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WEEKLY NEWSLETTER
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Israel
Index
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.
Data as of December 1988
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