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ernment spending, forcing businesses to cut back or even close. But eventually the plan set the
stage for the two decades of rapid expansion that followed. Immigrants began pouring in from
the Soviet Union in 1990, fortifying the economy over the next decade with about one million
people who were disproportionately young, skilled, and educated.
Meanwhile, the Madrid peace conference and the Oslo peace process weakened the Arab
economic boycott of Israel that had deprived Israel of imported products and services, foreign
investment, and export markets. Many companies saw the signing of the Oslo Accords as a
signal that they could do business with Israel and not suffer Arab retaliation. Finally, the new,
liberalized economic environment helped let loose a high-technology sector, driven by en-
trepreneurialism and innovation. By the end of the 1990s, technology had emerged as Israel's
fl agship industry.
The fi rst decade of the twenty-fi rst century tested the new economic regime repeatedly. The
year 2000 saw the outbreak of the Second Intifada, followed in short order by the collapse of
the global high-tech industry. In 2006, the economy suffered another security-related blow
with the Second Lebanon War, which lasted little over a month but paralyzed one-third of the
country under a rain of rockets. A year later, a new threat emerged when the collapse of the
U.S. subprime mortgage market set off a global fi nancial crisis.
In fact, Israel experienced three full-fl edged recessions over the decade — in 1997-1998, in
2001-2002, and in 2008 -2009 —but they were manageable and were not caused by funda-
mental fl aws in the economy. Israel was among the last developed economies to be pushed
into recession by the subprime crisis and was among the fi rst to emerge from it, after only two
quarters (six months) of negative GDP growth. As much of the developed world struggled with
the aftereffects of the global recession in 2010, Israel's GDP expanded 4.5 percent, compared
with 2.7 percent for industrialized economies. Just as signifi cant, the economy rebounded very
rapidly after the Second Lebanon War, a testament to its ability to cope with war, at least a
brief one.
The private sector proved able to absorb repeated external shocks, moving quickly to cut
costs, keep production lines running even in wartime, and to seek out new markets and op-
portunities. The government's policies of fi scal restraint also helped shield the economy from
shockwaves set off the by subprime crisis. Yet recent experience also shows the limitations of
unfettered free-market policies. Israel did not go to the lengths the United States did to de-
regulate its fi nancial markets, a hesitancy that subsequently spared it the banking and fi nancial
crisis that the United States suffered.
With the electorate and the political establishment both preoccupied by the political and
security challenges facing Israel, economic issues have never been at the forefront of policy
debate. This differentiates Israel from most Western societies and may explain why the gov-
ernment has often been slow to address economic issues. Nevertheless, today there is a very
broad ideological consensus among Israeli policymakers in favor of smaller government and a
free market. Although the Likud has led seven governments since 1985, Labor four, and Kad-
ima one, all the governments have pursued the broad outlines of economic management —
privatization, deregulation, and careful fi scal policy.
