Israel

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).

[Page 948]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.

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