Israel: Economy

Israel has a diversified, technologically advanced economy with substantial but decreasing government ownership and a strong high-tech sector. The major industrial sectors include high-technology electronic and biomedical equipment, metal products, processed foods, chemicals, and transport equipment. Israel possesses a substantial service sector and is one of the world's centers for diamond cutting and polishing. It also is a world leader in software development and, prior to the violence that began in September 2000, was a major tourist destination.

Israel's strong commitment to economic development and its talented work force led to economic growth rates during the nation's first 2 decades that frequently exceeded 10% annually. The years after the 1973 Yom Kippur War were a lost decade economically, as growth stalled and inflation reached triple-digit levels. The successful economic stabilization plan implemented in 1985 and the subsequent introduction of market-oriented structural reforms reinvigorated the economy and paved the way for rapid growth in the 1990s.

A wave of Jewish immigration beginning in 1989, predominantly from the countries of the former U.S.S.R., brought nearly a million new citizens to Israel. These new immigrants, many of them highly educated, now constitute some 13% of Israel's 7.5 million inhabitants. Their successful absorption into Israeli society and its labor force forms a remarkable chapter in Israeli history. The skills brought by the new immigrants and their added demand as consumers gave the Israeli economy a strong upward push and in the 1990s, they played a key role in the ongoing development of Israel's high-tech sector.

During the 1990s, progress in the Middle East peace process, beginning with the Madrid Conference of 1991, helped to reduce Israel's economic isolation from its neighbors and opened up new markets to Israeli exporters farther afield. The peace process stimulated an unprecedented inflow of foreign investment in Israel, and provided a substantial boost to economic growth in the region over the last decade. The onset of the intifada beginning at the end of September of 2000, the downturn in the high-tech sector and NASDAQ crisis, and the slowdown of the global economy have all significantly affected the Israeli economy. However, despite the conflicts in Gaza and Lebanon, the Israeli economy grew during 2006.

Israeli companies, particularly in the high-tech area, have in the past enjoyed considerable success raising money on Wall Street and other world financial markets; Israel has approximately the same number of companies listed on NASDAQ as the next three countries (Canada, Japan, and Ireland) combined. Israel's tech market is very developed, and in spite of the pause in the industry's growth, the high-tech sector is likely to be the major driver of the Israeli economy. Almost 45% of Israel's exports are high tech. Most leading players, including Intel, Motorola, IBM, and Cisco have a presence in Israel.

After growing by an exceptional 9.2% in 2000, growth was negative in 2001 and 2002, as a result of the security situation, global recession, and high-tech downturn. Growth returned in 2003, and as a result of the improvement in the security situation and the economic recovery plan undertaken by the Government of Israel, the Israeli economy grew by an average of more than 5% per year from 2004 to 2007. This was followed by growth of 4.2% in 2008. With the onset of the global financial crisis, the slowdown in the Israeli economy only began in the third quarter of 2008, but had largely recovered by the third quarter of 2009. Unemployment reached a high of 10.7% in 2003, a level not seen in 20 years, and declined consistently each year until 2008, when it reached 6.1%, the lowest level since 1995. The global economic slowdown raised the 2009 unemployment rate to 7.6%.

Trade of goods and services in Israel grew by 9.3% and 5.2%, respectively, in 2006 and 2007. Exports declined by a sharp 35.6% in the fourth quarter of 2008 and 28.6% in the first quarter of 2009. Diamond exports alone declined by more than 36% in the fourth quarter of 2008 compared with the same quarter the previous year. Agricultural exports, which increased by 44% in 2007, declined by almost 12% in the fourth quarter of 2008. However, recovery was well underway by early 2010, with exports posting 15.8% growth in the second quarter while imports were up 8.3%.

The general consensus among economists is that Israel entered the global economic crisis in relatively good shape. Because the Government of Israel maintained conservative policies during the crisis and avoided ambitious fiscal spending packages, the Israeli economy is expected to quickly emerge from a shallow recession and return to a path of growth, even if not at levels that were seen prior to the crisis.

The United States is Israel's largest single trading partner. In 2009, bilateral trade totaled $22.3 billion, a decline of about 20% over 2008, victim of the slowdown in global trade. The U.S. trade deficit with Israel was $11.1 billion in 2009. The principal goods exported from the U.S. include civilian aircraft parts, telecommunications equipment, semiconductors, civilian aircraft, electrical apparatus, and computer accessories. Israel's chief exports to the U.S. include diamonds, pharmaceutical preparations, telecommunications equipment, medicinal equipment, electrical apparatus, and cotton apparel. The two countries signed a free trade agreement (FTA) in 1985 that progressively eliminated tariffs on most goods traded between the two countries over the following 10 years. An agricultural trade accord signed in November 1996 addressed the remaining goods not covered in the FTA but has not entirely erased barriers to trade in the agricultural sector. Israel also has trade and cooperation agreements in place with the European Union, Canada, Mexico, and other countries.

Best prospect industry sectors in Israel for U.S. exporters are energy; defense; security and safety; health care; industrial chemicals; information and telecommunications; electronics; building and construction; travel and tourism; and education.

Sources:

CIA World Factbook (February 2012)
U.S. Dept. of State Country Background Notes ( February 2012)

Glossary