Israel Essay ⋆ Business Essay Examples ⋆ EssayEmpire

Israel is a world leader in technologically advanced products and services. Growth has been impressive in recent years, and macroeconomic policy has been well managed. However, significant structural problems need to be addressed in order for Israel to reach its full economic potential. Israel is a highly open, developed economy with gross domestic product (GDP) of $162.75 billion, or $22,500 per capita (unless otherwise noted, figures are from 2007, and are taken from the Central Bureau of Statistics [CBS] or Bank of Israel [BOI]). According to the Organisation for Economic Co-operation and Development (OECD), Israel’s per capita purchasing power adjusted GDP, an indicator of living standards, is 21st in the world, at 88 percent of the OECD average and 63 percent of the U.S. level (using a different methodology, the International Monetary Fund ranks Israel 18th). Israel has been invited to join the OECD.

Israel’s population is 7.282 million—75.5 percent Jewish, 20.1 percent Arab, and 4.4 percent others (May 2008). From 1998–2008, annual population growth averaged 2.1 percent; during 1989–2000, over one million people immigrated from the former Soviet Union. Israel has a small land area and high population density. It is poor in natural resources, except minerals. The leading population and business center is the Tel Aviv metropolitan area; other population centers are Jerusalem, Haifa, and Beersheba. Life expectancy is slightly above the European average, but infant mortality is high. Health expenditures are 8.7 percent of GDP (2006). Basic health is 70 percent publicly funded. Although hospitals are overcrowded, medical care is generally excellent. Israel has a high rate of homeownership and an underdeveloped rental market. Land is 93 percent government owned.

Water is very scarce. The world’s largest desalination plant opened in Israel in 2005; another plant was added in 2007. Agriculture is technologically advanced, capital intensive, and highly productive, but also highly protected and subsidized. Major exports are produce, flowers, and wine.

Defense expenditures average 8.5 percent of GDP (1998–2007). Since 2002, Palestinian suicide bombings and the associated economic costs have declined sharply. The economy was robust to the Second Lebanon War of 2006; the direct cost in lost GDP was just 0.5 percent. In 2008 Israel received $2.4 billion in U.S. military aid; civilian aid has been phased out.

Economy

In 2001–03, Israel experienced a major recession, caused mainly by Palestinian violence. During 2004–07, real GDP grew steadily at 5.2 percent per year. Israel has free trade agreements with the United States, Canada, and the European Union (EU). Exports are 45 percent of GDP, and are divided approximately equally between the United States, the EU, and others. Leading export sectors are high and medium-high-tech industry, including pharmaceuticals (36 percent of exports), general services (19 percent), diamonds (15 percent), and high-tech services (11 percent). Exports grew 8.6 percent annually (in nominal terms) over 2004–07, led by information and communications technology (ICT). The weight of ICT in total business product is the highest in the world (2006).

In balance of payments, the current account/GDP ratio rose from minus 5 percent to 6 percent over 1997–2006, falling to 3.1 percent in 2007. The capital account has been liberalized since 1991. Israel is among the frontrunners in receiving foreign direct investment (FDI); FDI is concentrated in the ICT sector.

Israel ranks first in the world in availability of scientists and engineers and in research and development (R&D) expenditures as a percentage of GDP. Israel ranks third in patents per capita. R&D is concentrated in ICT. IBM, Intel, and other multinational corporations conduct R&D in Israel. There is limited government support for R&D.

Israeli venture capital funds raised $10.6 billion from 1998–2007. Over 2004–07, Israel’s country risk premium was halved to 30 basis points; Israel’s sovereign debt ratings have improved steadily. The financial system has become more competitive, efficient and stable, but further improvement is necessary. The Tel Aviv Stock Exchange maintains ties with NASDAQ and the London Stock Exchange (LSE). NASDAQ lists 75 Israeli companies; LSE lists 50.

Banking is dominated by two large banks. Many analysts see consumer banking as a cartel; corporate banking includes foreign players and is more competitive. A corporate bond market has developed; the banks’ traditional dominance of credit markets is being gradually eroded. In 2005, the banks were forced to sell off their provident funds; many funds were purchased by insurance companies. From 2008, pensions are mandatory by law.

Over 2003–07 the deficit/GDP and debt/GDP ratios have declined from 6.2 percent to 1 percent, and from almost 102 percent to 80.6 percent. Government spending/GDP declined from 50.8 percent to 44.9 percent, while taxes stayed near 37 percent. Privatization has contributed to the reduction in debt/GDP.

Historically, the tax burden fell disproportionately on middle-class workers; financial income was untaxed. Since 2003, financial income has been taxed, while income taxes have been reduced. VAT and corporate taxes have also been reduced; current tax rates are 15.5 percent and 27 percent, respectively.

Monetary policy has succeeded in achieving price stability; currently, the inflation target is 1–3 percent. Stanley Fischer, a world renowned economist, has served as BOI governor since 2005. In 2007, the Bank of Israel’s interest rate was below the U.S. Federal Funds Rate, a historically unprecedented situation.

Exchange rates are flexible. Over 2006–early 2008, the shekel appreciated by over 20 percent against the U.S. dollar, leading the BOI to intervene in currency markets for the first time since 1997. Israel joined the Continuous Linked Settlement (CLS) system in May 2008, making the shekel fully convertible worldwide.

Business firms have invested in quality improvement; ISO 9000 certification is widespread. Some Israeli companies have attained world-class quality, but traditional industry and construction lag behind.

Education And Employment

Primary and secondary education are plagued by inadequate infrastructure, poor discipline, and low teacher salaries. Internationally standardized test scores are low, despite large expenditures. Student achievement is highly stratified by socioeconomic status. Israel’s research universities are excellent but public funding (traditionally 70 percent of university budgets) has stagnated. Access to higher education has been expanded dramatically through the opening of teaching-oriented colleges (public and private). The “brain drain” of academics and physicians (especially to the United States) is an acute problem.

Public administration suffers from severe structural problems. Coalition governments average two years in office, public services are limited, and dissatisfaction with bureaucracy is widespread. Construction planning is centralized, rigid, and slow. Law enforcement has serious weaknesses. Israel ranks 30th in corruption perceptions, second-worst among Western nations. A significant deterioration occurred over 2002–06. Many local authorities suffer from corruption, mismanagement, and inefficiency.

Inequality is high, and has risen since 2000, in part due to reductions in real transfer payments. The poverty rate is 23.7 percent overall, 34.9 percent among children (2006/7). (Because the poverty line is defined in relative terms, it actually measures inequality.) Poverty is concentrated in the Arab and Ultra-Orthodox sectors, which have poverty rates near 60 percent.

In the final quarter of 2007, unemployment was 6.7 percent, versus 10.7 percent (average) in 2003. The private sector labor market is highly flexible, and resembles U.S. and UK labor markets. The public sector is less flexible, and resembles the European model. Unionization has declined, especially in the private sector.

Long term growth of per capita GDP has been slow; Total Factor Productivity (TFP) growth has been disappointing, especially in trade and services, construction, and low-tech industry. Labor productivity is close to the OECD average (2006); the BOI cites foreign workers as an important cause of slow TFP growth. Israel suffers from low labor force participation among prime-aged males. High unemployment and low labor market participation are strongly correlated with low education levels. Arab women and Ultra-Orthodox Jewish men have the lowest participation rates. The general participation rate has improved somewhat since 2004. The government spends little on active labor market policies.

Non-Israeli workers (79 percent foreign, 21 percent Palestinian) comprise 8 percent of the labor force; many are employed illegally. Foreign workers are concentrated in agriculture, construction, hotels, and restaurants, and elder care. “Contract employees” compromise 5–10 percent of the civilian labor force. They are employed through manpower agencies (“contractors”) at low wages and with few or no benefits, often against the law. They are concentrated in the service sector; surprisingly, the government is a major employer. Public sector strikes are a chronic problem, affecting essential services and education on all levels; many analysts blame Israel’s unusual labor laws. Public monopolies (e.g., ports, utilities) pay abnormally high salaries.

Historically, the government has underinvested in roads and rails. However, road congestion has declined somewhat since 2000; intercity rail is gradually being expanded, and light rail projects are under way in Tel Aviv and Jerusalem. The Cross Israel Highway, Israel’s first toll road, opened in 2002. Israel lags behind Western nations in traffic safety. Ports are inefficient and domestic shipping costs are very high. Air transport is uncompetitive; regulations strongly favor domestic carriers.

Bibliography:

Eyal Argov, Endogenous Monetary Policy Credibility in a Small Macro Model of Israel (International Monetary Fund, European Dept, 2007);
Bank of Israel, Annual Report (2006 and 2007);
Avi Ben-Bassat, ed., The Israeli Economy, 1985–1998: From Government Intervention to Market Economics (MIT Press, 2002);
Guy Ben-Porat, Israel Since 1980 (Cambridge University Press, 2008);
Central Bureau of Statistics, www.cbs.gov.il (cited March 2009);
Robert Owen Freedman, Contemporary Israel: Domestic Politics, Foreign Policy, and Security Challenges (Westview Press, 2009).

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