Monday, February 26, 2007

JERUSALEM - Israel’s economy continued to bound forward with growth above 5 percent for the third straight year in 2006, despite Palestinian unrest and last year’s border war in southern Lebanon.

The Central Bureau of Statistics in Jerusalem reported last week that the cost of the war was only 0.3 percent of the gross domestic product, not 1 percent as had been estimated, leaving growth in 2006 at 5.1 percent.

The three consecutive years of strong growth have been accompanied by high levels of foreign investment that has been relatively unaffected by violence in the Palestinian territories and intermittent attacks on Israelis.

In a speech in December four months after the Lebanon war Israeli Prime Minister Ehud Olmert declared that Israel’s economy had never been so healthy.

“This is the first year in the history of the state in which exports exceed imports by billions of dollars,” he said.

The Economist, which ranks economies on the basis of five-year average GDP growth, has placed Israel among the five fastest-growing emerging markets in the world.

In the past 20 years, Israel rose 12 places from the 48th biggest economy in the early 1980s to the 36th biggest in the 2001-05 period. During the same period, it underwent two long Palestinians intifadas and two wars in Lebanon in addition to being on the fringe of the 1991 Gulf War, in which it was hit by dozens of Iraqi missiles.

In upgrading Israel’s credit rating this month from “stable” to “positive,” the international rating agency Standard & Poor’s said the revision “reflects the improved resilience of Israel’s public finances and economy to geopolitical shocks after a three-year period of fiscal consolidation and strong economic growth.”

On a rare sour note, the Histadrut labor federation has called for a broad general strike this week that likely will target government offices and could be extended to public transportation, airports and schools.

The strike was called to protest the government’s failure to pay thousands of municipal employees because of a dispute over the transfer of funds from the national government to municipalities.

Israel, meanwhile, has not escaped the effects of its security burden, which includes financing a large standing army and developing weapons systems. Although the nation’s per-capita GDP has risen in six years from $15,000 to $18,700, it would have risen to $22,500 were it not for security outlays, said Dan Peled, head of security economics at the Israel Institute of Technology, or Technion.

Nevertheless, Israel was able to attract a record $20 billion in foreign investment last year, including $4 billion from U.S. financier Warren Buffet in the Iscar Metalworking Co., a maker of precision tools. It was Mr. Buffet’s first major investment outside the United States and was made in a plant just a few miles from the Lebanese border.

Two months later, the war broke out, and a rocket hit the industrial park in which Iscar is located. Although many workers left during the war to take their families to safer locations, the plant maintained production.

“We didn’t miss a single shipment,” said a company official. “For our customers around the world, there was no war.”

Most foreign investment is in the high-tech field in which Israel has long excelled. This is one area in which Israel’s security concerns are an advantage because many of Israel’s technological innovations are spinoffs from the military field.

The Tel Aviv stock market, which remained relatively stable during the war, has risen about 25 percent since the war, despite forecasts of another round of fighting by summer with Hezbollah and perhaps Syria, and the prospects of a major war with Iran.

Nehemia Shtrasler, economics editor of the Ha’aretz newspaper, said the economy’s buoyancy is explained by free-market policies, including budgetary restraint, tax cuts, privatization and the opening of the market to the free movement of goods, services and capital. Inflation is near zero, and reserves stand at $28 billion.

“Israel’s economy is growing faster than that of all Western economies,” Mr. Shtrasler wrote. “Even the war did not slow the pace.”

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