Israel’s Economy: Stunned But Still Strong

September 2, 2014

5 min read

Despite the numerous setbacks suffered in Operation Protective Edge, Israel’s economy remains resilient. Amid news of massive budget cuts needed to pay for the latest war and losses to the tourism and retail industries, statistics from many sources project a rapid economic recovery and continued growth of one of the world’s most vibrant small economies.

The war in Gaza has taken a significant economic toll on Israel, felt most sharply by the tourism sector, which comprises some 7 percent of Israel’s economic activity. Israel’s Ministry of Tourism reported that tourism for July dropped by 26 percent from the same period last year, representing a loss of at least $566 million.

Hardest-hit from the ongoing war are the businesses in the south of the country, where the majority of the Hamas rockets hit. Stores and restaurants have suffered from a drop in sales, while manufacturing facilities close to the Gaza border have been impacted by slowdowns in manufacturing due to incessant rocket alerts.

Israel’s Manufacturers Association estimated the total economic impact on Israeli manufacturers for the first round of the conflict at about 1.2 billion shekels.

A number of economic studies indicate, however, that these setbacks are likely to be temporary, with the overall forecast for the country remaining positive. In a study published in early August, Dr. Adam Reuter, former senior officer at the Bank of Israel and the head of several investment firms, found that over the last 30 years Israel’s economy has enjoyed vigorous and sustained growth that continues to this day.

Between 1984 and 2014, Israel’s gross domestic product (GDP) increased tenfold from ‎‎$30 billion to $300 billion, while per-capita GDP rose from $7,000 to ‎‎$38,000. Negative indicators fell likewise:  The public debt-to-GDP ratio shrank from 280 percent to 66 percent, the external ‎public debt-to-GDP ratio fell from 55 percent to 10 percent, and the budget deficit-to-‎GDP ratio declined from 17 percent to 3 percent.

Over the same time period the defense budget as a percentage of the GDP went down from ‎‎20 percent to 6 percent, and annual inflation plummeted from 450 percent to 1 percent.

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Further numbers from this study reveal Israel’s impressive performance in the global market: Foreign ‎exchange reserves rose from $3 billion to $89 billion, and annual exports climbed from $10 billion to ‎‎$90 billion, of which hi-tech exports accounted for $28 billion in the last year compared to just $1 billion 30 years ago.

The recent war in Gaza is not expected to inflict any lasting damage on economic performance, noted Yoram Ettinger, a former ambassador for Israel and a longtime consultant to the Israeli government. In all three previous wars – the 2006 Lebanon War and the previous two operations in Gaza in 2009 and 2012 – the reaction of the economy has been one of brief downturn followed by rapid and complete recovery, “a ‘V’ and not ‎a ‘U’ shaped graph,” Ettinger wrote in a letter published last week.

The consultant noted that according to the Bank of Israel, “the 2006 war against ‎Hezbollah triggered an immediate drop of GDP from more than 6 percent to a ‎negative growth of 1.5 percent, followed by a swift recovery to almost 10 percent ‎growth in the following quarter.”

Operation Protective Edge is expected to lower Israel’s 2014 GDP by 0.5%, but will likely have “insignificant influence on foreign investors, most of whom seek Israeli high-tech companies, which are minimally vulnerable to rocket and missile fire,” he added. With the Israeli military’s emphasis on minimizing civilian casualties and its focus on defensive rather than offensive technologies, the economy may even receive an incidental benefit from the war: “The ‎expanded global interest in Israeli-developed and manufactured, battle-‎tested defense systems (e.g., Iron Dome, Trophy, etc.) – which ‎demonstrated their unique capabilities during the Gaza war – is expected to ‎bolster a quick recovery and the continued growth of Israel’s economy,” Ettinger explained.

Despite its size, Israel is currently the world’s top exporter of drones and the world’s co-leader ‎‎(along with the U.S.) in the development, manufacturing and launching of ‎small and medium-sized satellites. It is the second-largest cyber exporter in the world, with receipts three times larger than those of Britain. With the continued discovery and development of offshore natural gas reserves, Israel is also an emerging natural gas power.

Multiple industry reports tell the same story: The Israeli economy has posted impressive gains matched by few economies in the world, and its performance now positions the tiny country as one of the most attractive centers for investors. In February the 2014 International Monetary Fund report on Israel stated that despite the country being “exposed to a series of economic shocks, ‎including the global crisis and heightened geopolitical tensions in the Middle ‎East,” its GDP has grown by an average of 4 percent over the past five years, ‎compared with 0.7 percent for OECD countries. “Per capita GDP grows ‎more rapidly [in Israel] than in other OECD countries,” the report emphasized.

Amb. Yoram Ettinger
Amb. Yoram Ettinger

In 2013, the three leading credit rating companies maintained high ratings for Israel while lowering that of other developed countries. Meanwhile the OECD’s annual 2013 report found that Israel is the fourth most attractive country for foreign direct investment per GDP with a rating of 4 percent, ‎compared to 1.6 percent in the top 16 economies.

Commenting on these dazzling achievements, Ambassador Ettinger sent a message for the “boycott and divest” anti-Israel activists: “In contrast to those who wish to boycott Israel, 2013-2014 has highlighted ‎Israel’s expanding trade and investment global network, especially with the ‎surging economies of China, India and South Korea,” he pointed out. ‎

The emergence of the Asian economies has given Israel an alternative trading partner to Western countries that are becoming increasingly critical of Israel. “The dramatic expansion of Israeli exports to India, China, South Korea and other Asian markets has bolstered our ability to withstand European and American pressure on Israel,” Ettinger told Tazpit News Agency.

“When Israel becomes the largest defense exporter to India it will certainly strengthen our relations with one of the strongest emerging economies in the world,” he went on to say. “When we develop unique medical and defense and energy and satellite technologies, that makes it more difficult on the world to pressure Israel, due to the growing need for Israeli-developed and manufactured products.”

The analyst pointed to several factors and “unique resources” that have propelled Israel to consistent economic success in the face of global economic upheavals and the slowdown of the Western economies. One is the country’s renowned intellectual capital, including the world’s highest per-capita supply of scientists and engineers. However, Ettinger explained that it is actually the challenges facing Israel, rather than advantages, that have spurred innovation and development.

For instance, the unique limitations posed by its desert geography have led Israel to develop unique agricultural technologies, such as the drip irrigation now used around the world. The comprehensive lack of natural resources, fresh water, arable land and living space has fostered an innovation mentality among Israeli entrepreneurs, leading to the development of unique niches in its agricultural, energy and commercial industries.

Beyond these hurdles, Ettinger told Tazpit, is the unexpected benefit of coping with a “unique security challenge that has confronted us with systematic war and terrorism, prompting a series of cutting-edge technologies in response to such challenges and threats.”

He noted that “Israel’s defense forces have had to respond to the continuous challenge posed by the hostile military forces and terrorist organizations equipped with military systems supplied to them by many countries.” As a result, he said, “the IDF has established its own hi-tech force which has not only generated defense technologies but has also given birth to numerous commercial applications of those defense technologies.”

Therefore, Ettinger explained, “while global exports have suffered a severe decline, Israeli exports have sustained their high level due to the demand for the unique medical, agricultural, IT and defense technologies” that it develops.

“Is time working for or against Israel?” asked Ettinger in last week’s letter. He concluded that time has been firmly on Israel’s side. “The economic indicators from ‎‎1948 until today confirm that Israel has experienced splendid economic ‎integration and unprecedented economic growth, in defiance of ongoing ‎war, terrorism, boycotts and international pressure.‎”

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