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Behind the Headlines: Israeli Economy Booming in Wake of Peace Process

If, like many people, you consider Israel’s economy to be two-thirds socialist, one-third capitalist and four-thirds bureaucracy, it is time to get out from under that rock.

With the exception of a few bleak spots, most notably the country’s trade and budget deficits, Israel’s economy is booming.

“Overall, it is unquestionable that people are doing much better than they were,” said economic commentator Pinchas Landau.

“Look at the statistics. Real wages are up, particularly in the public sector. The rate of growth is strong, and there is a steady rise in the standard of living. Most people don’t have a lot to complain about.”

Israel’s gross domestic product for 1995 grew by a healthy 7 percent, according to figures just released by the Central Bureau of Statistics.

During the same period, inflation was just 8.1 percent – the lowest rate in 26 years – and unemployment fell to an eight-year low of 5.9 percent, with more than 100,000 jobs added to the economy.

Just two years ago, the jobless rate peaked at 11 percent, due mostly to the influx of immigrants from the former Soviet Union. But since the beginning of 1993, the number of employees has risen 23 percent.

Another positive indicator is the rate of foreign investment. “Major multinational companies are taking in Israeli companies or setting up alliances,” Landau said.

In the past year Volkswagen, Motorola, Nestle and Intel were among the major companies making significant investments in Israel. Landau expects this trend to continue in 1996.

As for the stock market, Landau said, “We are seeing fairly large-scale portfolio investment in Israeli interests by major financial institutions, something that is very encouraging.”

Michael Eilan, editor of Link, a financial magazine published in Tel Aviv, attributed the roaring economy to three factors: immigration, the rise in exports and the peace process.

“The influx of immigrants has definitely led to growth,” he said, citing as examples milk consumption and demand for housing.

“Immigrants drink milk, so we need to produce more milk, and then we need more trucks to transport the milk. Immigrants need homes, so homes must be built, and in their jobs they produce things, and these things are then sold.”

Eilan said he would like to see the country double its exports in the near future to alleviate much of its $10 billion trade deficit.

In the past several years, “on average, Israel’s exports have risen by 8 to 10 percent – except in 1993 – which isn’t bad,” he said.

Eilan said much of the exports “has been in technology and chemicals, because over the years a great number of people have created a framework in the military, and the civilian high-tech industry has capitalized on it.”

Eilan also credits the peace process for the country’s economic growth because “it has led to the removal of Israel’s pariah-state status.”

Progress in the peace process has led to the opening of new markets in eastern Asian and Eastern European countries that have established diplomatic ties with Israel, he said.

It has also led to a weakening of the Arab boycott, which “has meant that Israeli companies can enter more markets and find partners abroad,” Eilan said.

One direct result of the peace process is Israel’s improved credit rating.

Because Israel is no longer considered a war zone, Eilan said, “Moody’s and Standard & Poor’s recently upgraded the country’s debt-worthiness ranking to A- minus, making it easier for Israeli companies to borrow money abroad.”

Because the higher credit rating lowers the interest rate – and therefore the cost – on borrowed capital, it becomes a significant factor in allowing growth to occur.

Eilan stressed that Israel’s economic prowess goes part and parcel with an overall growth trend in worldwide markets.

“There have been big changes in the global economy. The sheer amount of the `cake’ has grown, especially in the Latin American and American markets,” he said.

Although Israeli and foreign investors obviously have a lot to celebrate, the economy is not out of the woods, experts say.

Speaking before the Knesset Finance Committee in mid-January, Bank of Israel Governor Jacob Frenkel called the economy “overheated” and said that the high rate of growth belies a 1995 balance of payments deficit of $4.6 billion.

“It is like being overdrawn in the bank,” said Eilan of Link Magazine. “We have a growing economy, and it’s not as if the country will shut down, but it’s not good to have such a balance.”

While acknowledging that the economy is “booming,” economic commentator Landau cautions that “much of the growth is phony because we’re importing so much, and we are covering it” with borrowing.

“Fast growth based on consumption is nice, but the question is how to pay for it” down the road, he said.

Exactly how to reduce the deficit is up for debate, but no one disputes Israel’s need to speed up privatization and to increase the productivity of its workers.

Other possible solutions: lowering interest rates, easing foreign currency controls and devaluing the government-regulated shekel.

One problem the government has yet to tackle is taxation.

“The government has been unsuccessful in reducing the tax burden,” Eilan said. “An Israeli earning $50,000 a year will pay close to half in taxes.”

Still, even with these hurdles, “the country is extremely successful,” Eilan said. “Most of the countries in Europe would give their eyeteeth for our economy.”

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