Israel-CHAPTER 3 - The Economy

A woman with a hat typical of headgear worn by kibbutz members

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--see Glossary). 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--see Glossary) 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.

Data as of December 1988