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Economy of Israel

Introduction

Israel has a technologically advanced free market economy. Cut diamonds, high-technology equipment and pharmaceuticals are among its leading exports. Its major imports include crude oil, grains, raw materials and military equipment. Israel usually posts sizeable trade deficits, which are offset by tourism and other service exports, as well as significant foreign investment inflows.

Between 2004 and 2013, growth averaged nearly 5 per cent per year, led by exports. The global financial crisis of 2008-2009 spurred a brief recession, but Israel entered the crisis with solid fundamentals, following years of prudent fiscal policy and a resilient banking sector. The economy also weathered the 2011 Arab Spring because strong trade ties outside the Middle East insulated it from spill-over effects.

Slowing domestic and international demand and decreased investment resulting from Israel’s uncertain security situation reduced gross domestic product (GDP) growth to an annual average of roughly 2.8 per cent between 2014 and 2017. Natural gas fields discovered off the coast since 2009 have brightened Israel’s energy security outlook. The Tamar and Leviathan fields were some of the world’s largest offshore natural gas finds in the last decade.

Political and regulatory issues have delayed the development of the massive Leviathan field, but production from Tamar provided a 0.8 per cent boost to GDP in 2013 and a 0.3 per cent boost in 2014. One of the most carbon-intense OECD countries, Israel generates about 57 per cent of its power from coal and only 2.6 per cent from renewable sources.

Income inequality and high housing and commodity prices continue to be a concern for many Israelis. Income inequality and poverty rates are among the highest in OECD countries, and there is a broad perception among the public that a small number of ‘tycoons’ have a cartel-like grip on the major parts of the economy.

Some sources predict that in the long term, Israel will face structural issues, including low labour participation rates among its fastest growing social segments: the ultra-Orthodox and Arab-Israeli communities. In addition, Israel’s progressive, globally competitive, knowledge-based technology sector employs only about 8 per cent of the workforce, with the rest mostly employed in manufacturing and services, sectors that face downward wage pressures from global competition. Expenditures on educational institutions remain low compared to most other OECD countries with similar GDP per capita.

Gross domestic product

Israel’s GDP rose by 0.7 per cent in the fourth quarter of 2018 compared to the previous quarter. The annualized change in GDP in the fourth quarter was 2.7 per cent, a 0.3 per cent decrease from its annualized rate in the third quarter. The value of GDP in the fourth quarter was estimated at $70.4 billion. The per capita GDP in the same quarter was estimated at $9,220, $271 more than a year earlier.

Indicatorsmeasuring unit20162017Change ±
GDP (at constant 2010)Billion US$287.808297.3969.588
GDP growth (annual)%4.13.3-0.8
GDP per capita (constant 2010)US$33,67734,135458
GDP (at current value)Billion US$317.748350.85133.103

Source: World Bank.

Industry

Israel’s GDP from industry fell to about $10.9 billion in the third quarter of 2018, from $11.2 billion in the second quarter. The output reached its highest quarterly level of $11.7 billion in the first quarter.

The industrial sector makes up about 26.5 per cent of GDP, and the production growth rate in 2017 was 3.5 per cent. The proportion of workers in the sector in 2017 and 2018 was 17.3 per cent and 17.2 per cent respectively of the total number of workers in the labour force, according to World Bank data.

The sector is generally highly diversified, covering high-tech products (including aviation, communications, computer-aided design and manufacturing, medical electronics, fibre optics), wood products, paper, potash, phosphate, food and beverages, tobacco, caustic soda, cement, pharmaceuticals, construction, minerals, chemical products, plastics, diamonds and textiles.

Agriculture

Israel Economy - Fanack Chronicle
Agriculture in Israel. Photo: Shutterstock

The agricultural sector contributed about 2.4 per cent to Israel’s GDP in 2017. The World Bank estimates that the proportion of workers in the sector is 1.06 per cent of the total number of workers in 2018, down from 1.07 per cent in 2017. The value of agricultural exports in 2017 amounted to about $2.2 billion.

According to the Ministry of Agriculture and Rural Development, agriculture is divided into two branches: agriculture (about 60 per cent) and livestock (about 40 per cent).

The area under cultivation is about 410,000 hectares. This area provides most of the fresh agricultural products consumed locally, including fruits, vegetables, eggs, poultry and milk.

The value of agricultural production in 2016 was about $7.9 billion. The total agricultural exports in 2015 amounted to $1.2 billion, around 15 per cent of the total value of agricultural production but less than 2 per cent of Israel’s total exports. The growth rate in agricultural production between 2005 and 2015 was about 19 per cent, despite the harsh weather conditions and continuous shortage of water.

Israel currently has 919 agricultural settlements. Some 48 per cent of these are moshavim (cooperative agricultural settlements) and 29 per cent are kibbutzim (communal settlements). Around 295,000 people live in the moshavim and 150,000 live in the kibbutzim.

Poverty

Israel suffers from the highest poverty rate of all the OECD countries, according to a National Insurance Institute of Israel report published in December 2018. According to the report, ‘The poverty line is defined as half the average disposable income, weighted by the size of the family.’

A 2019 study by the Adva Center, a policy analysis institute focusing on equality and social justice, found that a quarter of Israeli households live below or near the poverty line. The study also revealed that nearly half of Arab families (49.2 per cent) lived below the poverty line in 2016, compared to 13.2 per cent of Jewish families, while 13.5 per cent of Arab families were near the poverty line, compared to 7.2 per cent of Jewish families.

In the same year, Ethiopian Jews were the poorest in the Jewish community, with 22.8 per cent living below the poverty line, and 12.1 per cent of Russian Jews (who came to the country in the early 1990s) were near the poverty line, compared to 4.4 per cent of second-generation Ashkenazi Jews. The proportion of female-headed households was a constant 35 per cent between 2003 and 2016. In contrast, the proportion of female-headed households was 43.1 per cent in 2016, and 42.9 per cent of these households were close to the poverty line.

Between 2003 and 2016, the proportion of families headed by a worker – either employed or self-employed – living below or near the poverty line rose. At the same time, the proportion of families headed by two or more working people living below or near the poverty line doubled. The percentage of poor families supported by a university graduate rose from 13 per cent to 22.1 per cent, an increase of 70 per cent. A similar increase was observed in the proportion of families close to the poverty line, which rose from 15.8 per cent to 26.7 per cent.

International market position

Israel was ranked 16th – and first in the Middle East and North Africa – out of 137 countries covered by the Global Competitiveness Index 2017-2018, eight positions higher than in 2016-2017. It owes this performance in part to its strong innovation ecosystem. Its main weakness is terrorist incidents. According to the index, Israel spends 4.3 per cent of GDP on research and development, the most of any country in the ranking, and is the country where entrepreneurial failure is most accepted and innovative companies grow the fastest.

IndicatorRank (out of 138) 2016–2017Rank (out of 137) 2017–2018Change in rank ±
Institutions31292
Infrastructure28253
Macroeconomic environment48399
Health and primary education28271
Higher education and training24213
Goods market efficiency32302
Labor market efficiency21183
Financial market development19118
Technological readiness22712
Market size57561
Business sophistication21156
Innovation23-1
Global Competitiveness Index24168

Source: Global Competitiveness Index 2016/2017 and 2017/2018.

Infrastructure

The bulk of Israel’s industrial enterprises are concentrated in the country’s extended metropolitan agglomeration, stretching from Greater Tel Aviv to Haifa in the north and to Ashdod and Ashkelon in the south with satellite locations in Jerusalem and a number of smaller provincial cities.

This concentration of industrial locations is a mixed blessing. Most Israeli industries are located in dedicated industrial zones on the outskirts of cities, with generally easy access to the country’s road network. Location advantages are however increasingly jeopardized as a result of Israel’s seriously undeveloped transportation infrastructure. There is a huge discrepancy between vehicle density and actual road capacity, particularly at peak hours, causing huge traffic jams.

For decades Israel’s governments have neglected the country’s transportation infrastructure, remaining almost exclusively fixated on minimal motorcar mobility, resulting in a grave lack of multi-lane thoroughfares and adequate rail services.

When the wheels appeared to grind to a halt, the moment arrived to stir Israeli politicians and officials into action in the late 1990s. A number of cumbersome road bottlenecks were improved and a whole new toll-highway was constructed running from north to south (Road number 6). Israel had 18,470 kilometres of road in 2010 (World Bank). Substantial funds were being invested in upgrading Israel’s obsolete railway system, adding new lines and stations and preparing for large-scale electrification of the main routes. Relief soon became apparent with an increase of rail passengers from 5 to 35 million in just fifteen years time. The total length of Israel’s railway increased from 676 kilometres in 2001 to 1,034 kilometres in 2011 (World Bank).

Israel has also managed to upgrade the country’s main national airport of Tel Aviv-Ben Gurion into a modern facility capable of handling the anticipated increase in freight and passengers. More than 5.3 million passengers were carried in 2011, compared to 3.9 million in 2001 (World Bank).

Despite these marked improvements, Israel is still lagging behind in comparison with advanced Western European countries. One particular bottleneck is the lack of adequate mass transit systems in the country’s biggest cities, such as free bus lanes, tramlines and underground railways. Ambitious plans for improvement have been prepared but are making slow progress.

The Israeli gross domestic product (GDP) in the year 2015 had reached 299.42 billion US dollars, in comparison with 308.77 and 293.31 billion dollars in the years 2014 and 2013 respectively. In the year 2015 the GDP per capita had reached 35770 dollars, in comparison with 35670 and 34430 in the years 2014 and 2013. The Israeli economy had witnessed in 2015 a grow with a rate of 2.5%, in comparison with 3.4% and 4.4% in the years 2014 and 2013. The World Bank predicts that the Israeli GDP will grow in 2019 by a rate of 3.3%.

In December 2016, officials from the Bank of Israel confirmed that the Israeli economy had achieved a grow with a rate of 3.5%, pointing that the growth rate will decrease slightly in the years 2017 and 2018 to reach 3.1% and 3.2% respectively. The inflation rate had reached 2.8% in 2015, in comparison with 1.1% and 2.1% in the years 2014 and 2013.

According to the International Competitiveness Report for the period stretching between 2016 and 2017, Israel had came in the 24th rank, in comparison with the 27th rank in the period stretching between the years 2015 and 2016. This goes back to its being one of the most able economies in terms of innovation in the world (second at the world level).

High-Tech

Israel Economy - Fanack Chronicle
Haifa is one of the main industrial areas in Israel. Photo: Shutterstock

Today the division of high-tech industries, together with the branch of ICT services, has become the locomotive of Israel’s economy. In recent years, especially in the last decade, a number of highly dynamic innovative firms have been making headway. These are companies in the spheres of electronics, telecom, computer engineering, fine chemicals and pharmaceuticals carrying famous brand names such as Eltek, Alvarion, Teva, Aladdin, Delta Galil, Gilat, Vishay, and Elisra, all of which are positioned in the first echelons of global competitiveness, earning high export revenues for Israel.

Israel’s military industries occupy a special place in this division. Over the decades arms manufacturers such as Rafa’el, IAI and Ta’as have hugely expanded in scale and levels of sophisticated armoury, upgrading from producing basic fire arms to complicated weapon systems with a high technological content. Israel’s military industries – benefiting from huge public investments underpinned by decades of formidable financial transfers from the United States – were crucial in delivering vital so-called ‘spill-overs’ to the advanced modern industries of today, both in highly skilled professional manpower and in technological expertise.

High-tech exports accounted for 14 percent of manufactured exports in 2011, with a value of 8.8 billion USD. Export of ICT goods accounted for 10.7 percent of total goods exports (World Bank). Arms and security services account for roughly a quarter of Israel’s industrial exports and about 20 percent of industrial employment. In the last decades Israel’s arms exports have reportedly increased more than twentyfold, making the country the fifth largest arms exporter in the world. Another special branch worth mentioning is Israel’s diamond processing industry, good for yearly exports regularly exceeding 10 billion USD.

Whereas Israel’s high-tech firms are prominent eye catchers in the global economic arena, a considerable number of traditional Israeli firms which are active in for instance food processing, tool making or home applicant production, such as Osem (currently incorporated into Nestlé), Tnuva, Prigat and Elbit are holding ground on the Israeli consumer market.

Services

Israel Economy - Fanack Chronicle
Tel Aviv by night. Photo: Shutterstock

The services sector is Israel’s largest economic sector. It contributes 66.1 percent to the country’s GDP (CIA, 2012) and employs 77 percent of the labour force (World Bank). It is responsible for a third of Israeli exports, but consumes two-thirds of the country’s investments and public spending. The value of service exports in 2012 amounted to 110.9 billion NIS (31.2 billion USD), according to the Israeli Central Bureau of Statistics.

Even more so than the industrial sector, the services sector is a highly diversified conglomerate of smaller and larger private firms and of public institutions and enterprises, most of which are facilitating services. There are also enormous contrasts between high-end and low-end services, the former consisting, for instance, of business consultancies, real estate management and accountancy firms.

Because of its broad economic spectrum the whole sector is conventionally divided into sub-sectors, firstly public and private sector enterprises. The division of public services employs almost half of the sector’s total work force.

The biggest spenders among governmental institutions are those providing health care, education and welfare. Overall appreciation of Israel’s public health care and education is evident. But a growing number of Israeli political and economical analysts are pointing at a number of worrisome deficiencies, especially in the country’s educational system.

Deficiencies

Israel spends much less on secondary education compared to the budget for academic tuition, while standards of primary education are giving reason for rising concerns. Scores of Israeli pupils in standard global tests are disappointingly low and the number of secondary school drop-outs is alarming. Concerns have also been expressed about the lack of uniform educational standards. Public schools and some (but not all) schools operated by religious institutions are often badly equipped and performing below expectation.

Too many governmental bureaus and institutions are regularly featuring in Hebrew news reports with complaints about lengthy, time and money consuming procedures, questionable regulations and high levels of corruption. These are key factors which are measured and processed by world socio-economic research institutes such as the Global Competitiveness Index (GCI), disclosing vital insights into public service effectiveness of national economies. According to this index Israel’s public sector is remarkably inefficient compared to advanced European states, such as Germany, Great Britain, the Netherlands and the Scandinavian countries.

Energy

All data mentioned here are from the US Energy Information Administration.

Israel’s energy sector is governed by the Ministry of National Infrastructures, which gives overall guidance to the sector and oversees the state-owned energy companies. The most important of these companies is the Israel Electric Corporation, which until recently had a monopoly in all aspects of the sector.

Israel imports all of its coal supplies, and all but an insignificant amount of the crude oil.  In addition to refining products at its two refineries, Israel imports finished petroleum products. The imported coal is used exclusively for electrical generation. The coal is sourced from a number of countries, the largest supplier being South Africa. Israel consumed 15.4 million metric tons of coal in 2012.

Israel produced about 41.7 billion cubic feet of natural gas in 2009. This is a small amount compared to the countries of the Persian Gulf, but it is a large step towards greater self-sufficiency. The start of natural gas production in 2003 came about as a result of the discovery of the 27 bcm Mari-B gas field in 1999. It is about 25 kilometres off the coast of Ashkelon. This field was discovered and developed by a consortium of Noble Energy from the United States and Delek Drilling and Avner Oil Exploration from Israel. The field will be rapidly depleted, perhaps by 2014-2015.

In 2009, there were large natural gas discoveries off the coast of Israel. In January 2009, the Tamar gas field was discovered, about 90 kilometres offshore from Haifa. Tamar is estimated to contain about 178 bcm of gas, a quantity equivalent to total forecast consumption in Israel for the next twenty years, according to the Israel Natural Gas Authority. The other major discovery of 2009 was the Dalit field in March of that year, 40 kilometres south of the Tamar field. The Dalit field has been initially estimated to contain about 20 bcm of gas. After 2009, gas production more than doubled, reaching 91.8 billion cubic feet in 2011. Likewise, natural gas consumption increased from 50.6 billion cubic feet in 2008 to 117.3 billion cubic feet in 2011. Proven gas reserves stood at 9.5 trillion cubic feet in 2013.

Oil production is limited, with 5,839 barrels a day in 2012. Yet, oil consumption increased from 246,044 barrels a day in 2008 to more than 301,648 barrels a day in 2012. Proven oil reserves stood at 0.0115 billion barrels in 2013.

EU-Israel Association Agreement

EU High Representative Catherine Ashton and Israeli PM Benjamin Netanyahu.
EU High Representative Catherine Ashton and Israeli PM Benjamin Netanyahu.

Israel is a neighbouring and associated state of the European Union (EU). The relations between Israel and the European Union are framed in the European Neighbourhood Policy (ENP), the Euro-Mediterranean Partnership, and the Union for the Mediterranean. The main legal ties between Israel and the EU are established by the 1995 Association Agreement and several other agreement covering specific issues. The EU-Israel Association Agreement, signed in Brussels on 20 November 1995 and entered into force on 1 June 2000, is the legal basis governing relations between Israel and the European Union.

The Association Agreement established two main bodies for the EU-Israel dialogue. The EU-Israel Association Council (held at ministerial level) and the EU-Israel Association Committee (held at the level of senior officials) meet regularly to discuss political and economic issues as well as bilateral or regional co-operation. The main features of the EU-Israel Association Agreement include ‘provisions on regular political dialogue, on freedom of establishment and liberalization of services, the free movement of capital and competition rules, the strengthening of economic cooperation and cooperation on social matters. The agreement establishes an Association Council to be supported by an Association Committee. It also reinforces the arrangements for free trade in industrial products which had been in force since the late 1970s.’ The agreement also mentions many other areas of cooperation that are open to negotiation. Among other things, the agreement states that the respect for human rights and democratic principles guides the internal and international policy of both Israel and the EU and constitutes an essential and positive element of the Agreement. At Israel’s request, there is a Joint Declaration on the importance both parties attach to the struggle against xenophobia, anti-Semitism and racism.

The EU is Israel’s largest trading partner; preferential agreements between the two parties are seen as an important step in their economic development and prosperity. In 2011 EU-Israel trade totalled USD 40.3 (EURO 29.4) billion – with exports from the EU to Israel at USD 23 (EURO 16.8) billion and imports at USD 17.3 (EURO 12.6) billion. In 2010 Foreign Direct Investment in Israel by the EU totalled USD 5.2 (EURO 3.8) billion Euros, a growth of 22.1 per cent compared to the previous year; Israel’s FDI into the EU increased by 394 percent in the same period. The EU has given Israel a privileged relationship by neglecting Israel’s failure to fulfil its obligations under the EU agreement.

Article 2 of the Association Agreement referred explicitly to Israel’s human rights obligations under the Agreement: ‘Relations between the Parties, as well as all the provisions of the Agreement itself, shall be based on respect for human rights and democratic principles, which guides their internal and international policy and constitutes an essential element of this Agreement.’ Article 83 refers to the State of Israel only, thereby excluding products from illegal settlements on land which is occupied by Israel. Despite calls for the respect for human rights the EU has noted on numerous occasions the violations committed by Israel. The EU should activate Article 2 of the EU-Israel Association Agreement, which states that both sides must respect human rights as a pre-condition for cooperation between the two parties.

In July 2012, Oxfam stated that ‘Between 2002 and 2012, the Middle East Quartet, which includes the European Union, United Nations, United States and Russia, has made 39 joint statements calling on Israeli governments to halt the expansion of settlements. Yet during the same period, the number of settlers living in settlements has risen by more than one third – from approximately 377,000 to 500,000.’ Europe has condemned Israel’s settlement expansion but did little to sanction Israel, as every year similar statements are issued by the EU-Israel Association Council, the highest political forum between both sides, despite a sharp rise in new settlement construction across the West Bank. Oxfam thus stated that ‘Meanwhile, Palestinian displacement and Israeli-led demolition of Palestinian homes and water cisterns, many of which were funded by EU taxpayers, has increased. To see positive change on the ground, Europe needs to step up and take a leadership role. EU governments must match their words with urgent and concrete measures to push for an immediate end to settlement construction and the unlawful demolition of Palestinian civilian infrastructure.’

In March 2013, 23 members of European Parliament called for the suspension of EU-Israel Association Agreement. In their letter, the 23 Parliament Members called the EU to take the lead in observing international law and protecting universal human rights and to suspend the EU-Israel Association Agreement: ‘We therefore call upon the Commission to formally address the aforementioned concerns as soon as possible in the Association Committee, as established by article 67 of the Association Agreement and to consider the (partial) suspension of the Agreement. We also ask for your reaction and a serious proposal to address this crucial issue.’

The MEP’s stated that: ‘The Agreement is based on mutual respect for human rights and democratic principles, as explicitly stated in article 2 of the Agreement. The ongoing authorization for settlement activity of the Israeli government, as well as several human rights abuses that have been extensively documented by the United and international human rights organizations, are in breach of Israel’s commitments under article 2 of the Agreement.’

They also demand that ‘the violation of international law and human rights by the Israeli government’s activities, and the lack of response to the EU’s calls to respect international law, in particular a moratorium on settlement expansion, compels the EU to engage more deeply in a political dialogue with Israel on these troubling issues which need to be formally and duly addressed in the context of the Association Agreement.’

On 19 July 2013, the European Commission stated in three pages of guidelines that it will end funding Israeli science as well as collaborations between European and Israeli scientists, including EU grants, prizes, and financial instruments that support organizations or activities in areas not under Israel’s control before 1967, which include the occupied West Bank, East Jerusalem, the Gaza Strip, and the Golan Heights, starting 2014.

But prior to the annual EU-Israel Association Council meeting, which took place on 24 July 2013, The Guardian exposed that a diplomatic source from Brussels had revealed a plan to upgrade relations and cooperation between the EU and Israel. The article states that ‘The EU will widen its relationship with Jerusalem on a range of areas including migration, energy and agriculture. It will remove obstacles impeding Israel’s access to European government-controlled markets and enhance Israel’s co-operation with nine EU agencies, including Europol and the European Space Agency. […] Among the most controversial is the addition of areas of co-operation in the Agreement on Conformity, Assessment and Acceptance of industrial products, or ACAA – a deal first agreed in principle two years ago. In this agreement, the EU formally accepts for the first time the authority of Israeli ministers over goods produced in West Bank settlements.

Further Reading

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