Countries of the World/COUNTRYS.BIN/dp/0187/01878.txt

Text File | 1991-06-25 | 38KB | 592 lines

$Unique_ID{COW01878}
$Pretitle{225}
$Title{Israel
Chapter 4D.   Industrial Policy and Development}
$Subtitle{}
$Author{Richard F. Nyrop}
$Affiliation{HQ, Department of the Army}
$Subject{exports
israeli
foreign
imports
billion
government
industrial
defense
percent
equipment}
$Date{1979}
$Log{}
Country:     Israel
Book:        Israel, A Country Study
Author:      Richard F. Nyrop
Affiliation: HQ, Department of the Army
Date:        1979

Chapter 4D.   Industrial Policy and Development

     The War of Independence destroyed any possibility for Israel to become a
regional manufacturing center with markets in nearby Arab areas. The Arab
boycott, which was still active in 1978, went further than just refusing to
buy Israeli goods. Sanctions were also applied to firms doing business with
Israel that wanted to trade with Arab countries. Arab sanctions had varying
effectiveness, but they created problems for marketing arrangements,
production licenses as a means of acquiring foreign technology, and direct
investment relationships between Israeli firms and international companies.
The Arab boycott increased the difficulties of overcoming the constraint of
Israel's small domestic market.

     The small size of the domestic market affected Israeli industrial
development in several ways. The most obvious and perhaps most important
impact involved economies of scale; many modern industrial processes require
a high level of production to achieve low unit costs-often a production level
considerably higher than could be sold in Israel. Thus investment in modern
technology frequently meant that investors had to build a plant large enough
to achieve economies of scale but with part of production to be marketed
abroad, thereby facing the competition from established, international
companies and the risks of penetrating foreign markets largely in
industrialized Western Europe. Less obvious were the small firms' inability
to maintain marketing and research staffs, the effect of small-scale
production on allocation of resources in Israel, and the difficulty of
finding appropriate government policies to achieve rapid and rational
industrialization.

     In the years immediately after independence the flow of immigrants was
extremely high, and a shortage of goods existed. The government therefore
intervened directly to foster rapid development of manufacturing. Many
inducements were introduced, but commercial policy was very important. Local
manufacturing was completely protected from foreign competition by high
tariffs and quantitative restrictions on foreign imports, resulting in rapid
growth primarily among numerous small industrial concerns. Production was on a
small scale, managerial and skilled labor were spread thin, and costs tended
to be high.

     By the mid-1950s government officials recognized that this excessive
level of protection was causing distortions in the economy. Quantitative
restrictions on imports were removed, and a commitment was made to gradually
reduce import duties. Liberalization of commercial policy was slow. By 1978
domestic manufacturing still enjoyed substantial protection although an
Israeli agreement with the European Common Market countries, signed in 1975,
committed the government to continual, gradual reduction of tariff duties on
industrial products in return for duty-free entry of Israeli manufactured
exports to Common Market countries starting in July 1977; free trade in
industrial products between the two areas was scheduled for the late 1980s. In
the late 1970s some foreign firms were interested in establishing plants in
Israel to benefit from the duty-free access to the European Common Market.

     In the early 1950s a major focus of government policy was to create jobs
for the huge flow of immigrants and provide goods that were in short supply. A
highly protectionist policy was adopted in support of these goals. For some
officials, the increasing numbers of local manufacturers and growing
competition between them would mitigate the harmful effects of excessive
protection from the outside. It soon became apparent, however, that one or
only a few domestic producers of a specific product could supply the small
internal market.

     Since the mid-1950s the country's balance of payments dominated
government policy. Stimulating local manufacturing toward import substitution
and development of industrial exports became more important than excessive
concentration in domestic industry. Mergers were promoted to expand the size
of economic units in order to increase exports. The size of manufacturing
plants and industrial exports increased, particularly in the 1960s and 1970s,
but accompanied by the growth of cartels and monopolies in the domestic market
even though no Israeli firm was large by international standards. There was
some concern about the lack of internal competition. An effort toward
regulating cartels and restrictive trade practices became law in 1959, for
example, but legislation in 1969 removed obstacles and encouraged mergers in
a single line of production. Some economists commended government policy for
its flexibility and accomplishments, noting that reduced tariff protection and
liberalized imports would counteract the excessive concentration in domestic
industry over the long run although acknowledging that costs and prices in the
home market were higher than would have been the case with greater internal
competition in the short run.

     Since the mid-1950s industrial development policies have concentrated
largely on science-based industries, such as metal products, chemicals,
plastics, and electronics, because they best suited the country's endowments.
A substantial inflow of foreign capital permitted development of advanced
technology and capital-intensive industries. Policy attention and investments
concentrated on manufactured components or high-quality special products, such
as scientific instruments and minicomputers, requiring a large amount of
precision per unit and high value added, rather than mass produced items
requiring large production runs to be economical.

     Growth of productivity per worker has been at a sustained high rate since
independence. The skills in the labor pool added to the country's comparative
advantage in modern industries. The proportion of well-educated scientists and
engineers, skilled workmen, and able managers in the Israeli work force was
unrivaled in young, developing countries, even though Israel's development
efforts required still more. Educational and training programs for both the
already skilled and the unskilled immigrants enlarged and added to the pool of
skills.

     The country's defense needs reinforced development of science-based
industries. Facilities that originally began as repair and maintenance shops
for imported military equipment, developed competence to make substantial
modifications and adaptations on equipment and subsequently to produce Israeli
versions of guns, planes, missiles, armored vehicles, and electronic
equipment. Development of defense and related civilian products was
particularly stimulated after the 1967 war when France, a major military
supplier at the time, embargoed armaments. By 1978 Israel's defense industries
were producing for their own needs more than what they used to buy from the
French, and exports of military and related products were becoming major
foreign exchange earners.

     The government used a variety of means to influence the peace and
direction of industrial development. Availability of low interest credit, tax
incentives, tariff protection, export premiums, export insurance, and
marketing assistance were part of the policy arsenal. Legislation protected
and encouraged investment by foreigners. Foreign investments in Israel
remained low in the 1950s but became substantial in the 1960s (until the
six-day war) and in the early 1970s (until the 1973 war). The government
sponsored and promoted research and development for some products and lines
because the si