Countries of the World/COUNTRYS.BIN/dp/0187/01875.txt

Text File | 1991-06-25 | 28KB | 453 lines

$Unique_ID{COW01875}
$Pretitle{225}
$Title{Israel
Chapter 4A.   The Economy}
$Subtitle{}
$Author{Richard F. Nyrop}
$Affiliation{HQ, Department of the Army}
$Subject{percent
government
economy
economic
immigrants
national
labor
large
gnp
institutions}
$Date{1979}
$Log{Design From Israeli Coin*0187501.scf
}
Country:     Israel
Book:        Israel, A Country Study
Author:      Richard F. Nyrop
Affiliation: HQ, Department of the Army
Date:        1979

Chapter 4A.   The Economy

[See Design From Israeli Coin: Design derived from an Israeli coin]

     The Israeli economy made impressive progress after independence in May
1948, from producing olive oil and flour to manufacturing jet fighters and
sophisticated guided missiles. Even farming in an arid land achieved
remarkable results and, because of different institutions, capital inputs, and
specialization, went far beyond that attained in surrounding Arab areas.
Economic growth was stimulated by a large influx of immigrants (the population
increased almost four- and one-half times by the beginning of 1977) and a
substantial flow of capital from abroad. World Jewry financed a considerable
part of the development of the country.

     Even though the economy had expanded far beyond the legacy of the British
Mandate period, exports still remained considerably below imports. By the late
1970s the country was nearly as dependent on foreign support as it had been in
the beginning. The social welfare spending, based on the socialist orientation
of many Israeli leaders, and the large defense burden considered necessary to
guarantee the nation's survival, exceeded available resources after the
October 1973 War. Balance-of-payments problems and high rates of inflation
have plagued the state ever since. By the late 1970s the time for decision had
come. A number of economists, particularly in the central bank, believed that
an evaluation of priorities and a restructuring of the economy were imperative
to bring spending into line with resources. A start was made on the hard
decisions in 1977, but many foreign and domestic observers were not convinced
that the new economic policies were enough.

The Economy Before Independence

     When the Jewish settlers began to arrive in the late 1800s, the economy
of Palestine was largely semifeudal and semi-self-sufficient agriculture.
Production techniques were those of generations past, and output was hardly
more than the family consumed. The exchange of goods was limited, and the use
of money even more limited. Towns were few and not large. Manufacturing was
by artisans in small shops.

     With the arrival of the early Zionist settlers from Europe-particularly
those of the Second Aliyah (see Glossary)-there was a marked effort toward
rapid economic development of the Jewish enclave, which contrasted sharply
with the traditional economy of the indigenous inhabitants of Palestine.
Development of the Jewish economy was helped by a continuous infusion of new
immigrants and by the import of capital, much of it belonging to the arriving
immigrants. This basic formula for growth was established early and followed
up to the present time; another important ingredient was the dedication and
acceptance of sacrifice for the goal of a Jewish homeland by the pioneering
Zionists.

     The Jewish settlers brought with them a different approach. In
agriculture the emphasis was on commercial farming, high productivity, and
labor-saving devices. Foreign capital helped increase irrigation, use of
pumps, and experiments to determine the more advantageous crops. The
immigrants also brought a variety of skills. The General Federation of Labor
(known as Histadrut-see Glossary) was formed in December 1920 and helped
spawn a wide range of activities, such as manufacturing, banking, insurance,
marketing, transportation, and construction, to use the skills of immigrants
and to broaden the Jewish economy.

     The waves of immigrants set up a pattern that was still discernible in
the 1970s, although tremendously diluted because the number of new immigrants
had become small compared with the resident population. Immigrants became
consumers when they first arrived and economic producers only later after a
transitional period. Each wave of immigrants increased demand, which was
partially satisfied by imports, but domestic activity was spurred to meet the
new demand although increasing output took time. Manufacturing and some other
activities usually required increased imports of machinery and equipment.
The housing sector was particularly sensitive to immigration, and construction
activity often was the first job opening for new arrivals. At times employment
in the building trades rose as high as 45 percent of the labor force. As
housing needs eased after the wave of immigration, other sectors of the
economy usually were expanding providing employment opportunities and the
additional goods needed by the larger population.

     The formula of immigration combined with capital imports produced rapid
economic growth in the Jewish enclave before independence. An efficient and
varied agricultural sector along with a growing manufacturing sector largely
built around consumer goods, such as foods and textiles, but including others
such as construction materials, supplied part of the population's needs.
Service sectors, such as banking, transportation, and trade supported the
production sectors, resulting in a more rounded and modern economy than was
common in the Middle East.

     By the 1940s the Arab economy in the Mandate was far less advanced
although changing. Agriculture was still the main activity of Arabs, and
farm incomes were increasing. Manufacturing was expanding even though most
was confined to shops rather than factories. Urbanization of Arabs was
growing. The combined import needs of Arabs and Jews far exceeded the exports
available from the Palestine economy. The local currency was linked to the
British pound, however, and there were no balance-of-payments problems from
the large import surplus.

Growth and Structure of the Economy

     By any measure the Israeli economy grew remarkably after independence.
By 1976 gross national product (GNP) amounted to the equivalent of nearly
US $12 billion. Between 1950 and 1976 GNP increased by nearly 9 percent a year
in constant prices, by 4.7 percent a year on a per capita basis. The Israeli
economy, which was about 40 percent of that of Egypt (in GNP terms) after the
War of Independence, 1948, was about as large as Egypt's by the mid-1970s
although Egypt had a population some ten times as great. By 1976 per capita
GNP amounted to nearly US $3,400, higher than that of Italy. The Israeli
standard of living was equal to that of some West European countries and
exceeded that of East European nations. The engine of growth was the inflow
of foreign funds and immigrants; the population increased an average of 5.2
percent a year between independence and 1976.

     Economic growth was not constant. Between 1965 and 1967 the economy
stagnated, and unemployment increased sharply. The 1967-73 period was one of
high growth, averaging 10.5 percent a year (in constant prices); investments
more than tripled (in constant prices) at the same time that public and
private expenditures were rising rapidly. By 1970 the demand on resources
became excessive, and inflationary pressures mounted (see Banking and Monetary
Policy, this ch.). Between 1974 and 1976 the economy stagnated (growing by an
average 3.2 percent a year in constant prices) as the government attempted
to contract aggregate demand to control inflation and ease the strains on the
balance of payments. GNP increased by 2 percent (in constant prices) in 1975
and only by 1 percent in 1976 and 1977.

     The economic stagnation since the 1973 war had the biggest impact on
investments. Gross domestic capital formation declined after 1973-by 14
percent in 1976 and by 15 percent in 1977; by 1977 it was below the level of
1971. The low level of investments p