Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Table of Contents
1 Introduction ...................................................................................................................... 1
1.1 Importance of the Study .................................................................................................. 1
1.2 Literature Review ........................................................................................................... 1
1.3 Objectives ....................................................................................................................... 2
1.4 Objects and Scope ........................................................................................................... 2
1.5 Research Questions ......................................................................................................... 2
1.6 Methodology ................................................................................................................... 3
1.7 Structure of the Study ..................................................................................................... 3
2 Content of the Study ......................................................................................................... 4
2.1 Chapter 1: Models explaining Israel’s Economic Growth ............................................. 4
2.2 Chapter 2: Facts about Israel’s Economy between the 1970s and the 21st Century ..... 7
2.3 Chapter 3: Reasons for Israel’s Economic Growth from 1970s to 2000s ...................... 9
3 Conclusion ....................................................................................................................... 14
4 References........................................................................................................................ 16
5 List of Figures ................................................................................................................. 20
1
1 Introduction
1.1 Importance of the Study
Since Vietnam is a country striving for success in becoming a developed country, our
assignment aims at exploring the track record of Israel as a pioneer and comparable example.
The problem of Vietnam’s economy is that it is equipped with a low-skilled labor force and
that its agriculture industry does not apply much technological advancement. Additionally,
the government is operating inefficiently by intervening too much in the markets which leads
to reduced development of private sectors. Since Israel is a country which succeeded in a
remarkably short period of time, we want to draw measures for Vietnam following the
example of Israel.
1.2 Literature Review
The two famous Japanese economists, Hayami and Godo have developed a theoretical
framework including the model of dialectic social development, the institutional and
technological innovations so as to find an appropriate explanation for the economic
phenomena especially those in East Asia: how can the low income countries catch up with the
high income countries, how can technology advancement and structural reforms affect a
particular economy and the remarkable developing processes of some countries in Asia,
which are also covered in this study. Whereby the research conducted by Hayami and Godo
only focuses on the technology and institutions, the Kremerian model in Population Growth
and Technological Change: One Million B.C. to 1990 studies about the role of population
growth in the economic development. In addition to the two models mentioned above, the
theory researched by Keynes emphasizes the role of the government in order to stabilize the
economic fluctuations in the short run. Based on these models, our study tries to understand
the effects of population, institution and technology on the economic development in Israel.
The work of Assaf Luxembourg from 2011 explains the main facts and events of the
Israeli economy that contributed to the major factors that led to the Israel’s economic growth.
In addition, Nadav Halevi’s online article provides a brief summary of modern Israel’s history
by presenting the role of several historical obstacles throughout the development of Israel.
The description of Israel’s economy during the 1970s to 21st century is mainly based on
the online newspaper article by Weissmann (2012) published on the website of The Atlantic.
2
In order to explain the initialization of the stabilization plan which was implemented in
Israel, additional sources which provide information on the Israeli history are adduced as
evidence and basis for analysis, since the article by Weissmann only gives a brief overview.
The first aspect of the plan was the extension of Israel’s immigration policy which enriched
the labor force by opening its borders especially for Jewish people. The role of venture capital
for the growth of the Israeli economy is also examined in the article by Weissmann. It
describes the initiation of investments in Israel due to the government’s program Yozma.
Additional literature mentioned in this part of our assignment supports the contribution of
investments to the Israeli economy’s growth by providing figures and outcomes. Since the
work of Israel’s governor of the Bank of Israel was also crucial for Israel’s growth, his
achievement is explained with the help of historical and biographical evidence especially
provided by the website of the IMF.
1.3 Objectives
Our assignment aims at examining the development process of the Israeli economy
between the 1970s and the beginning of the 21st century by analyzing appropriate models and
providing facts about Israel’s economy during this period as well as factors contributing to the
process of Israel’s growth.
1.4 Objects and Scope
In order to conduct the study, we focus on Israel’s GDP, inflation rate and growth rate as
well as on figures on the growth of Israel’s startup sector. The time frame for our findings is
from the 1970s until the beginning of the 21st century.
1.5 Research Questions
The question guiding our research is “What contributed to the growth of the Israeli
economy from the 1970s until the beginning of the 21st century?”. To define our question
more precisely we ask which models are appropriate to clarify the growth of the Israeli
economy, which crucial historical events took place and which factors were leading to the
success of Israel’s economy.
3
1.6 Methodology
This study is an attempt to identify the major reasons that contributed to Israel’s economic
growth. Since the dialetic social development model is a broad concept which simplifies the
complex relationship between the economic subsystem including technology as well as
resource endowments and the cultural-institutional subsystem, the model can explain the
effects of the stabilization plan used to foster Israel’s economy. Models related to the dialetic
social development model are the theory of institutional innovation, the Kremerian model of
population growth and the Keynesian model of economy which are investigated to make
Israel’s economic growth comprehensible.
1.7 Structure of the Study
In order to investigate whether Israel and its way to success can be considered as an
appropriate role model for the Vietnamese economy, we examine Israel’s economy by
applying the model of dialetic social development to the Israeli economy. Secondly, we
provide facts about Israel’s economy from the 1970s to the 21st century. Thirdly, we present
the stabilization plan which was the reason that contributed to Israel’s economic boom during
this period.
4
2 Content of the Study
2.1 Chapter 1: Models explaining Israel’s Economic Growth
The state of Israel was first officially established in mid May 1948 (Nadav Halevi, 2008).
In its first two decades of existence (1948-1973), the Israeli economic growth rates exceeded
10% annually (World Bank, 2016) which is the result from its strong commitment to
development. However, since 1973, there was the “Lost Decade” of the Israeli economic
history, as the consequence of the oil crisis simultaneously with the Yom Kippur War in
1973, the government deficit grew significantly due to the huge defence spending and in an
effort to finance the huge budget deficit, the Bank of Israel printed money which accelerated
the inflation rapidly (Melnick & Mealem, 2009). In 1984, the inflation rate was nearly 400
percent - the level bordering on hyper-inflation (World Bank, 2016). The situation became
worse when foreign investors evacuated their money leading to the “banking crisis”
(Weissmann, 2012), whether or not Israel would be able to pay its debt and deal with the
current account deficit became unclear so the economy was on the brink of collapse in
financial and foreign currency markets (Ben-Porath, 1989). However, in 1985, with the
implementing of the stabilization plan, a macroeconomic strategy carried out by governments
and central banks to reduce the severity of economic fluctuations (economic growth, price
levels and unemployment) in the short run (Investopedia, n.d.), and the market-oriented
structural reforms, which are enacted in order to reduce the government involvement in the
economy, the Israeli economy was restorative and continued to develop (Bruno, 1986)
(Melnick & Mealem, 2009). Since the establishment of the state, many alterations happened
to the structure of Israel’s economy unrecognizably. This study is aimed at analyzing the
economic growth of Israel between the 1970s and 2000s with the support of following
economic theory and model.
First of all, according to Hayami and Godo, the model of dialectic social development is
developed to conceive “how such technological and institutional changes are interrelated with
each other, how they respond to changes in resource endowments, and how such responses
are governed by cultural tradition” can be applied to explain why the Israeli economic
structure had to change and how the changes affect the economy in the country. “Model of
dialectic social development is a model of the evaluation in social systems through dialectic
interactions between economic and cultural-institutions variables.” (Hayami & Godo, 2005).
5
The economic subsystem consists of interactions between resource endowments (factors
of production – including natural resources, labor and capital) and technology (production
function – the determining factor that determines how factors of production are combined to
create added values). Moreover, increases in economic resources depend on progress in
technology and vice versa. The activities that use both human capital and physical capital as
inputs for the production of accumulation of information can be called “investment in
intangible capital”. Advancement of technology acts as a fundamental for resource
augmentation and it is also promoted by “purposive resource using activities” or “investment
in intangible capital”. A crucial element in augmenting knowledge production function is
investment in human capital (enlargement of human capacity) by improving the performances
of education, training programs and healthcare systems. The investment in human capital will
increase the efficiency of knowledge production, which will result in increasing the efficiency
of the process creating economic value added from given resources (Hayami & Godo, 2005).
According to this, the “quality university education” and the “highly motivated and educated
populace” play important roles in ushering in a new period of high technology and thence
rapid economic growth in the State of Israel (Adler, 2014).
In “From the poverty to the wealth of Nations” written by Hayami and Godo in 2005,
culture in the cultural-institutional subsystem is defined to imply “the value system of people
in the society” and institutions are defined as “rules sanctioned by the members of the society
including both formally stipulated laws and informal conventions”. More importantly,
“cultures and institutions are defined inseparably related”: “The rules that contradict the
morals of people would not be sanctioned socially and, if stipulated formally, would not
function effectively”. They investigated and recognized that the culture (value system) and
institutions (rules) which are “components of the social system” has significant influences on
the productivity of economic subsystem, including resource endowments and technology.
This explains why the Jewish culture and the performance of the government are basically
responsible for the economic development in Israel.
On that account, institution innovation appears to be relevant to modern market economy
changed from subsistence-oriented economy (Hayami & Godo, 2005). "Institutions are the
rules of the game in a society or, more formally, are the humanly devised constraints that
shape human interaction" (North, 1990, p. 3). Institutions whether the product of intentional
decisions or arise randomly always play crucial role in determining market outcomes.
Owing to that, it is especially important to analyze the performance of a particular
institutions over time: Previously the evolution process of society together with population
growth put pressure on natural resources to meet all needs, that results in the development of
economy. Hence, institutions need change and innovate in order to organize people
effectively and facilitate economic progress. To build appropriate institutions, consider the
relationship between three institutional characteristics: economic institutions; political power;
political institutions. Economic institutions are related to the growth of economy because of
their motivations to economic actors in society. In particular, they have impact on investments
in physical and human capital, technology and the organization of production. Economic
institutions not only determine the aggregate economic growth potential of the economy, but
also how to distribute the society resources. Like economic institutions, political institutions
are collective choices to determine the constraints on and the incentives of the key actors in
political sphere. The distribution of political power is determined by the political institutions
and resource endowment of the economy (Acemoglu and Robinson, 2006). “Recognition that
institutions are key to economic growth and to the distribution of resources is reflected not
only in scholarly analyses of arrangements such as public agencies but also in the advice of
development agencies that government in general focus less on urging states to avoid
intervening in markets and more on constructing pro-market institutions” (Richard F.Doner,
