Since independence, Israel’s economy has moved steadily from state control toward a free-market regime. This chapter examines the main features of Israel’s development in its first forty years. It shows how Labor Zionism gradually gave way to a much more capitalistic economy, partly through reforms in foreign trade policy from the 1960s to the 1990s, and also as a result of stabilization policies introduced in 1985.

The War of Independence, 1947–1949

In November 1947, fighting between Jews and Arabs broke out following the passing of a resolution in the UN General Assembly calling for the partition of Palestine into two states, one for the Arabs and one for the Jews. The Arabs rejected the resolution and the Jews accepted it. Against the background of this conflict, the British decided to abandon the Mandate, withdraw their armed forces, and leave Palestine. On 14 May 1948, the leadership of the Yishuv declared independence and the State of Israel came into being. One of the first acts of the new government was to open the country’s borders to Jewish immigration.