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What's behind Israel's biggest economic boom? The occupation

The period of Israel’s history that by far saw the largest economic growth, more than any other, was the six years following the Six Day War. And what agricultural, industrial, or hi-tech breakthroughs took place around 1967-1973? None worthy of mention. More than any other single factor, it was the establishment of the Occupation-Settlement Enterprise.

By Dr. Assaf Oron

Settlement construction in the settlement of Gilo, January 21, 2010. (Photo: Activestills.org)

This week, Dr. Karnit Flug became the first woman in Israeli history to be appointed Governor of the Israel Central Bank – a position analogous to the U.S. Federal Reserve chair. The process leading up to her appointment played out as a satirical mirror-image to what had transpired in America a short while earlier.

In both cases, the outgoing chair/governor had strongly recommended his second-in-command, a woman, as successor. In both cases, the government had originally skipped over the female candidate, instead courting has-been male candidates with skeletons in their closets. And in both cases, common sense eventually prevailed.

Bank of Israel Governor Dr. Karnit Flug. (Photo: Nati Shohat/PR)

There were, however, the familiar differences between the American process and its Israeli doppleganger, in the depth of the farce. Whereas the Obama administration had only considered Larry Summers over Janet Yellen, but never formally extended the invitation – the Netanyahu government managed to formally appoint not one, but two would-be male governors, only to see both candidacies evaporate into thin air. Then, Bibi and his finance minister, Lapid, bickered and vacillated over various other candidates for an additional three to four months before finally reverting to Flug – who was meanwhile the acting governor – as the option of last resort. This was preceded by Lapid – a few months ago Israel’s rising political star and nowadays its favorite laughingstock – going on national TV a mere four days before the final appointment and stating in his signature dismissive overconfidence that, “Flug will never be Bank of Israel governor.”

But without a doubt, the cherry on top is the reports from multiple sources that at the very last moment, Netanyahu extended a desperate invitation to none other than Larry Summers himself. That’s how I learned that Summers is Jewish. In Netanyahu’s world, any male neoliberal economist of Jewish descent, anywhere on the globe, is a more appropriate Bank of Israel governor than an Israeli-born woman who rose through the Bank’s ranks (Flug’s predecessor was American Stanley Fischer).

But I digress… sorry, Israeli politics are often so funny that no satire can do them justice.

Why this virulent “Anti-Flugism” on Netayahu’s part? What is, metaphorically, the “dark secret” that made Bibi try to throw everyone and the kitchen sink into the Governor position, just to avoid the natural successor?

Flug’s lack of a Y chromosome does not explain the depth of Bibi’s hostility. Instead, most economic journalists point towards a working paper published in 2007, when Dr. Flug was head of the Bank’s research division.

That paper, co-authored by Flug and Dr. Michel Strawczynski, divided Israeli history from 1960 through 2006 into periods delineated by historical and economic turning points, and calculated the growth in each period as well as a host of variables representing economic policy and the political situation, in an attempt to answer the question: what are the main drivers of growth periods? More specifically, do these tend to be geopolitical factors (wars, immigration waves, the global economy, etc.) – or the Israeli Treasury’s macro-economic policy (deficit, liberalization, public investment, etc.)? Here is the raw data from the article:

Flug and Strawczynski concluded unequivocally that during the period they studied, geopolitics had trumped economic policy in their impact upon Israel’s economic fortunes by a 2:1 ratio. Frankly, no elaborate econometric models are needed to draw that conclusion: the table shows it directly, and anyone with a living memory of a substantial chunk of that period can attest to that. If anything, the models might have granted economic policy more than its fair share, at the very least due to the fallacy that macro-economic steps have an immediate effect rather than a delayed one.

Anyway, the Flug-Strawczynski report was a thorn in Netanyahu’s side. In 2003-2006 he had clawed his way back from the political wilderness and as finance minister, implemented a radical neoliberal agenda of brutal social safety-net cuts and rampant privatization. That period coincided with Israel’s emergence from its deepest economic crisis since the 1970s – the Al-Aqsa Intifada crisis of 2001-2003, exacerbated by the 9/11 recession.

Bibi has presented Israel’s recovery from the 2001-2003 crisis as evidence of his economic genius, and as his claim to gravitas in the eyes of Israel’s socio-economic elites, who had up until then seen him as a superficial hack. Yet, here comes the head of the central bank’s research department, who states in a formal report that in reality, Israel’s economy mostly rode on George W. Bush’s coattails to exit the crisis.

Fair enough. That probably explains Flug’s “Dark Secret” vis-a-vis Netanyahu. It is a bit ironic, because the report authors actually go out of their way to praise Bibi’s economic policies, to an almost embarrassing degree considering this is was a research report and not an op-ed. Yet they could not undo their results, and could not allay Bib’s wrath.

But this tempest in an economic teapot is not the Dark Secret I care about.

PM Netanyahu, Finance Minister Lapid, former BoI Governor Stanley Fischer and failed BoI nominee Ya’avok Frenkel (far left). (Photo: GPO)

I was very glad to discover the Flug-Strawczynski report. Not because of the analysis – I am not a fan of neoliberal models; they seem to be “flexible” enough to give neoliberals exactly what they want, reality be damned. Thomas Herndon brilliantly showed this about the influential Reinhart-Rogoff article; I had my own, eerily similar personal experience with this type of (mal)practice by another celebrity neoliberal, Dartmouth’s Jonathan Zinman. In the Flug-Strawczynski case, the signal coming from reality was probably way too strong to be obliterated via neoliberal hocus-pocus modeling.

No, it was not the analysis I was glad to see. It was the raw data in their Table 1 shown above. The data exposes a dark secret that is not Flug’s – but rather, shared across the entire Israeli elite. In fact, it is a secret hiding in plain sight.

How Did Israel Become a Wealthy Country?

In the last 30-40 years or so, Israel has been a Westernized country, wealthy relative to most of the world – both in terms of lifestyle and in terms of self-image. That is, most Israeli citizens nowadays both live a Westernized, consumerist, relatively wealthy lifestyle, and expect to deserve this kind of life. Most current international economic indices of wealth show Israel in the top 10-15 percent of countries worldwide.

In 1960, the beginning of the period examined by the Flug-Strawczynski report, this was not the case, not at all. So what triggered Israel’s “economic miracle,” its transition into a solid First World status?

If one compares Israel to other countries that hop-skipped from the “Second” or “Third World” to the “First World” over a similar time frame, the question’s difficulty becomes more apparent. In the Israeli press there have been attempts to cast Israel as an “Asian Tiger” like Japan, South Korea, or Taiwan. But all these Tigers took a pretty clear path to prosperity: they became global industrial export powers. Israel, too, takes pride in its exports; but our exports have never reached “Tiger” levels and have never exceeded our imports (under certain calculation choices, in 2010 Israel’s exports briefly and narrowly exceeded its imports – but not when all imports and exports are considered; and even this hasn’t happened in any other year).

Containers being loaded onto ships for export. (Photo: Shutterstock.com)

So Israel is not an “Asian Tiger.”

Some European nations, too, have emerged from relative poverty to relative wealth over a similar period: Italy and Spain come to mind. During their period of rapid growth, these countries enjoyed stable peace, maintained very small militaries, became global tourism magnets – and, to boot, had positive foreign-trade balances for most of the time. Israel certainly did not follow this path either.

So what is Israel’s secret?

The common Israeli answer to the riddle is a mix of self-congratulatory theories. The most popular is a story of generational brilliance: it begins from our amazing agriculture built from the 1930s to the 1960s (only to be dismantled later by neoliberalism), followed by amazing “traditional” industry from the 1950s onwards (which, again, produced far less exports than our imports at any given point in time, and has been largely dismantled since the 1980s) – and nowadays, the fabled “Silicon Wadi”, the golden calf of Israeli hi-tech.

Another explanation comes from Israeli fans of neoliberalism. After long years of quasi-socialist or inconsistent policies, sometime in the mid-1980s Israel’s macro-economic policy started following neoliberal dogma. Since then, its neoliberal marks only keep improving. This – according to neoliberals – is the source of economic manna raining on Israeli heads. This latter theory is the one examined by the report. The authors’ models managed to rule a respectable defeat: neoliberal orthodoxy was not a decisive factor in Israel’s economic growth, but it was “statistically significant” (as a statistician I question the “significance” premise here, for various reasons).

But the raw data alone suffices to show that the “neoliberalism brought us prosperity” theory is pure hogwash. If it were true, we’d expect the numbers in Table 1 to show weak or inconsistent growth before the late 1980s, and ever-accelerating growth since then. What we see instead is perennial inconsistency, start to finish – but with the longest periods of strongest growth happening predominantly in the 1960s and 1970s, well before the advent of Israeli neoliberalism. Don’t believe me? Here’s what the authors themselves write: “After 1973, growth periods were scarce and short…” (p. 5).

So neoliberalism is not it.

What about the agriculture-industry-hi-tech explanation? The real data is not kind to them either. What was the most massive persistent-growth period, far ahead of any other period in 1960-2006? The six years immediately after the 1967 war. Per-capita annual growth during these six years was an astronomical 9.9 percent, with the short Intel-led “hi-tech” burst of 1999-2000 coming in a distant second at 6.3 percent, and 1960-1965 third with 5.6 percent (Table 1, third column of numbers). Not only was the 1967-1973 growth rate phenomenal; this period is also one of the longest in the hectic history depicted in the table (and for unknown reasons, the authors wrongly snip it somewhat too short at December 1972, instead of September 1973 on the eve of the 1973 war). Cumulatively, over the 76 months from the 1967 war to the 1973 war, Israel’s per-capita GDP had almost doubled.

What agricultural, industrial, or hi-tech breakthroughs took place around 1967-1973? None worthy of mention. Rather, the project bringing about this growth spurt, the project most responsible for shifting Israel from “Second World” to “First World” economic status – not exclusively, but more than any other single factor – is the establishment of the occupation-settlement enterprise.

Prime Minister Levi Eshkol (second from left) and Min. Menachem Begin (second from right) watch an army parade in occupied Sinai, a number of days after the Six Day War, June 13, 1967. (Photo: Moshe Milner/GPO)

As I said, this is a secret hiding in plain sight. The data are public, but no one seems to be interested in them, and certainly no one in Israel cares to emphasize them. I first encountered them a few years ago, on the amazing global-health visualization website gapminder.org. Playing with the interactive graphs there, I was naturally curious about my home country.

Below are some Gapminder plots highlighting Israel. The x-axis shows the current year’s per-capita growth rate, while the y-axis shows the (log-transformed) per-capita GDP. In the 1967 snapshot, Israel is near the top of the “Second World” cluster, not far from countries like Hungary and Yugoslavia. By the 1974 snapshot, it had already hop-skipped to the bottom of the “First World” cluster. The dots connected by a green line show Israel’s remarkable annual per-capita growth numbers during the intervening seven years. Making a similar leap concurrently with Israel are Japan (large red circle), Italy and Spain (somewhat smaller, orange circles).

So I’ve known about this data for a while. But Gapminder is “just a website,” and a European-based one to boot. Israelis have retreated since 2000 into a reflexive denial of any embarrassing information coming from abroad (even if the source is a likeable Swedish public-health professor dealing with 200 countries’ data and not obsessed with Israel in particular). Therefore I was really glad to see an official report from none other than the Israel Central Bank, admitting the same reality, black on white.

So what do Flug and Strawczynski have to say about the remarkable growth spurt of 1967-1973? Par for the Israeli establishment’s course, they say next to nothing about it. Yes, a 37-page report named ”Persistent Growth Episodes and Macroeconomic Policy Performance in Israel” devotes almost no attention to the single most massive growth period in its study. The only half-hearted reference to this period is in parentheses, saying that the 1967 war “(…enhanced growth since it was short and created prospects for improving Israel’s geopolitical situation)” while the 1973 war did roughly the opposite – and this too, was not invoked to explain growth, but only to explain why the authors didn’t include wars directly as a covariate in their model (p. 12; they did include the number of terror victims, though).

Just for completeness, I will address this half-hearted, not-quite-an-explanation explanation as well. Yes, 1967 established Israel as a regional power. But this geopolitical upgrade came at a direct geopolitical price: the Soviet bloc immediately cut off all ties with Israel, turning it into an explicit Cold War pawn for better or worse. The Arab economic boycott, in place since 1948 but rather toothless during its first two decades, began to intensify, reaching its peak after 1973. And from a strict security perspective, as recent analysts point out, 1967 actually harmed Israel’s deterrence potential: on the Egyptian front the war never really ended, devolving into a bloody four-year war of attrition. It is after 1967 that Palestinians make their appearance as an autonomous player, launching guerrilla and terror attacks, first from Jordan and Gaza, then from Lebanon and worldwide. By contrast, the years immediately before 1967 were among the calmest in Israeli history. So neither geopolitics per se nor the objective security situation were the economic ATM making Israel rapidly wealthier between the summer of 1967 and the fall 1973.

What was this ATM then? It was the establishment of the Occupation regime, which paid immediate dividends in multiple ways. Here are some of them:

Arab Labor, Part A –  Practically overnight, Israel’s labor market was flooded by a huge number of low-cost, high-quality indigenous laborers. The product of Palestinian labor for Israeli businesses directly contributed to our national wealth. It took a while for the authorities to actually document and partially “rein in” this labor (in the sense of it being formally reported). But its extent was truly torrential: within a few years there were scarcely any Jewish-Israeli manual laborers anymore. In addition, the documented minority among Palestinian workers, numbering tens of thousands from the middle of the period onwards, paid Israeli income tax and the Israeli equivalent of Social Security, without receiving anything in return, thus giving a boost to Israel’s government budget, too (since 1994 this money was supposed to go to the Palestinian Authority; withholding it has become a national sport among Israeli politicians).

Palestinians workers walk next to the Wall and an Israeli military tower to cross very early the Eyal Israeli military checkpoint into Israel in order to reach their workplace, Qalqiliya, West Bank, 22.11.2011. Thousands of Palestinians are passing this checkpoint every morning, some coming as early as 4am. (Photo by: Anne Paq/Activestills.org)

Arab Labor, Part B – Palestinian labor made it far easier for many in Israel’s working class to hop-skip overnight into the middle class as independent business owners. The Israeli construction worker became an independent contractor, with Palestinians doing the work. The auto mechanic became an auto-shop owner, and so forth. Anyone living in Israel during the 1970s and 1980s recalls the crocodile-teared public refrain about, “All workers are Arab” and “Jews don’t want to do the work anymore…”  But in reality, most Israelis were busy laughing all the way to the bank.

Palestinian youth working under precarious conditions, under the minimum wage on plantations in the Jewish settlement of Ma’ale Efrayim, Jordan Valley, March 21st, 2009. (Photo: Keren Manor/Activestills.org)

Arab Labor, Part C – The lower cost and higher yield of Palestinian labor allowed Israeli consumers to enjoy cheaper products and services, especially if they went to the Territories to purchase them – which in 1967-1973 was considered a perfectly safe, almost daily activity. Inside Israel itself there was a construction boom, with large modern apartments becoming affordable. Many Israeli business owners kept prices the same or even raised them as demand increased, becoming wealthier faster due to the dramatically higher margins.

The Settlement Enterprise – Conventional wisdom attributes the massive expansion of Israeli settlements to the right-wing Likud governments starting in 1977. In reality, even before that the settlement project had transformed some regions beyond recognition, first and foremost “East Jerusalem” – the vast regions in the city’s north, northwest, east and south annexed in 1967 that are far larger than both pre-1967 parts put together. A conglomerate of Jewish mega-neighborhoods sprouted on those hilltops within a few years. The new land was “free,” i.e., forcibly confiscated from its Palestinian owners, and labor was cheap (see above…). By 1973, Jerusalem had already turned from a sleepy border town to a vibrant sprawling city, greatly invigorating the capital’s economy.

A neighborhood of the Har Homa settlement outside of Jerusalem. (Photo: Activestills.org)

Captive Market – Overnight, the “domestic” market for Israeli products increased in the size of its population by some 50 percent. After taking over the Occupied Territories, Israel imposed a customs union on them and either completely blocked or placed strong barriers on imports into the Territories from abroad. Local Palestinian industry was also repressed by suffocating military bureaucracy, as well as by the situation itself. Gapminder.org pegs the per-capita Jordanian buying power in 1967 at roughly one-third of Israel’s; so depending upon product, the actual market expansion was probably smaller. But would any business complain about an immediate 10-20 percent market expansion? For Israeli monopolies the captive market was especially lucrative. For example, Israel’s three oil companies united to create “Pedesco,” a gas-station monopoly operating only in the Territories. But the jewel in the crown remains the currency monopoly. The Israeli lira (the shekel’s predecessor) became the Territories’ only de-facto currency, and Israeli banks charged Palestinian banks confiscatory fees for the privilege of using it.

An Arab Boycott bypass road – As written above, post-1967 Arab nations became gung-ho about boycotting Israel. However, the so-called “Open Bridges” policy announced by Israeli Defense Minister Moshe Dayan allowed West Bank businesses to export to the Arab world via Jordan, and the West Bank label was not boycotted. Israeli businesses quickly took advantage of this opportunity, and ever since 1967 a lot of Israeli products have been sold to unsuspecting Arab-world consumers under a false label, thus accessing previously unreachable markets. This was especially easy with agricultural produce. The Israeli press was openly bragging about the practice in the 1970s.

Exploitation of natural resources – Easiest to exploit was, of course, the land itself. But other resources have been intensively, and quickly exploited as well. Only years later, it was revealed that starting in summer 1967, Israel pumped massive amounts of oil from the Abu Rudeis field in Sinai; by 1973 this field supplied half of Israel’s oil consumption. In addition, water from the Golan Heights taken from Syria in 1967, doubtlessly helped Israeli agriculture in the North, the country’s most productive region (pre-1967, the incessant “water war” with Syria was the single greatest flashpoint along Israel’s borders).

A Palestinian youth throwS stones towards an Israeli quarry, built on Palestinian land, during a protest against the separation barrier in the West Bank village of Suqba, on December 11, 2009. (Photo by: Oren Ziv/ Activestills.org)

Expansion of Government Spending – Many of the items above necessitated massive public spending. But more than all everything else combined, military expenses had mushroomed beyond belief. Huge new bases were built in the Territories, in Sinai above all – including the ill-fated Bar Lev Line fortifications. The number of employees in Israel’s “security industries” increased by 150 percent from 1967 to 1973 (h/t Shir Hever for the datum). This was yet another stimulus to Israel’s economy, and an increasing chunk of it came from the United States as military assistance (which was essentially nonexistent pre-1967). But some of this spending was unfunded; indeed, Israel’s budget dipped into the red in 1969, and by 1973 the government ran a hefty deficit.

“Start-Up Nation”? The most amazing start-up in Israeli history remains the establishment of the occupation regime. One teeny problem: we forgot to make our strategically timed exit.

Despite the remarkable commitment of most Israeli governments to the occupation and settlements, these twin projects have never again succeeded in delivering a boom remotely similar to 1967-1973. Even worse, the occupation has become the major instigator of Israel’s economic crises. This, of course, started right then in October 1973. The war’s direct cause was an Egyptian realization that Israel intends to make permanent its occupation of the Sinai. The 1973 war hurled Israel into one of its worst economic crises (slightly mitigated in Table 1’s numbers by the misguided addition of three pre-war quarters), a crisis with global implications due to the oil embargo it triggered. Thereafter, both IntifadasPalestinian rebellions against the occupation – had also triggered recessions, with the 2001-2003 recession’s numbers being the worst in the study period.

Emerging from the mid-1970s crisis and the late-1980s crisis required that Israel pay a political price. On the first occasion, it was returning the Sinai and (falsely) committing to Palestinian autonomy. On the second occasion the price was engaging in direct negotiations with the Palestinians, leading to some limited autonomy. But the exit from the 2001-2003 crisis was granted to us by the George W. Bush administration free of charge, as part of his crusade to reshape the Middle East, and of his generally superb skills in running things. 

This unbelievable (and highly irresponsible) politico-economic gift from Bush has caused most Israelis to enter a mental bubble of smugness and disengagement from reality. It is this bubble that explains much of Israel’s ridiculous military adventurism since the mid-2000s. It is this bubble that allows Bibi to boast of “saving Israel’s economy” via some neoliberal magic potion. And it is this bubble, in which economists like Flug and Strawczynski attempt to “investigate,” supposedly, what causes Israel’s growth and recession cycles – all the while completely ignoring the occupation regime that actually underlies most of them.

If you are still confused as to what this little post’s message is:

Post-1967, Israel’s economy became an occupation economy first and foremost. Setting up the occupation regime gave us our biggest economic growth spurt. Since then, the occupation’s woes have given us our worst crises.

Yes, there is also Israeli hi-tech, and there is also macro-economic policy. But studying Israel’s macro-economy without explicitly entering the occupation regime into the picture, is – my apologies if this offends anyone – tantamount to economic malpractice.

On an overall calculation, my guess is that Israel is still somewhat ahead, economically, on the cumulative gains and losses from its occupation gamble. This is mostly at the expense of Palestinians, of course, but also increasingly at the expense of the U.S., the EU and others who have poured increasing amounts of money and effort to keep the situation in Israel-Palestine from falling completely off a cliff. That inflow of outside money has helped us retain many of the occupation’s benefits (for example, at least the Arab labor part was a massive growth and wealth-generation engine until 1987, rather than ending in 1973), while externalizing the humungous military cost, and shirking responsibility for crippling of Palestinian economy. Yet, the occupation’s annual balance is probably negative nowadays, and getting worse, on average, every year.

So why can’t we give it up? Besides the well-known political and social reasons (fear of Palestinians in general and terror in particular, the settler Right’s chokehold on national politics, plain inertia), there is also the memory of the original “high” of 1967-1973. That initial boom still lives in too many Israeli hearts and minds, equating the occupation and “greater Israel” with a sense of prosperity. That explains our collective behavior patterns, such as,

• Pledging to give up the occupation again and again, yet not following up, and very often not even doing anything that can realistically lead to its end;

• Denying or suppressing the occupation’s existence, its nature or the magnitude of its impact upon Israeli life;

• Blaming everyone but ourselves for its side effects.

In short, the classic behavioral patterns of an addict.

Whoever is still not convinced how unique 1967-1973 were in Israeli economic history, here is a gapminder.org trace of Israel’s annual growth rate from 1967 through 2010. No other period comes close.

A few notes from the discussion that followed the Hebrew version:

The fact that the occupation’s start-up period made Israelis much wealthier, on average, does not automatically mean that it made Palestinians poorer during that same time. Rather, the effect on Palestinians seems to had been mixed: many of the elites suffered (exiled, jailed or lost a lot business-wise); new elites – those who knew how to do business with the occupation – gained; and the common Palestinians often made more money from serving the new masters’ needs. However, medium and long-term the switch from a mixed farming/urban, developing economy towards a predominantly day-labor based one, has not been good. Infrastructure and skill development stagnated, and Palestinian income became almost entirely dependent upon the whims of Israel’s policy toward Palestinian labor.

There is no denying that Israeli hi-tech has been an important growth engine. However, our hi-tech, which started in earnest during the mid-1980s and matured during the 1990s, is taking place against the background of an already wealthy economy. Therefore it cannot explain the critical transition into that situation. Moreover, major occupation crises, when they occur, still trump Israeli hi-tech together with the entire economy. In fact, one can see the last few years in Israeli politics and economics, as a frantic collective attempt to insulate the hi-tech and other ultramodern “First World” features from the occupation – without letting go of the occupation itself. This acrobatic effort is symbolized by one man: Naftali Bennett, a hi-tech millionaire who went on to become chairman of the Settler Council, leader of the settler-affiliated political party, and now serves as Israel’s minister of the economy.

Dr. Assaf Oron is an expatriate Israeli living in Seattle since late 2002. He works as a research statistician at Seattle Children’s Hospital. Prior to arriving in Seattle, he was active in the Israeli anti-Occupation groups Ta’ayush and “Courage To Refuse.” He now supports the activities of the humanitarian organization Villages Group from afar (http://villagesgroup.wordpress.com).

Author’s note: This is an English translation, with some updates and revisions by the author, of a text appearing in Hebrew on Haokets in September. My best wishes to Dr. Flug for her recent historic appointment. At this juncture I wouldn’t wish her new job on my worst enemy, but on a personal level the honor itself is well-earned. Contrary to what my introduction might suggest, as far as I know Dr. Flug’s personal credentials are impeccable. The “Dark Secret” is in fact shared by Israel’s entire economic elite. The title is attributed to Flug since her research work had brushed perilously close to that “Dark Secret” without exposing it. Thanks to Shir Hever for some information and for pre-publication comments. Thanks to post-publication talkback commenters, even the not-so-friendly ones, for helping me improve the English version.

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    1. mikey

      Is there statistics about the economic affect of the occupation on the Palestinians? I have read that overall their situation improved under the occupation, or at worst didn’t deteriorate. For example, while Palestinian labor was cheap from Israeli viewpoint, Palestinians were still making more money in Israel then in the West Bank, and many of them would be unemployed altogether.

      So if that is true, we have a miracle. Israel propelled itself to first world status on the back of Palestinians, while in the meantime, Palestinians are not worse off as a result of the occupation.

      Reply to Comment
      • Mikey,

        This is very briefly addressed in the notes in the end.

        Initially, many rural and working-class Palestinians indeed gained by working for Israelis more than they did as, say, farmers. But overall, the conversion of an entire generation into day-laborers was very unhealthy.

        Infrastructure and skill development stagnated, the middle and upper classes languished or emigrated, and Palestinian economy became a very limited limb of the “greater Israel” economy.

        At least according to Gapminder (you are welcome to look at other sources), growth in the West Bank and Gaza during the Occupation’s early years, was a small fraction of the boom Israel had experience.

        Once Palestinians rebelled, Israel decided to start chopping that limb off, with devastating consequences for Palestine’s economy.

        In addition, the farming mainstay of much of the West Bank, has been severely eaten into by land confiscations for settlements, and by access restrictions.

        Reply to Comment
      • Palestinian

        “They steal your loaf of bread.. they give you a crumb of it.. and then they order you to thank them for their generosity… How insolent they are!!!”

        Ghassan Kanafani

        Reply to Comment
    2. Danny

      Where to begin?

      First of all, the article has a basic contradiction in that it states flat out that the main growth engine for Israel’s economy is the occupation, but later on seems to do an about face and state that the occupation is in fact a drag on Israel’s economy. Which is it?

      Without having to over-analyze the issue, one can state without a shadow of doubt that the occupation has been nothing short of a disaster for Israel’s economy. By some conservative estimates, since 1967 Israel has flushed down the proverbial toilet tens of billions of dollars (some estimate the value to be $50 billion!) – money which will NEVER be reimbursed. Just thinking about what could have been done with that money (i.e. how many new hospitals, schools and subway stations could have been built) boils one’s blood with anger.

      Israel’s economy has been propped up mainly due to 3 factors:

      1. Handouts: By some estimates, European and American suckers poured some $100 billion (!) into the zionist enterprise, the former because of holocaust guilt, the latter due to sheer stupidity. This is the main pillar in Israel’s economic strategy. Without this pillar, Israel would be $100 billion poorer, and MUCH less developed than it currently is.

      2. High tech: In the 1990’s, Israeli propensity for out-of-the-box thinking (the same skewed mental process that cause us to think of fantastic new ways and reasons to start conflicts with our neighbors) actually started paying off through some constructive innovation for a change. Israeli entrepreneurship is quite advanced and inventing new technologies which silicon valley likes to buy. But, as the recent Teva debacle recently showed us, every good thing must eventually come to an end. While Israeli high tech is still producing some impressive exits, the sorry state of Israel’s education system clearly shows us that the high tech industry’s days are numbered.

      3. Real-estate bubble: This driving force is the latest one to drive Israel’s economy, and its eventual explosion will be ugly. If I were a home-owner in Israel today, I’d seriously consider selling before the eventual collapse.

      Taken together, these 3 factors show us that Israel’s economy is much more rickety than we are led to believe. In particular, if the handouts industry (or as Norman Finkelstein correctly calls it – The Shoah Industry) collapses, Israel’s economy will come crashing down in short order, bringing Israel back at least 30 years to the good old days of 500% inflation.

      Reply to Comment
      • Danny,
        Here’s were to begin: look for the sentence

        “If you are still confused as to what this little post’s message is:”

        And read the passage below it.

        After reading it, you might notice that the gap between us is not as wide as you had thought.

        I understand if you missed that passage at first go – it is a long post after all.

        Cheers, Assaf


        Reply to Comment
        • Danny

          Assaf, I was referring to the title of this piece. It states in a pretty straightforward manner that the occupation is responsible for Israel’s economic boom, while in reality it wasn’t even a catalyst back in 1967 because whatever growth there was between 1967-1972 completely evaporated in 1973. In the 1980’s, Israel was running the risk of becoming a bona fide third would country with its %500 annual inflation and 14% unemployment. What ultimately saved it from economic collapse? Handouts and high tech. In the 2000’s, it was (and still is) real estate.

          By the way, if you look at the macro-economic data, you’ll notice that Israel is in fact NOT a first-world country, but a second-world country. True, the country is well-developed from an infrastructure perspective, but that comes at a price of having the WORST socio-economic gaps in the developed world, as well as 25% poverty rate (a rate that is comparable to that of the Arab world).

          Reply to Comment
          • Assaf

            1. The English title was not my choice. My original title (see the Hebrew here: http://www.haokets.org/?p=51609) was “Dr. Karnit Flug’s Dark Secret”. Of course, that domestic reference makes little sense for readers abroad.

            2. Note that the title is “Israel’s *biggest* economic boom”. Not “the only boom”. So it is factually correct. Just like the article, it does not claim exclusivity for the Occupation effect – “only” that this is a huge, dominant macro-economic effect that is *completely* overlooked, denied, sidelines, etc. etc., by nearly all Israelis.

            Yourself included, I guess…

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          • Danny

            As I understand it, the point of this piece is basically to bash Flug. Pretty flimsy bashing, if you ask me. She actually seems to be the right person for the job, and I especially like her given that the chimp who currently occupies the treasury ministry really didn’t want her for the job. The fact that she failed to mention that Israel had a short boom in 1967-1972, and that this had something to do with its success in the war and the taking of spoils, etc, is a non-issue in my opinion.

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          • Assaf

            Sorry Danny, you’re a really nice guy but I can’t continue being your reading-comprehension teacher.

            Have a great day!

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    3. Tomer

      A super load of left-wing rubbish!!
      What about Israel’s growth from independence until the mid-60s?
      You’ve left that part out ‘cos it does not fit your argument!
      There are many inconsitencies but there are too many to not here.

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      • Tomer,

        As Table 1 in the post very clearly shows, it is Flug and Strawczynski (from whose report the table is taken) who decided to start the analysis in 1960 – not me.

        They write that pre-1960 the economic data were not detailed enough to carry out their analysis. Gapminder, too, doesn’t have annual growth rates for Israel pre-1960.

        I agree that once the German Reparations reached Israel, the remainder of the 1950s (1954-1959) had pretty decent growth overall. Perhaps the only period that can compete with 1967-73. Although on absolute term the increase in 1954-1959 was substantially smaller.

        But hey, at least you’ve had your fun complaining about “left-wing rubbish”.

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    4. Governments often coordinate, through spending and other policy, economic expansion. I think it plausible that the post 67 period did exactly that. It might also have placed seeds for neo-liberalism through Arab labor; as small Israeli business grow in number and size, more political dissent against political control by the prior socio-economic elite will emerge, neo-liberalism the gate opening solution.

      The 90-96 immigration was so vast that the high tech boom numbers may not adequately reflect the latter’s economic impact, being deflated by the majority of immigrants who could not contribute to this economic spike. I’m not certain post 67 really qualifies as the greatest period of growth; growing from little if different than growing from much, although I think the point about government coordinated activity via occupation remains; indeed, under dearth, such coordination and jump start seems even more important.

      What did Bush II grant post 03? Direct aid to Israel plus subsidies to the PA? I don’t think this is made clear in the piece. My impression is that the West Bank economy would be in much distress without EU and US aid, although I’m not certain how far down the food chain that aid goes. In this sense, the West is indeed subsidizing the occupation, as Israel would have to exert greater effort upon a shrinking if not collapsing PA.

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    5. Ohad

      What was the contribution to the GDP of the Sinai oil?
      It seems as this was the main cause for the temporary jump in GDP, and the other factors are minor.

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      • Ohad, I don’t know why people have such a hard time believing Palestinian labor had a major impact.

        Here’s a formal government analysis from ~2000 (my translation): “This development [the post-67 boom] was affected by trade with the West Bank and Gaza, and by the addition of large amounts of labor from the West Bank and Gaza.”

        No mention of the Sinai oil here; it definitely contributed, but secondary compared with Arab labor and other classic colonial-enterprise benefits. http://www.cbs.gov.il/statistical/meshek.htm

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    6. blood libeling doesnt qualify as peace activism

      Is it fair to say that a proffesional Palywood magazine such as +972 ,that writes solely in English and therefore dont bother addressing the Israeli public opinion one bit, has no real interest in ending the conflict in the mid-east (if they were aiming for that they’d try to convince the Israelis or Palis- and write in Hebrew or Arabic) but only an interest in bashing the Jews and Zionism for foreign patrol money?
      tour “reporter” Yosi gurviz , for exmaple – appears in that David Duke (KKK holocaust denier) video:

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    7. The Trespasser

      Got to agree on all points.

      I’d only remind of the conveniently forgotten Large Aliyah, which brought a significant number of scientists, engineers etc. accompanied by many low-qualified labourers and their children from former USSR. About 1 000 000 total, almost one quarter of Israel’s population at the time.

      It looks as if Dr. Oron lives on the moon, has no wifi and have to rely on news papers he has brought with him on his way there.

      There were few government projects to boost all kinds of start-ups among “Russian” immigrants.

      I was working with a firm, who make parts (satellite antennas for vehicles, waterproof enclosures for field telecom stations, telecoms for pilot helmets, etc.) for major Israeli and, consequently, American weapon makers. Owned by “Russians” and most employees are first-generation Khazar occupants as well 😀

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      • Assaf

        The massive immigration wave of post-Soviet Jews started in 1990. How can it explain Israel’s economic mega-boom in 1967-1973?

        There was a much smaller Soviet Jew immigration wave in 1971-1973, but it too comes a bit too late (and is too small) to explain the growth spurt.


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    8. Bab

      I would be more inclined to point to population growth and asset prices in Israel as having contributed more to per-capita GDP than cheap Arab labour, although cheap labour helps.

      If you look at the periods of strong GDP growth, it mostly coincides with strong population growth of 2% a year or above, together with strong capital inflows from those new migrants.

      This in turn has led to the largest property bubble in Europe (40% growth over the last four years) as well as the longest construction boom. Good for the middle-aged, not so much for the young, particularly the 99% of them who aren’t benefactors of the tech sector.

      Will be interesting to see how it turns out. Will substantial numbers of young emigrate due to cost of living issues? Will migration taper off and lead to a popping of the housing bubble, etc etc…

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    9. Av

      This article/blog post is economically illiterate, simplistic pseudo-economic nonsense, produced by a ‘statistician’ who works for a hospital (where do you find these people, and why can’t you find qualified writers to write about the subjects they write about?). There’s no understanding of basic economic history or theory in the article – but simply some woolly backwards rationalization from a correlation between economic growth and the years 1967-73. We are essentially witnessing an author who dislikes the occupation, proving the theory of confirmation bias on himself. It’s one thing to find such correlations – but even when the data correlates, there is no implication of causation. In this case, of course, there isn’t even a correlation, since if the occupation of the West Bank was an economic growth engine, there’s no reason for that growth period to have ended in 1973, just when the settlement enterprise and flood of Arab labour was getting started. The quackish reasoning filling this article is profound, and I don’t have time to go into its many errors. Suffice to say, if occupation of neighbouring undeveloped terroritories was the secret for instantaneous economic development, everybody would be doing it. However, the world is a little bit more complicated than the world of hospital statistics.

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      • But of course, we should trust the “economic literacy” of an anonymous commenter who hasn’t bothered to read the text before dissing (see reply to “Danny” above, it applies to you too),
        and for some obscure reason places “statistician” in quotation marks.

        Ahh, the joys of anonymous talkback.

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      • David Wavey

        And you’re not to set it straight — is that right? Thanks for the expert view.

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    10. David

      While this, along with the extraction of oil from the Sinai wells may have caused a spike in Israel’s economy for a few years, the fact that tourists and donations flooded the country following the war, and large numbers of highly educated Soviet immigrants began arriving after being granted exit visas was also a factor.

      Aside from that, this is not the reason that Israel is a wealthy country today. Note that although there was dramatic economic growth between 1967 and 1973, Israel’s economy stagnated later, and all but collapsed in the 80s.

      Israel’s economic boom has its origins in the 1990s, and that was for two reasons. First, and most importantly, because Israel began embracing the free market. Israel was a socialist state for decades, with the government and Histadrut owning most of the economy, and this severely restricted growth in GDP and living standards.

      Secondly, because of the mass immigration of Soviet Jews. Most of them were highly educated and skilled – 60% had a college degree, and number of engineers that immigrated to Israel during this period was greater than the number of engineers Israel had in 1989. The high proportion of educated Russians greatly helped Israel to become the start-up nation, boosting the science and technology industry. The Russian wave also resulted in a million new consumers, hundreds companies increased their markets, and the increase in consumption resulted in an increase in exports.

      I believe that Israel is about to have a third economic boom this decade. Firstly, Israel can expect a large number of French Jews to immigrate in the coming years. Not only is anti-semitism rampant across France, the country’s economy is declining under the leadership of Francois Hollande, and Hollande is turning France into a socialist basket case. I expect Hollande’s 75% tax on the rich to have particularly unpleasant effects. Registration for immigration with the Jewish Agency is skyrocketing, or so I hear, and French Jews are buying Israeli apartments by the thousands. French Jews, like the Russians, are also on average highly educated and skilled. In addition, Israel will began extracting natural gas from the Mediterranean starting 2017.

      What will likely follow is another burst of economic growth, after which growth will decline, but the Israeli economy will keep growing. I expect Israel to become a trillion-dollar economy sometime mid-century.

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    11. Vacy Vlazna

      No mention of the billions that boosts Israeli economy from the sale of military IT and weapons that are tested on the Palestinians and upon which the Israeli economy is dependant. i.e. dependant of Palestinian suffering. Israeli prosperity is steeped in Palestinian blood and agony. Absolutely nothing to be proud of.

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      • Vacy,
        1967-1973 was too early for the type of profits you describe (military tech “tested” on the Palestinians, etc.) to bear fruit. It has definitely played a role since then.

        In the same vein, I suggest you read the post more carefully. I am certainly not proud that the Occupation’s establishment underwrites Israel’s biggest economic boom in the last 50+ years.
        Other Israelis don’t seem to be proud of it too – otherwise they wouldn’t be busy diverting their attention away from it, and vociferously denying the fact on the talkback threads of both this version and the Hebrew original.

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    12. Economist

      It’s really a pity that English readers of this post can’t read the Hebrew comments to the original post in Haokets.org. Basically, this Dr. Dr. Oron’s claims are not really supported by economic theory, economic history of Israel, or even economic common sense. When confronted with his illiteracy in economic theory, and the inevitable fallacies in his conclusions, Dr. Oron replies (as he does here) by claiming that economists had (and still have) mistakes too, so his interpretation of the data is as valid as any other. What can I say… Let’s close all the social science departments and fire all the faculty. The don’t know better than anyone else. And the loss is not great, there will always be hospital statisticians to help explain the world we live in.

      There are more qualified researchers in Israel, who have already dealt with the question of the occupation and Israel’s economy. I recommend Shlomo Swisrki’s short book on the topic, “The Price of Vanity” (2005).

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      • “Economist”, I agree – it is a pity people can’t read them and see for themselves, instead of trusting your version.
        Oh, actually there’s Google Translate and such, so please dear readers, do give it a try.
        Thanks also for recommending Swirski’s book! For some reason I have the feeling he would be in strong agreement with my little blog post here.

        But you can ask him about this yourself, too.

        Oh…. and you’ve won the prize for “Understatement of the Year” with your “Economists had mistakes too”… Really now?

        When you catch a neoliberal economist in the act of admitting being wrong about the state of global economy pre-2008, and about the assumptions underlying that mistake – please let us know. I’d definitely be interested in reading that.

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        • economist

          Again, bashing another academic field will not make your arguments stronger, or your reputation as a blogger higher. That was actually meant to be an understatement.

          Now, let’s catch us an economist admitting he was wrong. Is Alan Greenspan neo-liberal enough for you? Here is, chairman of the Fed for 18 years, right up to 2006, who oversaw all the financial market deregulation during the 90’s, admitting he was wrong:

          This took me just about two seconds to find on Google. I guess that was two seconds longer than the time you’ve dedicated to try and prove or disprove your assertions about economics and economists.

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          • Assaf

            Yeah, you might have wanted to spend a bit more than 2 seconds on what Greenspan is trying to pass as “admission in mistakes”.

            Pearlstein, W. Post: “Alan Greenspan still thinks he’s right”

            “…What we find, however, is that Greenspan’s journey of discovery brings him right back to where he began — to an unshakable faith in free markets, an antipathy toward market regulation, and a conviction that progressive taxes and social spending are to blame for slow growth, stagnant wages and exploding deficits.”

            The only thing Greenspan “admits”, is that he was wrong to think people’s “irrationality” is cancelled out by economies of scale.

            See also here: http://www.forbes.com/sites/michaelnoer/2013/10/30/review-of-alan-greenspans-new-book-he-lost-us/

            “He takes some positions that are at variance with his actions at the Fed, but the book never veers into apologia, if only because Greenspan, the man, is virtually absent from its pages.”

            Here: http://www.nytimes.com/2013/10/21/books/the-map-and-the-territory-by-alan-greenspan.html?_r=0

            “The most provocative part of the book is Mr. Greenspan’s assertion that government spending on Social Security, Medicare and other entitlement programs is the reason that the American economy has grown more slowly in recent decades. He writes that taxation of upper-income households is reducing their ability to invest in new ideas and new machines and new buildings.”

            Oh well, better luck next time. I think I’ve given you more than enough attention. Have a great weekend…

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    13. David T.

      Denying humans their basic rights to exploit the situation large scale. Any similiarities to other racist and dehumanizing state concepts?

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    14. Fred McMurray

      It’s all relative. Just think of Israel’s GDP to be about the same as Greece or Spain. And with a smaller population, and no major economic upheavals. Moreover, arab-Israelis have the most freedom and opportunity in Israel” than ANYWHERE else in the Middle East.

      Yes, the anti-zionists are grabbing at straws while the Arabs and Muslims butcher each other on a daily basis. It really is difficult hiding the violent news from the Middle East, but we can count on the anti-zionists for doing their best.

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