ECONOMY: The National Economy

Balance of Payments

The perennial problem of the trade deficit has been, until recently, the high price Israel has had to pay for the miracle of attaining rapid growth while successfully meeting other national challenges. This yearly gap between a high level of imports and a significantly smaller scale of exports indicated economic dependence on foreign resources. Thus, a primary policy goal - eventually reached recently - of every government was to achieve "economic independence," the point where exports will finance all imports and this deficit will disappear.

Over the first 48 years of Israel's existence, this deficit grew continuously, 45-fold (in current prices): from $222 million in 1949 to $10.1 billion in 1996. However, in relative terms, the deficit steadily decreased during that period, indicating that the problem was gradually being solved: whereas in 1950 exports financed only 14 percent of imports, in 1960 this ratio was 51 percent, and in 1996 it stood at 79 percent. Since then the actual deficit began declining, down to $4.7 billion in 2001 and to a mere $0.7 billion in 2005 with exports of goods and services thus financing all imports, with some surplus funds remaining.

Over the past 59 years, Israel has required around $US 176 billion (in current figures) to cover all its annual trade deficits. Almost two thirds of this accumulated deficit was covered by unilateral transfers, such as funds brought in by immigrants, foreign pensions, donations from Jewish fund-raising organizations abroad to institutions of health, education, and social services, and grants from foreign governments, especially from the United States. The rest was financed by loans from individuals, banks, and foreign governments, which Israel has been repaying since its early years.

That is why the national external debt increased every year until 1985, when, for the first time, less was borrowed than was paid back. This positive trend reverted for a few years until the net national external debt reached a new high of $20.8 billion in 1995. During the past decade it diminished considerably, down to zero, and since 2002 it is becoming growingly positive - namely, Israel is a creditor - with "the world" owing it more than Israel owes the world, over $31 billion in 2006.

Foreign Trade

With its small economy and relatively limited domestic market, Israel's growth depends mainly upon expanding exports.

Much of the country's creative resources have been devoted to building its industrial exports. The value of these has grown almost 3,000-fold (in current prices) - over 56 years - from $13 million in 1950 to $52 million in 1955, to $1.4 billion in 1975, to $5.6 billion in 1985, to $30.8 billion in 2000, and to $ 39.4 in 2006 - an increase of 7.5% over 2005.

In recent years, over 85 percent of all imports of goods - amounting to $47.2 billion in 2006 - have been production inputs and fuel; 54 percent of these arrived from Europe, with the Americas providing 17 percent, Asia 16 percent, and the remaining 13 percent from other countries. In the same year, 33 percent of Israel's exports of goods - amounting to $36.6 billion - were directed to Europe, 40 percent to the United States, 19 percent to Asia, and the remaining 8 percent to other countries. During most of the 1990s Israel's industrial exports to the U.S. exceeded its imports from there, and since 2000 this is true even when excluding the export of diamonds.

Joining the General Agreement on Tariffs and Trade (GATT), as well as instituting a free trade area for industrial products with the European Community (1975) and for all products with the United States (1985) has enhanced the competitiveness of Israel's exports. Hence, Israeli goods can enter - duty free - both the European Union (EU) and the United States. This enables local Israeli producers to aim for a market almost 110 times larger than the domestic one and attracts investors who wish to export their products to Europe without paying duty. Israeli investors also forged joint ventures with Jordanian and Egyptian businesses in special industrial zones that enable the export of products duty-free to the US and the EU.

To maximize chances of success, local Israeli enterprises have sought to identify segments of international trade where they can carve out specialized niches for themselves. The establishment of joint ventures with foreign industrial firms has often utilized a blend of local innovations and large-scale foreign production and market penetration. Joint projects have been undertaken in areas such as electronics, software, medical equipment, printing, and computerized graphics. Many of these joint projects are assisted in recruiting capital for joint ventures through frameworks such as the following six binational development research cooperation foundations, supported by the governments concerned: with the US (BIRD); with Canada (CIIRDF); with Singapore (SIIRD); with Britain (BRITECH); with Korea (KORIL-RDF) and with Victoria/Australia (VISTECH).