ISRAEL

State of Israel

Medinat Yisrael

Dawlat Israel

COUNTRY OVERVIEW

LOCATION AND SIZE.

Israel, a country slightly smaller than the U.S. state of New Jersey, is located in the Middle East, bordering the Mediterranean Sea for a length of 273 kilometers (168 miles). In the south and southwest, it borders the Gulf of Aqaba and the Sinai Peninsula, occupied in the war of June 1967 and returned to Egypt in April 1982. To the east, it shares a 238-kilo-meter (147-mile) borderline with the Hashemite Kingdom of Jordan and 307 kilometers (189 miles) with the Palestinian Autonomous Area on the western shore of the Jordan river. In the north, Israel shares 79 kilometers (49 miles) of borders with Lebanon, and with Syria for 76 kilometers (47 miles) on the disputed Golan Heights.

The "Gaza Strip," a small piece of territory running some 40 kilometers (25 miles) along the Mediterranean coast, has been under limited jurisdiction of the Palestinian National Authority (PNA) since 1994 and may eventually form a part of a single Palestinian entity, together with the Palestinian Autonomous Area in the West Bank. The territories which were occupied after the war of June 1967 are not recognized as forming part of the State of Israel, although it seems unlikely that Israel will reverse its annexation of East Jerusalem. Control over the Old City, which is the Jews' principle holy site, the Wailing Wall, and the Muslims' holy mount, the Haram al-Sharif with the al-Aqsa mosque, is heavily disputed.

POPULATION.

Israel's population was estimated to total 5.85 million in July 2000. This number includes about 171,000 Jewish settlers in the West Bank; about 20,000 in the Israeli-occupied Golan Heights; about 6,500 in the Gaza Strip; and about 172,000 in East Jerusalem. The country's population is heavily concentrated along the coastal strip, with about 75 percent of the Jewish inhabitants and around 60 percent of the non-Jewish population located between Ashkelon and Nahariya. In 1997, the Tel Aviv district had almost 1.2 million inhabitants, accounting for some 20 percent of total population. Jerusalem (Yerushalayim in Hebrew and al-Quds in Arabic) counted 633,700 inhabitants, in 1998. Haifa (Hefa) is the largest city in the north with some 265,000 inhabitants. Of the total population, 91 percent are defined as urban, that is resident in localities with more than 2,000 inhabitants. Around 80 percent of Israel's population is Jewish of which 40 percent were born abroad, mostly European or American-born (1.2 million citizens), and 60 percent (2.8 million citizens) were Israeli-born Jews. The 20 percent of non-Jewish Israeli citizens are mostly of Arab origin.

There are 2 main Jewish communities, the Ashkenazim and the Sephardim. The former are the Jews from Eastern, Central, and Northern Europe, while the latter originate from the Balkan countries, North Africa, and the Middle East. There are around 15 percent Muslims and some 2 percent Christians and 2 percent Druze. Israel is also home to the Bahai community's principal sanctuary in Haifa.

Hebrew is the official language and Arabic is officially used for the Arab minority. English is the most commonly used foreign language. Ultra-orthodox Jews, who refuse to converse in the holy language of Hebrew, and elder Eastern European immigrants speak Yiddish. Due to the diversity of the immigrant population, most Israelis are multilingual.

After the Diaspora (the dispersion of Jews from their homeland) for nearly 2000 years, aliyas or waves of immigration started bringing Jews to what had once been Israel in the last decades of the 19th century, driven by the idea of establishing a Jewish national homestead in their biblical land. From the early 1920s, the Jewish population in Palestine increased more than sevenfold, from only 80,000 to 600,000 in 1948, when the State of Israel was declared. In the first 20 years of the state's existence, between 1948 and 1972, the country's population quadrupled.

OVERVIEW OF ECONOMY

Once a traditional economy based mainly on agriculture, light industry and labor intensive production, Israel was until the 1990s described as the "most socialist economy of any nation outside of the Eastern bloc". High growth, second only to Japan in the period 1922-73, was achieved through a highly centralized, state-driven economic policy, making Israel a world record-holder in high taxes, foreign debt , and finally inflation , which reached triple digit levels from 1977 to 1984.

Since a national unity government first began implementing measures of stabilization and reform in 1985, Israel's economy has been transformed from a highly state-centered one to a mixed economy focused on high-tech and exports. The influx of Jewish immigrants from the former Soviet Union topped 750,000 between 1989 and 1999, bringing the population of Israel from the former Soviet Union to 1 million, one-sixth of the total population, and adding scientific and professional expertise of substantial value for the economy's future. The influx, coupled with the opening of new markets at the end of the Cold War, and the onset of the Middle East peace process, energized Israel's economy, which grew rapidly in the 1990s, despite a slight setback during 1997 to 1999. Capitalizing on the country's human resource potential, the government instituted economic reforms and new policies that have created a global high technology powerhouse in such industries as semiconductors, computer software, telecommunications, and biomedical equipment. The dramatic growth of Israel's high tech sector in recent years has led to a shortage of qualified workers and a significant rise in salaries for these positions.

In the 1990s, Israel enjoyed a remarkable economic expansion that brought new levels of prosperity and a significant increase in purchasing power. With economic growth averaging nearly 6 percent between 1990 and 1996, Israel's economy expanded by some 40 percent in real terms, and per capita income jumped from US$11,000 to almost US$17,000. The slowdown in economic growth between 1997 and 1999 was generally attributed to the waning of the stimulative effects of the immigration waves, such as for residential construction and new business investment, high interest rates, and much tighter fiscal policy in this period. A further reason was increased political and security uncertainty due to a lack of progress in the peace process. In 2000, Israel's GDP per capita was US$17,500—higher than in Spain or New Zealand.

Both major parties, the currently ruling Likud under Ariel Sharon and the Labor party, are committed to further liberalizing the economy, strengthening exports and attracting further foreign investments, mainly in the high-tech sectors, and to keeping the macroeconomic environment stable. Despite moving gradually toward a more open, competitive, and market-orientated economy over the past decade, the level of government involvement in the economy remains high, as do the public's expectations for government assistance. The country's infrastructure network remains publicly owned, as does much of the banking system. However, the pace of privatization has quickened in recent years.

POLITICS, GOVERNMENT, AND TAXATION

Israel is a parliamentary democracy. The president, who has ceremonial function, is elected by the Knesset, a unicameral parliament, for a 5-year term. Moshe Katzav, member of the Likud party and of Persian origin, was elected president in 2000. Since the May 1996 election, the prime minister is elected directly by a separate universal vote. The minimum voting age is 18. The prime minister since 2001 is Ariel Sharon, who took over from Ehud Barak. The latter had failed to achieve an agreement with the Palestinian National Authority at Camp David and could not meet the Israeli public security expectations in the early phase of the second intifada or uprising. Apart from Ehud Barak, the 1990s saw a number of prime ministers come and go. Benyamin Netanyahu, Shimon Peres, Yitzhak Shamir, and the much-loved Yitzhak Rabin, who was assassinated in 1995 by an ultra-orthodox Jew frustrated by rapprochements with the Palestinians, have held the office in the last decade.

The State of Israel was declared on 14 May 1948, its political leadership emerging from the Jewish Agency. Its chairman, David Ben Gurion, became the first prime minister and is considered the father figure of the state. For decades the country was dominated by the Labor Party (though under changing names) first under Ben Gurion, then under other leaders, and the Histadrut, Israel's General Federation of Labor. The 2 institutions formed a quasi-socialist system with large state welfare provisions. The first change of the ruling party came as a surprise in 1977, when the Likud Party, under Menachem Begin, won the largest share of seats.

With 5 wars fought since the inception of Israel with its Arab neighbors the Israeli Defence Forces (IDF) have at any stage played an important role. Virtually all leading statesmen in Israel had senior positions in the IDF before coming to office. A permanent peace settlement seemed possible for the first time when President Sadat of Egypt visited Jerusalem in 1977 and addressed the Israeli parliament. A year later at Camp David under the guidance of President Carter, Begin and Sadat agreed on a peace treaty that was finally signed in March 1979. Until today, though, a comprehensive peace agreement with all Arab neighbors has not been struck and the problem of a Palestinian entity has not been resolved.

The Israeli Parliament, known as the Knesset, consists of 120 members elected to 4-year terms, although the prime minister has the option to call for new elections before the end of the term, or the prime minister's government can fall on a vote of no-confidence in the Knesset. A total of 11 political parties are currently represented in the 16th Knesset. The political spectrum includes the Hadash Party, a left-wing umbrella group, including the Communist Party and other Marxist factions that is made up of both Arab and Jewish citizens; the left-wing Meretz Party; the center-left and chief opposition Labor Party; the new centrist Third Way Party; the ruling right-center Likud Party; the religious parties (National Religious Party, Shas, and United Torah Judaism); and the rightist Moledet. Yisrael B'Aliya is a centrist party focused on the rights of Russian immigrants. The United Arab List, a combination of the Democratic Arab Party and representatives of Israel's Islamic Movement, is a defender of the rights of Arab citizens.

After the failed talks between Palestinians and Israelis at Camp David the ongoing second intifada began in September 2000. The Israeli-Palestinian conflict over land and the status of Jerusalem remains a crucial issue. Israel had benefitted considerably from the onset of the Middle East peace process, and its economic success depends at least to some degree on political stability. Since the 1993 signing of the Declaration of Principles on Palestinian self-rule, the future status of Jerusalem and the continuing expansion of Jewish settlements in East Jerusalem and the West Bank have emerged as 2 of the most critical issues affecting the peace process. The ongoing intifada was triggered when Ariel Sharon, as prime minister, paid a highly disputed visit to the Muslim holy site in the Old City of Jerusalem. The Old City, within the walls of which are found the ancient quarters of Jews, Christians, Muslims, and Armenians, has a population of some 25,500 Arabs and 2,600 Jews. In addition there are some 600 recent Jewish settlers in the Arab quarter. It is highly unlikely, though, that any Israeli government will give up control, gained in 1967, over East Jerusalem and the Old City, in particular.

INFRASTRUCTURE, POWER, AND COMMUNICATIONS

Israel's infrastructure is modern and well developed. To cope with its growing population and to improve the functioning of the economy, Israel is making large investments to upgrade its infrastructure. Major projects include the construction of a new terminal at Ben Gurion International Airport; a tunnel through Mt. Carmel to provide a bypass route around Haifa; the Cross-Israel Highway, a major north-south artery; and mass transit systems planned for Jerusalem, Beer Sheva, and the Tel Aviv region.

TRANSPORTATION.

Israel has a total of almost 16,000 kilometers (9,942 miles) of paved roads, including 56 kilometers (35 miles) of expressways. The main highway runs along the Mediterranean coast, linking the north (Haifa) and the center (Tel Aviv). The second major link between Tel Aviv-Jerusalem causes major problems. Due to little space for the construction of new roads, the 45-minute-drive from Tel Aviv to Jerusalem takes about 3 hours during rush hours. Part of the old Beirut-Jerusalem railway connection runs from Nahariya via Haifa to Tel Aviv. The route from Tel Aviv to Jerusalem is not in use anymore. The importance of trains especially in passenger transportation is overshadowed by the government-owned Egged bus company, which operates the second largest bus system in the world after Greyhound. Freight traffic consists of grain, phosphates, potash, containers, petroleum, and building materials. Rail service serves Haifa and Ashdod ports and extends to Eilat port. Haifa and Ashdod on the Mediterranean Sea coast are the main ports in Israel. The port of Eilat is Israel's gateway to the Red Sea. In 1997, Israel's merchant fleet consisted of 55 vessels. There are 2 international airports in Israel, Tel Aviv's Ben-Gurion airport and Eilat airport. Plans to merge the airports of Eilat and of the neighboring Jordanian city of Aqaba did not materialize. An international airport in the Gaza strip in operation since 2000 but currently largely dysfunctional due to security problems.

POWER.

The Israel Electric Corporation (IEC) has completed a US$10 billion investment program in 2000, which has boosted the country's generating capacity from 8,000 megawatts to about 12,000 megawatts. The country's plants almost entirely run on fossil fuels; no nuclear power plants are in operation. Israel is preparing for the availability of natural gas by planning a natural gas distribution network. Local authorities are searching for solutions to environmental problems related to municipal solid waste and wastewater treatment. The first international tender for a waste-to-energy plant was issued in January 1998. Development of regional sanitary landfills, a national air pollution monitoring system, and municipal wastewater treatment plants, even in outlying regions of the country, are indicative of a growing awareness of environmental issues.

TELECOMMUNICATIONS.

Israel is one of the world leaders in mobile communications. There are currently 3 major Israeli cellular mobile network providers, as well as a Palestinian company and almost as many cell phones in use as main lines. In 1999, there were 2.8 million land-lines and 2.5 million mobile users. The Israeli telephone

system, no longer monopolized by the government-owned Bezek company but open to competition, is the most highly developed system in the Middle East, with a good system of coaxial cable and microwave radio delay. All systems are digital. In addition to telephony providers, Israel has now at least 21 ISPs, a figure constantly increasing.

Israelis are radio listeners: There were 3.07 million radios in the country in 1997, compared to 1.69 million televisions. Given the importance of news and information, people commonly listen to the news at work; bus drivers usually turn up the volume to allow passengers to listen to the news. Since 1999, there has been a digital TV station in operation, which has also drawn a large number of subscribers.

ECONOMIC SECTORS

Once strongly based on agriculture and low-cost industrial production for the domestic market, the country has undergone major structural changes, shifting to a modern export-oriented economy. In recent years, it has been the high-tech sector that has grown most substantially. Agriculture contributed 4 percent to the GDP in 1999, while industry accounted for 37 percent, and services for 59 percent.

AGRICULTURE

The agricultural sector is fairly small, accounting for 3.5 percent of the GDP in 2000 and employing 2.6 percent of the labor force . Nonetheless, Israel is largely self-sufficient in foodstuffs lacking only in grains, oils, and fats. Since the establishment of the State of Israel, the area under cultivation has increased. Currently, the cultivated area totals 4.2 million dunams (4 dunams equal 1 acre) about 50 percent of which are irrigated crops. The main factor limiting agricultural development is not land but the availability of water. With several years of water shortages in summer the further development of Israel's agriculture will involve raising the yield of existing land and recycling wastewater. Revenues in the agricultural sector amounted to around US$4 billion in recent years. The main categories are livestock and poultry, vegetables, fruits, flowers and field products.

A special feature of Israel's agriculture that has gained a great deal of international attention is its cooperative settlements. For centuries, Jews in the Diaspora were barred from owning land; therefore, the Zionist movement saw land settlement as one of the chief objectives of Jewish colonization. There are 2 basic forms of settlements, the moshav and the kibbutz, both developed to meet the needs and challenges encountered by a farming community new to its professions and its sometimes hostile surroundings. The moshav works on the principal of a co-operative with individual farms of equal size with every farmer working his own land to the best of his ability. The farmer's economic and social security is ensured by the cooperative structure of the village which handles marketing his products, purchasing farm equipment, and providing credit and other services. In 1998, a total of 455 moshavim existed, inhabited by 180,000 people. The kibbutz is a collective settlement of a unique form, based on common ownership of resources and the pooling of labor, income, and expenditure. Every member is to work to the best of his ability. He is not paid any wage but is supplied with all the goods and services he needs. The kibbutz is, therefore, based on voluntary action and mutual liability, equal rights for all members, and it assumes for them full material responsibility. In 1998, the 268 kibbutzim were inhabited by around 120,000 people.

INDUSTRY

Israel's industry was originally designed to cater to a domestic market. It was to supply such basic commodities as soap, vegetable oil and margarine, bread, ice, printing, and electricity. It used raw materials available locally to produce goods as canned vegetables and fruit, cement, glass, and bricks. In order to save foreign exchange, imports of processed goods were curtailed, giving the local industry the opportunity of adding local value to the manufacturing process of products imported from abroad. Although most of Israel's industrial production is still for domestic consumption, the country's economy is far more export-oriented. Higher valued processed goods (excluding diamonds), especially electronics and high-tech related, currently constitute 90 percent of total exports. There has been a heavy expansion in export-oriented industries as a result of government tax and investment incentive schemes.

MINING/HYDROCARBONS.

The Dead Sea area, a land depression bordering Jordan, which contains potash, bromides, magnesium, and other salts in high concentration, is the country's chief source of mineral wealth. The large potash works on the southern shore of the Dead Sea are linked by road to Beer Sheva from which a railway runs northward.

Lacking large-scale resources of fuel and power, Israel is forced to import more than 90 percent of its energy requirements. Petroleum constitutes around 8 percent of all goods imports. The main sources of the annual crude oil requirements of around 50 million barrels are Egypt, Mexico, and Norway. Around 30 percent of requirements are purchased on the spot market. Most imported crude oil is refined at the Haifa oil refinery, which has a capacity of more than 6 million tons a year. Output of natural gas from the Dead Sea area is transported through a pipeline to the Dead Sea potash works and to towns in the Negev desert and a large phosphate plant. Production totaled 21.5 million cubic meters in 1994.

MANUFACTURING.

The total value of Israeli exports has risen: US$18 million in 1950, US$780 million in 1971, and almost US$21 billion by 2000. The greatest expansion has taken place in the electronics industry with Israel specializing in defense-related and communication equipment, software, and network equipment. The value of exports of this sector and of metals and machinery has grown from US$12.8 million in 1970 to US$9.5 billion in 1999 and by an incredible 40 percent to US$13.3 billion in the strong export year of 2000.

Israel's single most important industrial export product is cut and polished diamonds. The diamond trading and processing industry has traditionally been a Jewish stronghold. Expertise and trading contacts were brought to Israel by immigrants from the Netherlands and Belgium, home to the world's largest diamond trading center, Antwerp. Israel's specialty is medium-sized diamonds which controls approximately 75 percent of the world market in this segment. Annual exports grew from US$4.6 billion in 1995 to US$5.7 billion in 1999 and jumped to US$6.8 billion in 2000.

SERVICES

TOURISM.

Israel and the surrounding countries, also known as the Holy Land, are the sites of biblical history. David's mountaintop capital, Jerusalem, is holy to the world's 3 monotheistic religions. Nearby in the West Bank lies Bethlehem, birthplace of Jesus. But Israel is also an attractive destination for hiking, desert trips, diving, or relaxing in one of the Dead Sea spas.

Tourism is the industry most severely affected by the security downslide caused by the ongoing Palestinian uprising. Since October 2000 tourism has declined by 45 percent in comparison to the peak in the quarter immediately preceding the intifada. Experience has shown that tourists take many months to return after the end of unrest. With no improvement of the security situation in sight the sector is unlikely to recover in 2002. Since the end of the Gulf War visitor numbers had been on the rise. While in 1990 only 1.1 million tourist visas were issued, this number continuously increased to 2.3 million in 1999, according to Israel's Ministry of Tourism. Tourist receipts totaled US$2.77 billion in 1996 and reached US$3 billion in 1999.

FINANCIAL SERVICES.

Israel possesses a highly developed banking system, consisting of a central bank, the Bank of Israel, 14 commercial banks, 5 mortgage banks, and other financial institutions. Bank groups, namely Bank Leumi group, Bank Hapoalim, and Israel Discount Bank, are at the core of the industrial complex and hold 92 percent of the total assets of the banking system. Once owned by the Histadrut, the all-powerful General Federation of Labor, they had to be bailed out by the government during an economic crisis in the early 1980s. Since then, they have been quasi-government owned, but there are plans for privatization. A law inhibiting banks to own more than 10 percent of industrial holding companies , introduced to prevent another structural crisis, has not been enforced strictly.

In 1997, the Tel-Aviv Stock Exchange (TASE) adopted an automated trading system leading to lower transaction costs. The then ongoing peace process and flourishing high-tech industries have since strongly attracted foreign investors. The real value of stocks traded in TASE increased by 59 percent during 1999. In 2000, 681 companies were listed on the TASE. The turnover was US$58.7 billion in 2000. In October 2000, Israel's Securities Authority adopted a dual listing regulation, allowing for Israeli companies that are traded on the New York Stock Exchange (NYSE) and Nasdaq to trade on the TASE without additional regulatory requirements. This measure enables Israeli and foreign investors to trade in these shares at convenient hours, and at low costs. Nevertheless, the general slump, especially in the high-tech shares, has affected the TASE, too. The combined effects of the economic downturn and security uncertainties will have to be monitored. Investment in the Tel Aviv Stock Exchange, acquisitions of Israeli companies, and equity flotation by Israeli companies on foreign stock markets, principally New York, have brought billions of dollars in new capital to Israel in recent years, primarily though not exclusively to its high technology industries.

INTERNATIONAL TRADE

Until the 1990s, high tariffs and strong non-tariff barriers characterized Israel's trade policy, and several barriers are still in place in particular with regard to processed food and agricultural products. Israel has free trade agreements with the European Union (since 1975), the United States (signed in 1985, fully effective since 1995), the European Free Trade Association (EFTA, effective since 1993), Canada (1997), and Turkey and has concluded bilateral agreements with a number of other states. Israel is the sole country in the world to have both European Union and U.S. free trade agreements. In June 2000 an association agreement between the EU and Israel came into force. In line with WTO regulations, Israel gradually began exposing the domestic market to foreign imports since September 1991. This process allowed administrative limitations on imports from third countries to be canceled, imposed higher rates of customs tariffs that since have been reduced, according to their degree of influence on local production, and allowed Israeli industry time to adjust to competition. The

final stage of this process came to an end in September 2000, when tariff rates reached a maximum range of 8 percent to 12 percent.

Israel's main exports are manufactured goods and software, which accounted for 97 percent of total exports (excluding diamonds, ships and aircraft) in 2000. Agricultural exports accounted for 3 percent in 2000, compared to 16.5 percent in 1970, illustrating the depth of Israel's structural changes. The share of Israel's information communication technology exports as a percentage of exports of services is substantially high. In 1997, this share (20.1 percent) was second only to Japan (24 percent), and much higher than the OECD average, which was 12.5 percent. The United States alone absorbs more than a third (41.2 percent) of Israel's exports. Other important destinations include the European Union (27.3 percent), of which Belgium (6 percent), Germany (4.8 percent), and United Kingdom (4.3 percent) dominate; and Asia (18.5 percent), of which Japan (2.7 percent) dominates, according to Central Bureau of Statistics 2000 figures. The change in Israel's exports between 1999 and 2000 indicate that the growth rate of traditional manufacturing exports increased slightly, whereas it increased dramatically in the high-tech industries.

The geopolitical situation that has prevailed in the Middle East, since the inception of Israel, has prevented trade between Israel and its neighbors. Furthermore, the difference in the level of development and production structure between Israel and its neighbors made Europe and the United States her main trading partner. In 2000, the United States and the EU accounted for 32 percent and 30 percent, respectively, of Israel's exports and for 22 percent and 41 percent of its imports. In 2000, exports for the United States (excluding diamonds) totaled US$21.7 billion, constituting an increase of 23.3 percent in Israel's exports. Within the EU, Israel's largest export markets were Germany (21 percent), the United Kingdom (18 percent), The Netherlands and Italy (both 11 percent), and France (10 percent). Exports to Asia (excluding diamonds) increased from 12 percent in 1998 to 16 percent in 1999.

Israel has traditionally run a large external trade deficit , meaning that imports exceeded exports. Israel's imports have always exceeded its exports because of the Jewish state's dependence on raw materials. In addition, Israel imports military equipment, investment goods, rough diamonds, fuels, and consumer goods , mainly from the United States (18.6 percent), Belgium (9.9 percent), Germany (7.5 percent), the United Kingdom (7.6 percent), Italy (4.8 percent), and Japan (3.3 percent), according to 2000 figures. The cost of Israel's imports has largely been offset by cash grants from the U.S. government and charitable organizations and individuals abroad. The EU accounted for 67 percent of Israel's 2000 trade deficit, and Asia accounted for 15 percent. The trade balance with the United States was positive.

MONEY

Israel's fiscal policy has focused on reducing the state's intervention in the economy and improving Israel's fiscal stance, namely, reducing the budgetary deficit as a percentage of the GDP and the government's debt relative to the GDP. The reduction of the deficit law was drafted in 1991 for the fiscal year 1992 and for the years to come. The law sets a maximum level for the budget deficit . Indeed, the budget deficit as a percentage of the GDP decreased from 4.9 percent in 1990 to 0.6 percent in 2000. However, Israel's ratio of government debt to the GDP still remains high compared to European countries. The internal debt, as a percentage of the GDP was reduced from 104 percent in 1989 to 70 percent in 2000; the external debt decreased from 39 percent in 1990 to 24 percent in 2000. Both the political right and the political left are committed to a sound fiscal policy. Since 1985 the Israeli government has not been allowed to borrow from the Bank of Israel and has had to finance its debt by issuing bonds. The Israeli government issues bonds in Israel, as well as in the United States, Europe, and the Far East.

The end of the disinflation process in Israel, which began with the 1985 Economic Stabilization Program, is aimed for 2003. Israel's inflation rate was cut from a worrying 444.9 percent annual inflation in 1984 to 18 percent in the late 1980s. Currently, the country has virtually reached price stability with inflation down to 1 percent in 2000. The inflation rate in the past 2 years has been consistently under the inflation target and is one of the lowest in the developed world.

POVERTY AND WEALTH

Though Israel has a strong social record, as in most societies, inequality exists in different guises. In 1988, families in the upper 10 percent of household income received 8.4 times the share of the bottom 10 percent; in

1997, the share of the uppermost 10 percent increased to 10.6 times that of the lowest 10 percent. The 20 percent of households with the highest income increased their share of the national wealth while the share of the lower income households decreased. Nevertheless, the economic boom in the early 1990s has left the average Israeli better off. The GDP per capita has increased from US$5,600 in 1980 to US$17,500 in 2000, an increase only exceeded by Singapore and Hong Kong.

However, inequality between Israelis of different ethnic origins is deeply entrenched. The average incomes of Arab citizens of Israel are the lowest and have hardly changed over the last decade. The average income of Israel-born Mizrahi Jews (originating from Africa or Asia) are somewhat higher, increasing over the last decade, but the gaps between their incomes and those of Ashkenazi Jews (originating from Europe or America) did not change. The average incomes of Israel-born Ashkenazis are the highest and increase steadily. In 1997, Israel-born Ashkenazi salaried employees earned 1.6 times more than Israel-born Mizrahi employees and 1.9 times more than Arab employees, according the Central Bureau of Statistics. Israeli society also faces gender inequality, which are stronger among Oriental Jews and Arab Israelis. In 1997, women's monthly wages were, on average, 63 percent those of men. Women's hourly wages were, on average, 83 percent those of men. These figures show an

improvement over 1993 when women's earnings as a percent of men's was still 58 percent. The fact that many women only work part-time explains some of the gap in monthly earnings. Most salaried Israelis make less than the average wage; in 1996, 62 percent made less than 75 percent of average income. For about one-third of Israelis the labor market does not provide a decent living. Between 1979 and 1990, the proportion of Israeli families with poverty-level wages increased from 27.9 percent to 34.3 percent, according to the National Insurance Institute. This figure remained stable throughout the 1990s.

WORKING CONDITIONS

The Israeli civilian labor force were 2.435 million, or 54 percent of the 4.487 million population aged 15 years and over, in 2000. In Israel the rate of participation in the labor force is low compared to other developed economies. Women's rate of participation in the civilian labor force was 48.2 percent in 2000, as opposed to 60.8 percent for men. In 2 segments of the Israeli society, among Arab Israelis and ultra-orthodox Jews, the rate of participation in the labor force is rather low, especially for women. About 11.5 percent of the labor force in the business sector are foreign workers, of which 46 percent are Palestinians, and the rest are from other countries. Except for the Dead Sea minerals, Israel has almost no natural resources, making human capital the country's catalyst for economic growth and competitiveness. In 1999, about 13 percent of those employed were academic professionals, and 14.6 percent were professionals and technicians. In 1999 about 15 percent of the civilian labor force had 16 years of schooling or more, compared to 1 percent in 1979, indicating a sharp rise in qualified Israeli professionals.

The General Federation of Labor in Israel, usually known as the Histadrut, is the largest voluntary organization in Israel and an important economic body. It is open to all workers, including the self-employed, members of co-operatives and of the liberal professions, as well as housewives, students, pensioners , and the unemployed. The reach of the Histadrut extends to approximately 85 percent of all workers. Dues are between 3.6 and 5.8 percent of wages and cover all its trade union, health insurance, and social service activities. The federation engages in 4 main fields of activity: trade union organization, social services, educational and cultural activities, and economic development.

Israel's labor standards are in line with international regulations and norms. There is a minimum monthly wage, and employees are entitled to social benefits under the comprehensive national insurance, Bituah Le'umi. There is also a state-provided health-care system in place, the so called Kupat Holim. Every male conscript has to serve up to 30 days of army reserve duty every year; employers continue paying their employees' salaries during this time. Israel has a minimum wage law, which is 47.5 percent of the average wage. Sometimes questionable is the enforcement of labor standards with regard to foreign workers, mainly from Eastern Europe and South Asia, as well as Palestinian workers employed in Israel.

COUNTRY HISTORY AND ECONOMIC DEVELOPMENT

70 A.D. After a Jewish uprising against Roman occupation, the Diaspora begins, and Jews emigrate to Europe, the Balkans, the Middle East, and North Africa.

1882-1903. First Aliya (large-scale immigration) occurs, mainly from Russia.

1897. First Zionist Congress is convened by Theodor Herzl in Basel, Switzerland; Zionist Organization is founded.

1904-14. Second Aliya occurs, mainly from Russia and Poland.

1909. First kibbutz, Degania, and first modern all-Jewish city, Tel Aviv, are founded.

1917. The Ottoman rule, which has lasted for 400 years, is ended by British conquest; British Foreign Minister Balfour pledges support for establishment of a "Jewish national home in Palestine." (This statement is called the Balfour declaration).

1919-23. Third Aliya occurs, mainly from Russia.

1924-32. Fourth Aliya occurs, mainly from Poland.

1933-39. Fifth Aliya occurs, mainly from Germany.

1936-39. Arab revolt against Jewish immigration.

1947. After World War II and the Holocaust, the UN proposes the establishment of an Arab and a Jewish state in Palestine. The British pledge to end their mandate in 1948.

1948. On 14 May, David Ben Gurion, chairman of the Jewish Agency in the mandate of Palestine, declares the State of Israel. The following day, the armies of Lebanon, Syria, Iraq, Jordan, and Egypt attack the newborn Jewish State. The War of Independence (Israel) or the "Nakba" (catastrophe) begins and continues in 3 phases until 1949. Israel not only defends itself but increases its territory far beyond the original division plan. To Israelis, this is the miracle of David defeating Goliath; for the Arabs, it means escape and expulsion and the beginning of the refugee Odyssey of the Palestinians, the "Nakba." Peace talks in Cyprus fail.

1956. England, France, and Israel collaborate in a plot to remove Egyptian president Nasser, the hero of the Arab world and one of the leaders of the Non-Alignment movement, and attack Egypt. Under U.S. and Soviet pressure, Israeli troops withdraw, and Nasser claims victory

1967. On 6 June, following misinformation from Soviet observers, tensions suddenly build up and lead to an Israeli "pre-emptive" strike against its Arab neighbors. Within 6 days, Israel defeats all its enemies, among them the entire Egyptian air force before it can even take off, and occupies large amounts of land: in the South, Israel "frees" the Negev and occupies the Sinai peninsula; in the North, the Jewish state captures the strategic Golan Heights; and to the East, Israel occupies the Jordanian West Bank, including Jerusalem. The historic town is immediately declared the "eternal and undivided capital" of the Jewish state. At the same time, Israel becomes an occupation force controlling a large population of Palestinian Arabs in the West Bank and Gaza Strip.

1973. A surprise attack by Egypt and Syria gives the Arab states a face-saving "victory" that, in fact, is another defeat in the Yom-Kippur or October War.

1977. The Likud wins the general elections in 1977, introducing a new era in Israeli politics. Egyptian president Anwar Sadat visits Jerusalem and speaks to the Knesset, paving the way for ensuing peace negotiations at Camp David. A peace agreement between Egypt and Israel is signed in 1979.

1982. Israel invades Lebanon and manages to drive the PLO leadership from Beirut to Tunis. Ariel Sharon, the minister of defense and former war hero, single-handedly and somewhat illegally masterminds the invasion as far as Beirut. He has to resign after the invasion and later faces a court charge over a massacre of Palestinian refugees in the camps of Sabra and Shatilla by Israeli-allied Christian militias. In the midst of a deepening economic crisis, a national unity government and reform measures are implemented. Economic deprivation and general dissatisfaction with the Israeli military occupation trigger a Palestinian uprising, the Intifada.

1990. The downfall of the Soviet Union brings almost 1 million new immigrants to Israel. During the Gulf War and the liberation of Kuwait from Iraqi occupation, Iraq fires missiles on Tel Aviv and Haifa.

1992-93. The elections are won by war hero and ex-prime minister, Yitzak Rabin, in 1992. A secret channel leads to direct negotiations between PLO and Israel, resulting in mutual recognition and a Declaration of Principles for the assumption of peace talks, known as the Oslo Accord, presented to the public in Washington, D.C., on 23 September 1993.

1994-95. Israel concludes a peace treaty with Jordan and the Gaza-Jericho (Oslo II) agreement with the Palestinians. After a series of suicide bomb attacks within Israel, Rabin is assassinated on 4 November 1995. Shimon Peres becomes prime minister but loses the elections to Benyamin Netanyahu ("Bibi") who becomes prime minister in May 1996 and opens his reign with the tunnel under Al-Aqsa, leading to violent riots.

2000. Having won the elections against Bibi Netanyahu in June 1999 on a pro-peace platform, Israel's highest-decorated soldier, Ehud Barak, realizes his promise to pull Israeli troops out of South Lebanon within a year. Peace talks with the Palestinians at Camp David fail and the so-called Al-Aqsa Intifada breaks out in September, after a highly controversial visit of the new Likud leader, Ariel Sharon, to the holy sites in the Old City of Jerusalem.

2001. Ariel Sharon becomes prime minister.

FUTURE TRENDS

The real key to Israel's economic take-off will be its ability to come to some peaceful accommodation with its immediate Palestinian neighbors and the other countries of the region. As the Peace Process has stalled, so have the bright prospects for economic integration which were supposed to boost the regional demand for Israeli products and services. With a genuine peace in this region, Israel is easily poised to be a significant "engine of growth" for the whole Middle East.

Israel remains well positioned to compete in the knowledge-intensive industries of the 21st century, and its economy has the potential to grow at some 4 to 5 percent per year. Israel's proportion of scientists, engineers, and other skilled personnel in the labor force is high by international standards, and Israeli companies are rapidly developing experience in the business aspects of transforming technology into marketable products and services. Further, the ongoing structural transformation of the economy, especially its shift from traditional to higher-value goods and services, should add to Israel's growth potential in the near future. Finally, structural reforms that will increase the level of competition and reduce the role of the state should add to overall efficiency and productivity.

DEPENDENCIES

THE WEST BANK AND GAZA STRIP.

Since the Oslo Accords in 1993 between the Palestine Liberation Organization (PLO) and the State of Israel, a Palestinian National Authority has been established and autonomously rules over parts of the West Bank and Gaza Strip. Those territories are Israel's largest market and most important trade partner, with a total population of 2.9 million, of which 1.9 million lived in the West Bank and 1 million in the Gaza Strip in 1997.

With the occupation of the West Bank and Gaza Strip by Israel in the 1967 war, both territories became economically dependent on Israel. By 1987, almost 50 percent of the Gaza Strip's total labor force was employed in Israel. About 90 percent of imports came from Israel, in an involuntary and one-sided customs union. Local trade was concentrated in the hands of a few large-scale wholesalers. As a result, indigenous development did not occur. The Palestinians became increasingly dependent on Israeli wages, imports, and technologies. Industry remained weak, contributing only a small percentage of GDP, employing only a small fraction of the total labor force and remaining limited to small firms that were mainly engaged in subcontracting for Israeli firms of the textiles and clothing industry.

Until 1989, the combined level of the GNP in the Palestinian territories was only 6 percent of Israel's; the combined GDP of the territories was only 5 percent of Israel's, thus indicating the massive inequalities implied in the relationship. The outbreak of the first intifada, or uprising, in 1987, itself the result of the oppressive conditions of life under occupation, worsened the economic situation. The 1991 Gulf War effectively stopped vital remittances , direct aid, and income from wages in Israel, with frequent closures and curfews imposed on the territories. The repeated closures in the context of a deteriorating security situation in 1992 and 1993 led to mass unemployment and impoverishment.

The 1993 beginning of the peace process was hoped to bring remedy. But despite the peace process, employment of Palestinian workers in Israel steadily decreased, and as a result, unemployment soared to 20 percent to 30 percent on average and up to about 50 percent in Gaza. Closures have also contributed to a decline in the GDP, which fell by about 14 percent during 1992-96, while private investment declined by about 60 percent. Poverty has risen substantially. Trade relations have barely changed. Israel has remained Palestine's most important partner, still accounting for about 90 percent of trade. The current second intifada, an expression of the population's dissatisfaction with the peace process, has had devastating effects so far. Unemployment has soared to more than 50 percent, in the case of the Gaza Strip estimates reach figures as high as 80 percent. Billions of dollars of investments have been destroyed, and the little business infrastructure that has existed has been disrupted or destroyed.

BIBLIOGRAPHY

Aharoni, Yair. The Israeli Economy: Dreams and Realities. London: Routledge, 1991.

BDO Shlomo Ziv. Doing Business in Israel. <http://www.bdo-israel.co.il/db2001-2.html>. Accessed September 2001.

Economist Intelligence Unit. Country Profile: Israel. London: Economist Intelligence Unit, 2001.

Israeli Ministry of Finance. <http://www.mof.gov.il>. AccessedSeptember 2001.

Rivlin, Paul. The Israeli Economy. Boulder: Westview Press,1992.

U.S. Central Intelligence Agency. World Factbook 2001. <http:// www.odci.gov/cia/publications/factbook/index.html>. Accessed October 2001.

U.S. Department of State. Commercial Guide, FY 1999: Israel. <http://www.state.gov>. Accessed September 2001.

—Ralph Stobwasser

Markus R. Bouillon

CAPITAL:

Tel Aviv/Jerusalem. Israel proclaimed Jerusalem as its capital in 1950, but most countries, including the United States, have not recognized this internationally disputed move and maintain their embassies in Tel Aviv.

MONETARY UNIT:

New Israeli Shekel (NIS, named after the currency in use in biblical Israel, was introduced in the late 1980s). Bills include 10, 20, 50, 100, and 200 shekels, and there are coins worth 1/2, 1, 5, and 10 shekels. The New Israeli shekel is divided into 100 agorots, of which there are 5, 10, and 20 agorot coins.

CHIEF EXPORTS:

Machinery and equipment, software, cut and polished diamonds, chemicals, textiles and apparel, agricultural products.

CHIEF IMPORTS:

Raw materials, military equipment, investment goods, rough diamonds, fuels, consumer goods.

GROSS DOMESTIC PRODUCT:

US$110.2 billion (purchasing power parity, 2000 est.).

BALANCE OF TRADE:

Exports: US$35.1 billion (f.o.b., 2000). Imports: US$31.5 billion (f.o.b., 2000).