Letter from Israel: Economy

Israel Export Institute - 50th anniversary

After having enjoyed for many years one of the fastest GDP growth rates of all world economies, Israel is now continuing the economic recovery that began in 2003, after a two-year slow-down in almost all economic activity. In 2006, Israel's GDP rose by 5.1%, in spite of the Second Lebanon War, which caused a temporary loss of 0.7% of the GNP. The speedy recovery and the continuation of rapid growth were led by the business sector, which expanded by 6.4%, resulting in a per capita GDP of about $20,000 in 2006.

The country's most remarkable economic achievement in the 61 years of its existence is the rate at which it has developed, while simultaneously dealing with four major challenges: maintaining national security, which now accounts for some eight percent of the GDP (in contrast to over 25% in the 1970s); absorbing large numbers of immigrants - the raison d'être of the Jewish state (over three million - a five-fold increase - since its inception in 1948); establishing a modern infrastructure to meet the requirements for economic growth; and providing a high level of public services.

The price for this impressive growth has been, until recently, a deficit in the balance of payments. In 2006, for the first time, exports surpassed imports. Foreign debt has been eliminated, with Israel becoming a creditor in recent years. In 2006, Israeli continued to achieve its main macroeconomic objectives: a very low, sometimes even negative rate of inflation (down from 445% in 1984!), a very low budget deficit, and a limited increase in public expenditure. Israel has also proven to be very attractive to international investors.

CURRENCY
The unit of currency is the shekel (divided into 100 agorot), known as a unit of weight for means of payment in gold and silver as early as the second millennium BCE. It is recorded in the Bible that Abraham's servant approached Rebecca at the well with "a golden earring of half a shekel weight, and two bracelets for her arms of ten shekel weight in gold/" (Genesis 24:22). The shekel was valued at $0.26 in August 2009.

MAJOR REFORMS

The New Israeli Shekel (NIS) is now a "hard" currency, traded freely on all international money markets. This is a comparatively recent development after decades of currency control, which was essential - as in many countries after World War II - for the survival and growth of the economy. The rate of exchange of the shekel is now, after removal of all foreign currency restrictions, determined by the international money market.

The economic reform program embarked on by the government in 2003 continues to reduce the budget (as well as taxes) further and streamline the economy. Whereas the government is still obligated to encouraging economic initiatives, its policy has succeeded - since the 1990s - in reducing its direct involvement in the economy. Thus, apart from almost eliminating subsidies supporting the prices of basic commodities and trimming down the entitlement for those directed at encouraging foreign investments and exports, it embarked on a major privatization campaign of selling the ownership of hundreds of public companies.

NATIONAL ECONOMY

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.

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. 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 dutyfree 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 bi-national development, research and cooperation foundations.

THE ECONOMIC PICTURE
The high level of public consumption, in particular the resulting large deficit in the government's budget, was always a primary cause of Israel's high inflation rate. The pursuit of economic viability called for checking inflation, reducing the balance-ofpayments deficit, and maintaining rapid economic growth, all of which required curtailing the high public expenditure that has taken place in recent years. The financing of Israel's massive public expenditure required heavy taxation, which its citizens had to bear, for years. In recent years, changes to the tax system were adopted to integrate Israel more firmly into the global economy.

LABOR AND EMPLOYMENT
Extensive legislation exists for the protection and welfare of workers. Minimum requirements are anchored in law, including a maximum 47-hour workweek, compensation for overtime and holiday work, paid annual vacation and sick leave, as well as severance payments and pension plans. Wages and specific working conditions in the various economic sectors are set forth in agreements negotiated between the government (as a major employer), the various trade unions and the organizations of employers.

Industry Centennial: Computers in Industry

INDUSTRY

Israel is today an industrialized country with most of its manufacturing, including many traditional fields, based on intensive and sophisticated Research & Development and hi-tech processes, tools, and machinery. This is the outcome of very rapid and intensive development.

The vast investment in aviation and armament industries created new technologies that became the base for Israel's unique hi-tech industries, such as medical devices, electronics, computer software and hardware, telecommunications, etc. In the 1980s, Israelis who worked in the Silicon Valley returned to Israel, opening development centers of multinational companies such as Intel, Microsoft, IBM, and others. In the 1990s, a highly skilled immigration of scientists, engineers, technicians, and medical workers from the former Soviet Union enabled the upgrading of Israel's industry to its current level of sophistication, with its array of export products.

Due to its lack of natural resources and raw materials, Israel's one advantage is its highly qualified labor force, scientific institutes, and R&D centers. Today, Israeli industry concentrates mostly on manufacturing products with high added value, by developing products based on Israel's own scientific creativity and technological innovation.

Industry Centennial: Genetic Engineering

HI-TECH INDUSTRIES

The fastest growth rates (averaging 8 percent annually in recent years) are to be found in the hi-tech sectors, which are skill and capital intensive and require sophisticated production techniques, as well as considerable investment in research and development, on which 4.4 percent of Israel's GDP is spent - by far one of the highest rate in the world). The quality of this R&D in Israel is ranked, according to U.N. experts, among the first 10 in the world. A successful contribution to all these is due to academic research institutes, which provide much of the basic R&D and venture capital.

The age of information technology (the Internet, electronic commerce, etc.) placed Israel's economy, and particularly its hi-tech industries, in the forefront of world development in these fields. A number of internationally recognized Israeli companies have been bought by top business conglomerates in multi-billion dollar transactions. The number of new start-ups is very high due to the extraordinary innovative talent in Israel, coupled with the availability of highly skilled manpower. The growing presence of Israeli firms on Wall Street and the European stock exchanges is yet another manifestation of the respect with which Israel's hi-tech industry is regarded.

Arts and Crafts

ISRAEL'S DIAMOND INDUSTRY

Israel is a leading world diamond manufacturing and trading center. The main reason is that the Israeli diamond industry is as multifaceted as its diamonds. The Israeli diamond is synonymous with trust and reliability, and it is guaranteed to be conflictfree and genuine.

In addition, the Israeli diamond industry is a world leader in both cutting-edge technologies and craftsmanship, thus ensuring the best yield of polished diamonds from the rough. The large inventory of local production, as well as tax-free rough and polished imports, ensures competitive prices. The Israel Diamond Exchange is the largest diamond-trading floor in the world, housing all of the operational functions and needs of every diamond buyer under one roof. Israel produces most of the world's output of small polished stones, which are used in jewelry settings. It is also responsible for 40 percent of the polishing of diamonds of all sizes and shapes, making Israel the world's leading diamond-polishing center in terms of both production and marketing.