An economic overview

On the eve of the Jewish New Year, the Israeli economy can be described as satisfactory, with concerns about the future.

In 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.

Finance 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.

When 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 Statistics (CBS).

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.

But 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 mere 6.3%.

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 consumer.
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.

Industry 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 economy.

Exports: The lifeblood of the economy

Exports 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.

When 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.

But 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.

Currently, 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.

Today, 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 market counterparts.

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.

Israel’s current 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.

Since the 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.