, Princeton University; recently in Israel studying that country's economic problems; author of the annual "Survey of International Finance"
  • More By Gardner Patterson