Israel, established in 1948 and with a population of 8.5 million, belongs to the self-defined group of developed countries. In 2010 it was accepted into the Organization for Economic Cooperation and Development (OECD), the prestigious “rich countries’ club”. With a GDP of $40.799 per capita (based on Purchasing Power Parities) in 2018, it ranked 22nd out of 34 OECD members (Germany, with $54.355, ranked tenth). It also ranked 22nd out of 189 countries (in 2018; Germany ranked fifth) on the United Nations Human Development Index, which takes into account not only economic performance but also performance in the fields of health, education, and gender equality.
Israel has advanced technological industries and services, which earned it the image of aStart-Up Nation to use the title of Dan Senor and Saul Singer’s best-selling book. Most major IT multinationals have research and development centres in Israel. Half of Israel’s industrial and service exports are high-tech related. Israel pioneered the production of drones and has civilian and military satellites circling Earth. In 2015 it had two universities in the top 100 ARWU (“Shanghai”) ranking (Germany had four), two more in the top 200, and two more in the top 500.
Yet the Israeli economy fails to produce jobs with decent pay for a large number of its citizens: close to 19 percent of Israeli households are below the poverty line (50 percent of median income), around 30 percent of workers earn the minimum wage or less, and 70 percent of employed persons earn equal or less than the average wage—the one income statistic announced monthly in Israel, possibly on the presumption that it is representative. Investments hardly reach areas an hour’s drive from Tel Aviv, and the Palestinians who became citizens of Israel in 1948 hardly ever figure in governmental economic development plans.
How can we explain these apparently contradictory indicators? How do they fit the history of a country in which the state controlled most major capital flows and owned major infrastructural and industrial corporations for years, in which the Histadrut, the federation of labour unions, not only organized most workers—achieving one of the world’s highest rates of unionization—but also owned some of the largest corporations, the largest bank and most pension funds, and a country whose symbols included the communal kibbutz and the cooperative moshav?
To start with, high-tech industries and services hardly represent the nation as a whole, as they employ no more than eight percent of the Israeli civilian work force. Furthermore, most of those industries are located in the centre of the country in and around Tel Aviv. They employ mostly men (65 percent), graduates of the best high schools, prestigious military units and top universities. A lucky few can earn millions of dollars if and when they manage to sell their product to US giants, but regular work is also well-remunerated: average high-tech salaries are twice the Israeli average. The actual sum is lower than the equivalent in Silicon Valley, but enough to place a family with two earners each making a similar sum in the upper decile of the Israeli household income scale.
Israeli high-tech is to a large degree a club of its own within the Israeli economy—most Israelis would find it hard to gain entry—but high-tech is not exceptional as far as concentration of resources and privilege are concerned. To start with the ownership structure, a huge slice of economic activity in Israel is controlled by a relatively small number of capitalists. A government commission on competitiveness in the Israeli economy noted that the Israeli economy is characterized by a concentrated ownership structure, with a large portion of public companies controlled by a limited number of business pyramids. It also found that the majority of the top 100 companies listed on the Tel Aviv stock exchange are controlled by 23 business groups. Although the phenomenon of business groups is not unique to Israel, a Bank of Israel report found that the ten largest groups’ segment of the market—30 percent—constitutes one of the highest concentrations in the western world.
Concentration of control and wealth is to a large extent the long-term result of a neo-liberal turn of the Israeli economy dating back to 1985. During the first three decades after its founding in 1948, the Israeli state pursued a developmental agenda whereby it controlled capital flows, directed investments, orchestrated rapid industrialization, developed infrastructure and housing, and aimed for full employment. During much of that period, GDP growth was close to ten percent on average.
The developmental agenda, which Israel shared with many other countries at that time, encountered a crisis in the late 1970s and early 1980s due primarily to very high military expenditures following the 1967 war, and even higher expenditures after the 1973 war. Facing run-away inflation, in 1985 a coalition government headed by the centrist Labour Party and the rightist Likud Party adopted a neoliberal agenda promoted by the major international financial institutions.
The new agenda called for curbing state expenditures in order to “free resources” for business, privatization of major state and Histadrut corporations, restraining salaries (especially in the public sector) by among other things opting for indirect employment, i.e. employment through contractors and manpower agencies which reduces the costs of employees’ compensation, and relegating the Histadrut, once a powerful partner in a tri-partite state–unions–business corporatist structure, to the margins of macro-economic policy making.
Formerly controlled by the state and the Histadrut, business credit was now handled by an oligopoly of commercial banks. Pension funds, formerly controlled by the Histadrut and used to fund both state and Histadrut developmental projects, were privatized and sold to commercial insurance companies. The Bank of Israel, for years an important partner and facilitator of state-developmental policy, was declared “independent” and de-linked from state-led projects. Needless to say, the few major banks and insurance companies that now control credit are owned by some of the major family-owned business groups and serve their interests.
The new macro-economic agenda was gradually instituted under the promise of increased investments and economic growth, yet the results left most Israelis wanting: Israel, a country with a long history of high investments, now ranks below the OECD average. Whereas the state and the Histadrut once made an effort to distribute investments throughout the country, now business investments are concentrated in the centre of the country and in a few industries—high tech, finance, and real estate. The Tel Aviv and Central districts attract the bulk of new investments; the north of the country and the south, and even the Jerusalem district, receive much less. Moreover, a significant portion of credit at the disposal of the business sector is channelled abroad.
The down-sizing of the state was quite successful, at least in fiscal terms. The Israeli budget was reduced from 56.1 percent of GDP in 1988 to 39.3 percent in 2014, and by 2018 rose again a bit to 43.4 percent. At 41.7 percent of GDP, in 2013 Israel’s government expenditures (including municipalities and social security) were lower than the OECD average of 49.3 percent (Germany—44.7 percent). On the other hand, the Israeli government could boast of a downsized public debt (including municipalities) to international credit rating agencies: while the national debt stood at more than 100 percent of GDP into the mid-1990s, by 2014 it was reduced to 67.5 percent, and by 2017 to 60.9 percent.
Down-sized state projects and state budgets require lower tax revenues. With half the population earning less than the income tax threshold and thus absolved from payment, tax cuts quite simply benefitted the other half but especially the top income decile and the corporate elite. In 2012 income from direct taxes in Israel was lower than the OECD average. Income from indirect taxes, and particularly Value Added Tax—which are less progressive than direct taxes—was higher than the OECD average. This means, of course, that the burden on low-income Israelis is proportionally heavier than on those with high incomes.
Lower taxes and lower budgets mean, among other things, lower expenditures on social services. Given that, Israel’s military budget is quite high by comparison. During the second Intifada, for example, the military budget stood at about eight percent of GDP and was around five to six percent in recent years, while in Germany and most of Western Europe it ranges between one and two percent. By contrast, expenditure on social services is comparatively low. In 2017 for example, Israel’s expenditure on the social safety network was the lowest among OECD countries—16 percent of GDP compared to an OECD average of 20.2 percent (and 25.1 percent in Germany).
Concomitant with these developments, Israeli workers have been losing their collective bargaining power. Union membership, which stood at 70 percent in the 1950s and 1960s, is down to 25–30 percent. Once one of the strongest union federations in the world, the Histadrut was shorn of its power, selling most of the firms it once owned, including the largest bank, Hapoalim, and the single largest industrial conglomerate, Kur. It lost control over Israel’s largest Health Maintenance Organization (HMO)—once its largest source of income, as HMO membership fees were passed on to the Histadrut. It also lost its pension funds. The Histadrut now represents a relatively small number of strong unions, mainly in the public sector.
Their bargaining power dramatically reduced, Israeli workers’ share of the national income pie has steadily declined. Over the past decade or so, while the employers’ share grew from a low of eight percent in 2002 at the height of the economic crisis brought on by the second Palestinian Intifada to 18 percent in 2014, workers’ share contracted from 67 percent to 57 percent (the rest being taxes) during the same time.
One major result of de-unionization and workers’ shrinking share of national income has been the shrinking of the Israeli middle class, which like in most Western societies was the main benefactor of state-led developmentalism through state employment and state services. In 1988 it comprised a (not particularly high in itself) 33 percent of households headed by an employed person; by 2010 it had shrunk to 26 percent. The measure used was households earning between 75 and 125 percent of median household income. Using a wider definition—75 to 150 percent—a study by Prof. Steven Pressman found that in 2005 only 36 percent of Israeli households could be classified as middle class, compared to around 60 percent in the Scandinavian countries and 52.4 percent in Germany (2004). Given that wages have largely stagnated since, it is reasonable to assume that no expansion of the middle class has taken place.
At the lower end of the income scale, the proportion of families living below the poverty line, which stood at an already high 10–12 percent in the 1980s, rose to a very high 19–20 percent in recent years due to both worsening conditions on the labour market and cuts in social security and assistance allowances.
Most low-wage earners are women. Nationally, their monthly salaries are about 67 percent those of men and hourly wages 85 percent. Women are over-represented among earners of what the OECD defines as low wages—two-thirds the median wage. Most working-age Palestinian women who are citizens of Israel do not work at all, as work can be found mostly in faraway Jewish towns and cities to which public transportation is infrequent.
Income and wealth are concentrating at the top. At the very top stand of course the owners of the major corporations. One decade after 1985, Merrill Lynch began including Israel in its international list of millionaires and billionaires. The Boston Consulting Group and UBS followed suit. In 2003, the Israeli business paper The Marker began keeping track of the Israeli super rich, those whose financial assets are valued at one billion US dollars and more: in 2003 there were eight such Israelis and their collective worth stood at 37 billion dollars; by 2015 their number reached 84 and their combined worth stood at 140 billion.
The new business elite, in turn, created a highly remunerated managerial class. In 2012 the average cost of CEOs at the top 100 corporations traded on the Tel Aviv Stock Exchange was 42 times the average Israeli wage and 87 times the minimum wage.
Compared to most post-war European societies, Israel is highly heterogeneous. Given our focus on Israel’s economy, one simple way of approaching this issue is by looking at salaries of the three major national and ethnic groups: Ashkenazi Jews, i.e. those hailing from Europe and America; Mizrahi Jews, those hailing from Arab and Muslim countries; and Palestinians who are citizens of Israel (as distinguished from those in the occupied territories and those who found refuge in Arab countries in 1948–49). In 2013 second-generation Ashkenazi wage earners (Israeli-born children of fathers who came from Europe or America) earned about 33 percent more than the average wage, second-generation Mizrahi Jews earned about ten percent more than the average wage, and Palestinian Israelis earned 33 percent less than the average wage.
In 1948 the vast majority of the 600,000-strong Jewish community consisted of European Jews, presently sharing the collective appellation “Ashkenazi” (ashkenaz being the Hebrew name of Germanic territories of the Middle Ages, from whence many migrated to Poland and Russia). Most hailed from Eastern Europe, the popular base of Zionism; another sizeable contingent came from Western Europe, mainly from Germany, after Hitler assumed power. Within one decade after the 1948 Arab-Israeli War approximately 900,000 Jewish immigrants had arrived, about 45 percent of them Holocaust survivors from Europe and some 55 percent Jews from Arab countries.
The adjustment of the Jews from Arab countries was generally problematic. Most families spent many years in transitory camps, eventually settling in peripheral areas of the country where they suffered high levels of unemployment throughout the 1950s. It was only when Israel embarked on a course of rapid industrialization that they were finally “absorbed” at the cost of collective proletarianization, all of which served to cement an enduring social, economic, and cultural cleavage between Ashkenazi and Mizrahi Jews, the latter appellation reflecting the common fate experienced by communities as disparate as those of Moroccan, Iraqi, or Yemenite origin.
The year 1948 created another line of cleavage—between Jews and Arabs. While some 600,000 to 700,000 Palestinians who resided in areas that became part of Israel fled or were expelled, thus giving rise to the Palestinian refugee problem, some 150,000 remained within Israel’s borders. Palestinians who are Israeli citizens now number over 1.8 million. Israel’s Palestinian citizens fared poorly compared to Jewish citizens: for two decades, until 1966, they were under military administration that restricted their movements. Most of their lands were confiscated and given to Jewish villages, towns, and development projects, transforming the mostly peasant Palestinian community into hired hands. Palestinian citizens of Israel find themselves at the bottom on almost all social and economic indicators.
To these three groups we have to add large numbers of non-Israelis on the labour market. Starting in 1967, Palestinians from the occupied territories began commuting to Israeli agricultural settlements and urban construction sites. During the first Palestinian Intifada, when the entry of Palestinians from the occupied territories was restricted, the government allowed them to be replaced with workers from other countries. Once opened, the doors would remain so for an unending stream of non-Israeli workers—presently estimated at around 300,000. Thais work the fields of collective and cooperative farms, Romanians and Chinese work on construction sites, Filipino women tend to elderly Israelis, and Africans work in restaurants and hotels. Needless to say, none of the non-Israeli workers are protected by Israeli unions—although most labour laws and some collective agreements are supposed to apply to them, they are not enforced.
Most Israeli economists would not bring this up, but the fact is the Israeli economy is deeply affected by the ongoing conflict with the Palestinians and the Israeli occupation of Palestinian lands conquered in 1967. While most other countries’ economies are vulnerable to global economic crises, such as that which erupted in 2007–8 and plunged growth in Israel from 4.1 percent in 2007 to 1.1 percent in 2008, Israel is additionally vulnerable to the effects of violent confrontations such as the second Intifada which hurled the Israeli economy into two consecutive years of negative GDP growth and three consecutive years of negative growth in GDP per capita.
There are many aspects to the economy of the conflict and continued occupation. On one hand many Israeli businesses profit, most prominently the military industry, , as many of its products benefit from the expertise, experience, and prestige accrued as a result of IDF clashes with the Palestinians (military exports amount to roughly ten percent of total exports). So do security-service providers, such as contractors erecting the Separation Barrier. But these profits are dwarfed by the damage wrought to the Israeli economy as a whole due to the contraction of economic activity during times of conflict. To cite just one recent example: for one full year after the July 2014 Israeli bombing of the Gaza Strip tourism to Israel was in crisis. And such confrontations are very frequent. Thus, the lack of a political settlement represents an ongoing threat to the Israeli economy.
Another economic aspect is the heavy fiscal cost of the Jewish settlements in Palestinian territories. Ideology is a matter of geography, and in our case the free market ideology instituted in 1985 happens to stop at the Green Line. On the other side of the line, all Israeli governments have made heavy fiscal contributions to the settlements project—whether in the form of civilian expenditures including high subsidization of municipal budgets, or military expenditures including a heavy presence of all branches of the military and security services on the ground.
To sum up, the Israeli economy needs to go through a significant transformation. Allow me to mention just three elements of such a transformation: one is ending the Israeli occupation of Palestinian lands and almost total Israeli control of the Palestinian economy, opening the door to a regional agreement that would allow, on one hand, downsizing regional military expenditures, and on the other economic growth for Palestine and the region as a whole. Such an agreement would also facilitate greater integration of Palestinians who are citizens of Israel into the Israeli economy.
A second is public control of business credit, so that investments go to the entire country and not just to its privileged centre and so they provide decent wages, unionization, and non-discriminatory employment.
The third is a dramatic re-investment in public services such as education, health, housing, and welfare, so as to provide for better educational and social opportunities for the majority of the population. Such a move would involve abandoning the ideology that sees the national budget as a constant target for cuts to satisfy multinational financial interests, viewing it instead as an instrument for improving the lot of the entire population.
Shlomo Swirski, PhD, is currently the academic director of the Adva Center and one of Israel’s leading sociologists and social activists. In the 1970s he led a new departure in Israeli academic sociology with a series of analyses of Israeli ethnic and class relations and was one of the founders of Critical Research Notebooks, a social science journal devoted to a critical reassessment of social and economic policies. In the early 1980s he published a path-breaking class analysis of the relations between Mizrahi and Ashkenazi Jews. In 1991 he was one of the founders of the Adva Center, an action-oriented academic institute dedicated to monitoring equality and social justice in Israel. At the Adva Center Swirski has produced pioneering analyses of Israel’s political economy, among them the social ramifications of the budget process, the privatization of public services, and the internal—economic, social, military, and political—costs of Israel’s continued occupation of the Palestinian lands. This article was originally published by the Rosa-Luxemburg-Stiftung’s Israel Office. Translation by Ursula Wollin.
 Ministry of Finance, State Budget 2014, and State Budget 2017–18.
 Ministry of Finance, State Budget 2014
 Swirski et at., Labor Report 2015.
 Steven Pressman, “The Decline of the Middle Class: An International Perspective”, Journal of Economic Issues 1 (2007), 181–200.
 Swirski et al., Labor Report 2014. Gaps in Germany are larger: average CEO pay was 147 times the average worker’s salary; and in the US much larger—354 times. See Ryan Derousseau, “Why do American CEOs make twice as much as German CEOS”, Fortune (November 4, 2014).
 Swirski et al., Labor Report 2015.