INTRODUCTION | CHALLENGES & ACHIEVEMENTS | MAJOR REFORMS | NATIONAL ECONOMY | ECONOMIC PICTURE | ECONOMIC SECTORS
The fastest growth rates (averaging 8 percent annually in recent years) are to be found in the hi-tech sectors. These sectors are skill and capital intensive and require sophisticated production techniques, as well as considerable investment in research and development, on which 4.9 percent of Israel’s GDP is spent – the highest among OECD countries. The quality of this R&D in Israel is ranked, according to U.N. experts, among the first 10 in the world. A successful contribution to all these is due to academic research institutes, which provide much of the basic R&D, and venture capital.
The significance of hi-tech industries’ growth may be illustrated by their having accounted for only 37 percent of the industrial product in 1965, a rate that grew to 58 percent in 1985 and around 70 percent in 2006.
Almost 80% of hi-tech products are exported, while the more traditional, low-tech firms export only close to 40 percent of their product. Hi-tech exports quadrupled from $3 billion in 1991 to $12.3 billion in 2000 and to $29 billion in 2006 (plus another $5.9 billion of hi-tech services exported). In 2009, the product of ICT (information and communications technology, a major part of hi-tech industry) amounted to $19 billion. Contributing 17.3 percent of the business sector GDP, it employed 204,000 persons, and its exports were close to $16 billion. Over 90 percent of the public budgets for R&D ($7 billion in 2006) are allocated to hi-tech industries, much of which is channeled via joint venture capital funds.
In recent years, the government has been collecting fair dividends on its shares in these funds, over and above repayment of loans granted to successful start-up companies. In addition to the six binational foundations mentioned earlier, Israel has agreements for joint funding of R&D projects with the US, Canada, Italy, Belgium, Austria, France, Sweden, Germany, Holland, Ireland, Portugal, Spain, Hong Kong, India, Turkey and China.
The age of information technology (the Internet, electronic commerce, etc.) placed Israel’s economy, and particularly its hi-tech industries, in the forefront of world development in these fields. A number of internationally recognized Israeli companies have been bought by top business conglomerates in multi-billion dollar transactions. The number of new start-ups is very high due to the extraordinary innovative talent in Israel, coupled with the availability of highly skilled manpower. The growing presence of Israeli firms on Wall Street and the European stock exchanges is yet another manifestation of the respect with which Israel’s hi-tech industry is regarded.
Israel is a leading world diamond manufacturing and trading center. The main reason is that the Israeli diamond industry is as multi-faceted as its diamonds. The Israeli diamond is synonymous with trust and reliability, and it is guaranteed to be conflict-free and genuine.
In addition, the Israeli diamond industry is a world leader in both cutting-edge technologies and craftsmanship, thus ensuring the best yield of polished diamonds from the rough. The large inventory of local production as well as tax-free rough and polished imports ensure competitive prices. The Israel Diamond Exchange is the largest diamond trading floor in the world, housing all of the operational functions and needs of every diamond buyer under one roof.
In 2008 diamond exports amounted to $9.4 billion. Although the industry was badly hurt by the recession during the course of 2009, preliminary data shows that global demand picked up during 2010 and that export levels resumed their previous levels.
During 2009 Israel exported most of its diamonds to the US, with a similar number being sent to Hong Kong. Other important customers are Belgium and Switzerland.
Israel’s agricultural sector is characterized by an intensive system of production stemming from the need to overcome the scarcity in natural resources, particularly water and arable land. The constant growth in agricultural production is due to the close cooperation between researchers, farmers, and agriculture-related industries. Together they develop and apply new methods in all agricultural branches. The result is modern agriculture in a country more than half of whose area is desert.
As Israeli farmers and scientists have had to contend with a difficult environment and limited water resources, their experience is especially relevant to the developing world. Its success lies in the determination and ingenuity of farmers and scientists who have dedicated themselves to developing a flourishing agriculture, demonstrating to the world that the real value of land is a function of how it is utilized. The close cooperation between R&D and industry led to the development of a market-oriented agri-business that exports agro-technology solutions – particularly water solutions – world wide.
Agriculture in Israel is the success story of a long, hard struggle against adverse conditions and of making maximum use of arable land and scarce water (including from modern desalinization plants, the know-how of which is a winning export story). When Jews began resettling their historic homeland in the late 19th century, their first efforts were directed – mostly for ideological reasons – to turning barren land into fertile fields. The secret of Israel’s present agricultural success lies in the close interaction between farmers and government-sponsored researchers, who cooperate in developing and applying sophisticated methods in all agricultural branches, as well as technological advancement, new irrigation techniques, and innovative agro-mechanical equipment.
Since Israel attained independence in 1948, the total area under cultivation has increased by a factor of 2.6, to approximately 1.1 million acres. The irrigated land area increased by a factor of 8, to about 0.6 million acres until the mid 1980s; however, owing to the growing shortage of water, coupled with intensive urbanization, this is now less than half a million acres. During the past half century the number of agricultural settlements grew from 400 to 750, but the share of the population living in them has fallen from 12 percent to less than 5 percent.
Today, most of Israel’s food is domestically produced and supplemented by imports, mainly of grain, oilseeds, meat, coffee, cocoa, and sugar, all of which are more than covered by agricultural exports. Farm production consists largely of dairy and poultry products. Additionally, a large variety of flowers, fruit, and vegetables is locally grown, especially in warm areas that give farmers an early advantage in European markets. During the winter months, Israel is Europe’s greenhouse, exporting melons, tomatoes, cucumbers, peppers, strawberries, kiwis, mangoes, avocados, a wide variety of citrus fruits, longstemmed roses and spray carnations.
The share of agricultural product of the GNP declined from 11 percent to 2.6 percent between 1950 and 2008, and the proportion of agricultural exports decreased from 60 percent to less than 2 percent of total exports. This, despite an absolute increase of annual exports from $20 million in 1950 to $1.2 billion in 2009 due, inter alia, to the widespread introduction of innovative farming methods, modern irrigation and water treatment technologies, and export-oriented farming.
In the early years of statehood, residential building accounted for 84 percent of total construction output. Subsequently, allowing for more infrastructure construction, it fluctuated between 70-75 percent until 1991, when it leaped back to 86 percent in order to meet the demands of renewed immigration. As a result, the construction sector output also rose sharply in 1991, a year when the number of apartment-unit-starts reached an all time peak of 83,500. Since then that annual figure has dropped steadily to 29,000 in 2004. The record number of new apartments completed was 70,100 in 1992, shrinking to 31,700 in 2005. Once considered a leading branch of the economy and a barometer of the economic activity, the construction sector contributed only 5 percent to the GDP in 2006, down from 30 percent in 1950.
While at first almost all construction was the result of government initiative and investment, between 1958 and 1989 its share fell gradually, from 67 to 16 percent. At the beginning of the 1990s it rose temporarily, when the private sector could not meet the fast-rising demand created by the sudden influx of hundreds of thousands of immigrants. In the last few years the general rise in the standard of living (together with foreign demand for property in Israel) seems to be indicated by a rapid increase in the most expensive class of apartments, especially in highly sought-after neighborhoods in cities such as Tel Aviv and Jerusalem.
Israeli companies are among the world leaders in the design and manufacture of building metal structures, prefabricated parts and components – such as doors, windows, sanitary equipment, plumbing components, fixtures and accessories, and more. These goods are successfully marketed worldwide and may be found at major construction sites on all continents.
The importance of the transport and communications sector largely exceeds its small share in the economy’s statistics, as it is an infrastructure industry serving all other branches of the economy as well as households. It is a service rather than a production sector, and is growing – as is the case in all modern economies – faster than the production industries. A remarkable growth in the aviation part of this sector took place in recent years (thanks to a parallel increase in tourism), but the growth of the communications sector has been even faster.
Transport and communications contributed 7 percent to the GDP in 2006, constituted some 8 percent of exports of goods and services, and employed 5 percent of the country’s labor force. Thirty-six percent of its product originates from land transportation, 20 percent from shipping and aviation, 39 percent from communications, and the rest from various services.
Since the early 1950s, the total gross tonnage of the merchant fleet has grown more than tenfold, while air carriers now fly more than 100 times as many passengers. During the same period, the road length was doubled, the number of buses more than tripled, and the number of trucks increased tenfold.
Tourists are attracted by Israel’s geographical diversity, its archeological and religious sites, the almost unlimited sunshine and modern resort facilities on the Mediterranean, Lake Kinneret (Sea of Galilee), the Red Sea, and the Dead Sea.
In the year 2000, the largest number of tourists ever – 2.41 million – visited the country (compared to 33,000 in 1950, 118,000 in 1960, 441,000 in 1970, 1.18 million in 1980, and 1.34 million in 1990). This figure was topped in 2008 as Israel opened its doors to more than 3 million tourists.
Visitor figures continue to rise. In the first half of 2010, 1.6 million tourists visited Israel, 39 percent more than in the same period last year, and 10 percent more than in 2008. Americans make up 21 percent of the tourists in Israel, with Russians making up 15 percent and other European countries making up much of the rest.
Tourism provided foreign currency earnings of $2.8 billion in 2006, i.e. 5 percent of the income from all exports and 16.8 percent of the export of services. In the first half of 2010, incoming tourism brought in about $1.55 billion.
Although this industry contributes less than 3% to the GNP, it has a foreign currency added value of 85 percent (making it the added-value leader among the country’s export industries) and employs some 80,000 persons. This industry’s large potential is yet to be exploited, as it is a major factor in Israel’s economic growth plan.