An economic overview
Israel's economic state is nothing more than satisfactory.
Economy Photo: Courtesy
On the eve of the Jewish New Year, the Israeli economy can be described as satisfactory, with concerns about the future.
a television interview on Israel’s Channel 2 last month, Stanley
Fischer, the well-respected governor of the Bank of Israel, said that
the state of the Israeli economy was good but not excellent. This more
or less sums up the state of the local economy compared to the faltering
economies of the EU and, to a certain extent, that of North America.
Minister Yuval Steinitz and Prime Minister Binyamin Netanyahu have
endeavored to create the impression that the state of the economy is
excellent. But the need to create more sources of income, in the wake of
an economy with a falling growth rate on the one hand and the need to
increase social spending to create a more equitable society on the
other, has shown that all is not well.
Furthermore, the recent
upheavals in the region have had a negative impact on the State of
Israel, and the need may arise to increase the military budget.
assessing the state of the Israeli economy, many emotional factors come
into play. Yet despite the fact that this may also affect sentiments
and consequently have an impact on consumer demand, the stark figures
are all-important. When analyzing the economy, the best indicators are
the figures published regularly by the government’s Central Bureau of
Up to now, the economy has managed to hold its
own. GDP growth is falling and, according to the latest projections, it
will probably amount to 2.7% to 2.8%. The latest OECD estimates put
growth in 2012 at 2.9%, but local institutions are less certain. The
first estimate of the CBS for the first half of 2012 has GDP rising by
an annual 3.0%, but it is doubtful whether the final figures will be
that optimistic and whether the growth figures for the second half of
the year will be so encouraging.
Yet even a growth rate of 2.7%
in the current global economic environment can be considered
satisfactory. In 2011 Israel attained a growth rate of 4.7% and in 2010
5.7%. So 2.7% may not seem like much, but compare this to an expected
flat to negative growth rate in the euro zone, less than 2% in the US,
and just over 1% in the UK.
Other important economy-related data
can also be described as satisfactory. Unemployment is still low at 7.2%
of the labor force, while exports in May, June and July rose by 8.9%
compared to the corresponding period in 2011.
But while the local
economy is in relatively good shape compared to those in other Western
countries, the future prosperity and growth of the local economy is
closely linked to what is happening overseas in the economies of
Israel’s main trading partners.
Israel has a small but dynamic
export-oriented economy. High growth rates are common, with a rate of
nearly 6% in 2010. In Q4 2010, Israel had an annual growth rate of 7.5%.
In a dynamic economy, being small can sometimes be an advantage. In
times of expanding world trade, it flows with the tide. In times of
economic woes, like now, it can expand or at least mitigate the negative
aspect of contacting world trade by finding niche markets where a small
size is an advantage. That is something Israel does extremely well,
especially in the hi-tech industry.
This is highlighted by the
export figures for July -- a growth of 17.3% in exports to $4.4 billion
and by the export figures for May, June and July. During those three
months, hi-tech exports rose by 21% compared to the corresponding period
in 2011, and the export of electronic components rose by 42%. The
general rise of 8.9% in exports during this period, as well as the hefty
rise in high-technology goods, is evidence of our agility in the export
markets of the world.
Despite the fact that Israel is an expert
in finding niche markets, the long-term export prospects of the economy
are linked to the prosperity of its main markets. Niches are all right,
but they are usually temporary expedients. The long-term stability of
Israel’s export trade is closely linked to the economic developments in
Europe, North America and the Ear East, and at present economic growth
in these areas is not very promising. Growth in our economy is closely
linked to export performance. Israel’s annual total exports -- visible
and invisible -- amount to approximately $85 billion over 36% of GDP.
there is more to the expectations of a fall in growth rates than a
decline in exports. During 2011, investments were one of the major
reasons for the hefty economic growth rates. In the first half of 2012,
investments grew by 17.9% and by 14.1% in the second half. In the first
half of 2012, investments grew by only 4.2%. Part of the reason is the
decline in demand for real estate. In the first half of 2011, the
purchase of residential real estate, an important element in the
investment figures, rose by 13.2%. By the second half of 2011, it had
risen by only 11.7%, while in the first half of 2012 it has risen by a
The purchase of residential real estate is an
important element in the investment figures as well as in the
consumption figures, and consumption is one of the major mainstays of a
free market economy. In the first half of the year, consumption per
capita rose by 2.9%. Consumption is part of the domestic economy. It is
strongly influenced by domestic matters, mainly the buying power of the
On a nationwide basis, the buying power of the consumer is
strongly linked to the level of employment. And employment in industry
is strongly linked to export performance, and that is faltering.
is one of the basic elements of the economic consumption chain. The
employees in industry, as well as in other productive branches of the
economy, use their salaries to pay for the essentials of life, such as
food, lodging clothing and education for their offspring. When demand
for industrial production falls, the exporters have to decrease their
workforce. When that happens, unemployment among industrial workers
rises. They buy less of everything, and this creates a chain reaction.
For a country like Israel, exports are at the epicenter of the economy.
Everything revolves around it.
After World War II, the Japanese
used to say “Export or die,” meaning that without exports, their economy
was nothing. In many ways, this also holds true for the Israeli
Exports: The lifeblood of the economy
are at the heart of the local economy. Hi-tech is at the center of the
export industry, as nearly half of our industrial exports are generated
by the hi-tech industry. Thus the hi-tech industry is one of the pillars
of the economy.
The civilian science-oriented industry in this
country started to take off in the early 1990s, but the roots of the
industry go back the establishment of the State of Israel.
the state was proclaimed on May 14, 1948, Israel was immediately
attacked by the armies of five Arab states. At that time, Israel had a
population of 650,000 in contrast to the tens of millions of the Arab
states. But through superior organizing, Israel was able to mobilize its
full military potential and was able to put together a military force
of 80,000 soldiers, which was a match for the invading Arab armies.
the leaders of the nascent state were well aware that in numbers Israel
would always be at a disadvantage. They knew that the only way to
combat the dangers that threatened the very existence of the state was
the use of superior technology.
The military needs of the state were
the seeds of the science-oriented industry. Necessity was the kernel
from which Israel’s most successful and profitable industry grew.
the civilian science-oriented industry outnumbers its military
counterpart, but the military is still a very important source of
know-how and personnel. If at these times Israel has a technologically
advanced market economy, it is due largely to the military research
programs. In 1948 Israel was a very poor country.
according to statistics published by the UN for 2010, Israel has the
24th-largest economy in the world and ranks 15th among the 169 nations
on the UN's Human Development Index, which places it in the category of
"Very Highly Developed."
These high rankings in the global
pecking order are due largely to the development of the science-oriented
industries. The military holds pride of place in the scientific
development in this country. In fact, the military in the countries of
the world usually set the pace in scientific and technological
development. They are motivated by military necessity and are usually
much less hampered by budgetary considerations than their civilian
In the first 10 years or so of Israel’s
existence, the country had problems obtaining weaponry with which to
defend itself against well-armed Arab armies. So in addition to
developing electronic hi-tech weaponry, which also required a very high
level of technological development, in 1951 the government launched
Israel Aircraft Industries, and the Technion opened an aeronautical
engineering department. Both have proven to be wise investments. In
addition, the government further developed the rather primitive
workshops that provided light weapons for the Hagana, the underground
military wing of the Jewish Agency.
science-oriented technical industry is based on the country’s
development abilities. It has seven academic institutions, three of
which were founded before the establishment of the State of Israel,
namely the Technion the Israel Institute of Technology in 1924; the
University of Haifa in 1925; and the Weizmann Institute of Science,
which started life in 1934 as the Sieff Institute.
establishment of the state, three more have been added: Bar-Ilan
University; Tel Aviv University; and Ben-Gurion University in Beersheba.
They all have research institutions and all have special companies that
market their developments.