Socialism’s Biggest Failure: Israel

Unless you’re an Israel scholar, you may not know that most of the founders of the modern state of Israel were socialists. The system they put in place in 1948 was based on socialist principles, reflecting both the experience many had growing up on kibbutzim or activism in socialist organizations in Europe.

The founders created an economic system dominated by the public sector, which to a certain extent fit the needs of the nascent country at the time. By taxing private enterprise heavily, they sought to build a social infrastructure, including government buildings as well as roads and housing, hoping to handle the massive flow of immigrants into the country.

Labor unions were especially strong which meant Israel’s factories were inefficient in relation to competitors elsewhere. Food and public transportation were heavily subsidized. By the 1980s, Israel was crippled with run-away inflation, mounting national debt and a lack of foreign reserves. Socialism was a failure.

How did that society evolve into the economic miracle of today? In 1985, Prime Minister Shimon Peres, one of the heroes of the War of Independence, convinced the Labor Party to accept drastic measures including deep cuts in public spending, freezing public sector salaries, and cancelling automatic salary adjustments for unionized workers. Further, responsibility for setting interest rates was transferred from the Treasury, which used the printing press to win political support for the government to an apolitical Bank of Israel. Import duties designed to protect local businesses were slashed and Peres began to lower taxes.

In 2003, the current prime minister, Benjamin Netanyahu, added crucial components to the transition from the failed socialist system to free market capitalism, when he reduced social spending, cut taxes, raised the pension age, and sold state assets to the private sector, even the El Al airline.

The result? Today Israel is one of, if not the fastest growing economies in the developed world. Inflation is 0.4%, unemployment is 4%, and the shekel is one of the world’s strongest currencies. Although poverty has not been eliminated, it is less than it was in 1985 and per capita income is about to pass both Britain and Japan. Israel imports more than $100 billion annually and has a trade surplus––something the U.S. has been unable to achieve for decades.

Socialist policies nearly brought about the country’s ruin. They undermined incentive and ingenuity. Today, Israel is known for its technical ingenuity. That could not have taken place under the socialist model where all property belonged to the state and personal initiative was neither encouraged nor rewarded.

Those who argue socialism can’t be judged by its implementation in places like Russia, Cuba or Venezuela, have a hard case to make that it can work anywhere given its failure in Israel where the entire leadership of the country was fully committed to it and gave it nearly forty years to work before throwing in the towel.

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