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Israel
Index
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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