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WEEKLY NEWSLETTER
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Israel
Index
View of the National Water Carrier that brings water from
the north to foster agriculture in the Negev
Courtesy Embassy of Israel, Washington
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--see Glossary).
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.
Data as of December 1988
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