State of the Economy
Israel is an economic anomaly in the Middle East. It has perhaps the least amount of hydrocarbon resources and the still the highest per capita GDP. But what the country lack in oil and petroleum, it makes up in brainpower. National literacy is higher than 90 percent. The country has more scientists and technicians per capita than any other country in the world. About 30 percent of the population possess at least 13 years of education.
This people power combined with the government's support of high-tech endeavors and a highly skilled immigration pool have helped drive the country's high-tech capabilities that have been used in fields as diverse as weaponry to agriculture.
This world-class high-tech sector has helped drive the country's diversified economic base, which is further supported by a sophisticated service sector, including banking, accounting, legal and technological services.
While the country is the region's economically strongest, growth has slowed in the late 1990s after several years of strong expansion. This has been in part due to tight monetary policy seeking to curb inflation.
But growth may be again spurred in the coming years, in part by improving prospects for peace. Israel continues to seek peace with Syria, Lebanon and to determine its relationship with the Palestinians. But already, since the Oslo agreements and the peace treaty with Jordan, there have been some tangible sings of economic benefits. There has been increased trade, albeit minimal, with Jordan. Israelis are taking advantage of Jordan's Aqaba port. Many countries are establishing diplomatic relations with Israel and many companies who once shied from doing business with Israeli companies because of the Arab Economic Boycott, are now doing business as the boycott has been eased.
Since 1996, the Israeli economy has been stuck in a deep slowdown. The recession worsened in 1998-- GDP grew by only 1.9 percent, compared with 2.4 percent in 1997 and 4.7 percent in 1996. This low growth rate creates a strong possibility that Israel's per capita GDP will decline in 1999. After rising by 1 percentage point to 7.7 percent in 1997, Israel's unemployment rate continued to climb in 1998 and 1999 as a result of the downturn, and reached a level of 8.8 percent and over 9.0 percent, respectively. The government failed to keep inflation at 4 percent in 1998, which was one of its main targets. Following a rapid devaluation of the Israeli shekel in October, inflation for 1998 reached 8.6 percent.
The government of Ehud Barak, elected in May 1999, must exert considerable efforts to fulfill its election commitments. These include alleviating the state from its 3-year recession and creating 300,000 new jobs during its term. Avraham Shochat, the new Finance Minister, has stated that his top priority is to rekindle economic growth. Economists stress that he must first tackle the mounting budget deficit, which reached 7.9 billion shekels ($1.9 billion) in the first half of 1999. Future plans include a NIS 6 billion (roughly $1.4 billion) cut in the year 2000 budget.
Financial analysts do expect the Israeli economy to overcome its current woes, as soon as the new leadership resumes the peace process and tourists arrive for millennium celebrations. Thus, optimistic estimates predict year 2000 growth at 3.5 percent. Infrastructure investment, primarily land transportation infrastructure, is expected to continue to grow in the upcoming year and beyond. This investment will be financed by an increase in the budget deficit and at the expense of other budget items. When implemented, such a change in economic policy focus is likely to lead to an accelerated pace of growth.
The Oslo agreements and the peace with Jordan were both expected to boost Israel's economy, help further integrate the country's marketplace into the world economy and increase its attractiveness to foreign investors. The peace process has also led to the opening or renewal of diplomatic relations with numerous countries, including the nations from the former Soviet bloc, China and India.
The agreements have also positively impacted the capital market as well as financial policies of large corporations. But they have not yet had the anticipated far-reaching long-term benefits, particularly in terms of returns on foreign investment.
In the medium- to long-term future, the increased economic growth Israel expects from the peace process will not be dependent on increased commercial contacts with its Arab neighbors. Rather, it will come from improved economic ties with the West, which will be seen in increased foreign investments, particularly, as the Arab boycott of Israel loses its impact.
Still, there will be some growth from trade with Arabs. Jordan and Israel traded goods worth US$ 18 million in the second half of 1996 after opening the border to cargo in June 1996 for the first time in nearly fifty years. Israel exported US$ 9 million in goods and imported US$ 5 million from Jordan. In the following year, these totals increased 130 percent, to $20 million and $12.5 million respectively. In 1998, Israel exported $25 million in goods to Jordan, while importing $17 million in Jordanian products.
Israeli merchants have made increasing use of the Aqaba port in their trade with third countries, as evident in the container traffic at the Arava terminal, mostly en route to the port of Aqaba. In 1998, container traffic at the Arava terminal increased 218 percent from the previous year. During the first nine months of 1999, there was a 156 percent increase in traffic versus the corresponding period last year.
Inflation during the first half of 1999 was affected by the Bank of Israel's monetary policy, the recession and the Shekel's large depreciation during the third quarter of 1998, which was followed by a large appreciation. The 18.5 depreciation during August-November 1998 was the main reason for the 5.8 percent increase in the CPI between September-November. In the second quarter of 1999, the index rose by a cumulative rate of 1.1 percent, and 1999's inflation amounted to 1.3 percent.
During the last quarter of 1998, the Shekel depreciated by nearly 20 percent against the dollar. A large cut in the Bank of Israel's interest rate is expected, which would reduce interest rate differentials between Israel and abroad, subsequently leading to a substantial one-off depreciation within the diagonal band. In such a case, a new equilibrium exchange rate will develop at a higher level.
During the first six months of 1999, as in the previous two years, budgetary developments were affected by the slowdown in tax receipts. This slowdown results from the recession, the decrease in real estate activity and the Shekel's depreciation, which increased companies' financing expenses in 1998 and reduced their reported profitability.
The domestic budget deficit reached NIS 5.4 billion through the first half of 1999 compared with NIS 2.8 billion in the corresponding period last year. The 1999 budget deficit for the whole of 1999 is expected to total NIS 12 billion, or 3 percent of GDP versus the targeted deficit of 2 percent of GDP.
The Law for the Reduction of the Budget Deficit was formed in 1992 and created the basis for determining the 1999 target deficit. Calls to amend the law have been voiced since the economy slipped into recession, and have recently won support from academic circles, the business sector and government. The objective of the change is to facilitate "built-in stabilizers," i.e., a larger deficit during periods of recession and a smaller one during times of prosperity.
Israel's unemployment rate rose from 8.6 percent in the first quarter of 1999 to 8.8 percent in April and May. Since October 1998, the number of job seekers has risen by an average monthly rate of 1.2 percent. During the first half of 1999, the number of job seekers amounted to 158,000.
A large proportion of Israel's labor force is highly skilled and well-trained. The national literacy rate is higher than 90 percent; many Israelis speak several languages, and, are often fluent in English. Israel has more scientists and technicians per capita than any other country in the world. About 30 percent of the population possess at least 13 years of education and about 20 percent of the population holds academic degrees. Almost one-quarter of the work force is involved in scientific, academic or technical professions. Another quarter is employed in industry. Israel publishes more scientific articles per capita than any other country in the world.
Israel's labor force is not cheap, although average wages are lower than those prevailing in Europe or in the United States. Israel, however, has an especially professional labor force. Productivity in the high-tech fields increased from US$ 45,000 in sales per worker in 1985 to over US$ 90,000 presently.
Immigration has been crucial to the Israeli economy, particularly the large number who have arrived since 1989. Many came from the former Soviet Union and were highly skilled, providing deep professional and technological resources that spurred economic growth in terms of know-how and supply and demand.
According to figures provided by the Israel Central Bureau of Statistics (CBS), since 1990 more than 850,000 immigrants arrived in Israel, comprising roughly 16 percent of Israel's population today. A large number of these immigrants have already been absorbed into the Israeli economy, although not all have succeeded to find employment in their trained fields.
Roughly 40 percent of the business sector product is comprised of services. Industry accounts for 30 percent, transport and communications, 13 percent, construction 9 percent and water and electricity 4 percent. Agriculture contributes the remainder.
Israel has been cursed with a lack of most basic raw materials by blessed with a highly skilled labor force. It has thus focused its economic energies on manufacturing products with high added value. During the past few decades, Israel has made important international contributions in the fields of medical, electronics, biotechnology, telecommunications, fine chemicals, computer hardware and software, diamond cutting and polishing.
The country's highest growth rates are in the high-tech sectors, which require large R&D investments, sophisticated production techniques but are not capital intensive. Traditional industrial branches include food processing, textiles and fashion, furniture, fertilizers, pesticides, pharmaceuticals, chemicals, rubber, plastic and metal products.
Transportation accounts from roughly 9 percent of GDP and 11 percent of exports of goods of services. This sector also employs 6 percent of the country's work force. Of this, 48 percent works in land transportation, 23 percent in shipping and aviation, 19 percent in communications and the rest in various services, including storage and parking.
Between the early years of statehood and 1991, residential building comprised between 70 to 75 percent of total construction output. After 1991, the rate leaped to 86 percent as tens of thousands of immigrants needed housing.
The percentage of private investment in all construction has gradually overtaken government increasing form 33 percent in 1958 to 83 percent in 1989. This percentage did temporarily decline as large wave of immigrants created enormous demand for government-sponsored or subsidized housing.
A combination of domestic production and imports meets most of the country's food needs. Imports consist primarily of grain, oilseeds, meat, coffee, cocoa and sugar, which are financed by agricultural exports.
Israeli farms produce mostly dairy, poultry, flowers, fruits and vegetables. Lucrative winter produce include long-stemmed roses, spray carnations, melons, tomatoes, cucumbers, peppers, strawberries, kiwis and avocados are especially successful exports. Israel's high-tech capabilities have also spurred the country's agricultural success. Farmers and researchers work cooperate to develop and apply sophisticated agricultural methods as well as technological advancement, new irrigation techniques and innovative agro-mechanical equipment.
More than 2 million people visit the country each year, attracted by its geographical diversity, archaeological and religious sites, almost unlimited sunshine and modern resort facilities. Most tourists to Israel come from Europe and the Americas.
Tourism, with its enormous potential, is a major factor in Israel's economic plans to eliminate its balance of payments deficit. Tourism is a major source of foreign currency earnings. Some 70,000 employees are directly involved in the tourism infrastructure throughout the country.
In 1997, total sales of hotel accommodations amounted to over $1.1 billion. The country's tourism infrastructure consists of over 48,000 rooms in hotels, kibbutz guesthouses and holiday villages. According to Israel's Ministry of Tourism, over the next ten years facilities providing over 50,000 rooms must be built. The Israeli government also aspires to promote regional tourism with Egypt, Jordan and the Palestinian Authority.
The country's small domestic market limits the country's economic growth potential and forces it to rely on external trade for sustainable economic growth.
Exports of goods and services will be an important factor in helping the Israeli economy disengage itself from the recession in the year 2000. At the same time, the resumption of growth will lead to a more rapid increase in imports. In 1999, exports of goods and services are expected to grow by 4.3 percent in real terms, while imports of goods and services are expected to expand by 5 percent.
Israel imports 40 percent of its oil from Egypt, valued at approximately US$ 500 million per year. Total oil imports amount to 9 to 11 million tons per year.
© 2000 Mena Report (www.menareport.com)
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