ECONOMY: Challenges and Achievements

Economic challenges: Aliya  (immigration) Photo from exhibit "Vibrant Israel" - exhibit was produced by the Public Affairs Division of the Israel Ministry of Foreign Affairs Jerusalem, Israel, 1997

Recent achievements

• The year 2000 was the first ever in the country's economic history with both a zero inflation rate and a significant decrease of the balance of trade deficit, the latter declining further to $0.7 billion by 2005 and turning the trend into a surplus of $0.9 billion in 2006.

• Israel absorbed almost 1.2 million immigrants in a decade, augmenting the country's civilian labor force, from 1.65 million in 1990 to 2.8 million in 2006.

• Inflation was defeated, from an annual rate of 445% in 1984 to 21% in 1989, 0% in 2000 - rising only to 2.4 percent in 2005 and to less than zero - 0.1% in 2006.

• Foreign debt was eliminated, from being 1.6 times the GDP in 1985, still 25% of the GDP in 1995, declining to less than 3% in 2001, and down to zero by 2003 - with Israel since then becoming a creditor (i.e., the world economy owes it much more than Israel owes the world).

• Foreign investments rose steadily, encouraging the GDP and accelerating growth of exports from $175 million in 1987 to $5.8 billion in 1997, to $10.7 billion in 2005, and $25.2 billion in 2006.

• Industrial exports grew almost six-fold in the past two decades, from $6 billion in 1985 to $35.6 billion in 2005 and $38.1billion in 2006.

Historical challenges

Israel's most striking economic achievement is the rate at which it has developed while simultaneously dealing with the following enormously expensive challenges:

• Maintaining national security: Israel now spends around 8 percent (as against over 25% in the 1970s and 23% in 1980) of its GDP on defense. Even in eras of relative calm, Israel must retain a strong deterrent capability.

• Absorbing large numbers of immigrants: The "ingathering of the exiles" is practically the raison d'etre of the Jewish state. Since its inception, Israel has absorbed more than 3 million immigrants, more than five times the number of Jews living in the country when it attained independence in 1948. In its first four years alone, Israel's population more than doubled as 700,000 immigrants, mostly refugees from postwar Europe and Arab states, poured into the country.

Since 1990 another wave of 1.2 million immigrants (940,000 from the former Soviet Union alone), required enormous outlays for their physical and social absorption. However, much faster than the previous waves of immigration, these newcomers soon contributed to accelerating the GDP growth - though also temporarily increasing unemployment to an 11.2 percent high in 1992. This was gradually reduced to 7.6 percent at the end of 2006.

• Establishing a modern economic infrastructure: Although basic networks of roads, transportation, port facilities, water, electricity, and communications existed in 1948, they were far from adequate, requiring enormous outlays for their development and expansion. Without this huge investment in communications and transportation, much of the expedited growth of the economy could have never occurred.

• Providing a high level of public services (health, education, welfare, etc.): As Israel is committed to ensuring the well-being of its population (with special concern for the weaker elements in the society) a continuously growing proportion of its resources had been devoted to meet these obligations. Although recent urgent economic policies necessitated a curtailment of this appropriation, the 2006 and 2007 government budgets assured the beginning of a corrective trend here.

"An economic miracle"

In its first 25 years, the Israeli economy achieved a striking average GDP growth rate of close to about 10 percent annually, while at the same time absorbing waves of mass immigration, building a modern infrastructure and economy almost from scratch, fighting four wars, and maintaining security. This was considered to be 'an economic miracle.' In actual fact, it should be ascribed largely to the resourceful use of substantial capital imports over the years - first and foremost, the mass investment in means of production - coupled with the country's success in rapidly and productively absorbing immigrants.

During the following six years, however, between 1973 and 1979, the growth rate decreased (as in most industrialized countries, partly due to the oil crises of 1973/4 and 1979/80) to a yearly average of 3.8 percent. In the 1980s, it dwindled further to 3.1 percent. Then, the 1990s saw an average annual growth rate of more than 5 percent in the GDP (even reaching 7.7 percent in 2000) and back to 5.2 percent in 2005 and a similar rate in 2006.

The GDP per capita grew by more than 60% in the course of the last decade of the 20th century, reaching an annual level of close to $18,700 in 2005 and $ 20,138 in 2006.

The economic growth rate in Israel in 2006 was relatively high compared with the growth rate in other developed countries. The average growth of the GDP in the 30 OECD countries totaled 3.2% in 2006 and was 1.9% lower than the growth rate in Israel.