Israel Economy

Poor in natural resources, stymied by socialist inefficiencies, and hamstrung by the burdens of large defense expenditures and Jewish refugee absorption, Israel for years relied upon substantial financial assistance from diaspora Jewish communities and foreign governments, especially that of the US. In the last few years, however, the country has begun to reap the fruits of extensive privatization, free trade with the US and the European Community, and the development of a high-tech export-oriented economy of $205.7 billion.

Israel’s growth rate is extremely high, averaging 3.1% from 2002-2006, and in May 2007 it was invited to join the OECD (Organization for Economic Co-Operation and Development, which includes the United Kingdom and the United States). Its per capita GDP (approximately $28,900) was the 27th highest in the world in 2007. Israel’s trade deficit has been a persistent problem, and its reduction has been a primary goal of every Israeli government. The deficit now approaches $91.25 billion, though it is decreasing in relative terms: exports now finance around 85% of imports, as opposed to 14% in 1950. In total, Israel’s industrial exports have grown over 1550 times since 1948 and now exceed $54.2 billion.

The country’s main industries are chemicals, diamond cutting and polishing, textiles, high-tech (especially bio-medical and computer) products, and military hardware. Israel is also a leader in desert agriculture and plant genetics. Of particular note is the role of solar power in the economy. Since the 1950s, the use of solar energy to help solve energy shortages in Israel has produced a thriving eco-friendly industry boom of solar power companies, which provide energy in over 90% of Israeli homes.

Israel’s economy has always suffered from high inflation. By the early 1980s, the annual inflation rate had reached the triple digits. In 1985, when inflation threatened to reach four digits, the government implemented an emergency stabilization program that has helped curb inflation substantially. The new Israeli shekel (NIS) has held relatively steady against the dollar, and inflation from 2002-2006 was roughly 1.9%.

The two greatest burdens on Israel’s economy are defense and social spending. The former has declined markedly as a result of the peace process—expenditures on defense now make up 6% of the GDP, as opposed to 23% in 1980. Immigration, however, continues to exert pressure on the economy. Since it attained independence, Israel has absorbed more than 2.6 million immigrants, four times the number of Jews living in the country in 1948. In the early 1990s alone over 800,000 immigrants, primarily from the former Soviet Union, flooded the country, driving unemployment to 11.2% in 1992. Because Israel has always been committed to providing social services, the immigration boom has been a financial strain. Over 50% of public expenditure is spent on health care, unemployment assistance, and other social service programs.

At the same time, recent immigration has flooded Israel with highly educated workers and professionals. While it took time for the economy to accommodate so many skilled individuals (horror stories abound of scientists forced to sweep streets), the net result has been a tremendous economic boom. With incomes rising, Israel has begun importing tens of thousands of workers from Asia and Eastern Europe to work the menial jobs Israelis no longer want. The country’s newfound prosperity and the current focus of the US government on domestic issues have led many to predict that the large American foreign aid traditionally received (US$3 billion per year plus loan guarantees) will be reduced in coming years.

Kibbutzim And Moshavim

Two percent of the Israeli population lives on about 270 kibbutzim (plural of kibbutz), somewhat socialist rural communities where resources are communally owned and production is controlled by the members ...more