Economy

   Israel's economy has made impressive progress, and the economic well-being of its people has improved significantly since independence, when Israel was a poor country with weak agricultural and industrial sectors and a dependence on imported consumer goods, raw materials, and food. Economic growth was stimulated by a massive influx of immigrants (see ALIYA) and large governmental and private capital flows from abroad. Although virtually bereft of natural resources and faced with substantial burdens of immigrant absorption and defense, Israel had become an economic power by regional standards by the beginning of the 21st century (with a gross domestic product [GDP] of more than $12 billion), and its people generally had become prosperous (with more than $24,000 per capita GDP in 2005). Life expectancy is among the highest in the world, Israel has maintained a substantial level of social services for its population, and its gross national product had made dramatic progress. Nevertheless, Israel's economy remains dependent on foreign assistance and is burdened with an extraordinarily heavy debt-repayment responsibility.

   Israel's economy grew rapidly after independence. Between 1950 and 1972, the country maintained a real economic output rate of nearly 10 percent per year, and its output per worker nearly tripled. This was accompanied by significant increases in the standard of living. Inflation became a problem as the economy reached double-digit inflation in the early 1970s and triple-digit inflation (more than 400 percent) by the 1984 election (see KNESSET ELECTIONS). It was subsequently brought down to some 15 percent by 1987 through the efforts of the 1984-88 Government of National Unity. Balance of payments problems also marked the economy in the 1980s.

   Israel lacks substantial natural resources — it has limited amounts of various chemicals, such as potash and phosphates, and water supplies—but this has been offset by the unusually valuable asset Israel has in its human resources. Massive immigration created problems in Israel's early years, but it also endowed Israel with a motivated and skilled labor force. Israel has developed its own highly regarded educational and scientific establishment. Illiteracy is virtually nonexistent, and Israel's population is one of the most highly educated in the world. It is in the forefront of scientific accomplishment in fields such as irrigation and water usage, energy technology, and medical-scientific research.

   Israel's only significant domestic energy source is solar power; it has no coal or hydroelectric power potential and possesses very little oil and natural gas. Energy requirements are met largely by crude oil and coal imports, and nuclear power is under study.

   Israel has lacked the capital necessary for its economy to function efficiently, and since 1948, it has relied heavily on foreign capital inflows to finance the economy and for current expenditures. External sources have included loans, grants, contributions, outside investments, government aid from the United States, the sale of Israel bonds, German reparations and restitution payments, and donations from Diaspora Jewish communities. These sources have permitted Israel to pursue a policy of rapid economic and demographic expansion.

   The country's economy today has reached a significant level of accomplishment. It has returned to the robust economic expansion that characterized Israel before the recession of the early years of the 21st century coinciding with the start of the Al-Aksa intifada. Beginning in 2004, the effects of the intifada seemed to have worn off, and foreign investors and businessmen recognized the long-term resilience of the Israeli economy despite the absence of peace and continuing terrorist attacks. The integration of the Israeli economy with the global economy continued with imports at the rate of 40 percent of GDP and exports at more than 35 percent in 2005. Israel's economic growth for 2005 was the highest in the Western world. GDP rose by 5.2 percent, and per capita income jumped by 3.3 percent.

   Other statistics showed similar economic strength. Although it suffered significant temporary disruption (especially in the northern sector) as a result of the Second Lebanon War (2006), the fundamentals of Israel's economy remained remarkably strong, stable, and durable, leading major investment analysts to predict sustained growth and integration with the globalized economic system.

   See also Buffett, Warren E.; Israel Aircraft Industries (IAI); Koor Industries.