Israel without Ideology (Fortune, 1952)

March 24, 2013: 10:00 AM ET

Most opinions of this young nation are extreme, rooted in emotion or dogma. Mr. Lehrman, whose reports on overseas economics have appeared frequently in these pages, tries for an unbiased view. He is author of the recently published Israel: The Beginning and Tomorrow.

Editors note: Every Sunday Fortune publishes a relevant story from our magazine archives. This week, President Barack Obama visited Israel and the West Bank for the first time since he has been the U.S. commander-in-chief. On Thursday, the President gave a speech to Israeli students, promising unwavering U.S. support for the country. We turn now to 1952, when Israel was a polarizing political issue in the U.S. This story covers Israeli resources, government and its importance as an ally in the Middle East. 

By Hal Lehrman

israeli_farm_workers

Israeli farm workers in 1952

To the U.S. a sound appraisal of Israel, as part of the disturbed and disturbing Middle East, is important. Measured per Israeli capita or per square mile of Israeli area, however, American misunderstanding about Israel is probably greater than about any other country. Almost everybody, Gentile or Jew, capitalist or socialist, pro or con, has judgments that are extreme-and therefore wrong. Excessive partisan enthusiasm or animus has befogged estimates of Israel's shape and direction. Some allege that she is a Moscow-drifting socialist mess, a permanent "charity case," a menace to U.S. security in Arab areas. Others say that she is a harmonious union of cooperative and private enterprise, a robust economy well on the way toward self-sufficiency, an impeccable ally, a full-blown democracy on the Western model. Both sets of concepts are wild.

Right now, a whole calendar of modern plagues has descended on Israel-shortages, black markets, inflationary spirals, rubber money. Financial ruin might already have come had the U.S. Government not stood by. Since 1948 the Export-Import Bank has loaned Israel $135 million. Last year Congress voted a grant of $64,500,000 on Marshall plan lines. But are things going from bad to worse or are they improving? What is the U.S. stake here, what are the odds on saving it, and how much should be laid on the line to do so? To get to the answers, let us first review Israel's achievements since 1947-48, when the Jewish community of Palestine (then 650,000 in number) obtained its independence by U.N. fiat, stopped one invading army dead, chased away four others, and won an uneasy armistice with more territory than before the invasion.

In the past four years the Israelis, enduring a living standard that makes British austerity seem almost pleasurable by contrast, have performed prodigious feats. To help guard against renewed assault and to rescue Jews from lands of persecution or danger, they have more than doubled their Jewish population. They have constructed 132,000 housing units, they have increased the number of gainfully employed by over 150 per cent, they have extended the cultivated acreage by better than 100 per cent (19,000 new farm units and 320 new rural settlements).

The drama and promise of the struggle have elicited some $175 million in foreign loans and close to $450 million in private foreign philanthropy. During three years up to the end of 1951, according to official count, new private foreign investment totaled $180 million, of which $65 million came from Americans. Some examples :

- General Shoe Corp. of Nashville, Tennessee, operates Israel's first assembly line in a new Jerusalem factory where Yemenite immigrants, fresh from an eleventh-century culture in a distant Arab kingdom, have learned how to churn out American-style shoes.

- A Kaiser-Frazer plant at Haifa, with an estimated 30 per cent American investment on a capitalization of $2,500,000, assembles U.S.-made automobiles that are bartered with Finland for paper, machinery, and prefabricated houses, with Turkey for fodder and livestock, with France for autobuses.

- A $2,400,000 plant, established by General Tire & Rubber Co. of Akron, Ohio, at Petach Tikvah, in cooperation with the Palestine Economic Corporation (P.E.C.) and other U.S.-Israeli, capital, aims at producing 100,000 tires annually.

- Another tire factory at Hadera, capitalized at $3 million and under the technical supervision of Dayton Rubber Co. (Ohio), is being financed half by Israeli capital, half by some 400 Americans.

- P.E.C., launched to stimulate U.S. investment, increased its outstanding common stock from $800,000 in 1925 to $6,800,000 in 1951; in the last three years the company has developed substantial interests in banking, chemical manufacture, industrial and residential real estate, paper milling, and shipping.

- American Palestine Trading Corp. (Ampal), which marketed over $14 million in debentures between September, 1948, and May, 1952, has invested in shipping, hotels, housing, and industrial enterprises.

- Some other firms entirely or chiefly U.S.-owned are producing butane gas, refrigerators (U.S. components), pipe fittings, prefab concrete walls, fabrics, emulsions, glass, watches, and office buildings.

Iron and copper have been discovered in the Negev wastes, confirming Biblical report. Israel's seemingly barren land contains manganese, sulfur, phosphate, peat, bituminous shale, kaolin, glass sand, limestone, gypsum, basalt, marble. Many of these must still meet the test of commercial extractability. There is probably oil. The Dead Sea shows rich and scarcely exploited chemical potential. With proper financing, Israel could contrive a substantial industrial revolution. Northern water can be tapped to expand the present power supply and to fructify the southern desert. An increase of only $100 million in the value of agricultural produce would make the hard-currency shortage manageable enough to cover basic rations. Export-Import Bank Chairman Herbert E. Gaston has testified that Israelis use loans "very thriftily for the promotion of their economy the creation of a really modern Western type of civilization. "

Prodigies coming?

Yet Israel, to survive, must accomplish new prodigies. She must transform an arid land into a fruitful one. Out of East European socialists, political rabbis, and earnest but vague economic libertarians, she must distill a government able to give the economy a just measure of control and freedom. Without these, expansion--the sole alternative to strangulation--will be impossible. Israel must assimilate an increasingly large Oriental immigration into a community that regards Westernization as its only salvation. Ten per cent of the population consists of Arabs, and Israel must coax, inspire, or bully them into loyalty or make them powerless to act as a fifth column. She must turn hostile Arab states on all borders into tolerant neighbors, buying and selling, and calm enough to permit reducing the terrible drain of preparedness costs. And if Israel cannot make peace with them, she must contrive so to act as not overly to exacerbate the U.S., which, while it displays no particular skill itself in placating the Arabs, strategically requires Middle Eastern calm.

Jewish immigrants

Jewish immigrants

Can Israel do all this? The present is perhaps a good moment in which to assess her chances. For the first time her achievements, problems, and prospects bear careful examination. For one thing, compared to the state of affairs that prevailed for years, she is sitting still long enough for a snapshot. This is because of a statesmanlike change in immigration policy. Heretofore, virtually unrestricted immigration caused the rate of increase of population to imperil solvency and stability. Even militarily there were grounds for fearing a large, undigested, immigrant mass. Immigration is now limited, except for Jews from areas where curtailment might jeopardize a "last-chance" opportunity for exit (satellite Europe) or where new persecutions might flare up (North Africa). Between 35,000 and 75,000 are expected in 1952, a distinct relaxation from 180,000 last year. The change gives reason for Israeli hope and, in this light, difficulties can be faced with some confidence.

Competitor of capitalism

Israel's rulers have gone to lengths extraordinary for socialists to attract private foreign investors. But despite the new enterprises listed above, response has been far below potential and need. In part the fault lies with the reputation of Histadrut, the trade-union federation. All top leaders of Mapai, Prime Minister David Ben-Gurion's party, emerged from Histadrut and, when government policy is shaped the views of organized labor enter vastly into the shaping. Moreover, Histadrut is a massive entrepreneur, constantly plowing profits back into plant. It owns factories, construction companies, wholesale and retail marketing agencies, and other key enterprises; operates ships and banks; encompasses over 80 per cent of agriculture and is the proprietor of 16 per cent of all Israel's industry.

Thus Histadrut competes with management in business, entirely apart from negotiating with it on labor relations. In the scramble for import licenses, raw-material allocations, foreign credits, and similar government favors in an economy of universal shortages and tight controls, Histadrut has benefited from its position as a blood-and-bone component of the dominant political party. It has, indeed, grown too big and all-pervasive to be explained away as an earnest, selfless partner in a smoothly functioning team of cooperative and private enterprise. Representatives of the private sector--though not themselves generally notable for ingenuity or social consciousness--feel discriminated against by government and smothered by the sheer size of the trade-union colossus.

The cat-and-dog quality of relations between the two sectors has not gone undetected by private foreign investors. Government has protested its good faith and has offered tax concessions and better than 10 per cent annual hard-currency repatriation on investments that earn foreign exchange. But neither these inducements nor recent reductions in the scope of a few Histadrut affiliates have overcome calculations of risk. Despite last summer's election gains of the private-enterprise General Zionists, there is still no impressive proof of the administration's readiness to explore all ways of making such enterprise a truly equal factor in the economy.

histadrut_headquarters

Histadrut headquarters

Ben-Gurion told this writer in Churchillian paraphrase that "I did not become Prime Minister to preside over the dissolution of Histadrut.'' But his coalition cabinet of socialists and rabbis is, in practice, barely socialist. Government ownership is relatively more restricted than in Italy, France, or Tory-ruled Britain, covering only the postal, telephone, and telegraph systems, Haifa port, some railway equipment and track, and the mineral resources. No private business establishment or area of enterprise has been nationalized since Israel was created nor has the government any visible intention of doing so.

Manpower and agriculture

Even before Israel existed, the Jews of Palestine proved their talent for making gardens out of desert and for fabricating an ingenious assortment of manufactured goods (electric transformers, false teeth, textiles, diamond gems, Christmas-tree ornaments, etc.). If they had retained their original population, plus a natural increment, they might already have become nearly self-sustaining except in food production. Like Britain and Switzerland, Israel can never dig enough food from her soil to fill her stomach; she must rely on the sale of goods and services to pay for imported food. And because of the immigrant tide, the economy has been unable to extend itself fast enough. The development of productive installations is impressive when compared with 1948, but it is pitifully inadequate when matched against the appetite of a population that has more than doubled.

In 1951 Israel's imports were seven times larger than exports--with the year's trade deficit officially calculated at $225 million. To produce consumer goods and exports, Israel needs more know-how. Moreover, owing partly to policy errors, manpower and capital are also in shorter supply than they need have been. The new state continues to depend for existence on outside aid--the alms of world Jewry and the loans and grants of Washington. Before these transfusions can be suspended, there must be stepped-up production for export and stepped-down import for consumption. Both are feasible.

Scarcely 20,000 immigrant families--about one-tenth of the total--went into the moshavim (cooperative villages of independent farmers) and under 10,000 persons into the famed kibbutzim (collective settlements). Newcomers who went to the land had no advance knowledge of the hardships involved and little training.

Back from the land

Immigrant camp notices

Immigrant camp notices

Of the new moshavim population, close to 1,500 families withdrew to cities or immigrant camps. Of the remainder, only 10 to 20 per cent made their living off the land. The mass of postwar immigrants lacked spiritual or physical preparation for the plow; they came not out of Zionist zeal but to find a refuge. The problem of transforming significant numbers of them into farmers was unprecedented.

An estimated quarter of all cultivated land is being worked by new immigrants. But a soft official policy side-stepped large opportunities to make agricultural labor more adequate. The government failed to impose a firm draft on the kibbutzim for instructors. The compulsion of earning a living was overlooked as a way to recruit farmhands. To counter demoralizing idleness in reception camps, the government in 1950 gave able-bodied immigrants the choice of working or not eating. But an extravagant program of public works absorbed much of the new labor force at prevailing trade-union rates. Though the practice won votes for Mapai, it also drained public funds, and quashed all impulse to face the rigors of farming.

Outright neglect of abandoned Arab farms cut potential produce. This loss was increased by the official passion for mechanization; where no tractor was available or where the terrain was not suited to some ambitious pattern of machines and irrigation, it seemed "scientific" to neglect the land. In the first years, few were encouraged, for instance, to tend olive plantations in Arab hand style and olives became scarce. Fig crops rotted because harvesting and preserving were not understood. Carob trees went untended, so that carobs for feed had to be imported. Large sums were spent on relatively unproductive trees under a reforestation and landscaping program. More recently, this tendency to ignore modest, real opportunities has begun to subside--but at the beginning of 1952 an estimated two-fifths of the total national acreage available for cultivation still lay untouched for secondary reasons difficult to justify in the emergency.

Suppressed tomatoes

The regime adhered to certain perhaps necessary formulas, like price controls, too inflexibly. The official price for tomatoes was so low as to destroy the incentive of producers, and tomatoes, too, almost vanished for a time. Other ideological quirks arose outside government, especially in the old kibbutzim. They eagerly took up allocations of extra land, but extra manpower became a problem. Many kibbutzim were ready to enroll immigrants as equal members but not as hired hands because this would presumably mean "exploitation." Food production in the enlarged settlements fell badly short of the possibilities.

The net is that the nation's capacity for work was threatened by the drop in nutritional standards. For the entire first quarter of 1952 the individual meat ration was around ten and one-half ounces. The average Israeli's diet began to slip below subsistence levels. The slump in public morale and energy then forced the government to establish priority for food imports despite the long-term undesirability of spending hard currency on such items. Today, wisely, visa preference is being given to the young and able-bodied, who, if they have no other useful skill or profession, must do a two-year hitch on farms. The government is beginning to apply economic pressures and create inducements for a large-scale shift of workers into agriculture. The first bumper harvest since independence, assured by the recent rainy winter, should also give a badly needed boost to the farm recruiting program, whose success is a prime requirement.

Capital and industry

The new state's abysmal rate of industrial efficiency is a function of management, labor, and government. Proprietors grew fat from the cost-plus system fostered by the British during World War II. Several exceptions apart, they kept growing fatter in Israel until recently because the sellers' market made them immune to all compulsion to give the consumer a break through efficient production. Workers resisted factory streamlining as a step toward unemployment. The combination of high pay and low output made the average worker four times as costly as in England. Government periodically exhorted managers to learn about industrial engineering and exhorted workers to take more pride in quality, but for a long time government policies of full employment and wage rates geared to living costs removed any real incentive for workers to reform their techniques. After years of nervous conversation, the regime last January finally prodded Histadrut into approving piecework "where possible," but it remains to be seen what will be done.

Legislation and official rhetoric long evinced a formal desire to facilitate the arrival of venture capital, but to many the inadequate implementation seemed to betray a fear of "capitalist robber barons." One could almost detect an aversion among the socialist-minded old-timers--who after all had done so much for the country's pioneer development--to the easy entry of "profiteers" now that the state was at last established. A tendency was even noted to secure a share of profits for the government in advance by walloping newcomers with stiff fees and charges in exchange for the privilege of taking a business risk. New entrepreneurs had to fight through masses of bureaucratic paper to obtain a site, a factory, machines, raw materials, credits, or labor. Because the Israeli pound, officially pegged at $2.80, was being black-marketed at 40 cents or less, the routine exchange of dollars, sterling, or Swiss francs into local currency to meet business expenses became absurdly expensive. The regime's passion for planning imposed control upon control. Undoubtedly the rapacity of some old-line Israeli entrepreneurs and some foreign companies warranted wariness, but what came forth looked like a classic killing of the golden goose.

Last February the government gave a tangible sign of recognizing that it would be better off if it let the investor prosper a bit. The pound rate of $2.80 was scrapped except for certain food imports. For tourists and philanthropic institutions it was fixed at $1.40, for investors at $1. This instantly gave a fillip to export production by slashing labor costs in dollars. Simultaneously, the government announced that in the future the cost-plus method of industrial price fixing would give way to a system based on costs of efficient producers. Profits would then depend on efficiency. Raw materials would no longer be distributed on a basis of historical position but according to quality and cost of output, with priority for export production. Exporters would be authorized to use part of their foreign-exchange earnings for the direct purchase of raw materials. Properly administered, the new pattern could encourage productivity (by driving out substandard firms) and foreign investment (by making profits more secure and increasing the raw-material supply for enterprises that survive competitively).

"New Economic Policy"

The immediate effects of the "New Economic Policy," of course, were a buyers' panic, higher domestic prices across the board, further decline in the standard of living, and initial unemployment--the two latter results useful if they save hard currency and release labor for productive purposes. Even so, the new policy, if and when fully implemented, would be barely a halfway house. It introduces the life-giving element of competition and the possibility of granting enlightened producers a little freedom from government allocation of foreign credits. But the basic allocation power remains with government. The independent, medium-size entrepreneur still fears favoritism for giant labor "corporations" intimately linked with the administration. There are still five economic ministers in the cabinet, and the jungle of controls, licenses, and fees seems as thick as ever.

Many potential investors await the day when Israeli money is stabilized at the level of its real value and when the only foreign exchange over which the government exercises the right of allocation will be public funds derived from grants, loans, and philanthropy. These will long have to be husbanded for debt services and the importing of essential foodstuffs, military equipment, and fuel. Someday access to foreign exchange deriving from normal commercial sources may become free and equal for Histadrut "capitalism" and private enterprise alike, without possibility of government diversion or any control except against nonessential imports; only then can Israel hope for substantial increase in the foreign venture capital required for solvency and stability.

Meanwhile Israel continues to lean desperately on artificial foreign props. Thanks to a liberal British policy, she had easy access to £40 million of sterling Palestinian credits in London, but these funds gave out last January. Foreign philanthropy remains the state's most reliable source of revenue. In 1951 U.S. Jewry gave around $70 million, $56 million of it through United Jewish Appeal. U.J.A.'s performance might have been even better had the Israeli government not thrown most of its weight in the U.S. behind a three-year bond flotation pegged to an astronomical goal of $500 million. Expert analysts believe that "BIG" (Bonds Israel Government) clashed needlessly with the philanthropic effort, disbursing heady sums for competitive promotion and elaborate overhead. By the year's end it had produced an estimated gross of only $52 million, repayable with interest.

The net bond return did bring an additional measure of immediate relief to the Israeli economy. If bond promoters can be persuaded or compelled to cooperate with U.J.A. instead of conflicting, the combined proceeds may be large this year again. They had better be, because the Israeli treasury is living from hand to mouth, barely able to cope with debts that mature from day to day. In the period immediately ahead Israel, like other client nations, will no doubt continue to need generous dollar transfusions from Uncle Sam.

How generous the U.S. should be depends on what Israel is. Some of the answer has been given by the economic story above. It is a story in part of improvisations, mistakes, and imperfections but also one of measurable progress, under excruciating difficulties, toward rehabilitation. One excellent sign for the future is Israeli eagerness to receive U.S. and U.N. technicians and learn from them--which makes the country a choice area for pilot plants that could ultimately benefit even Israel's backward neighbors.

But there is more to the question than economics. What is Israel as a polity, a society, an international force?

The Israeli Communists (mostly Arabs) have only five out of 120 seats in the Knesset (parliament) and are in chronic opposition. In last year's election the fellow-traveling Mapam party slumped badly and it recently lost some of its leaders. Other political factions and the vast majority of Israelis are either religious or staunchly nationalist or both, and hence unlikely to take the Kremlin road.

The administration, in fact, has the nationalism of youth. Verbal attacks by Radio Baghdad and Radio Cairo are stoutly returned by Kol Israel (Voice of Israel). Israelis at the U.N. embrace each occasion to pin Arab ears back in debate. That Israel, in an Arab world, should keep her powder dry is understandable. But she could advance regional stability by toning down her remarks and also by according more liberal treatment to the 150,000 Arabs inside Israel. Their wage standards have risen, their schools have been improved, their women have been enfranchised--but in large areas still under Israeli military control they suffer from restrictions not entirely justified by security. The Arab League, of course, wants more than a reform of this condition. It asks the Department of State to make Israel take back most of some 800,000 fugitive Palestinian Arabs, to chop her territory in half, or even to erase her. Last fall, across a table piled with succulent meats, feudal Arab landowners told this writer that their world might otherwise turn to the Soviets, being capable of national suicide on a "point of honor." Perhaps, like Iran, it is, but hardly more so than Iran, where Israel does not figure even as a pretext. In any case, this sort of frivolity about Communism is an Arab, not an Israeli, tendency.

Military and foreign policy

israel_industriesFor the U.S. to toss Israel to the camels might further incite fanatical Arab anti-foreignism--a mood that serves to distract the masses from concern about their incredible destitution under opulent rulers. Tranquillity would seem less obtainable through placating the assassins who currently dictate many decisions of Arab statesmen than through (1) strengthening internal security and (2) reforming the condition of the wretched millions in Arab lands.

In the area context, Israel can be a pillar of Western strength. A Middle East without her would be an area without a decent fighting force. Two years of universal military training and annual reserve service up to the age of forty-nine give her a reservoir of mobilizable manpower up to 50 per cent of the male population plus a percentage of women. There is also a permanent nucleus of trained, mechanized professionals. In World War II, by the way, Jewish Palestine proved her value as a supply base, repair shop, arsenal, and source of fighting men. Israel is worth holding.

Today Israel calls her foreign policy "non-identification," no formal tie-up with East or West nor yet neutrality. She reserves the right to take sides in specific issues. "We are not for sale," Prime Minister Ben-Gurion has said. Where the Iron Curtain is down against Jewish emigration, the Israeli press and government lambaste Communist leaders as "Pharaohs." Soviet propaganda, in turn, equates Zionism with fascism, internationalism, cosmopolitanism, and other "Wall Street" doctrines, and bleeds for Arabs. Israel--like Britain--has recognized Red China, and the Ben-Gurion regime still occasionally seems to harbor the illusion that Israel may be a bridge between East and West. Yet realistic elements are drawing ever closer to a solid working agreement with the West for the development of Israel's capacity for joint defense.

East and West

Internally, it must be said, there are some notable frailties in the spirit of Israeli democracy. The absence of any bill of rights or constitution gives parliament unlimited latitude in lawmaking. Officials have vast opportunities for over-enforcement. With rare exceptions, newspapers tell the reader with Balkan dogmatism not what is happening but what a political party wants him to think. Party and politics interfere with an extraordinary range of life--education, employment, farming, housing, even scouting and religious worship. The taxpayer is a target. The official is a dispenser of privileges and penalties, not a public servant. Except in the courts, the individual is measured less by his own value than by the strength of the group to which he belongs. If he does not belong, he does not get far. Israel's bureaucracy rarely indulges in "minkcoatism" but it does venerate "influence," protektsia.

If the U.S. had to be a "melting pot," Israel, with over sixty nationalities, must be a pressure cooker. For the massive adult-education program required, funds, equipment, and personnel are extremely short. Few Israelis come from countries where the individual is really counted. The "Oriental" ratio in the population has risen from 20 to 39 per cent since 1943 and is rising. (In 1951 seven out of every ten immigrants were "Easterners.") Many Israelis of European extraction see in immigrants from Iraq or Bombay men less akin culturally than a Roman archbishop or a Tennessee Baptist.

The Orientals are conditioned to government as an oppressor, and the East-Central European Jews, though enormously less docile, have never been deeply indoctrinated with ideas of freedom. Their elite may have read Voltaire and Jefferson, but they lived under the Cossacks of the Czar, or Pilsudski's Polish colonels, or Hitler's storm troopers--or the British Mandate police. They fled Europe in search of human dignity, and it is hardly surprising that they should have brought with them something of the old climate. In general, public concern for the individual as such is deficient, despite the fact that parliament, press, and every queue outside the rationed shops hum with dissent. In terms of active indignation over infringement of individual liberty, apathy prevails. The nonreligious, for instance, accept compulsory religious marriage, a rigidly blue Sabbath, and other state-sanctioned rabbinical limitations on personal freedom. The popular attitude seems to be that authority pushes people around everywhere else, "so why not in Israel too?"

Yet Israel's electorate has freedom of franchise, her parliament has freedom of debate, her courts have freedom from fear or favor, and her press has freedom from state dictation. Here is a skillful adaptation of some of the essential forms of Western polity. Compared to the Arab states, Israel is a beacon light of liberty. In the U.N. she voted to defend Korea and she has lined up with the West most of the time. It is patently in the interest of the worldwide democratic cause that she be encouraged to develop further along Western lines.

For this she must, first of all, be economically stable and territorially secure. This calls for the various kinds of help that the U.S. gives to many countries, allocated in proportion not to population but to potential return to the fund of mutual security in the area--relatively high in this case. At that, material support alone might not guarantee an increasing freedom of spirit. Accurate Western criticism has been welcomed and applied by Israel in the past--and Israeli ears are still wide open.

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Shelley DuBois
Shelley DuBois
Writer - Reporter, Fortune

Shelley DuBois writes on management issues for Fortune.com. Before joining Fortune, she was a producer for National Public Radio's Science Friday and worked for Wired. Shelley has a graduate degree in science, health and environmental reporting from New York University. She lives in Brooklyn.

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