Country Profile: Israel
HISTORICAL OVERVIEW
The state of Israel was founded in 1948 after a United Nations
mandate. Israel was established based on the Jewish belief that the land
on the eastern Mediterranean is a land promised by God to the Jews as a
homeland for the Jewish people. After the establishment of the state, there
occurred an influx of Jewish immigrants from all over the globe, but
especially Europe. At the time, the indigenous population, the
Palestinians, was predominately Arab and Muslim. The resulting
displacement of thousands of Palestinians has led to tension not only with
the Palestinians but with other Arab countries in the region. The issue of
property rights has led to several wars over the course of Israel's
history. During this time, Israel has engaged in war with several of its
Arab neighbors including Jordan, Egypt, Lebanon, and Syria. In 1979, Egypt
and Israel entered into the Camp David Peace Accord. After the 1987
Palestinian Intifada, or uprising, Israel began peace negotiations with the
Palestinians, ultimately leading to the establishment of territory under
the rule of the Palestinian Authority. Under the current government,
however, negotiations have broken down and tension has heightened.
ECONOMIC OVERVIEW
Originally, the Israeli economy was based on agriculture, commerce and
light industry. However, "Israel now enters the post-industrial age with
internationally competitive industries in key sectors, including:
communications, electronics, information technology, biochemistry and
agritechology" (Ministry of Finance 1998).
At the country's inception, all aspects of the economy were originally
overseen by the Ministry of Finance. There were, however, plans to create
a central bank, and in 1954 the Bank of Israel was established. The Bank
of Israel was intended to be independent of the government and to oversee
monetary policy. Yet, according to Haim Barkai, an Israeli economist and
advisor, the Bank of Israel was severely constrained in its ability to
function efficiently (1995). The Bank had little control over the printing
of money and had "to obtain the approval of the Economics Committee of the
Cabinet before changing the liquidity ratios of commercial banks; hence,
the Bank's control over the money multiplier was severely restricted"
(Barkai 1995).
Beginning in 1969, Israel began to experience a rapid inflation that
eventually reached triple digits, 450 percent in 1984. Causes of this
inflation included the wars in which Israel engaged, the rise in oil prices
by OPEC, and bad economic policy.
In 1985 measures were taken to begin a liberalization of the Israeli
economy in order to control inflation and stabilize the economy. Such
measures included limiting government involvement in the economy,
stabilizing the currency, decentralizing and restructuring the banking
system, and deregulating the private sector to promote integration into the
world economy. According to the Ministry of Finance:
Israel' economy is currently undergoing a restructuring which began in
1985 when the government implemented a stabilization program in face of a
severe economic crisis. At that time the government cut the deficit by
adopting a package that included tax increases, drastic reduction in
subsidies and other spending cuts, and emergency aid from the United
States. The government also cut real wages, imposed price controls and
devaluated the shekel. These steps, coupled with a drop in oil prices,
enabled the economy to regain its equilibrium (1998).
Since then, Israel has been making great progress in strengthening its
economy and becoming a member of the world economy.
Israel has dropped many barriers to world trade, such as lowering value
added taxes. Moreover,
Subsidies were cut drastically in 1985, reducing industrial and consumer
subsidies from 11.5% of GDP in 1980 to only 2% in 1994. The subsidization
of basic foodstuffs has been abolished. In addition, the government
relinquished responsibility for marketing, importing and pricing grain,
wheat, soy, beans, oil, and eggs; private firms now dominate these
activities. The monopoly in citrus exports and a cartel of fuel
distributors were also eliminated (Ministry of Finance, 1998).
Israel is now a member of the World Trade Organization, has signed the
Uruguay Round of GATT, and has made free trade agreements with the European
Economic Community, the United States, the European Free Trade Association,
Canada, Turkey, Poland, Hungary, Slovakia and the Czech Republic.
Furthermore,
[Israel] is currently negotiat[ing] a free trade agreement with Jordan,
has concluded a Most Favored Nation agreement with Egypt, and has created a
de facto customs union with the Palestinian Authority, as stipulated in the
Paris Agreement. In March 1996, the Council of Ministers of the OECD
approved Israel's request to participate in the organization's activity,
and Israel has accordingly joined certain O.E.C.D committees as an observer
(Ministry of Finance 1998).
The Israeli government, then, has taken significant steps to integrate its
economy into the global economy.
The Bank of Israel has also undergone and carried out significant reform.
Currently, Israel's banking structure consists of 23 commercial banks, two
merchant banks, eight mortgage banks, one investment finance bank, eight
financial institutions, two joint service companies, and one foreign bank
branch. In 1989, the New Israeli Shekel (NIS) was taken from a fixed
exchange rate and allowed to fluctuate against a basket of currencies. The
government began selling its shares in several banks and industries.
In October 1997, the State sold 43% of the shares in Bank Hapoalim, the
largest bank in the Israeli banking system. It also sold an option to buy
another 20% of the shares. In February 1998, the State sold additional 7.6%
of the shares in Bank Hapoalim in a public offering in Israel. It also sold
25% of the shares in United Mizrahi Bank as well as shares and options in
Israel Discount Bank and Bank Leumi which were sold to the public. In April
1998, the State privately placed a 2% stake in Bank Leumi.
Control of the banks, then is moving from the public to the private sector,
allowing for greater competition within the system.
This privatization process is also occurring in Israel's business and
industry sector. "Between 1986 and 1996, The Government had sold all, or
portions, of its share holdings in 79 companies and subsidiaries, including
banks" (Ministry of Finance 1998). The current breakdown of Israel's
business sector is as follows:
[T]rade & services make up the largest portion of the business sector
product (49.7%), while manufacturing accounts for another 23.8%, transport
and communication make up 11.8%, construction 10.3% and water and
electricity 2.1%. Agriculture, the mainstay of most developing economies,
contributes the remaining 2.6%.
These figures indicate that Israel has become an economy more dependent on
technology and less dependent on agriculture.
The current world economic crisis has inevitably slowed down the Israeli
economy, however, it has not plunged into crisis as other countries have.
The explanation of the Ministry of Finance is careful fiscal and monetary
policy.
Bibliography
Bank of Israel. http://www.bankisrael.gov.il/firsteng.htm
Barakai, Haim. The Lessons of Israel's Great Inflation.
Westport, Connecticut: Preager, 1995.
Ministry of Finance, Israel.
http://www.mof.gov.il/englishframe.htm