Israel - ECONOMY

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Israel - The Economy

SINCE THE FOUNDING of Israel in 1948, the Israeli economy has experienced two distinct periods: one spanning the years 1948 through 1972, and another stretching from 1973 to 1988. The three prominent features of the Israeli economy during the first period were the ingathering of the exiles (resulting in a very high rate of population growth), considerable importing of capital, and rapid growth of total and per capita gross national product (GNP). During this period, the Israeli economy grew at a very rapid rate, averaging an annual GNP increase of 10.4 percent annually.

Between 1973 and 1986, by contrast, GNP growth declined to about 2 percent per annum, with no increase in per capita output. At the same time, the rate of inflation--which from 1948 through 1972 was in single digits--increased to a high of 445 percent in 1984. In 1975, 1983, and 1984, the Israeli economy came close to exhausting its potential sources of short-term financing to cover its balance of payments deficits.

In July 1985, the government instituted an emergency program to interrupt the hyperinflation that was threatening the survival of the economy. By the end of 1985, the rate of inflation had been reduced to 20 percent. Even more remarkable was the elimination of the government's budget deficit in fiscal year (FY) 1985. At the beginning of FY 1986, the budget deficit remained close to zero. The emergency program ended fourteen years of steadily worsening inflation and devaluations, and reversed years of government overspending. The relative stability the program achieved was seen as the necessary precondition to an assault on the underlying structural shortcomings responsible for the slow growth of the economy since 1973.

Israel

Israel - The Economy - 1948-72

The years immediately following the state's creation in 1948 were difficult for the Israeli economy. The new state possessed no natural or financial resources, no monetary reserves, little economic infrastructure, and few public services. A sizable portion of the existing Arab population fled the new state, while impoverished and afflicted Jewish refugees poured in from the European displaced persons camps and, later, from the Arab countries. In contrast to the 1930s, when Jewish immigrants to the Yishuv (or prestate Israel) had arrived with ample financial and human capital, after 1948 most immigrants lacked the wealth and skills needed by the new state.

The new state had to supply food, clothing, shelter, and employment for its new citizens; set up civil and community services; and establish an independent foreign exchange, monetary, and fiscal system. Given the shortage of private capital, the burden of dealing with these problems naturally fell upon the public sector. The financial capital needed to deal with the influx of immigrants was drawn either from the high level of domestic savings, or from capital imports (such as foreign loans and grants), or foreign private sector investments (such as Israeli bonds). The government's solution to the capital shortage included an austerity program of stringent price controls and rationing. The government also decided to promote investment projects in agriculture and housing through the use of public funds rather than through private capital markets. The public sector thus gained control over a large part of Israel's investment resources and hence over the country's future economic activity.

The result of this long-term state intervention was the development of a quasi-socialist economy, which, in terms of ownership, was divided into three sectors: private, public, and Histadrut, the abbreviation of HaHistadrut HaKlalit Shel HaOdim B'Eretz Yisrael (General Federation of Laborers in the Land of Israel). The Histadrut, the umbrella organization of trade unions, quickly became one of the most powerful institutions in Israel. Although Histadrut-owned enterprises generally behaved like privately owned firms, the collective nature of the labor organization precluded the timely demise of economically inefficient enterprises. Public sector firms were owned by local authorities and quasi-governmental bodies such as the Jewish Agency. As in the case of the Histadrut-run corporations, criteria other than profit maximization dominated the economic operation of these firms.

The Israeli service sector, therefore, became totally dominated by the government and the Histadrut. Histadrut-affiliated cooperatives achieved a near monopoly in such areas as public transport and the production and marketing of many agricultural products. The Jewish Agency acquired Israel's two major banks, which together made up 70 percent of the banking system; and the two largest insurance companies were (and in 1988 continued to be) owned by the Histadrut.

The importance of the government and the Histadrut was not limited to the service sector. They became increasingly involved in the industrial sector as well. Whereas the percentage of plants owned by the public and Histadrut sectors in 1972 was less than 2.5 percent, their share of total industrial employment was 27 percent. Similarly their share of total industrial output in 1972 was 34 percent. This situation continued until 1988, when discussions were initiated to decrease government control of business activity.

The major factor accounting for the increased role in industry of the public and Histadrut sectors was the development of Israel's defense industry. After the June 1967 War and the French arms embargo that followed, the Israeli government decided to build as many domestic weapons systems as it could. In the 1980s, companies such as Israel Aircraft Industries and Israel Military Industries continued to be state owned and among the largest firms in the country. The Histadrut-owned Tadiran Electronic Industries became a major defense contractor and the state's largest electronics firm. Similarly, the government-owned Israel Chemicals Limited and its subsidiaries held the sole rights to mine potash, bromine, and other raw materials in the Dead Sea area. The oil refineries, as well as the retail gas distributors, were also mostly government owned.

Israel

Israel - ECONOMIC GROWTH AND STRUCTURAL CHANGE

Between 1948 and 1972, Israel's GNP rose by more than 10 percent per annum on average. Thereafter, Israel's growth rate slowed to an annual average of 2 percent. Not only was Israel's economic growth rate much lower after 1972, it was also far less stable. The reasons most often cited for this slowdown include a sharp increase in defense spending, the 1982-83 energy crisis, and increased expenditures on social welfare.

A breakdown of Israel's GNP into categories of consumption, investment, government expenditures, and net exports for the years 1960 through 1986, highlights some of the difficulties experienced by a small, open economy burdened with a massive defense expenditure. During this period, Israel experienced chronic current account deficits and increased government expenditures. The trade deficit, which accounted for an average of 20 percent of annual GNP from 1960 through 1964, reached a high of 35 percent in 1973. It declined to 16 percent in 1986, however, primarily because the real value of exports increased while the real value of imports remained unchanged.

Until the June 1967 War, defense spending ranged from 10 to 16 percent of GNP. Between 1970 and 1982, however, defense spending escalated to over 25 percent of GNP--a high ratio, even for the volatile Middle East. A significant share of defense spending originated from military imports. In the aftermath of the October 1973 War, military imports equaled 17 percent of GNP. About onequarter to one-third of this defense expenditure was paid for by United States aid. After 1984 the increase in United States aid reduced the defense burden in Israel virtually to pre-1967 levels. In 1986, the defense burden declined to 10 percent of GNP.

The sharp upturn in world oil prices in 1973 increased the cost of oil imports by more than 3 percent of GNP in that year. The oil price increases of 1979, which occurred at about the same time as the return to Egypt of the Sinai oil fields, are estimated to have had an even more devastating effect on the Israeli economy. The total direct losses to the Israeli economy caused by the increase in energy prices from 1973 to 1982 have been estimated at US$12 billion--the equivalent of one year's GNP.

In addition to these external shocks, the economy had to accommodate substantial increases in spending on domestic welfare programs in the early 1970s. In response to domestic social unrest, the government introduced large-scale social programs to improve education, housing, and welfare assistance for the urban poor. These programs were designed before 1973, but were implemented after the economy had begun to stagnate.

Slowdown of Economic Growth

The economy's behavior during the 1961-72 and 1973-88 periods was starkly different. The growth of capital stock declined modestly from an 8.9 percent annual increase during the first period to a 6 percent annual increase during the second period. A major decline occurred, however, in gross domestic product (GDP). From a 9.7 percent annual growth rate in the first period, GDP fell to a 3.4 percent annual growth rate in the second period. Furthermore, labor inputs (measured either as employed persons or total hours of work) declined from the first to the second period. The annual increase in employed persons from 1961 through 1972 averaged 3.6 percent; employed persons increased only 1.5 percent annually from 1973 through 1981. Similarly, total hours worked increased by an annual rate of 3.9 percent during the first period as compared to 1 percent during the second period. If the growth of the economy is measured as GDP per employed person, then Israeli performance declined from 6.1 percent to 1.9 percent over the two periods. If GDP per hour of work is used, Israel's performance declined from 5.8 percent to 2.4 percent. Finally, if GDP growth is measured per unit of capital, it declined from 0.8 percent a year between 1961 and 1972 to -2.6 percent a year from 1973 through 1981.

Until 1973 the rise in labor and capital productivity was the major growth-generating ingredient in the Israeli economy, accounting for about 43 percent of total output growth and for 72 percent of the increase in output per worker hour. By contrast, beginning in 1973, increases in capital stock accounted for 64.7 percent of total growth. The contribution of labor and capital productivity to total output declined to 18 percent, and its contribution to the increase in output per worker hour declined to 25 percent. Between 1961 and 1981, the relative contributions of capital per unit of labor and of total labor and capital productivity to the increase in labor productivity were reversed. In large part, this reversal explains the slowdown in Israel's growth after 1972.

Three factors apparently led to a decline in the growth of business sector employment from 1973 through 1981. First, the growth rate of new people entering the labor force dropped, primarily because net immigration declined from an annual increase of 3.8 percent in the 1961-72 period to 2.5 percent in the 1973-81 period. Second, because of the increase in the income tax rate at higher levels of income, the average rate of labor force participation among men declined from 73.6 to 64.9 percent, while the rate for women increased from 29.2 to 33.4 percent. Fewer families found it worthwhile for the husbands to work at highertaxed , high-paying jobs; instead, the wives worked at lower-paying, lower-taxed jobs. Finally, the influx of Arab employees from the West Bank and the Gaza Strip declined in the 1973-81 period. In all, the share of business sector employment relative to the whole economy declined from 77.2 percent in the 1961-72 period to 73.6 percent in the 1973-81 period.

By 1988 the potential sources of large-scale net immigration had almost run dry. Since 1979 (as of 1988, 1979 was the last year during which the Soviet Union had permitted large numbers of Soviet Jews to leave) the rate of net immigration had been low; during several years, it had been surpassed by emigration. In 1987 immigration increased slightly, although this addition to the labor pool was insufficient to increase Israel's growth rate. The immigration of Oriental Jews had also decreased significantly by the 1980s. Given the low probability of sizable immigration from the United States or the Soviet Union, observers concluded that a return to the rapid economic growth of the 1950s and 1960s depended on Israel's ability to substitute alternative sources of sustained growth. Possibilities in this area were the new, science-based and high technology industries.

Changes in Investment Patterns

Gross investment reached an exceptionally high level of 30 percent of GNP in the period ending in the early 1970s, but subsequently dropped to 20 percent of GNP in 1986. While this figure is substantially lower than that achieved by earlier Israeli performance, it is internationally an acceptable standard of investment and private savings.

Nonetheless, concern existed in Israel about the extent of public-sector debt. Since 1973 the government has incurred a substantial domestic and foreign debt that has resulted in a significant reduction in the proportion of private savings available for investment. From 1970 through 1983, private savings averaged slightly above 10 percent of GNP. The success of the Economic Stabilization Program adopted in July 1985 in order to cut back on government spending led to an increase in private saving, however; by 1986, private savings stood at 21 percent of GNP.

Unlike the unstable trend in private savings recorded in the banking sector, investment in housing has taken a consistently high share of GNP, hitting a 40 percent peak in 1980. This high level of investment in housing, which many economists argue is not justified economically, further constrained the rise of gross business investment. For example, despite the rise of the share in GNP of gross investment in manufacturing during the 1970s, Israel's 1982- 86 average share of 4 percent clearly is below international norms.

The lack of uniformity in government investment incentives and in the rate of return on capital within the manufacturing sector may be responsible for the mix of Israeli investments. Economists generally agree that inefficiencies have arisen as a result of excessive substitution of capital for labor, underused capacity, and inappropriate project selection. Government policy has been identified as the primary factor causing capital market inefficiencies by crowding out business investment, creating excessively high average investment subsidies, and introducing capital market controls based on inefficient discretionary policy.

The 1967 Law for the Encouragement of Capital Investment provided for the following incentives to "approved-type" enterprises: cash grants, unlinked long-term loans at 6.5 percent interest, and reduced taxes. The Treasury assumed full responsibility for any discrepancy between the linked rates paid to savers and the unlinked rates charged to investors. Because inflation in the mid-1970s reached levels close to 40 percent, the real interest rate paid on long-term loans was close to -30 percent per annum, with a total subsidy on long-term loans reaching a high of 35 percent in 1977. These extremely favorable interest rates and implied subsidies led to an excessive substitution of capital for labor.

The investment system has been characterized by the following factors: private firms generally are not allowed to issue bonds, the government establishes the real interest paid to savers and the nominal interest paid by investors, and the economy is plagued by high and unpredictable rates of inflation. These conditions have maintained an excess demand for investment. The result has been a continuous need to ration loans--and an implicit role for government discretion in project approval. Thus, since the late 1960s, as a result of capital market controls, the government has been making industrial policy.

Changes in Industrial Structure

The industrial structure of the economy can be seen in terms of the allocation of GDP, employment, and foreign capital among the tradable, nontradable, semitradable, and service sectors. The tradable sector includes agriculture, manufacturing, and transportation; nontradables include public services and construction; and semitradables include business and financial services, commerce, tourism, and personal services. Public services include the activities of government, national institutions, and local authorities; education, research, and scientific organizations; health, religious, political, and trade-union groups; and defense.

Up to 1981, the economy allocated approximately 40 percent of its GDP to the tradable sector and about 33 to 35 percent to the nontradable sector. This distribution was mirrored in the allocation of civilian employment across the two sectors. The size of the public service sector in 1981 was 21 percent of GDP and 28 percent of civilian employment. Some economists argue that this latter figure is very high relative to the international norms for a developing country. They are not high, however, when compared to developed socialist countries in Europe. Some economists also argue that Israel's high level of nontradables can be explained by the high level of capital inflows from abroad, by a high demand for public services and construction as a result of immigration, and by defense needs.

From 1955 through 1972, the real output of tradables increased relative to that of nontradables. Most of this increase was attributable to the importance of physical capital in the form of machinery and increased productivity. After 1972 the importance of machinery declined, while that of labor increased. Educated workers were being absorbed into the public and financial services; simultaneously, manufacturing productivity was declining. Increased demand favored nontradables, and the share of tradables in both employment and output further declined. The overriding factor remained the rapid increase in the educated labor force.

Changes in Labor Force

In the 1950s and 1960s, through a state effort to absorb the large number of immigrant children into the public school system, the government assured itself of a future supply of educated workers. The demand for more educated workers was provided by the rapid expansion of public services, which are inherently humancapital intensive. Growth in public services resulted from the rapid and sustained economic growth that lasted until the early 1970s, and from the high rate of population growth.

In the 1970s, the education level of the labor force continued to rise markedly. Unlike the experience of other Western economies, the increased supply of educated workers in Israel did not, on average, depress the relative wage level of those with more schooling; nor did it markedly worsen the employment condition of more educated workers as compared with workers with a secondary education. The continued increase in demand for education-intensive services and for more sophisticated goods and services generally have so far precluded the negative effects experienced in other countries. The widespread high level of human capital is expected to continue into the twenty-first century as long as investment in education continues to be profitable.

Israel

Israel - The Economy - THE PUBLIC SECTOR

The two most important tools of economic policy in Israel have been the budget and foreign exchange control. Through the budget, the government can deal with all financial activities of the public sector. Defined in its broadest terms, the public sector includes the central government, local authorities, and national institutions (where the central government clearly dominates). In 1986 government and private nonprofit institutions represented about 20 percent of GDP, which was about a 20 percent increase over the public sector's importance in 1968. Similarly, the provision of government-owned housing and rental services increased by 28 percent, rising from 8.4 percent of GDP in 1968 to 11 percent in 1986. Overall, in 1986 the business sector represented 69 percent of GDP, whereas the public sector, in all of its dimensions, represented 31 percent of GDP.

Government Budget

By 1988 the government had been operating under a deficit for more than a decade. Between 1982 and 1984, the deficit equaled between 12 and 15 percent of GNP. After the implementation of the July 1985 Economic Stabilization Program, the government succeeded in balancing its budget. This balance was achieved not only because the government raised taxes and reduced spending, but also because the reduced inflation increased the real value of tax revenues. During FY 1986, the expansion of the economy compensated for the reduction in direct and indirect taxes. The government also initiated plans to reduce further its public debt.

Before the July 1985 reforms, the tax system was considered to be very progressive on individual income but barely touched corporate income. After the reforms, which included a new corporate tax law, large sums of taxes were collected from business sectors that previously had been untaxed. Personal income tax ranged from a base rate of 20 percent (payable on incomes equivalent to about US$500 per month) to a top rate of 60 percent on a monthly income of about US$2,100. Corporate income tax generally was 45 percent. Few corporations, however, actually paid this rate once various government subsidies were included in the calculation.

Provision of Civilian Services

Civilian public services have employed a high proportion of the labor force and consequently have absorbed a high share of Israel's GNP. Spending on health, education, and welfare services rose from 17 percent of GNP in 1968 to 20 percent in the early 1970s. The level of spending on civilian public services remained constant at about 20 percent through 1986. The share of the total civilian labor force employed in civilian public services rose from 22 percent in 1968 to 30 percent in 1986.

The civilian services primarily responsible for these high outlays were education and health services, whose share increased from 50 percent of the total in 1969 to more than 60 percent in 1986. At the other end of the scale were economic and general services, whose expenditures declined from 33 percent of the total in 1969 to 23 percent in 1986. The share of other welfare services (including immigrant absorption services) remained constant. The decline of general and economic services reflected a transfer of some of these functions from the public sector to the business community and a decline in direct government intervention in the economy.

Unlike social welfare and economic services, which were directly funded by the government, until the early 1970s education and health services received substantial funding from foreign sources. In 1968, for example, the government financed only 70.5 percent of Israel's education services. By 1978 the government's share had increased to 84.5 percent. Whereas in 1968 the Jewish Agency financed about 20 percent of the total national expenditure on education from foreign aid funds, by 1978 only 7.6 percent came from foreign aid, and this percentage has decreased further since. The result was an added burden on the taxpayer, equal to approximately 22 percent of the national expenditure on education. Direct private financing of education expenditures contracted from 9.5 percent of the total in FY 1968 to 1.7 percent in FY 1978. The key element explaining this latter drop was the institution of free, compulsory secondary education in the late 1970s.

Health services' funding followed a similar pattern. The government's share rose from 53 percent in 1968 to 62 percent in 1980. Here, however, the Jewish Agency's participation decreased even more sharply, from 20 percent of the total national expenditure on health in 1968 to nearly zero in 1980. The added burden of government financing from internal sources over the decade was almost 30 percent.

In both health and education, the trend illustrated a transition from foreign financing to internal resources and a switch from direct private financing (and independent fundraising by nonprofit institutions) to the imposition of a greater burden on the central fiscal system. In the past, when these services were expanded, the cost often was carried by aid from abroad. As this source began to dwindle, the cost increasingly shifted to the government, which for political reasons could not reduce these public civil expenditures.

Provision of Defense Services

Throughout its existence, Israel has been obliged to devote a considerable part of its resources to national defense. Since 1973, Israel's annual defense expenditure has equaled that of the Netherlands and exceeded that of Sweden. In per capita terms, Israel's expenditure has been two to three times as large as theirs. Defense expenditures in the Netherlands and Sweden each amounted to 3 to 4 percent of GNP in FY 1976; in Israel, they amounted to more than 25 percent of GNP. The persistence of a high defense expenditure over a very long period makes Israel's situation unique.

The simplest definition of the defense burden is the total budgeted resources diverted to defense and thus precluded from other uses by citizens. Other resource costs include the opportunity cost of labor working for the defense sector and therefore unavailable to other sectors, thus reducing civilian output. Finally, foreign currency spent on military imports is unavailable for civilian imports.

Although estimates of the defense burden suffer from inadequate data, the Central Bureau of Statistics publishes data on the noncivilian component of public consumption, which is used as a proxy for defense expenditures. Apart from the war years of 1967 and 1973, the annual fluctuations have been dominated by long-term changes in defense costs (commonly referred to as "ratchets" or step functions). By 1986 defense expenditure had declined to a range from 10 to 16 percent of GNP, depending on the measure used.

These official data do not include information on forfeited earnings of conscripted soldiers, forfeited earnings of persons on reserve duty, and costs of casualties, stockpiling, civil defense, land devoted for army training, and many other government and civilian expenditures ascribed to defense. Although it is impossible to assign a rough order of magnitude to the items mentioned, some economists have speculated that they are not insignificant components of the civilian public sector. This becomes clear when one considers that the length of time devoted to conscription, reserve duty, and regular army duty has been lengthened. Government defense functions involved in operations in the West Bank and the Gaza Strip add a further cost to the defense burden.

The cost of defense also includes direct defense imports and military aid from the United States. In FY 1986, Israel received United States military aid in the range of US$3 billion. A large share of these funds has regularly been spent in the United States.

On the other side of the defense-burden equation are the beneficial by-products associated with military activity. The most important benefits are education, absorption of immigrants, agricultural settlement, and the development and manufacture of weapons and equipment. An example of these beneficial by-products was the development of the Kfir interceptor, which created jobs for technicians and laborers. In short, when estimating Israel's defense burden it is important to consider the cost reductions implicit from these beneficial by-products.

Taxation

From 1961 to 1983, government expenditures grew far more rapidly than Israel's GNP, primarily because of the sharp increase in defense outlays from the latter half of the 1960s through the 1970s. Taxation was insufficient to finance the increase in government spending. Although gross taxes increased, net taxes declined continuously during the period. To meet the deficit, the government resorted to domestic and foreign borrowing.

By the mid-1970s, the government increasingly relied on foreign sources to finance the domestic deficit. These growing debts were equivalent to almost 14 percent of each year's GNP, during a time when GNP was growing at less than 2 percent a year.

In the second half of the 1970s, the tax system collected approximately 47 percent of GNP, compared with 35 percent in the 1960s and 41 percent in the first half of the 1970s. This rise occurred mainly in direct taxes and taxation of domestically produced goods, while taxes on imports declined by a small margin. During FY 1981, direct taxes represented 25.7 percent of GNP; they were 14.3 percent of GNP in FY 1961. Taxes on domestic production represented 12 percent of GNP in FY 1981, a decline from the FY 1961 high of 13.9 percent. The introduction of the value-added tax on both domestic and foreign goods added a tax base of 8.7 percent of GNP in FY 1981.

In FY 1986, income taxes collected represented 33 percent of GNP. Value-added taxes represented 20 percent of GNP and customs duties represented 4 percent of GNP. In late 1987, the government announced plans to revamp the tax structure in the light of the 1985 Economic Stabilization Program.

Israel

Israel - INDUSTRY

The Histadrut directly owns or controls a significant portion of Israeli industry. The separation of industries among the public, private, and Histadrut sectors of the economy, however, is not a simple one. Many important enterprises are partners with either or both the Histadrut and the government. Most big industrial concerns, such as the Nesher cement and Shemen vegetable oil plants, are owned either solely by Histadrut (through its industrial conglomerate, Koor Industries) or in partnership with private investors. About 10 percent of FY 1985 industrial output was produced by joint ventures of the private and Histadrut sectors.

In FY 1985, private-sector industrial ownership was as follows: electronics, 51 percent; textiles, 92 percent; clothing, 97 percent; machinery, 61 percent; food and tobacco, 60 percent; leather goods, 80 percent; wood products, 72 percent; paper products, 81 percent; and printing and publishing, 86 percent.

Manufacturing, particularly for export, has been a major component of GDP. In FY 1985, manufacturing contributed 23.4 percent of GDP. Industrial production grew at a rate of 3.6 percent in 1986, compared with 3 percent in 1984. Most of this growth has been in export products. For many years, export growth was led by the electronics and metallurgic industries, especially in the field of military equipment. In the 1980s, exports from the textile, clothing and fashion industries expanded, as did exports of food products of various sorts. Following a slump in the 1980s, diamond exports made a strong recovery after 1985.

<>Electronics
<>Biotechnology
<>Diamonds
<>Chemicals, Rubber, and Plastics
<>Clothing and Textiles
<>Tourism
<>Energy

Israel

Israel - Electronics

In the 1980s, high-technology industries received the greatest attention from the government. Israeli electronics companies competed worldwide and in some cases were leaders in their fields. Israel's Scitex was a leading image-processing firm, Laser Industries led in laser surgery, Elbit led in defense electronics, and Fibronics led in fiberoptic communication. In 1985 the electric and electronic equipment industry represented 4.5 percent of industrial establishments, 12 percent of industrial employment, and almost 13 percent of industrial revenues.

Despite the success of the electronics industry in the 1980s, experts predicted that in the 1990s this sector will face a shortage of engineers and technicians. A major reason for this shortage is the lower net pay for engineers in Israel relative to the United States. An identical 1985 gross salary of US$30,000 in Israel and in California would generate a net income of US$9,000 in Israel and US$20,000 in California. Although the Israeli would consume a higher amount of social services than his or her counterpart in California, a wide gap would remain between the two salaries. As long as this gap exists, Israel will have difficuly keeping skilled engineers.

Israel

Israel - Biotechnology

Israel's biotechnology industry is relatively new and an offspring of its American counterpart. Its creation in the late 1960s resulted from the establishment in Israel of subsidiaries of foreign pharmaceutical companies. The first of these was a subsidiary formed by Miles Laboratories with the Weizmann Institute of Technology, called Miles-Yeda. This was followed by the Hebrew University-Weizmann Institute subsidiary, Ames-Yissum. Over time, these firms became wholly Israeli-owned entities. Gradually, foreign venture capitalists began to initiate other independent biotechnology entities in Israel. As of the early 1980s, Israeli venture capitalists had begun creating their own science-based entities.

Many economists call biotechnology a "natural" Israeli industry. Its primary input has been data from research and university laboratories. The only other major ingredient has been American capital to support research and development activity. The main areas of research in the mid-1980s included genetic engineering, human and animal diagnostics, agricultural biofertilization, and aquatic biotechnology.

Israel

Israel - Diamonds

Israel's diamond industry in the 1980s differed considerably from its 1950s version. Until the early 1980s, a handful of large firms dominated the Israeli diamond industry. The nucleus consisted of European Jewish cutters who had immigrated during the Yishuv. In the 1970s, Israel surpassed <"http://worldfacts.us/Belgium-Antwerp.htm"> Antwerp as the largest wholesale diamond center, accounting for more than 50 percent of all cut and polished gem diamonds. Diamonds were the only export in which Israel was more than a marginal supplier.

Unlike other industries, the diamond industry was affected entirely by external factors not under Israeli control. The diamond industry imported rough diamonds, cut and polished them, and then exported them. The slump in the industry from 1980 through 1982 surprised many Israeli firms that had speculative stockpiles. The result was a complete restructuring of the industry in FY 1984, and the creation of approximately 800 new and smaller manufacturing units. These small entities in mid-1986 concentrated exclusively on cutting, leaving the marketing to larger export firms. This latter task was supported by the 2,000-member Israel Diamond Exchange and the 300-member Israel Precious Stones and Diamonds Exchange, together with the quasi-governmental Israel Diamond Institute.

The success of this revitalization can be seen in the trade figures for the industry. In 1982 net diamond exports were US$905 million, equal to 18 percent of total exports; in 1986, however, diamond exports had grown to nearly US$1.7 billion, or approximately 24 percent of total exports.

Israel

Israel - Chemicals, Rubber, and Plastics

The chemical industry began in the early 1920s, when a small plant was started to extract potash and bromine from the Dead Sea. In the past, the chemical industry concentrated on the sale of raw materials, such as potash and phosphates, and their processed derivatives. In the early 1980s, the industry undertook a comprehensive research and development program, which has substantially transformed it. Helping Israel to become one of the world's largest chemical-producing nations was the industry's development of new treatment processes for ceramics, glass, textiles, plastics, and wood. In 1986 the chemicals, rubber, and plastics industries together provided 15.6 percent of total industrial sales and engaged 11 percent of the industrial labor force.

In the 1980s, Israel Chemicals Limited (ICL)--a governmentowned corporation--was the largest chemical complex and also dominated Israel's mineral resources industry. Its subsidiaries included the Dead Sea Works, Dead Sea Bromine, and Negev Phosphates. ICL also was parent to smaller research, desalination, telecommunications, shipping, and trucking firms. In addition, ICL owned Amsterdam Fertilizers in the Netherlands and Broomchemie, Guilin Chemie, and Stadiek Dunger in the Federal Republic of Germany (West Germany).

In the plastics field, Kibbutz Industries Association--a member of the Histadrut--accounted for more than 60 percent of Israel's plastics output and more than 75 percent of plastics exports. Virtually all the successful plastics establishments were kibbutz owned.

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Israel - Clothing and Textiles

During the mid-1950s, Israel, like other developing countries, promoted the textile and apparel industry to be a ready source of employment. By 1985 the textile and clothing industry was represented by 1,523 establishments. These businesses employed about 46,000 workers (representing 15 percent of industrial workers) and earned revenues equal to approximately US$13 million, or 8.8 percent of total industrial earnings. In 1988 Israel continued to promote this industry as a source of employment for unskilled and semiskilled immigrants and for local Israeli Arab labor.

The textile and apparel industries were characterized by many small firms and a few large, vertically integrated companies (including Polgat Enterprises, considered one of the most efficient producers in the world). Like other Israeli industries, the textile and apparel industry depended for its survival on its ability to export to Europe and the United States. Given the generally high tariff barriers in Europe and the United States on such products, the agreement Israel signed with the European Economic Community (EEC) in 1977, the Israel-EEC Preferential Agreement, as well as the United States-Israel Free Trade Area Agreement (as of 1987) have lowered and will lower further these tariffs, thus making Israeli textile and apparel products marginally competitive. Duty savings were not expected to play a major role in increasing Israel's trade competitiveness in these markets as long as Israeli wages in these industries were higher then comparable wages in Asia. Because they pay higher wages, Israeli textile and apparel producers have continued to concentrate on the more expensive segment of the market.

Israel

Israel - Tourism

Tourism has always been an important source of foreign currency for Israel. In 1984 this industry earned US$1.08 billion. The Israeli airlines earned an additional US$210 million in touristrelated business. In 1986, 929,631 tourists arrived by air and 18,252 arrived by sea. Another 17,563 tourists arrived from Jordan by land via the Allenby Bridge. Sixty percent of total 1986 tourists originated in Europe, an additional 20 percent originated in the United States.

Although the 1986 figures are respectable, they represent a decline by 13 percent over the preceding three years. Moreover, the 1986 figure for American tourists is 41 percent lower than comparable figures for the years 1983 through 1985. This decline in tourism to Israel in 1986 reflected a general decline in American tourism to the Middle East, which was caused by security considerations and by a weakening of the United States dollar against European currencies.

Israel

Israel - Energy

Israel depends almost totally on imported fuel for its energy requirements; domestic production of crude petroleum and natural gas is negligible. After the June 1967 War, Israel acquired a large portion of its oil supply from captured Egyptian fields in the Sinai Peninsula. In 1979 these fields were returned to Egypt. Exploration within Israel was continuing in the mid-1980s, with interest centered on the Dead Sea and northern Negev areas, as well as in the Helez region along the coastal plain near Ashqelon. Despite having spent about US$250 million between 1975 and 1985 searching for oil, Israel remained almost devoid of domestic energy sources. By 1986 domestic and foreign oil exploration in Israel ground to a near halt, although Occidental Petroleum (headed by Armand Hammer) continued its seismic studies in preparation for future drilling.

Because of the failure to find economically worthwhile deposits of fossil fuels, Israel has devoted large sums to developing other energy sources, particularly solar energy. In fact, Israel has long been an acknowledged leader in this field. Overall, the structure of Israel's energy economy has changed considerably since 1973. Between 1982 and 1984, about 50 percent of Israel's electricity came from coal. By 1985 oil-to-coal conversion programs made coal the source of 17 percent of Israel's primary energy. It appeared unlikely in 1988 that a major improvement in Israel's energy balance would occur.

The Arab oil embargo and the Iranian Islamic Revolution have forced Israel to diversify both its coal and oil imports. In 1986 Israel's major sources of coal were Australia, South Africa, and Britain. The bulk of Israel's oil came from Mexico and Egypt.

Israel

Israel - AGRICULTURE

Historically, agriculture has played a more important role in Israeli national life than its economic contribution would indicate. It has had a central place in Zionist ideology and has been a major factor in the settlement of the country and the absorption of new immigrants although its income-producing importance has been minimal. As the economy has developed, the importance of agriculture has declined even further. For example, by 1979 agricultural output accounted for just under 6 percent of GDP. In 1985 agricultural output accounted for 5.1 percent of GDP, whereas manufacturing accounted for 23.4 percent.

In 1981, the year of the last agricultural census (as of 1988), there were 43,000 farm units with an overall average size of 13.5 hectares. Of these, 19.8 percent were smaller than 1 hectare, 75.7 percent were between 1 and 9 hectares, 3.3 percent were between 10 and 49 hectares, 0.4 percent were between 50 and 190 hectares, and 0.8 percent were more than 200 hectares. Of the 380,000 hectares under cultivation in that year, 20.8 percent was under permanent cultivation and 79.2 percent under rotating cultivation. The farm units also included a total of 160,000 hectares of land used for purposes other than cultivation. In general, land was divided as follows: forest, 5.7 percent; pasture, 40.2 percent; cultivated, 21.5 percent, and desert and all other uses, 32.6 percent. Cultivation was based mainly in three zones: the northern coastal plains, the hills of the interior, and the upper Jordan Valley.

Agricultural activities generally were conducted in cooperative settlements, which fell into two principal types: kibbutzim and moshavim. Kibbutzim often served strategic or defensive purposes in addition to purely agricultural functions. In the 1980s, such settlements usually engaged in mixed farming and had some processing industry attached to them. A moshav provides its members with credit and other services, such as marketing and purchasing of seeds, fertilizer, pesticides, and the like. By centralizing some essential purchases, the moshavim were able to benefit from the advantages of size without having to adopt the kibbutz ideology.

The agricultural sector declined in importance from 1952 to 1985. This decline reflects the rapid development of manufacturing and services rather than a decrease of agricultural productivity. In fact, from 1966 through 1984, agriculture was far more productive than industry.

Efficient use of the factors of production and the change in their relative composition explain a significant portion of the increased productivity in the agricultural sector. From 1955 to 1983, the agricultural sector cut back on employed persons and increased the use of water, fertilizer, and pesticides, leading to a substantial increase in productivity. Other factors that contributed to increased productivity included research, training, improved crop varieties, and better organization. These changes in factor utilization led to a twelvefold increase in the value of agricultural production, calculated in constant prices, between 1950 and 1983.

In absolute terms, the amount of cultivated land increased from 250,000 hectares in FY 1950 to 440,000 hectares in FY 1984. Of this total, the percentage of irrigated land increased from 15 percent in FY 1950 (37,500 hectares) to around 54 percent in FY 1984 (237,000 hectares). The amount of water used for agricultural purposes increased from 332 million cubic meters in FY 1950 to 1.2 billion cubic meters in FY 1984.

The most dramatic change over this period was the reduction in the agricultural labor force. Whereas the number of workers employed in agriculture in the early 1950s reached about 100,000, or 17.4 percent of the civilian labor force, by 1986 it had dropped to 70,000, or 5.3 percent of the civilian labor force.

Agriculture has benefited from high capital inputs and careful development, making full use of available technology over a long period. Specialization in certain profitable export crops, in turn, has generated more funds for investment in agricultural production and processing, as has the development of sophisticated marketing mechanisms. In particular, Israel has had success in exporting citrus fruit, eggs, vegetables, poultry, and melons.

Another factor important in Israel's agricultural development has been the sector's impressive performance in foreign trade. The rapid growth of agricultural exports was accompanied by a general increase in total exports. Between 1950 and 1983, a prominent development was the decline (by 65 percent) in the importance of citrus fruit exports in relation to total raw agricultural exports. This decrease was more than balanced by the increase in importance of processed agricultural products, whose exports increased by 4,000 percent over the same period.

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