The Effect of Russian Immigration on the Israeli Economy Essay

The Effect of Russian Immigration on the Israeli Economy ? Executive Summary Throughout history, there have been many periods of mass immigration of Russian Jews into Israel and the Middle East. Most recently, the fall of the Soviet Union has enabled over one million Russian Jews to move to Israel. As expected, this influx of people had a significant effect on Israel’s population and economy. The purpose of this essay is to discover what role this flood of immigrants played on Israel and Russia, and how each of the country’s economy has been affected by these changes.

My findings show that Russian Jews played a significant role in the emergence of a successful Israeli market-based economy. Because the majority of Russian immigrants arrived in Israel with a high-level of education, the swell of intelligence allowed Israel to develop their high-tech industry into what has become a worldwide leader. As foreign investors began to notice the wealth of technological knowledge in Israel, venture capital in the country has increased, with many corporations such as Intel and Microsoft setting up manufacturing and R & D centers throughout the country.

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While the technology sector in Israel would have remained competitive without the fall of the Soviet Union, the influx of Russian brainpower to the country has certainly contributed to its worldwide prowess in the industry. ? Throughout history, the infusion of Russian Jews into the Middle East has played a large role in the creation and development of the Israeli state. From the yishuvs of the early 1900s, which laid the foundation for the Israeli economy, on through immigrants of present day, each group has had an impact on the country.

Over the past twenty years, the political and economic environments of both Israel and Russia have changed drastically, largely due to significant economic reforms which have helped their transformations. By looking at the economic histories of both countries, specifically since the fall of the Soviet Union, you can see the enormous changes which have occurred over the past 20 years. Many of these changes can be traced back to the effect of Russian immigration on Israel during this period, as well as in the past.

The most significant result of this mass influx of brainpower has been the development of Israel’s high-tech industry, now a worldwide leader in technological development, and a hotbed for R & D, which has become the backbone of the Israeli economy. Economic history of Israel The economic history of Israel can be traced back as far as the late nineteenth century, prior to the establishment of the Jewish state. The influx of over half a million Jewish immigrants, from Russia and Eastern European countries into Palestine, helped form the foundation of the Israeli economy.

This group of immigrants, known as the yishuv, focused much of their efforts on developing agricultural settlements, similar to a modern day Israeli Kibbutz. “The early emphasis on agriculture would prove lucrative in later years as Israeli agricultural productivity and innovation allowed the country to become largely self-sufficient in terms of food production, and a leading exporter of produce and agricultural technology. The yishuv economy, based largely on agriculture and small manufacturing, grew at an annual rate of 13. 7 percent between March 1919 and December 1947. After declaring independence in 1948, Israel’s economy was built to support three functions essential to its sustainability; the high cost of defending Israel from its surrounding neighbors, which also happened to be its biggest enemies, the cost of absorbing large amounts of immigrants, and the development of infrastructure including banks, financial systems and government agencies, which were all capital intensive projects. Less than four years later, Israel had welcomed nearly 800,000 immigrants, doubling its Jewish population, and was forced to implement an austerity program to deal with the escalating costs. A New Economic Policy was introduced in early 1952. It consisted of exchange rate devaluation, the gradual relaxation of price controls and rationing, and curbing of monetary expansion, primarily by budgetary restraint. Active immigration encouragement was curtailed, to await the absorption of the earlier mass immigration. From 1950 until 1965, Israel achieved a high rate of growth: Real GNP (gross national product) grew by an average annual rate of over 11 percent, and per capita GNP by greater than 6 percent” .

During this time, Israel’s economy was aided by the influx of foreign currency, mainly from reparations from the German government, which led to extensive importing of German goods. Also aiding the development of the Israeli economy were donations and loans to the country through Israel bonds, which helped curb the importation costs of raw materials and energy. Much of these funds came from Israelies who were exiled from what is now Jordan, Israel, and parts of Lebanon. Over the next two decades, Israel’s dependence on the defense industry increased drastically.

Due to an inability to obtain the equipment necessary to properly defend itself from outside the country, Israel was forced to manufacture weaponry and communications equipment. Building on this necessity, the country soon began developing sophisticated technology related to the manufacturing of fighter jets, tanks and missiles, eventually leading to the exporting of these products outside the country. “The surge in military production was also a quest for technological superiority. Defense spending as share of Gross National Product (GNP) doubled from 10. 4 percent in 1967 to 20. percent in 1969 and reached 25. 7 percent in 1970, as the government poured massive resources into research and development, boosting employment in the defense industry from 14,000 in 1966 to 34,000 in 1972, and setting the industry up as a major engine of economic growth” . Near the end of this period, in the late 1980s, privatization reforms in Israeli policy helped lead to economic expansion in the 1990s. Building on its military prowess and advancements in the defense industry, Israel became a major player in the high-tech sector of the world economy.

While much of this growth can be traced to the massive influx of Russian immigrants through the 1990s, after the fall of the Soviet Union, its roots can be traced to the development of the Israeli Defense Forces. Taking advantage of the deregulation and privatization of the Israeli economy, many citizens used their expertise, gained from working for the IDF, and developed start-up companies, helping Israel become the most technologically advanced country in the Middle East. Israel now has a technologically advanced market economy, with leading exports including high-tech equipment and agricultural products and equipment.

As reported in the CIA World Factbook, “The global financial crisis of 2008-09 spurred a brief recession in Israel, but the country entered the crisis with solid fundamentals – following years of prudent fiscal policy and a series of liberalizing reforms – and a resilient banking sector, and the economy has shown signs of an early recovery. Following GDP growth of 4% in 2008, Israel’s GDP grew by 0. 5% in 2009 but is expected to expand in 2010. ” Looking forward, Israel faces daunting tasks related to their economic success.

On top of the global financial crisis, which continues to affect business throughout the world, Israel must continue to reform its private sector and address key issues such as inadequate infrastructure and environmental protection. Another issue that must be addressed is that of social inequalities in the Israeli workforce, which is one of the worst in the world. If these issues are not handled properly and efficiently, the economic progress Israel has made over the past 60 years could begin to deteriorate. Economic history of Russia

Prior to the fall of the Soviet Union, the government used various strategies to get the economy back on track. After taking office as president of Russia, Gorbachev’s intentions were to change and reform the Communist system. Several reforms, including glasnost and perestroika were implemented during Gorbachev’s time in office in order to revive the Soviet economy. Changes made during this time, such as the Law on State Enterprise and the Law on Cooperatives, which took place in the late 1980’s, contributed to the breakup of the Soviet Union.

The Law on State Enterprises allowed companies to determine production levels based on consumer demand, although these enterprises were still responsible for supplying the state before doing so. While this law allowed companies to negotiate with suppliers in order to lower manufacturing costs, it also lessened the role of government in industry. The government no longer controlled output levels and pricing on these enterprises, but the safety net which they provided to unprofitable businesses also disappeared as businesses were forced to cover their operational costs through their own revenues.

The Law on Cooperatives allowed for private ownership of business enterprises, and combined with the Law on State Enterprises, eliminated the government’s monopolistic hold on industry and trade throughout the country. Following the fall of the Soviet Union, Russia struggled to transform itself from a communist country into a successful market economy. Yeltsin became the first directly elected leader in Russian history, and took office in July of 1991. Based on advice received from the United States and the IMF, Yeltsin implemented radical, market-oriented reforms, which led to the omplete economic collapse of Russia, and ultimately, the 1998 financial crisis. Shortly after this crisis, Vladimir Putin became president, and the recovery process began. During Putin’s eight years in office, industry grew by 75%, investments increased by 125%, and agricultural production and construction increased as well. Real incomes more than doubled and the average salary increased eightfold from $80 to $640. One of the major contributing factors to the success of Russia’s economic policy was the economic situation in international markets.

Rapid growth in energy prices around the world and record low interest rates helped to restore high economic growth. For Russia, this meant a radical improvement in its balance of payment, as well as the availability of a large amount of liquid assets for investment . The recent recovery was largely made possible due to high world oil prices, along with renewed efforts to advance the country’s structural reforms. Russia remains heavily dependent on exports of commodities including oil, natural gas, metals, and timber, which account for about 80% of exports, leaving the country vulnerable to swings in world prices.

Industrial military exports are now the major non-commodity export. Similar to Israel, Russia has taken advantage of its military prowess and engineering brain power to become a major player in the worldwide defense industry, as well as other high-tech industries such as information technology and software development. Without further drastic changes to the economy, the success or failure of the Russian economy will depend mainly on the same factors that led to its recovery, specifically worldwide energy prices and demand. The Effect of Soviet Immigration on the Israeli economy

As discussed above, the yishuvs, formed in the early 20th century, laid the groundwork for what eventually became the backbone of the Israeli economy, agricultural productivity and innovation, and small manufacturing. A large influx of Soviet Jews occurred after Israel’s declaration of independence, and yet again after the fall of the Soviet Union, with nearly 1 million Soviets arriving within a six year window. While each of these infusions has played a large role Israel’s development, over time, the most recent influx may prove to have the greatest impact on the success of its economy.

The influx of Soviet Jews into Israel represented a 25 percent population increase in ten years, roughly equivalent to the population of France being absorbed into the United States. Largely barred in the USSR from owning land or businesses, many of these Jews had honed their minds into keen instruments of algorithmic science, engineering, and mathematics. In less than 25 years, since the various economic reforms began, Israel has accomplished the most overwhelming transformation in the history of economics, from a nondescript laggard in the industrial world to a luminous first .

Although they can’t be held completely responsible for this remarkable turnaround, the Russian Jews who came to Israel after the fall of the USSR certainly played a significant role in the recent success of the Israeli economy. In the midst of the mass infusion of Russian Jews, the Israeli government created several programs to help immigrants integrate into Israeli society. One of the main benefits of the Russian immigrants was their high levels of education and training in the ever-important fields of science and technology.

Unfortunately for many, the lack of jobs in these sectors led to increased unemployment rates. To make good use of this new brain power, Israel developed “technological incubators” helped to develop new high-tech companies throughout the country, and also turn many of these Russian innovators into successful businessmen and entrepreneurs. “As a result of this program, immigrants get the opportunity to transform a good idea into a good company without being obstructed by the all too frequent problems of language, cultural differences and ineffective networks in society.

Instead the specialist knowledge and expertise of new immigrants, with the perspective and knowledge for instance of different cultures can lead to the start-up of new companies which become more innovative than would otherwise have been the case. ” Ultimately, these incubators have helped Israel gain a competitive advantage in several high-tech industries such as telecommunications, biopharmaceuticals, and medical devices. Looking at the Israeli high-tech sector in relation to Porter’s Diamond Model, it is easy to see how the immigration of Russian Jews helped create this competitive advantage for Israel.

The additional brainpower obtained through this mass immigration only added to the significant knowledge many Israelis had gained through their mandatory military commitment, and subsequent university training at highly respected schools such as Technion, a science and technological institution on par with MIT. When the Russian Jews were added to this pool of brainpower, Israeli companies had the opportunity to hand pick the best of the best, with firms competing for human talent, technical leadership, and superior product quality, similar to Italy’s design cluster in Porter’s example.

These factors, combined with the market reforms that were recently implemented, allowed Israel to emerge as one of the world leaders in science and technology. According to Porter, nations gain competitive advantage in industries where the home demand gives their companies a clearer or earlier picture of emerging buyer needs, and where demanding buyers pressure companies to innovate faster and achieve more sophisticated competitive advantages than their foreign rivals. Home-demand conditions help build competitive advantage when a particular industry segment is larger or more visible in the domestic market than in foreign markets.

These conditions can be seen throughout the Israeli economy as it continues to evolve into a world power in science and technology. Combined with the significant venture-capital investments in Israel, the brainpower present in the country has enabled Israel to become a leader in technological innovation. Several worldwide leaders, including Intel, Microsoft and Motorola have established R & D facilities in the country to take advantage of the scientific abilities of its population, as well as their abilities to continue to develop new technologies, allowing these companies to stay ahead of the competitive curve throughout the world.

Israel has also become a leader in the export of agricultural equipment due to the expertise in creating innovative ways of growing crops in less-than-ideal conditions. These innovations, which allowed Israeli farmers to transform parts of desert into fertile land on which to grow their crops, have helped Israel earn its reputation as a technological leader in agriculture. The technological incubators mentioned above, have also played a large part n the development of related and supporting industries, another segment of Porter’s diamond. Due to the excessive amounts of qualified workers throughout the country, and the lack of jobs, many immigrants were forced to use their knowledge and expertise to create their own high-tech companies. These companies, along with the major players, and increasing amounts of start-ups, have drawn strong comparisons to California’s Silicon Valley, sometimes even being referred to as “Silicon Valley on the Mediterranean”.

A 2008 survey of the world’s venture capitalists by Deloitte & Touche showed that in six key fields – telecom, microchips, software, biopharmaceuticals, medical devices, and clean energy – Israel ranked second only to the United States in technological innovation. Germany, roughly ten times larger, roughly tied Israel, but adjusted for its population, Israel comes in far ahead of all other countries, including the United States. . The technological environment in Israel today, which is best described as an industrial cluster, has provided Israel with one of the most important sources of national advantage.

The knowledge base Israel has built over the past two decades, which can be largely attributed to the immigration of the Russian Jews in the early 1990s, who now account for 50 percent of the high-tech workforce in Israel, should prove to be a viable source of sustainable long-run competitive advantage, helping Israel to sustain its role as a worldwide economic and technological leader. Although many positives have come from the influx of the Russian Jews, there were also negative reactions in Israel.

The addition of 1 million people to the country from 1990-1993 increased Israel’s population by 20 percent, causing unemployment rates to skyrocket. In 1990, only 32 percent of the Russian men and 19 percent of the women participated in the labor market. And among those who were in the labor force, 40 percent of the men and 53 percent of the women were unemployed. Many of the workers who did find jobs were overqualified for their positions, many performing low-skilled jobs compared to their previous work in the Soviet Union, and based on the advanced educational standing of most of the workers.

This trend has continued, to a certain extent, with many immigrants still unable to find jobs to match their backgrounds. In recent years, after witnessing the revival of the Russian economy, many Russians who immigrated to Israel have started to immigrate back to Russia in search of career opportunities. Effects on the Russian Economy Due to the radical changes which have taken place in Russia since the fall of the Soviet Union, it is difficult to ascertain what effect, if any, the mass immigration of the Russian Jews had on the economy.

As the Russian economy has continued to improve over the past decade, the government has continued to remain in control of key sectors of the economy including energy, automotive and aerospace. While attempts have been made to transform Russia’s economy into a market based system, government bureaucracy and corruption have hindered any further advancement. While some may believe the brain drain out of Russia had a great effect on its economy, the impact, in reality, was very minimal.

Throughout history, the anti-Semitism that Jews have experienced, and the policies against them in Russia, would not have allowed them to make the technological advancements they were able to in Israel. While Russia once had the largest Jewish population in the world, due to various pogroms and persecutions, less than 500,000 now live in Russia. Also, while Israel’s economy had already taken steps towards recovery, the Russian economy had hit rock bottom. The technologic boom in Israel was funded mainly by foreign venture capital, which took advantage of the human genius available to them in Israel.

While much of this human genius came from the Russian Jews, odds are, it would have gone largely to waste if they had stayed in Russia. Although anti-Semitism continues to be a problem for Jews in Russia, the Jews have continued to use their entrepreneurial skills to take advantage of the improving economy, with three of Russia’s top five wealthiest oligarchs being Jewish. Conclusion Throughout history, the role of Jews emigrating out of Russia has played a large role in Israel’s development.

From the yeshuvs in the early 20th century, to the most recent insurgence, each of the movements has greatly affected the political and economic conditions of the country. Thanks to economic reforms in Israel over the past 25 years, Israelis have taken advantage of deregulation and privatization, and turned Israel into a work power in high-tech industries. The massive influx of highly educated Russian Jews, including thousands of engineers, researchers, doctors, dentists, nurses, and teachers has greatly affected this turnaround.

While Israel probably would have been able to survive without the immigration of the Russian Jews over the past twenty years, the competitive advantage which the Jews helped to create for the country may never have materialized. As can be seen by the fact that 50 percent of employees in high-tech industries are Russian immigrants, the immigration of Russian Jews in recent history has helped pave the way to Israel becoming, and remaining, a worldwide power in the science and technology sectors. ? Bibliography Brenton, K. M. (2007, August 15). Russia Profile. org.

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