Israel: economic success, or not

I’m out of town this morning, so just something brief and prescheduled:

Israel has been in the media a lot this week.  Much of that has been about the confrontation on the Gaza border.

But it has also been the 70th anniversary of the founding of the state of Israel.  In many respects it is an astonishing achievement, even if I remain sceptical of its longevity.  Sadly, demography and history seem to be against them.  Demography? 400 million Arabs and 80 million Iranians, few of whom seem reconciled to the idea of a permanent state of Israel.  History?  Well, the Crusader states last longer than 70 years, but were wiped out.  More recently, Smyrna (let alone the cleansing of the millenia-old Jewish community in Baghdad).

But the economic achievement of Israel can be, and often is, overstated. I noted on Kiwiblog the other day, a celebratory post, including this

In 70 years, Israel has become one of the world’s leading scientific and technological companies[countries?]. 45 of their top inventions are listed here.

12 Israelis have won Nobel Prizes – one literature, three peace, two economics, six chemistry. (Note a further 155 Jews in other countries have won a Nobel Prize, comprising 22% of all nobel prizes since 1901 despite being just 0.25% of the world’s population).

A few of their inventions are:

  • cellphones
  • Intel chips
  • ICQ
  • Polio vaccine
  • antivirus software
  • ingestible video cameras for cancer detection
  • USB flash drives

All of which is pretty impressive.  But what does it amount at an economywide level?

As regular readers will know I frequently point out that over recent decades New Zealand’s cumulative growth in productivity (real GDP per hour worked) has been lower than in almost all other OECD countries.  And we started below the average and had been aiming to catch up.

But how has Israel done by comparison?  This chart just shows the ratio of real GDP per hour worked for New Zealand and Israel relative to that of the United States (as a representative high productivity OECD economy), starting from 1981 because that is when the Israel data starts.

israel nz comparison

We’ve done badly, and they’ve done even worse.

I’m sure there are all sorts of explanations.  For example, Israel spends a large chunk of its GDP on defence and security, and even if that demand spurs innovations in some specific industries, it is unlikely to be a long-term positive for economywide productivity.  As I’ve pointed out previously, Israel is also remote – albeit in different ways to New Zealand: political barriers, security fears etc, limit the opportunities for trade and investment.   And Israel doesn’t exactly have the least heavily-regulated economy in the OECD.

But it is also hard to go past the elephant in the room.  To listen to the advocates of economic benefits of immigration, Israel should really the poster-child, the unquestionable success story.  Any Jewish person anywhere can move to Israel and claim citizenship, and large numbers have.  Population growth in Israel in recent decades has been faster than anywhere else in the OECD –  partly birth rates and partly migration – and (for whatever reason) Jewish people tend to come quite highly-skilled.   That part of the population growth has probably been a boon from a defence and security perspective, and of course the Law of Return is pretty fundamental to Israel’s sense of national identity, and its founding purpose.

But evidence of economic gains appears elusive.

25 thoughts on “Israel: economic success, or not

  1. On defence spending NZ and Japan have an advantage? Of course we export virtue signalling (being behind a large moat) but what about Japan?

    Last Sunday on Mornings with Wallace Chapman growth advocate Paul Spoonley was claiming agglomeration benefits were occurring in Auckland and that “absolutely” immigration made us more productive. Given the clogged roads and need for massive infrastructure spending it is hard to imagine? Also Auckland is not famous for exports other than real estate? He makes claims about ICT but are we a net exporter of ICT?


    • With tourism and international students contributing $15 billion to GDP then all these clogged roads are a result of servicing this 2 large and significant industries. 19 million inbound and outbound traffic out of the Auckland Airport does make Auckland a a prime destination for international and domestic travelers. The most visited city in NZ is Auckland.


      • Sorethumb, I am not into positives or negatives. As far as i am concerned people irrespective of race, colour or creed, immigrant or not, will always do well and prosper given the right conditions. My purpose is to highlight cause and effect. The type of industry focus ie Primary industries, tourism and international students are where our government subsidies have been focused. No point harping on and on about immigration because immigration is the effect of industry focus. If you want to change the immigration setting then you need to first change our industry focus that is not service orientated. The very best service always equate to more people not less.

        Also we do have an aging baby boomer population that will need to be cared for and no one wants a Japanese 48 patients to 1 nurse ratio tied to a bed and tranquilizers administered allowing blood clotting to kill off the patient quickly rather than having to care for them.


      • The governments job is not to concentrate on individual industries but raise the living standard of all it’s citizens (as far as practically possible).
        Kerry McDonald says

        ‘The high rate of immigration is a national disaster.’ ‘It’s lowering the present and future living standards of New Zealanders by serious adverse economic, social and environmental consequences.’

        As for “an aging baby boomer population that will need to be cared for” (which Paul Spoonley goes on about).
        Migrants are only a temporary fix for an aging population. Time and again modelling shows that the total population increases but does not affect the ratio of old to young as the migrants need their own chin wiped. So who is going to wipe the migrant’s bottom – Paul Spoonley? Spoonley gets away with it because RNZ has no one that looks at both sides of the immigration debate – they are a thoroughly biased [politically correct] public disservice.


    • Nothing to do with Israel, yet I was also perplexed by Paul Spoonley claiming agglomeration benefits were occurring in Auckland and yet also advocating sending new migrants to the regions (rural areas) where people have been moving away from for decades/centuries (both in NZ and globally) due to lack of agglomeration effects.

      Liked by 1 person

  2. Talking about demography being against Israel. The Gaza Strip seems to be in an awful situation with 2 million people crammed into a tiny strip of land ~50km by ~7km. With a TFR of over 4 and a population growth rate of 2.3%, it’s population will have doubled by 2050 becoming the most densely populated polity in the world. I hope I’m proved wrong, but I can’t see it turning out well.

    Liked by 1 person

  3. Don’t forget that anyone in the world who is a Jew has automatic Israeli citizenship as soon as they arrive in Israel. New settlements are having to be formed all the time to cater for this world wide migration. Unfortunately the Palestinians are paying the price with 2 million displaced Palestinians with no where to go. Productivity is not the issue or an Isreali concern as new migrants also bring their hard earned wealth from overseas into Israel to buy land which did not cost a Isreali land developer any money as it is land annexed by gunboat diplomacy. Low productivity but high profitability activity.


    • Government subsidised gunboat diplomacy does require a huge number of armed men to annex land that belong to someone else and to stand guard after, to keep the revolting Palestinians out.


      • You talk as if you think Palestine as a sovereign nation ever existed. It didn’t. If you are talking about the “West Bank” this is land that was annexed by Jordan around 1950, previously the whole region had been under the administration of the British who captured it from the Ottoman Empire in 1917. I believe the term “Palestine” dates back to Roman times where it was introduced as an attempt to weaken the Jews’ fierce attachment to the land. I also believe the term “Palestinian” when used to describe the Jordanian Arabs who lived in the area was appropriated by Arafat. When the West Bank was part of Jordan those who are now called Palestinians had full Jordanian citizenship. Had Jordan not invaded Israel in the 1967 war (and had Arafat not tried to assassinate the king of Jordan) they might have moved on decades ago. If you want to pick on “gunboat diplomacy” in the region there are far, far worse things going on than anything Israel is doing. If you repeatedly invade, threaten and attempt to terrorise another country I think it is reasonable to expect you might even lose some land as a result.


      • Matt, your argument does not stack up very well. Palestinians are a group of people who have lived in a specific area for thousand of years. Prior to the British drawing up the borders there never was clear designated borders anywhere in the Middle East. You could say the same of Maori who sailed to NZ or previously/currently Aotearoa. But these days we do recognise that tribal groups do have rights to land including Maori that have been displaced by NZ land wars. If you do not want to give land then a fair settlement price needs to be agreed. Gunboat diplomacy is just so wrong and in this Israel is so wrong.


      • The latest sniper death count is 60 dead Palestinians in peaceful protest and Israelis were jubilant and rejoicing. How is that not gunboat diplomacy?


      • >> Palestinians are a group of people who have lived in a specific area for thousand of years <<

        This seems to be your entire argument and it collapses because it is based on a falsehood. (You seem to have ignored most of what I said). What is true is that the Jews have been living in this area for a great deal longer and pretty consistently over thousands of years. What Palestinian tribe are you talking about? There is no such thing. There has never been an (Arab) Palestinian identity before the 1960s, there has never been an ethnic group called Palestinians and there has never been a nation state called Palestine. Not under the Roman empire, not under the Ottomon empire, never. The 1000 years you are talking about, is presumably the time when the area was under the Ottomon Empire is meaningless. It was not uniquely and exclusively occupied by a Palestinian tribe and the Ottomans, who in effect owned the land were not even Arab. Probably you should consider how the Ottoman caliphate came to control the area: by conquest – that is by taking the land off a previous owner.

        When Jordan invaded Israel they lost the land, there was no Palestine, only Jordan. When Jordan relinquished its claim to the lost land in the 1980s the status of the land – who "owns" what parts of it is a matter of negotiation (which is a consession in itself), but the PLA has resolutely and consistently refused even generous land for peace deals regularly offered by the Israelis.

        This kind of leads into you comments about "gunboat diplomacy" and related nonsense. You seem to be unaware that Gaza is self-ruled. They are not revolting against some overlord but are being encouraged by their Hamas terrorist leaders to breach the border between them and Israel so they can cause destruction within Israel and "kill Jews". That is their stated aim and this is the problem. They don't want peace. They have started a number of wars against Israel since Israel pulled out of there but you seem oblivious of this. Israel needs a large number of armed men, not because they are suppressing anyone but because they are surrounded by people who want them dead, and who deny their right to exist. Netanyahu was right when he said that the Israelis "use missiles to protect our people, they use people to protect their missiles", and he is still right, Hamas still seems willing to sacrifice their own people for little more than propoganda value, while also taking their citizens' eyes off their own substantial and largely self inflicted problems. That this strategy has proved so successful is tragic.

        You rail against a few deaths of mostly Hamas attackers ("peaceful"? – absurd) but are silent about the vastly more deadly and brutal wars and oppressions going on right next door and beyond. The egregious double standard that seems to apply whenever Israel defends itself never fails to amaze.


      • One day after Israeli forces fired on protesters and killed 60 Palestinians along the Gaza border, the U.N.’s human rights commissioner says that those who were shot included women, children, journalists, first responders and bystanders.

        “We condemn the appalling, deadly violence in Gaza yesterday,” said Rupert Colville, spokesperson for the U.N. High Commissioner for Human Rights.


  4. I see no reason why Israel will not be around for a long long time. They have the superior firepower plus around 100 nukes.
    It seems to back up the theory large scale defence spending is a negative externality.

    I think we can say with great authority that either Jews in that area have either not read the book of Amos or cannot comprehend its meaning or the implications.Very sad


  5. I was persuaded by the peak oil argument. As i see it though high prices deflated demand plus fracking kept prices down.They seem to be creeping up again? I always saw it as just a matter of time and the big issue is one of resource constraints. We are in a jar but cannot see the boundaries? The peak oil debate centred on the cornucopian notion that demand will drive innovation and that implied cold fusion type technologies?


    • I am still persuaded by the peak oil argument. But demand drives price rather than innovation, it is usually called critical mass. Profitability drives innovation ie how do I make a cheaper equivalent reliable product and therefore make a higher profit.

      Unfortunately Elon Musk gigafactory is over automated and therefore can’t deliver enough scale to get a lower price point even though there is a huge forward demand booked. Although highly productive it does not make a profit with billion dollar losses mounting daily.


      • Actually demand only drives price in the absence of a supply response. Hence China demand drove oil price rises in the last cycle because supply was rigid. Then cash poured into new exploration and fracking and price fell as supply grew in parallel with flat demand/slowing China.
        Profit does drive innovation particularly obvious super profits that attract new market entry and disruption. But regardless of where oil industry profits move in the short term, I firmly believe the shift to new renewable forms of energy is unstoppable (based on new cost curves).
        I’m hoping fusion is worked out in my lifetime.
        I also hope it is before fission makes an appearance in the Mid East.


  6. Correlation is not causation but hard not to notice the fall in productivity coinciding with the Berlin Wall coming down and the end of Soviet travel restrictions.

    Maybe the influx of orthodox Russian Jews were not as skilled as your traditional Jewish immigrant. Maybe their staunch conservative views have allowed hawkish governments to come to power stymieing economic growth in lieu of security spending. Maybe their focus on religion instead of economic activity have also played a part in lowering productivity.

    The blasting of Israel into the sea rhetoric from the arabs in recent years has given way to activism for land rights and fair access to Israel as well as stopping new settlements on contentious land.

    For Iran, the just see Israel as another American base in their backyard. Iraq also. With two bases so close, yes they will aim to deter further encircling. All makes for an interesting dynamic politically.

    On Thu, 17 May 2018 at 8:02 AM, croaking cassandra wrote:

    > Michael Reddell posted: “I’m out of town this morning, so just something > brief and prescheduled: Israel has been in the media a lot this week. Much > of that has been about the confrontation on the Gaza border. But it has > also been the 70th anniversary of the founding of the sta” >


    • Total US foreign aid to Israel is about 1.2% of Israel’s GDP according this report.

      Click to access RL33222.pdf

      The World Bank reckons that Israel’s total defence spending is about 5.6% of GDP, so the US support is material but nowhere near covers the difference between what Israel spends and what, say, a typical NATO member would be spending (% of GDP).


  7. “I remain sceptical of its longevity. Sadly, demography and history seem to be against them.”
    If God is for them, then maybe that is the key point.


    • very fair caveat, although it is a big “if” – one i’d probably have believed a few decades ago, but am more agnostic about now.

      At a human level, all it would take would be losing popular support in the US, and then one nuke to wipe out Tel Aviv. Even if Israel was able to retaliate they can’t wipe out the entire Arab world, (rightly) wouldn’t have the stomach for it, and wouldn’t be allowed to do so by the rest of the world.


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