Dear Readers, This pamphlet briefly describes the development of the Israeli economy during the first 50 years of the state, as reflected in its national accounts. A complete series of accounts is published annually in the Statistical Abstract of Israel, as well as in other publications of the Central Bureau of Statistics. Longitudinal survey data are presented in National Accounts of Israel, 1950-1997, Dec. 1998. Sincerely, Joseph A. Yahav The Government Statistician Major developments Percent average annual change

1950- -1965 1966- -1967 1968- -1972 1973- -1977 1978- -1984 1985- -1989 1990- -1996 1997-1998 Gross domestic product per capita 5.5 -1.2 8.6 0.8 1.2 2.1 2.4 - 0.2 Private consumption per capita 4.9 -0.8 5.1 2.3 2.8 4.2 3.6 1.2 Civilian public consumption 9.5 5.1 6.7 5.3 2.2 2.3 5.0 1.8 Capita formation in residential building 4.8 -26.2 30.8 -5.6 0.9 -0.5 11.3 - 3.6 Fixed capital formation of economic branches 7.4 -15.2 18.9 -1.4 3.7 0.6 15.0 - 2.5 Exports of goods and services 19.7 9.4 16.0 7.7 4.5 5.6 7.5 6.8 Imports of goods and services 8.4 4.4 14.5 6.0 3.7 3.6 10.8 2.4 Increase of product prices 12.8 4.4 9.1 33.9 133.- 6 60.8 13.3 8.0

Graphs

1950-1965: Immigration and Rapid Growth

Until the middle of the second decade of statehood, the Israeli economy grew more rapidly than most developed countries (at an annual average of 11%). Contributing to this performance were the low level of product at the beginning of the period (since small absolute changes are expressed as sharp relative increases) and mass immigration, which was reflected in a growing national population and labour force. (The population doubled in the first four years of this period and then continued to expand rapidly at an annual average of 4%). Another contributory factor was the increase in capital stock, occasioned by massive imports of capital goods which were paid for through loans and grants from abroad.

GDP per capita also grew rapidly over this period, an annual average of 5-6% - a notably high rate in comparison with other countries. In 1953, the purchasing power of Israel's per-capita product was 30% of that in the United States; in 1965, it came to one half.

The development of the business sector and the change over to a modern economy contributed to the growth in the GDP; this was reflected in the gradual decline in the share of the agriculture branch and an increase in the share of business and financial services, transport, water and electricity.

Throughout this period there was a marked growth in exports; exports of goods and services, at constant prices, expanded by an annual average of 20% and in 1965 they had reached five times the 1950 level - 21% of GDP.

Imports of goods and services, at constant prices, increased by an annual average of 8% in the 1950-1965 period. Imports exceeded exports throughout this time, such that, despite strong export growth, there was a widening of the import surplus which was financed by loans and grants.

The rapid increases in GDP and import surplus, for which Israel paid by taking credit and by receipt of unilateral transfers, allowed net resources available to the economy (in GDP and in the import surplus) to expand by 10% on annual average.

These resources were used to boost private consumption at an annual rate of 10% per annum, i.e. 5% per capita.

As the standard of living rose, the composition of consumption changed: a larger share of expenditure went for private health, education and culture services, improvement in housing conditions and durable goods. Concurrently, the share of consumption of basic necessities such as food, declined.

General government civilian consumption expenditure also increased. Expenditure for education, health, welfare, and administration services rose rapidly (at 15% on annual average) until 1955, as the public services took shape and mass immigration was absorbed. Between 1956 and 1965, the growth rate slowed to 7% on annual average.

Defence consumption fluctuated widely. Defence expenditure contracted in 1952, following the implimentation of a new economic policy including a large non-recurrent currency devaluation and credit restrictions. Defence spending rose sharply in 1954-1956, until Operation Kadesh (the "Sinai Campaign"); subsequently fell by one third afterwards; and then climbed again in 1961-1965. Over the whole period, defence consumption increased by 10% on annual average, similar to the rate of civilian consumption.

In order to finance the public services, the tax burden was raised to 25% of GDP at the end of the period as against 15% at the beginning. The increase in transfers to households, from domestic and foreign sources, offset only some of the increase in the tax rate.

Net national saving was 10% of disposable national income in most years during this time. Private sector saving came to 15% of disposable private income, and the government sector saving was negative for most of the period.

1966-1967: Economic Slowdown

Israel experienced an economic slowdown in 1966-1967, GDP expanding by only 1-2% each year. Business-sector product was flat, labour input contracted, and the unemployment rate rose sharply. However, as the labour input in the business sector declined, labour productivity increased.

The downturn was especially noticeable in investment in fixed assets. Investment in construction of dwellings declined sharply - especially government initiated investment and non-residential investment contracted by 15% per year, including all types of investment: buildings, infrastructure, transport equipment, and other machinery and equipment.

Growth in private consumption expenditure also slowed noticeably during those years; total per-capita expenditure was unchanged and households' expenditure for durable goods, clothing, and footwear fell markedly.

In contrast, general government consumption expenditure increased rapidly, mainly due to the upturn in defence expenditure, because of the Six Day War.

Exports of goods and services continued to rise strongly , at 9% on annual average, while the growth rate of imports of goods and services slowed to 4-5%. Thus, the deficit on goods and services account decreased from 18% of GDP in 1965 to 14% in 1967.

Net national saving declined steeply to 3% of disposable national income as against 10% in most previous years. The downturn in saving was affected by a notable increase in the government deficit - resulting from the upturn in defence spending - and an increase in transfers to households. Private savings remained at the level of previous years - 15% of private disposable income.

1968-1972, After the Six-Day War: Trade with the Territories Begins and Labour Force from the Territories Integrates into Production in Israel

The 1968-1972 period, following the Six-Day War, was typified by strong growth in GDP;. total GDP expanded by an annual average of 12% and the business sector product grew by 14%. A contributory factor in these increases was the onset of trade with Judea-Samaria and Gaza and a large increase in the labour force as workers from the territories were integrated into the domestic economy.

The resources available to the economy (from domestic production and imports) grew notably (13% on annual average). The additional resources were directed mainly to investment in fixed assets in order to expand capital stock along with the increase in the labour force.

Exports of goods and services also grew strongly (at 16% per year) reflecting, inter alia, a marked increase in income from tourism and the beginning of trade with Judea, Samaria and the Gaza Area. Exports to the territories expanded swiftly and reached 8% of total goods and services in 1972.

Private consumption expenditure per capita grew by 5% on annual average during this time. Concurrently, the change over from expenditure on basic commodities to "luxuries" such as private health, education, and culture services, as well as improved housing conditions, continued apace. Expenditure on durable goods - home appliances and furniture and private motor vehicles rose particular strongly.

Much of the added resources were channeled to general government consumption expenditure, especially defence expenditure; defence expenditure grew by 13% per annum during these years. Expenditure on civilian services - education, health, welfare, etc.- climbed by 7% per year.

Net national saving remained rather low in 1968-1970 - at 3-4% of national disposable income because of large government deficits. In 1971-72, net national saving climbed markedly to 13% of income due to the increase in private saving.

1973-1977: The Yom Kippur War and the Oil Crisis, High Inflation Sets In

In 1973-1977, the growth rate (GDP) slowed to an annual average of 4% and inflation surged. By the end of the period, GDP prices were rising at an annual rate of 44% These developments were caused in part by a decrease in output during and after the Yom Kippur War and an increase in prices of raw materials pursuant to the oil crisis.

Most of the increase in GDP during these years reflected an upturn in public and community services (6-7% on annual average); GDP of the business sector rose by an annual average of only 2%. The share of financial services rose while that of industry and construction decreased.

The slowdown in activity was reflected in a decline in investments in fixed assets. Non-residential fixed capital formation - in machinery, transport and other equipment, and in construction work contracted by 1.2% on annual average and capital formation dwellings decreased by 6%.

In contrast, private consumption expenditure slightly outpaced GDP growth during these years and grew by 5% on annual average and 2% per capita. Salient increases were observed in household expenditure on travel abroad, clothing, footwear, miscellaneous personal items, and housing. Expenditure on general government consumption grew relatively sharply (at 5% on annual average), mainly due to the increase in defence spending immediately after the Yom Kippur War.

The growth rate of exports of goods and services slowed to 8% on annual average during these years; tourism revenue however rose strongly. The tax rate climbed to 38% of GDP as compared to 31% on average in the previous period. Although transfers to households were enlarged, private disposable income declined because the increase was offset by a decline in private transfers from abroad.

Net national saving decreased to 5% of disposable national income because of a decrease in private saving, which had been high in the previous period. The government deficit rose in the first 3 years of the period, along with the upturn in defence expenditure, but was relatively small in the last two years.

1978-1984: Inflation Soars, Balance-of-Payments Deficit Widens

Inflation gathered momentum in 1978-1984 and came to nearly 400% per year at the end of the period. GDP growth slowed from 4-5% in 1978-1981 to 1-2% in 1982-1984.

During this time, the share of financial services continued to expand briskly and the share of public services in GDP also increased. In contrast, the share of the manufacturing industry in GDP declined and that of agriculture decreased markedly. Labour productivity was almost unchanged over these years.

The sluggish expansion of GDP reflected a severe slowdown in export growth, as diamond exports contracted and exports of other goods and services grew less vigorously.

Investments in fixed assets expanded moderately (at 2% on annual average). Investment in dwellings fell to 1% on annual average but fixed capital formation other than dwellings climbed by 4% because of large increases in investments in imported transport equipment and other machinery and equipment.

General government consumption expenditure grew only by 1% in 1978-1984. Defence consumption expenditure declined sharply after Israel and Egypt concluded their peace treaty and the growth rate of civilian general government consumption expenditure slowed. However, private consumption expenditure grew rather briskly, at 3% on annual average in per-capita terms. Especially conspicuous growth was observed in expenditure for durables; until 1983 purchases of private motor vehicles rose by 20% on annual average, household appliances (television sets, refrigerators, washing machines, etc.) by 23%, and household furniture by 7%. In 1984 these expenditures dropped sharply.

Collection of indirect taxes decreased and collection of direct taxes rose, elevating the tax burden slightly to 39% of GDP. Disposable per-capita private income climbed by 1% per year, outpacing the growth of per capita GDP.

The government debt doubled during these years relative to the previous period and came to three times Gross Domestic Product.

National saving continued to decline and reached a nadir in 1982, when net saving became negative in that year. Saving began to increase in 1983-1984 as the government sector deficit contracted and private saving expanded.

1985-1989: The Economic Stabilization Program, Inflation Falls to 20%

The emergency Economic Stabilization Program (composed of a non-recurrent currency devaluation coupled with an agreement among the Histadrut, the Government, and the Coordinating Bureau of Economic Organizations - representing major employers - to waive the Cost-of-Living Allowance and to impose price control) was activated in July 1985. In the aftermath of this measure, the inflation rate plummeted from 400% to 20%. Gross Domestic Product increased by 4-6% in the first three years after the program was implemented and slowed right down to 1% in 1988-1989.

When the Stabilization Program came into effect, government activity was downscaled and the growth of public consumption levelled off, civilian general government consumption increasing by 2% on annual average and defence consumption fell by 3%.

The decrease in government activity also strongly reduced investment in dwellings at government initiative (by 10% on annual average). The other types of investment private investment in dwellings and non-residential investment in machinery, equipment, and nonresidential construction - remained unchanged. Thus, total investment in fixed assets declined by 2% on annual average.

In contrast, private consumption rose by 6% on annual average. Most of the increase took place in the period immediately following the activation of the Stabilization Program, when relatively large wage increases occurred. In 1986-1989, the exchange rate was held deliberately at a relatively low level and import prices rose less rapidly than GDP prices. These price differentials evidently caused households to spend more on travel abroad and on durable goods.

From 1985 to 1987, exports of goods and services grew at an average annual rate of 7%. However, in 1988 and 1989 the average annual growth rate declined to 1%, owing to a decline in income from tourism due to unrest in Judea, Samaria, and Gaza.

As inflation declined, tax collection increased and the tax rate reached 41% of GDP. Disposable private income per capita increased by only 1% per year, and the rate of private savings decreased.

Net national saving rose in the first two years of the period to 9% of disposable national income due to a sharp fall in the general government deficit. Government income exceeded government spending during these two years because of grants from abroad that came in when the Economic Stabilization Program came into effect. However, the swift decrease in private saving offset some of the improvement in government saving. In 1987-1989, national saving again fell to 4-5% of disposable national income; even though private saving began to rise and reached 12% by the end of the period, the government deficit increased concurrently although it remained lower than the rates observed in 1966-1984.

1990-1996: Immigration and Further Disinflation

These were years of large-scale immigration from the former Soviet Union. Nearly 400,000 immigrants arrived in 1990-1991 and about 80,000 came in each of the subsequent years - in contrast to 10,000-20,000 per year in 1983-1989. The immigration wave in 1990-1991 contributed to rapid growth in private and general government consumption expenditure and gave rise to a large increase in investment in dwellings. In 1992-1995, as the immigrants found employment, additional investments in machinery and equipment were made and all industries showed rapid growth in production, causing exports of goods and services to expand as well.

Furthermore, the Oslo Agreement and the peace treaty with Jordan, concluded in 1993-1994, gave Israel access to new markets and led to an injection of investments from abroad.

These developments resulted in a rapid 6% annual average increase in GDP and an especially strong 7-8% expansion of business-sector product. The growth in per capita product came to 2% on annual average - exceeding growth in other countries - and by the end of the period, per-capital income in Israel had reached a level similar to that in developed countries such as Ireland, Great Britain, and Finland and higher than that in New Zealand, Spain, Portugal, and Greece.

Large numbers of new immigrants and foreign workers joined the labour force. In contrast, the number of workers from Judea-Samaria and Gaza declined. Labour input increased in 1990-1996 by 6% on annual average, similar to the growth rate of GDP, resulting in almost no change in labour productivity.

Inflation further declined, the rate of increase in GDP prices falling progressively from 20% in 1989 to 9% in 1996 (with the exception of 1991, in which GDP prices rose by 21%). Since the exchange rate remained relatively low throughout this period, import and export prices rose less than GDP prices. These price differentials helped imports of goods and services to outpace the growth rate of GDP, expanding by 11% on annual average.

Exports of goods increased by 7-8% on annual average during this time. Important contributory factors to the increase were trade with new partners (after many countries stopped boycotting Israeli goods) and expansion in exports of high-tech products. The difference between the growth rates of imports and exports abetted a significant worsening of the balance of payments, from a surplus of 2.4% of GDP in 1989 to a deficit of nearly 5% of GDP at the end of the period.

Total resources available to the economy, from GDP and imports, increased by 7-8% on annual average in 1990-1996. Private consumption expenditure also rose by 7% during those years, a pace that translated into a 4% increase in per-capita GDP. Acquisitions of durable goods increased particularly strongly (at 10% per capita on annual average), partly reflecting recent immigrants' purchases of durables in their first few years in the country. Household expenditure for clothing, footware, personal items, and travel abroad also grew quite strongly.

Civilian general government consumption expenditure increased sharply (at 5% per annum), as mass immigration prompted especially strong growth in education and immigrant-absorption spending. In contrast, defence expenditure rose at a relatively slow rate of 2% per year.

Investment in fixed assets expanded during these years at a robust 14% pace on annual average. Investment in dwellings expanded by 11% on annual average to provide housing for the immigrants - mainly in 1990-1991, when the influx of immigrants was strongest.

Investments in non-residential fixed assets - machinery, transport and other equipment; non-residential building, and other construction - rose by 15% on annual average in 1990-1996. Consequently, capital stock of the business sector expanded by 6-7% on annual average and kept up with the rapid increase in labour input.

The tax rate fell to 37% of GDP during this period. Since transfers to households from abroad increased and prices of goods and services for private consumption were relatively low, per-capita disposable private income rose by 3% on annual average - outpacing the increase in per capita GDP.

National saving climbed to 11% of disposable national income in 1990-1992 after having been under 10% since 1974. The main sources of the increase in saving during these years were grants and guarantees from the United States Government for the absorption of immigrants from the former Soviet Union. In 1993-1996, national saving declined again as the government deficit widened and private saving declined.

1997-1998: Economic Activity Slows

Economic activity slowed in 1997-1998. The GDP growth rate decelerated to 2% on annual average and per-capita GDP declined. As activity slumped, employment grew sluggishly and the unemployment rate rose. The pace of increase in GDP prices slowed to 8% on annual average.

Several factors contributed to the slowdown: the economic crisis in the Far East and in Russia, which affected demand for exports (especially of diamonds), regional security uncertainties that affected tourism, declining immigration relative to the previous period, and a decrease in capital formation in dwellings initiated by the public sector.

Additional components of domestic demand also declined. The increase in households' private consumption expenditure slowed to 4% - 1% per capita. The main decreases in growth occurred in expenditure on food, clothing, footwear, and private motor vehicles. Gross domestic fixed capital formation fell by 3% per year. Investment in dwellings decreased by 4% on annual average, mainly because of a steep 14% decline in construction initiated by the public sector. Fixed capital formation other than dwellings in machinery, transport and other equipment, non-residential buildings, and other construction works fell by 2-3%. Exports of goods and services climbed in 1997-1998 by 7% on annual average. Exports of the high-tech, software and agriculture products increased rather swiftly; whereas revenue from tourism and exports of diamonds contracted.

Terms of trade improved during this time, export prices rising 2-3% more than import prices. Consequently, the balance-of-payments deficit narrowed. A decline in private saving caused national saving to decrease during these years.

Graps:

Graph 1: Gross Domestic Product (GDP) Per Capita

Graph 2: Private Disposable Incom Per Capita and Private Consumption Per Capita

Graph 3: Civil Public Consumption Per Capita

Graph 4: Defence Consumption

Graph 5: Fixed Capital Formation

Graph 6: Export of Goods and Services

Graph 7: Government Dept

Graph 8: GDP Per Capita As Percent of The United States Average Product Per Capita

Graph 9: Taxes As Percent of GDP

Graph 10: Taxes As Percent of GDP - An International Comparison

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