Israel Economy in the 1960’s

By | December 22, 2021

The state of Israel it was established on the basis of the transfer of a large emigrant mass, which nevertheless possessed the requisites of capital and professional knowhow which allowed the country to create its own internal market. The Israeli economy has been subject to trends and contradictory trends, which have posed serious problems. In order to achieve balanced growth, combined with dynamic development, unpopular policies were needed, aimed at creating the conditions for stability and equilibrium. From 1959 onwards, Israeli expansionist economic policy, especially in the financial and monetary sector, had been made possible above all thanks to the reparations and refunds of payments by Germany, to donation funds, loans and direct investments, which however have generated inflationary pressures. For Israel business, please check

These pressures have resulted in:

1) an expansion of the money supply, which increased by 13 per cent, in 1961, and by 30 per cent, in 1962;

2) a rapid rise in prices (by 10% in 1961 and 15% in 1962);

3) an excess of imports over exports (the import surplus grew by 5% in 1961 and by 10% in 1962).

The correlation between the various aspects of the economic situation is clear: the strong import of capital, in fact, led to an inflationary push, given that the flow of new capital had exceeded the current account deficit of the balance of payments; as a result, foreign exchange reserves increased. This process of accumulation and the creation of surplus intensified in 1962 due to a devaluation that had become unavoidable, since the previous development had brought the exchange to a rate that was no longer realistic and unsustainable, so the new exchange rate was set at three Israeli pounds for one dollar HER. This devaluation was the main feature of Israel’s new economic policy, aimed at avoiding the economic crisis that had arisen due to a weakening of internal stability, coupled with a deterioration in the trade balance. Added to this was the need for integration into the world economy, accentuated by the emergence and consolidation of the ECM.

The new policy applied in 1962 immediately had its repercussions on the average rate of economic development, which, until 1966, was around 10% per year. The volume of investment was 547 million Israeli pounds in 1962 and 226 million in 1963; the rate of development of investments, in real terms, was 13.6% in 1962, 3.5% in 1963 and 21.9% in 1964. The number of employees in this period increased by 5% both in industry than in other sectors. The development of immigration, which had already reached high values ​​in 1959-60, continued to grow in 1964-65. In 1964 the population grew by 4% over the previous year, with no negative consequences for full employment. The increase in the gross national product, of about 10% for the period 1961-65, was due not only to

Economic policy, in the period 1965-67, was animated above all by two purposes: the improvement of the balance of payments and the stabilization of prices, including the price of money.

For the first two points the results were obtained: in 1967 the trade deficit decreased by about 120 million US dollars, after a decrease of 70 million in 1966 and 64 in 1965. Exports grew considerably: in 1967 they had increased by 46% compared to 1964. Prices had stabilized strongly: from May 1966 to October 1967 they did not vary, against a growth of 7.1% in 1965 and 7.8% in 1966. The cost of money fell considerably. From June 1966 to October 1967 the net interest (after the deduction of 25% of the income tax) was reduced by 12-27%.

Real output growth in 1967 was 2.2 percent, but the composition of that increase was also important. In fact, compared to a decrease of 21% in the construction sector, there was an increase of about 20% in agriculture.

The main feature of the Israeli economy during the 1967-70 period was its exposure to severe tensions. The causes of this phenomenon are well known: the needs of the defense absorbed more than a quarter of the gross national product and the volume of investments was surprisingly high, even if just enough to allow the state to bear the costs of security. In other words, the expansion of investment was essential to ensure that the growing defense needs did not increase the relative weight of military expenditure on the total, otherwise, in fact, too little resources would have remained available for other uses. Immigration, even if lower than that of Israel’s first years of life,of life achieved in the country. This pressure on the not abundant productive factors determined phenomena of over-employment. The scarcity of available labor, given its limited mobility, caused wages to rise with negative effects on prices and exports. In fact, in the period 1970-75 wholesale and consumer prices tripled, passing, respectively, from an index of 100 for 1970, to 309.6 for wholesale prices and 295.9 for consumer prices, in the 1975.

However, some long-term trends in the Israeli economy emerged and strengthened during this period; these trends can be summarized as follows:

1) A change in the structure of the economy, accompanied by a change in the employment structure of the country;

2) An increase in labor productivity, due both to mechanization and to the increase in production in sectors with high added value;

3) An agricultural “revolution” that opened the way to overcoming the constraints deriving from the limitations of space, water availability and commercial outlets;

4) The attribution of a growing share of product to exports.

In the years following 1970, the Israeli economy continued to be characterized by the same trends as in previous periods: excessively intense economic activity, high rate of development; substantial population increase, due to immigration; high level of investment; over-employment; excessive liquidity and a trend deficit in the trade balance, offset by large inflows of capital from abroad.

The government has endeavored to correct these trends through various economic policy measures. In the monetary field, it has imposed credit restrictions and increased the level of compulsory reserves of banks. In the financial field, it has tried to contain public spending, delaying the implementation of some public projects, such as the construction of buildings, roads, etc. Despite the fact that an office for economic planning had been established since 1962, only some of the numerous projects developed have been submitted to Parliament and their impact on the economic trend seems to have been very low. The last developed plan, relating to the period 1972-76, deals mainly with two problems: the high level of defense spending and the need to absorb around 250 during the five years. 000 immigrants. However, the chances of success of this plan are strongly compromised by the high rate of inflation and the size of theforeign account deficit.

Israel Economy in the 1960's