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January 16, 2012

Ministry of Finance Highlights Israel's Economic Success and Fiscal Discipline

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Israel's problems, real and imagined, are the focus of persistent media attention. The New York Times, for example, regularly chastises the Israeli government and finds fault with Israeli society wherever it looks. A recent Times op-ed on the treatment of gays chose to excoriate Israel, the region's most tolerant society. Relentless criticism and condemnation of Israel obscures the extraordinary recent accomplishments of the Jewish state. These accomplishments, laid out in a summary report for 2011 published by Israel's Finance Ministry, reveal a remarkable story of fiscal discipline and economic expansion.

Over the past year, while the world's developed economies continue to falter and their fiscal situations grow ever more serious, Israel's economy grew by nearly 5 percent. Its per capita gross domestic product increased by 3 percent. All of its major economic indicators were positive:

Unemployment declined to 5.6 percent.
Inflation was kept low at 2.6 percent.

The Israeli economy's current picture of stability and growth is the culmination of years of fiscal discipline that pulled Israel back from the brink of fiscal collapse just 27 years ago, when it experienced runaway inflation of 445 percent in one year.

A detailed report published by the Ministry of Finance delves further into Israel's economic transformation. This success was in large part due to reducing the burdensome presence of government in the economy coupled with increased emphasis on developing homegrown technologies. Page 12 of the report contains a graph showing the rapid growth of high technology exports since 1990. The destination of Israeli export trade has broadened as well; Asia now ranks alongside the United States and Europe as a major export market.

Despite Israel's continuing need to invest heavily in its military and the continuing legacy of an overwhelming government presence in economic activities, government expenditure has declined from 56 percent of the GDP in 1988 to less than 43 percent today.

A chart on page 14 reveals that Israel has experienced a recurring cycle of increased government borrowing followed by a return to fiscal stability. Yet in sharp contrast to the experiences of many developed economies, the most recent Israeli borrowing cycle that began in 2008 has been marked by a less severe debt load than previous cycles. As a result of responsible fiscal policy, Israel's government debt has declined from 100 percent of GDP in 1987 to 75 percent in 2010. Most of the developed world is heading in the opposite direction of increased debt load.

Page 16 of the report illuminates the most extraordinary achievement. In 1984, Israel experienced a crisis in runaway inflation of 445 percent. The government implemented severe measures, making significant budget cuts and taking away its own authority to print money. Since then Israel has managed to maintain a low single digit rate of inflation usually between 1-3 percent per year.

This extraordinary achievement of economic growth and fiscal discipline receives little notice in the media. It is all the more remarkable when considering the persistent efforts by anti-Israel activists in Europe and the United States to damage the Jewish state's economy through the Boycott, Divestment and Sanctions movement (BDS) and the longstanding Arab boycott.

One might argue that the BDS movement has unwittingly benefitted Israel by forcing it to emphasize technology exports that are less sensitive to boycotts. While this transition would have happened regardless, the impetus of the boycotters may have sped up the process. Israel's economic success in the face of unrelenting blacklisting and boycotts recalls the famous Arab proverb: Dogs may bark, but the caravan moves on.

Posted by SS at January 16, 2012 05:28 PM


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