Economy of Israel

Israel has a technologically advanced market economy with substantial government participation. It depends on imports of fossil fuels (crude oil, natural gas, and coal), grains, beef, raw materials, and military equipment. Despite limited natural resources, Israel has intensively developed its agricultural and industrial sectors over the past 20 years.

Israel is largely self-sufficient in food production except for grains and beef. Diamonds, high-technology, military equipment, software, pharmaceuticals, fine chemicals, and agricultural products (fruits, vegetables and flowers) are leading exports. Israel usually posts sizable current account deficits, which are covered by large transfer payments from abroad and by foreign loans. Israel possesses extensive facilities for oil refining, diamond polishing, and semiconductor fabrication.

Roughly half of the government’s external debt is owed to the United States, which is its major source of economic and military aid. A relatively large fraction of Israel’s external debt is held by individual investors, via the Israel Bonds program. The combination of American loan guarantees and direct sales to individual investors, allow the state to borrow at competitive and sometimes below-market rates.

The influx of Jewish immigrants from the former USSR topped 750,000 during the period 1989-1999, bringing the population of Israel from the former Soviet Union to 1 million, one-sixth of the total population, and adding scientific and professional expertise of substantial value for the economy’s future. The influx, coupled with the opening of new markets at the end of the Cold War, energized Israel’s economy, which grew rapidly in the early 1990s. But growth began slowing in 1996 when the government imposed tighter fiscal and monetary policies and the immigration bonus petered out. Those policies brought inflation down to record low levels in 1999.

High technology industries have taken a pre-eminent role in the economy, particularly in the last decade. Israel’s limited natural resources and strong emphasis on education have also played key roles in directing industry towards high technology fields. As a result of the country’s success in developing cutting edge technologies in software, communications and the life sciences, Israel is frequently referred to as a second Silicon Valley. Israel (as of 2004) receives more venture capital investment than any country in Europe, and has the largest VC/GDP rate in the world, seven times that of the United States.

Another leading industry is tourism, which benefits from the plethora of important historical sites for Judaism and Christianity and from Israel’s warm climate and access to water resources. The diamond industry is also of importance, but it has been impacted by changing industry conditions and shifts of certain industry activities to the Far East.

As Israel has liberalized its economy and reduced taxes and spending, the gap between the rich and poor has grown. As of 2005, 20.5% of Israeli families (and 34% of Israeli children) are living below the poverty line, though around 40% of those are lifted above the poverty line through transfer payments.

Israel’s GDP per capita, as of 28 July 2005, was USD 20,551.20 per person (42nd in the world). Israel’s overall productivity was USD 54,510.40, and the amount of patents granted was 74/1,000,000 people.