Where do we go from here? The alternative scenario

In sharp contradistinction to the mainstream, the alternative scenario has as its starting-point the fact that the Israeli economy, and the pre-state Mandatory economy before it, has a long-established pattern of counter-cyclical behaviour vis-à-vis the global economy.

I stress the words ‘fact’ and ‘established’, because they are crucial. To support them, let me briefly summarise the economic history of the pre-state yishuv and post-independence state. The primary factor driving the growth and development of the economy and society has been successive waves of immigration, known in Hebrew as ‘aliyot’, a religious term with the connotation of ‘ascending’ – in this context, to the Holy Land. Classic Zionist history begins with the First Aliya of 1882-88, and follows with the Second Aliya of 1905-08. The Balfour Declaration of 1917 and the conquest of Palestine by the British triggered the Third Aliyah (1919-21), with the Fourth following shortly after (1924-26) and the Fifth coming in the next decade (1933-36).

The main thing to note about these immigration waves is that they represented a small fraction of much larger waves of Jewish emigration from Eastern and (sometimes,
notably in the 1930s) Central Europe. The driving force behind them was either overt, state-sponsored anti-semitism (as in the wave of pogroms in Czarist Russia in 1881/2 and again in 1903/4, as well as in Germany after 1933), or general economic problems – often with a particular anti-Jewish bent (as in Poland and other countries in the inter-war years). In other words, immigration to Israel was almost always driven by push factors, rarely by pull ones.

This pattern continued after the creation of the State in 1948. The attempt by the Arab states to quash Israel at birth, and their defeat in the War of Independence of 1948-49, led to widespread anti-Jewish feeling across the Arab world and to overt violence in many countries. The result was a mass emigration which saw the bulk of the Jewish population of the Middle East move to Israel over a period of a few years (1949-52). Unlike their European brethren, these emigrants had no option other than to go to Israel. Ten years later, in the late 1950’s and early 60’s, the same drama played out in the Maghreb countries as the French colonial presence ended and Morocco, Tunisia and Algeria achieved independence. In this case, however, the emigrant wave split, with the better-educated and wealthier Jews going to France and the rest, by default, to Israel.

The Six Day War of 1967 triggered another wave of immigration. Initially, this was focused on Jews from affluent Western countries, whose motivation was more pull than push – but this wave soon faded, mainly for socio-economic reasons. However, it was superceded by the renewal of Jewish emigration from Eastern Europe, specifically the USSR. ‘Russian Jews’ as they were called, irrespective of where within the Soviet Empire they hailed from, began to arrive in the early 1970s and the trend continued over the decade. However, as time went on, a growing percentage of the émigrés, who went first to transit camps in Austria, ‘dropped out’ by changing direction and moving to the US instead — causing the Kremlin to clamp down and end the whole process. Only in 1989, as the Soviet bloc collapsed and the USSR itself began to crumble, did the opportunity to leave re-emerge. This time the response was immediate and overwhelming: in 1990-1991 some half-million Jews left the USSR for Israel and the wave continued, at steadily lower levels, through the 90s, eventually totaling almost one million people. Here, too, the push factor – decades of Soviet-style anti-semitism – was the dominant force fuelling the massive outflow.

The flow and ebb of successive immigration waves defined the economic history of their adopted country. Each new wave arrived to find an economy in the doldrums but, by delivering a positive shock to domestic demand and adding a new and dynamic element to the labour force, it sparked an upsurge in economic activity. This found immediate expression in the construction sector, by creating the need for new residential and non-residential buildings – and this sector acted as the locomotive for the entire domestic economy. The typical result was a real-estate boom that developed into a general boom, with rising inflation and growing pressure on the balance of payments. The latter negative phenomena eventually forced the government to adopt contractionary economic policies which, combined with the ebbing of the immigration wave, sent the economy into recession.

But this dynamic tended to be the mirror-image of the one at work in the global economy. The forces that triggered the immigration – including economic pressure, social unrest (in the form of anti-semitism) and/or overt political anti-semitism (as in Czarist Russia and Nazi Germany) – came to the fore in times of recession and economic distress. This pattern is most apparent in the inter-war years, when the immigration waves came against a background of global recession and dislocation (the immediate post-WW1 years), hyper-inflation and social upheaval (the mid-twenties) and, of course, the Great Depression. But the pattern held true in the post-WW2 period as well: it was at work in the post-independence Arab countries and, of course, in the dying years of the Soviet Union. In fact, most of the immigration waves came when not only the ‘source-countries’ economies, but
the developed world as a whole, were in recession (this is true of 1919-23, the 1930s, the late 60s, the mid-70s and the early 90s).

The state of the global economy therefore explains the timing of the emigration waves. But it does not explain why the emigrants that chose to go to Palestine/ Israel did so – and why the proportion of Jewish emigrants that chose Palestine/ Israel varied over time. To answer that, we must introduce another factor, much less-well known but absolutely crucial to the development of the overall historical process. This is American immigration policy. The period of wide-open immigration to the US began to wind down in the early 20th century, with the barriers to entry repeatedly raised until, in 1925, the gates were shut tight. They remained shut until the 1970s – and this goes a long way in explaining both the Holocaust and the establishment and growth of the State of Israel: in the critical period of 1925-1940, there was nowhere to go and from 1948 through 1975 there was nowhere else to go (except France, for those to whom that was a relevant option).

Moving from history to current affairs, my scenario for the Israeli economy – indeed, for the country as a whole – is based on the belief that the historic patterns outlined above will re-assert themselves in the coming years. This will give rise to a massive wave of immigration which, true to form, will drag the domestic economy out of recession and into rapid growth. This growth will take place whilst most developed countries are still mired in recession or low growth and will therefore reconfirm the counter-cyclical nature of the Israeli economy. Eventually, the emigration wave will ebb and the domestic boom will turn to bust. At that point, a new economic policy – aimed at addressing the ‘crisis’ then underway – will seek to redirect resources from the domestic economy to the external sector. By then, the world will be growing again and this policy will be timely and hence successful.

If this is correct – and I would stress that it is not a forecast, in the accepted sense, but rather a prediction based on historic patterns repeating themselves – then the Israeli economy will not mirror the path of the global economy but will rather follow a very different, almost contrary, trajectory. The reasons why I am increasingly convinced that the historic pattern will be followed may be summarised as follows:

A. Causes and sources of immigration to Israel:

1. The entire world is in the grips of the worst recession since the 1930s.
2. This financial and economic crisis is almost certain to result in widespread social unrest and, in many countries, political upheavals.
3. This process is already underway in many countries. One prominent symptom is an upsurge in anti-semitism across Europe.
4. The two main potential sources of Jewish emigration are the CEE (Central and Eastern Europe) countries and Western Europe. With regard to CEE, several countries — notably Ukraine — are already in dire straits; others –including Russia — are likely to follow.
5. In Western Europe, the tension between Moslem immigrant communities and the general population, which subsided during the boom years, will re-emerge in line with the deterioration in the economic situation.
6. Several South American countries, notably Argentina (home to the largest Jewish community in Latin America), are also facing socio-economic unrest.
7. For the first time, large numbers of young Jews in the US are questioning their prospects and future in that country.

In Eastern Europe, the size of the Jewish population is unknown and is a matter of dispute and estimation. However, including Russia, Ukraine, Belorussia and Hungary, any number between 0.5-1 million is realistic. France has the largest Jewish community in Western Europe (600,000), while that of the UK numbers some 250,000, so that one million for the whole of Western Europe is a reasonable approximation.

In the Americas, Argentina has a Jewish community of approximately 250,000. The Jewish population of the US is usually put at upwards of 5 million.

B. Consequences for the Israeli economy of an immigration wave in 2010-2012

1. The Israeli economy is suffering from a negative demand shock, as the global crisis has caused a sharp fall in overseas demand, whilst the domestic boom has run out of steam.
2. The Israeli real estate sector is moribund. Housing starts have been falling since 1996. The inventory of unsold new apartments has shrunk steadily since 1997 and now stands at a mere 9,000+ apartments for the whole country.
3. In these circumstances, any large positive shock to domestic demand would suffice to immediately restart domestic growth. Specifically, any sharp rise in demand for housing would cause prices to soar and trigger an immediate response from the construction sector.
4. In light of the above, the arrival of 100-200,000 immigrants over a 2-3 year period would be more than sufficient to drag the economy out of recession, by triggering a construction boom that would rapidly expand to the whole domestic economy.
5. An immigration wave would also cause an upheaval in economic policy, forcing the government to intervene on a large-scale in the housing sector by either undertaking state housing programmes or (much more likely) by providing significant financial and tax incentives to contractors to undertake building projects and by providing subsidised mortgages to new immigrants (and native young couples).

As noted, from the narrow perspective of ending the recession and blasting the economy onto a growth trajectory, 200,000 immigrants would probably be more than adequate. However, in view of the serious situation already facing large parts of European Jewry, and in light of the very grim prospects for many European countries, I believe that the impending immigration wave will be much larger than 100-200,000 — and may eventually surpass the 1 million-odd immigrants from the FSU (and elsewhere, notably Ethiopia) who arrived in the 1990s.

Conclusion:

To the best of my knowledge, no-one else is positing a scenario of this sort. On the contrary, in Israeli official circles there is absolutely no expectation – and hence no preparation – for any kind of large-scale immigration. Having personally lived through the period before and during the mass immigration from the FSU (1988-1992), I am completely unfazed by this obliviousness. It is actually par for the course and, as such, is part of the historical parallel. The Israeli economy and bureaucracy is always unprepared and therefore always taken by surprise. Belated reaction and rapid improvisation are the only modus operandi the country knows.

A potentially more troubling point is why the basic thesis – that the Israeli economy has a tendency to act in a counter-cyclical manner to the global economy – is not more widely recognised, given the historical record. The answer I would offer, on the basis of having presented this thesis to a number of serious economists, analysts, etc. whose opinions I respect, is that it (the thesis) is highly politically incorrect. Since the last immigration wave gave rise to the classic boom-and-bust cycle in 1990-1997, a new dogma of Israeli economic development, and hence policy has arisen, and swept all before it. This is that in the post-industrial/ info-technology world, globalisation is the key to success. The single most powerful and consistent theme in Israeli economic policy for the last 20 years (before, during and after the immigration wave form the FSU) has been the need to integrate the Israeli economy into the global economy – and this has achieved a very large measure of success.

To suggest that an earlier and much deeper-seated pattern of economic development is now about to re-assert itself, is unacceptable to the new economic and business elite. In part this is because the idea that the second era of globalisation in the world economy has
come to an end, is anathema to it; in part, there is also a vague realisation that a mass immigration from Western countries such as France and the UK presages the end of the socio-economic dominance of the current elite.

In any event, it seems to me that that there is a rapidly growing likelihood of an immigration wave – at least one of sufficient magnitude to turn the economy around, if not one large enough to reshape Israeli society. I expect the immigration to begin in late 2009/ early 2010 and to intensify through next year and perhaps beyond. In this scenario, the economy will turn round next year.

Conversely, if the optimists are proven correct and the global economy begins to improve next year then, as noted in the mainstream scenario, the Israeli economy will turn round faster and more powerfully than the global economy. Either way, for Israel, the end of the recession is within a 9-15 month horizon.

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