As early as the 18th century Adam Smith attempted to define how and why the economy works, placing considerable emphasis on the role of labor and the operation of unrestricted market forces. More recently economists have developed different theories.
W.W. Rostow argued how and why the economy works. He suggested that the process can be divided into stagesÑthe traditional, largely agricultural stage; a transitional stage, in which the human and technological conditions for a rapid advance are established; the take-off stage of rapid growth; and a mature stage marked by large-scale production and mass consumption. Israel's economic growth can be identified by applying the Rostow model. In the early years, the 1950s until the midd-1960s agriculture flourished and was driven by the need to feed a rapidly expanding population. The population quadrupled from 600,000 in pre-state period to 2.5 million in the 1960s. Agricultural output whether vegetable and orange growing or was enhanced by locally developed technologies which allowed the use of brackish water for growing vegetables. and intensive irrigation techniques which included the use of computer controlled water dripping systems which concentrated the irrigation process at the root of the plant. It was good for agriculture and it maximized the available water supply. It worked well for raising flowers which to this day, long after the eclipse of citrus growing, continues to be an annual source of several hundred millions of dollars in export revenues. Fertigation, by the introduction of fertilizers into the irrigation fluid made the whole growing process more effective. It helped in providing the food supply basis for Israel's population and subsequently these techniques became exportable to countries in South America as well as to big population nations such as China and India.
It is generally agreed that, especially in the early stages of development, natural resources exert a major influence on the rate of economic growth. However, even more important are human resources: the size of the labor force as a proportion of total population; the quality of the labor force, which is dependent on the level of education as well as inherent qualities of the people. After a few economic high-inflation hiccups in the early 1980s Israel entered a period in which both the human resources and technology basis was being laid for an unparalleled period of growth. The production of knowledge is a broad category including outlays on all forms of education, on basic research, and on the more applied type of research associated with industry.
In the early 1990s the arrival of about 700,000 Russian immigrants brought with it a highly educated human resource base which blended perfectly with the Israeli entrepreneurial and pragmatic approach to problem solving. Many of the new Israelis were extremely well grounded in physics, medicine and electronics. They knew very little about applied science. They had worked in their native Russia in large national institutes where the aim was to understand how things worked rather than how to apply basic science. Israelis were long on application and market orientation. The was a natural synergy between the two and it formed the productive human resource basis for a period of multi-year growth of more than 7.0% a year.
A labor force that is engaged in the production of high-technology products will produce more added value (the amount by which the cost of labour and raw materials is exceeded by the final selling price) than one engaged in simple processing industries. For this reason, most economists agree that the higher the rate of capital and technological investment, the higher the rate of economic growth. There is considerable empirical evidence that suggests that countries that devote a comparatively high proportion of their resources to investment, as opposed to consumption, tend to have relatively high long-term economic growth rates. It is argued that fast-growing industries tend to be those having a high research and development component in their total costs. In addition, firms within an industry that have large R&D budgets tend to experience the most rapid technological progress. The argument is that technical change and improvements must originate in inventions that lead to innovations in the products produced or in the processes where by existing product s are manufactured.
So as the 20th century draws to an end Israel has in just over 50 years, leapfrogged through the various stages of economic progress and its more recent economic indicators are pointing upwards. Low inflation, an incredibly high rate of foreign investment which will total several billions of dollars, by the year's end, a highly trained and motivated workforce and an unparalled track record of technological achievement in the ares of IT and Internet.
In 1994-1995 Bill Gates may have missed in identifying IT as the major new trend but Israelis were already on the band wagon. Large scale of output of technological products is part of Israel's projection of economic growth as well as a continuous growth in mass consumption.