Comparative Progress Global Business Systems: A Case Study Of Israel’s Economy

Economy of Israel

Discuss about the Comparative Progress Global Business Systems.

Modern Israel was established in the year 1948 with a very small population. In just a period of two years, the population of the country doubles. This lead to an increase in the gross domestic product per capita income. Various economic factors and conditions led to the transformation of the state. The assignment analyzes the economic factors such as interest rate, Gross domestic product, interest rate, technology, population and other factors. The country has the second largest start up companies in the world with the GDP of US$37,032. It is a developed nation and was ranked in seventeenth position in the world in the year 2010 (Aharoni, 2014). It is technically advanced economy. The economy plays a leading role in the supply of solar energy industry. The industries that are established in the country are metallurgical industries, chemicals, food, metal products, transport equipments and diamond cutting industries. The economy of Israel is relatively poor in natural resources and hence depends on imports of natural resources from other countries such as petroleum, raw materials, wheat’s and other natural gas reserves (Bental et al., 2016). The industrial sector of the economy is advanced and technologically upgraded. The nation has established a free trade agreement with European Union, United States, Turkey, Mexico and other countries of European free trade association.

Economy of Israel is also a tourist place with 3.54 million foreign tourists visiting the nation in the year 2013. The export goods of the nation include telecommunication equipments, machinery equipments, agricultural products, textiles, metals, and chemicals. Its main export partners are United Sates, United Kingdom, Hong Kong and China. The import goods and materials that are imported by Israel are raw materials, natural resources, petrol and petroleum products, fuels, consumer goods and investment goods. The importing partners of the country are United Sates, Italy, Germany, China and Switzerland (Yaron et al., 2013).

The condition of statehood had put the economy of Israel in crisis. The unemployment rate was high and the foreign currency reserves were scarce in the period 1949 to 1959. An agreement was signed with West Germany where Germany agreed to pay money to Israel for the development of the nation. This was done to compensate the Jewish property that was stolen by Nazis. Israel is nation that is religious in nature. The state mainly comprises of Muslims, Jews, and Christians. The priority was given for the development of industries. The policies of the nation concentrated on industrialization (Blinder, 2013). Development of two policies has helped the economy of Israel develop. The first policy was Jewish immigration and the second policy was peace process. In the early 2000, the economy of Israel went again into crisis due to the crashing of dot com bubble. It hampered the startups of many new industries that put the economy at stake. The economy of Israel was able to sustain the crisis of 2000. A growth in GDP was encountered in 2009 along with capturing low rate of unemployment (Bakalyar & Galil, 2014).  

Economic policies that led to economic transformation

Economic policies

Israel gained independence in the year 1948. Economic policies are the policy that is set by the government of nation to transform the economy and form strategy that will benefit the economy. The economic policies included attributes such as interest rates, government spending, money supply, inflation rate, cash rate, taxes and various monetary and fiscal policies. Changes in any one of the economic policies affect the entire nation (Benchimol, 2016). For example, increase in money supply in the economy increases the demands, investment and the inflation rate. The population of Israel was very low during the time of its establishment. In two years, the population of Israel almost doubled due to rise in the migration of people. The political, social and economical structure of the country was developed in the year 1948. The two main factors that led to the development and growth of the economy of nation was immigration and capital inflows. The population of the country doubled from 56,000 to 630,000 due to huge immigration of population (Balassa, 2014). These mainly included the refugees, from Central and Eastern Europe. Immigration of large amount of population led to increase in capital inflows and funds. There was rise in the national funding and private funding.

The two developments

Since the early 1990s two developments has led to the transformation of the economy of Israel. The first development was the immigration of Jewish people. This led to an increase in the citizens of Israel especially from the people of former USSR. The population increased by one million Jewish people due to immigration of people. The benefit was that people who immigrated were highly educated people, which now comprises of sixteen percent of population. Rise in the population has both the advantages and disadvantages on the economy (Ben-Elia, 2016). Rise in the population in Israel led the country to establish new start up industries and create demand for products. The establishment of startup industries led to an increase in investments. Rise in aggregate demand and investments leads to economic growth.

The above diagram shows that rise in the investment leads to the outward shift of both the aggregate demand and aggregates supply. This is due to the rise in the capital stock. The outward shift of the curves leads to a rise in the GDP and hence encourages economic growth.

The growth in the population has negative impact as well. Israel was successful in sustaining the rise in the population. The housing and employment needs of the people were fulfilled by the policies used by the economy. A new economic policy came into enforcement in the year 1952. The policy concentrated on curbing of monetary policies such as interest rate and money supply, relaxation of price controls and rationing, relaxation on restraints and exchange rate devaluation. The encouragement of immigration was curtailed to sustain and absorb the masses from previous immigration (Breznitz & Ornston, 2013).        

Rise in immigration and population

Peace treaty

The second development that led to the transformation of the economy is the signing of peace treaty between Israel and Jordan at peace conference held at the Madrid conference (Budge & Laver, 2016). 

Israel is technologically advance economy that attracts large amount of foreign investment. It is an industrialized economy where the concentration is on industries and service sector. The transformation of the economy of Israel led the economy become globalized with high tech industry, multinational labor and increase in consumer culture. It also led the gap between the rich and the poor to increase (Horowitz & Lissak, 2012).

Increase in foreign investments

Increase in the capital inflow from foreign countries was one of the reasons for the economic growth. Real Gross National Product increased by rate of eleven percent and annual gross national product increased at a rate of six percent. The capital inflows was in the form of unilateral transfers, loans from the United States aids, inflow from Germany in the form of reparations, and transfers of loans and unilateral transfers from other agencies such as that of Jewish institutes (Carmon, 2016). The availability of resources for consumption in domestic nation increased both the private and national consumption in the economy. Import substitution was promoted for the development of new industries by adopting protectionists measured through the government budget. Government also enabled subsidies that were involved in export of goods. This was done to increase exports and the revenue collected from these exports (Checherita-Westphal & Rother, 2012).

Changes in the economic fluctuations in the economy of Israel were mainly due to flow of immigration.  The economy encountered high rates of growth in income and GDP till the year 1973 after which the rate of growth was not as high as those of previous years did.  The economy of Israel fell into recession in the period from 2001 to 2003. The income of the nation has said to rise in the end of twentieth century that was similar to many developed and industrialized nations (Khattab et al., 2016). The contribution of industrial sector towards the GDP growth is maximum. The change in structure of economy increased the importance of industrial sector and declined the contribution of agricultural sector. The other reason for the economic transformation was development of technology and industrialization. From the traditional industries, the industry transformed itself into high tech sophisticated industry.  This was a major step from the transformation of economy of Israel (Kirzner, 2015).

Technologically advance economy

The capital inflow in Israel after the global crisis. In 2013, the foreign capital recorded a hit high of 7022 billion dollar. Increase in the capital inflow of the economy is the reason why the economy of Israel is able to maintain the deficit in current account.  Rise in capital inflow also led to an increase in the currency of Israel strengthening the currency of Israel that is twenty-three percent (Konnikov & Raijman, 2016).

The economic policies of the economy were changed from government control to a more free policy. The government released its control over the economy to help it develop and grow. A policy of economic liberalization was followed by the nation. A free trade treaty was signed by Israel with many countries to encourage export. The restriction of imports was changed from quantitative protection to tariff protection. The economy encouraged both import and export by flexible exchange rates (Maddison, 2013). The economy transferred itself from fixed exchange rate to floating exchange rate system where the exchange rate was fixed through the system of exports and imports.  The floating exchange rate system can be depicted in a following diagram:

After the independence of the economy of Israel, the economy followed trade restriction by imposing import substitution and quantitative restrictions on imports. This was done to encourage domestic production and reduce the imports if the economy. A new economic policy was generated in the year 1952 that concentrated more on liberalization of the economy. A free trade agreement was signed between the countries where the economy encouraged export and quantity restriction on imports were replaced by tariff protection. This helped the economy encourage exports and imports that led to industrialization in the economy (Martin, 2014). The foreign exchange currency was changed from fixed exchange rate system to floating exchange rate system where the government had less control on the economy. The state driven economic policy transformed the economy of Israel. The economy of Israel transformed from a central economy to a mixed economy where both the public and the private sector thrived and the government had less control on the economy. Liberalization of the economy led to an increase in the exports and strengthened the economy (Metzer, 2014). The GDP per capita of the economy rose and the purchasing power. The economy of Israel transformed itself into more competitive market structure, that was market oriented and pen in nature. The average tariff rate in Israel is 0.9 percent (Webber & Smith, 2014). The economy and the government puts several restrictions on the import of agricultural products to encourage the local farmers and help them increase and improve the standard of living. This can be analyzed from the following diagram of tariff restriction. Tariff restriction reduces the amount of goods that a country can import but also helps the government earn revenue in form of tariff rates. Tariff rates are the taxes that are imposed by the government on the economy (Morata & Sandoval, 2012).

Liberalization of economic policies

The role of the government changed in the economy. The control of the government on exports, imports, process and others were controlled. The role of the government shifted to other programs such as health care centers, infrastructure, and other social welfare benefit. The policy of social welfare payment such as unemployment benefits, transfer payment, pensions, insurance, helped the economy reduce the inequality gap of income (Magazzino, 2015). Due to the increase in transfer payments by the government, Israel was on e of the developed nations with the least income inequality gap. 

Israel was one of the nations to have encountered the largest economic growth for the period of six years. The main factor for encountering largest economic growth in a period of six years apart from industrialization and liberalization was establishment of occupation settlement enterprise. The major reasons for the growth of the economy of Israel were trade liberalization, industrialization, less control of the government over the economy, global and new economic policies, encouragement of imports and exports and free functioning of the economy. Apart from these, the other reason for the transformation of the economy of Israel was use of high and sophisticated technology in the agricultural and industrial sector (O’Connor, 2013). This occurred in a period from 1967-1973 where the rate of economic growth or the GDP growth arte almost doubled. The major reason for this was establishment of occupation settlement enterprises. The major transformation took from 1948 to 1956. The economic policies have made the economy of Israel a lender and not a borrower, which is mainly due to the macroeconomic policies that the economy follows (Perez, 2013).

The interest of the economy was declined to encourage the economy towards the path of growth. Decline in the interest rates led to an increase in the money supply. Rise in money supply in turn led to an increase in demand and investment. Taking loans from the banks became more interesting and lucrative that led to an increase in the investment. Increase in investment led to an increase in the start up of industries that helped in employment generation. Decrease in the interest rate will reduce the price for loan able funds and increase the demand. This will lead to an increase in aggregate demand and investment.

The unemployment rate is low in Israel as compared to other nations. This is mainly due to two factors. One is the refusal of the government of Israel to aid the public money at the time of crisis. This helped in curtailing the risk that was involved with the policy.   The second was the adoption of the policies set by Bach’ar commission that helped in management of finance of the economy. The economy of Israel is said to have gone through the phase of “Economic miracle’. Israel’s tremendous growth in the economy was remarkable (Plessner, 2012). The GDP growth rate was ten percent annually. Along with this, the economy was also successful in absorbing immigration, maintain security, fight the wars, maintain, and establish infrastructure. This was termed as economic miracle of the nation. The optimal utilization of the available resources and capital was one of the reasons for economic growth and development of the nation (Ram, 2013). The countries successful policies managed the immigrants successfully which contributed towards the growth of the economy. The economy was also successful in sustaining the global economic crisis. The economic growth of the nation was relatively high in 2006 as compared to other developing nations.  Israel was one of the few nations to have encountered a positive economic growth in 2009 after the period of global recession (Richardson, 2014).

Table: Economic growth rate of Israel

Year	GDP growth rate (annual %)
2001	0.2
2002	-0.1
2003	1.2
2004	5.1
2005	4.4
2006	5.8
2007	6.1
2008	3.1
2009	1.3
2010	5.5
2011	5.0
2012	2.9
2013	3.4
2014	2.6
2015	2.5

(Source: Data | The World Bank. 2016). 

The growth rate is fluctuating in the economy.  Initially the growth rate was rising. It declined in 2009 due to global recession and crisis. The economic growth rate was positive even at the time of recession. The other developing countries experienced negative economic growth rate but Israel experienced positive economic growth though it was low. 

Though the economy has experienced high rate of economic growth in past there are several economic challenges that an economy face. This includes both short term and long term challenges. The short term challenges that Israel economy face is the problem in developing the telecommunication industry that changes the economic outlook and perspective of the economy. The economy is also not being successful in promoting large multinational companies that controls the employment of large number of peoples. The rise in dependency of labor force participation of orthodox Jews with less knowledge hampers the economy in long run (Cingano, 2014). Due to the high dependency ratio the poverty among the orthodox Jews rise that is harmful for the economy of Israel. The two main challenges faced by the Israel economy are that of terrorism and work force participation.

Terrorism: Rise in terrorism is very harmful for the economy. It affects the functioning of the economy in a negative way. The resources of the economy deplete and it leads to rise in the pollution. The number of tourists visiting the economy also declined due to which the revenue that the economy earns from tourists also declined (Rudnitzky, 2014). The rise in the terrorism hurt the exports and the foreign investments too as foreign companies were apprehensive too invest in the nation. Israel’s economy began to grow after the war ended. The strong point of Israel’s economy was that it was able to sustain the risks of terrorism (Sadeh, 2014).

Work force participation: lower level of workface participation is harmful for the economy as it reduces the wealth generation and production of products in the economy (Scully, 2014).

Inflation: The prices are rising with the advancement in technology and economy.

The problem of income inequality between the rich and the poor is increasing.

Israel is a mixed economy where both the government and private sector work together in the economy. The challenges and economic problems faced by the economy of Israel are same as that of an industrial country. This includes problems and challenges associated with reconciling innovation in industrial products and methods. The industries face problems in transition stage when replacing the traditional activities with high tech sophisticated machines (Stiglitz, 2014). It is essential for the economy of Israel to figure the ways of fitting in the global economy that is marked by two major markets of European Union and United States. The economy also faces challenges due to the relationship that it holds with other Arab countries. The economy is always under the threat of war and terrorism due to which the major part of capital is wasted in maintaining the security and army. Peace can lead to productive utilization of products. Political security also helps the economy attract foreign investments that is beneficial for the economy. The educational qualification of the economy is high in Israel (Thórisdóttir & Karólínudóttir, 2014). 

Conclusion

Israel gained independence in the year 1948 after which the economy captured a tremendous growth in the economy. The population size of the economy doubled and the gross domestic product. The economic growth almost doubled in the economy. The economy of Israel transformed from a central economy to a mixed economy. Various economic factors led to the transformation of economy of Israel. These factors include economic liberalization policies, free trade, decline in interest rate, occupation settlement enterprise, economic liberalization, and less control of the government. Industrialization and rise in immigration are some of the other factors that led to the transformation of the economy. The economy experienced the growth in the GDP per capita income by forty percent. The economic growth doubled in the economy. Privatization of the economy and increase in capital inflow led to an increase in the economic growth. The foreign investment led to an increase on demand and start up industries. High tech technologies led to an increase in startup industries. The economy has low inflation rate, low unemployment rate and interest rate that led to an increase in foreign debt. Economy of Israel was able to survive the recession of 2009 and encountered a positive economic growth.

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