The country to be discussed in the following document is the State of Israel, analyzing the economic growth from January 1998 to January 2018.
First of all, Macroeconomic is one of the subjects in economics that examines how the aggregate economy progresses over time. In macroeconomics, there are a few key economic features that are carefully examined such as Gross domestic product (GDP), changes in unemployment, annual GDP growth rate, price levels, national income and currency inflation. (Staff, 2018)
There are two different types of economic analysis; Macroeconomics and Microeconomics. The difference between the two is that Macroeconomics studies the performance of the economy as a whole, including the amount saved and spent by all households, the productiveness of a countries labour force, how actions of a government and central bank stimulate the overall national or regional economy, whereas micro focuses on decisions made, performance and spending of individuals or single businesses. (Cia.gov, 2018)
Although the State of Israel is only 70 years old and the majority of its land at the time was empty, therefore, very limited starting basis, Israel still managed to become one of the worlds most advanced economies. The most popular economic sectors of Israel are High-Technology Research & development and industrial manufacturing. (Cia.gov, 2018)
In order to examine the performance of the Israeli economy it is necessary to look in the components of macroeconomics such as inflation which is a quantitative measure of the rate at which the average price of a basket of goods and service in an economy increase overtime inflation calculated the purchasing power of the national currency in our case New Israeli Shekel (NIS). This currency was introduced in 1971 and since then the national monetary fund and the central bank perform all the necessary analysis to keep inflation within permissible limits thus avoiding crisis and economic issues. The current rate of inflation in Israel is 0.2% which is the 14th best in the world (with an annual inflation average of 1.87% between the years 1998-2018), meanwhile Germany with 1.6%, USA with 2.1% and the UK with 2.6%. Thus, showing the Israeli Shekel is very stable. Additionally, when inflation is low, the interest rates are automatically lower, therefore, the cost of borrowing reduces, this motivates households to purchase durable goods such as real estate and automobiles. It also encourages companies to invest in their productivity and improve their competitiveness in the market without the need to constantly raise prices for their goods. With lower inflation, it is safer to make long-term investments. People are encouraged to put more in governmental bonds, savings accounts since they know that the currency will not devalue quickly. Same applies to wages, given that the average salary in Israel is approximately 10,524 NIS and inflation is low means that people will not feel noticeably poorer over the years yet their money will maintain its value and their purchasing power will remain relatively strong. Whereas in Ukraine for example, inflation rate is extremely high, in 2015 it reached its all-time high of 47.10%, which means that now everything became twice more expansive for Ukrainians, thus making the countries purchasing power dramatically weaker, slowing down their economic growth and reducing the standard of living since people can afford much less.
The second factor is unemployment. A high rate of unemployment results in more money spent from the government’s budget on unemployment benefits thus resulting in higher Income Tax rates for employees and companies. When unemployment is high governments will look to replenish their coffers by increasing their taxation on businesses, thus discouraging companies from hiring additional employees. This can be a crucial factor for Israel since its unemployment level is the 28th best in the world which is relatively low standing at 4.27% in 2017, whereas USA at 4.8% China at 4.9%, the UK at 5.0%, France at 9.6% and Spain at 16%. Although unemployment is relatively low, in 2017 Israel spent over 86 Billion NIS (£18 Billion) on public welfare which is about 6% of Israel’s GDP. However, if we look at the chart 6 we can see that since 2009 the level of unemployment has been rapidly decreasing and could potentially go below 2% by the end of the decade (2020).
The third factor is the annual GDP growth rate. The GDP growth rate measures how quickly the country’s economy is growing. This analysis is done by comparing two-quarters of the country's GDP which measures the overall economic output of a country. The growth rate is driven by the 4 components of GDP. The main driver being personal consumption which includes retail sales. The second component is the investment in business such including inventory levels and development of infrastructure. Governmental expenses are the third driver of GDP growth. Third and biggest categories are social security benefits such as welfare, defence and military as well as Medical care benefits. The forth is Net-Trade.
Israel’s GDP is currently $374 Billion with an annual growth rate of 4.0% which is relatively high given that it is already a highly developed county as usually less economically developed countries have a higher growth rate and MEDC’S have lower, also by looking at chart number 3 in the appendices its seen that since 1998 Israel’s GDP has quadrupled from roughly $100 Billion to almost $400 Billion, whereas USA and UK did not even double their GDP within the same time frame.
Israel has various sectors of activity from which they generate their GDP, such as exports and services. The importance of exports is that it provides employment, for example agriculture and the exports of fruits and vegetables provide lots of jobs, same as producing polished diamonds out of raw diamonds, one of Israel’s largest employers is Israel Aerospace Industries (I.A.I) which produces a number of things such as space equipment and aviation as well as defence products and in 2017 I.A.I had an order from the US worth over $11.4 Billion. Another major employer is Teva Pharmaceutical Industries (TEVA), which is one of the world’s leading pharmaceutical companies, TEVA is currently employing over 60,000 people as of 2017. TEVA is the biggest generic drug producer in the world and is also in the top 15 largest pharmaceutical companies on the globe. The second benefit of exports is that it effectively improves the economy since an increase in exports will increase aggregate demand thus resulting in higher economic growth. For example, Diamonds, Israel is one of the world’s largest sources for polished cut diamonds amounting to 14% of worldwide production and 28% of total exports in Israel, cut diamonds from Israel are being distributed to Hong Kong, USA, Switzerland, India, Belgium and Luxemburg.
Another major source of income for Israel is Tourism, welcoming close to 4 million foreign tourists in 2017 (whilst the country’s overall population is only 8 million people). Resulting in a 25% growth from 2016 and generated a record-breaking NIS 20 Billion ($5.4 Billion) to the Israeli economy. Given that Israel’s population is relatively small when compared to other developed nations, Israel still has the largest number of scientists per capita amounting to 140 scientists per 10,000 employees. Whereas in the US the ratio is 85 per 10,000 and in Japan 83 per 10,000. Thus, resulting in Israel being ranked 4th worldwide in scientific activity.
Due to its political and safety issues in the middle east, Israel had become one of the leading military equipment exporters in the world. Amounting to 12% of the world's total. The military & defence industry is a highly important sector and an enormous employer within Israel. In the global arms marker, Israel was ranked as the 10th largest weapon exporter in the world in 2015. There are over a hundred defence firms in Israel with revenues exceeding $3.8 Billion per year. Overall military equipment exporters have gone over $9 Billion in 2017. Majority of the equipment is being sold in the US and EU.
Another major key in Israel’s economic success is very low levels of corruption. Corruption is usually referred to as the main root of economic dysfunction since is causes Artificially high prices for low-quality products and services, resources to be distributed inefficiently and unfairly, uneven allocation of wealth also knows as disparities and severe income gaps with no middle-class people, low stimulus for high-tech development since the legal systems in corrupt countries work poorly thus making it unsafe to patent ideas or creations, As a result of economic instability corrupt countries are unattractive to Foreign investors due to the potential risk involved. In addition, in corrupt countries, there is a tendency for business to avoid paying taxes thus resulting in a severe loss of national income and GDP growth with an overall result that stops the country’s economy from growing. However, Israel is the second least corrupt country in the middle east behind UAE and the 28th least corrupt worldwide (out of 176 countries). Whereas, all its geographically neighbouring countries are ranked significantly lower, such as Jordan at 57th Egypt at 108th, Lebanon at 136th and Syria at 173rd.
Given all these features, according to the Global Competitiveness Report, Israel has been ranked 2nd as having the world’s most innovative economy. Additionally, Israel’s HDI was ranked 18th out of 188 countries, surpassing Japan, Luxemburg, France, Austria and Finland.
Furthermore, During the 2007-2009 recession the damage was relatively small in comparison to the US and EU, and even turned out to be highly beneficial as many high-tech companies such as Apple, Google, IBM, Intel and Microsoft opened R&D centres in the country due to lower labour costs which resulted in a very steep decline in unemployment ever since (see chart 6). Also, an article was published in 2010 following the recession called “Israel's economy most durable in face of crises” which stated: “Swiss research institute IMD releases World Competitiveness Yearbook, ranks Bank of Israel first among world's central banks. Jewish state also leading in the supply of skilled manpower but has a very low rate of participation in the workforce”.
However, despite immense economic success, there are many challenges. Despite continues startup activity, Israel did not manage to produce any corporate giants such as Apple, Google or Intel or even companies half their sizes. Additionally, Israel has not been able to duplicate the success of its communication and defence sectors in other industries. Another issue can be the growing number of “Haredi Jews” (ultra-orthodox) who are largely unemployed, do not seek employment, live off welfare, do no serve the military, pay fewer Taxes and State fees. Although in recent years the Israeli government is attempting to battle this issue by applying new legislation towards the “Haredi Jews” and “Israeli Arabs” who represent almost 30% of the country’s population but due to political and religious reasons are unwilling to participate in the corporate world.
All in all, it is evident that although Israel is small by territory and population it is one of the leading economies in the worlds today, with huge future potential in many sectors which provide essential goods for humanity, such as Pharmaceuticals, Financial service, Defence Force, high technology production, Fruits, vegetables, Meats and more. With low inflation rate, low corruption, low unemployment rate, high GDP growth and High Foreign direct investment especially in recent years (see chart 5) as FDI is recognised as a powerful engine for economic growth since it diversifies investors’ portfolios, promotes stable and long-term creditability and provides additional external financing on top of the country’s current budget which allows the country to develop at a faster phase given the financial aid.