The Israeli economy has experienced dramatic changes since 2000. In that year, it moved from a short, sharp boom to the beginning of one of the worst recessions in its history. Then, in 2003, it turned a corner to become one of the fastest-growing economies in the developed world. In the summer of 2008, the economy showed the first signs of deceleration as a result of worsening international conditions. Economic policy aimed to reduce the role of the state and the budget deficit. As a result, the internal debt has fallen as a share of national income. These developments have also helped strengthen the balance of payments in a fundamental way. This chapter examines the factors explaining economic growth, changes in the structure of the economy, and the improvement of balance of payments in recent years. It begins with providing the background by examining developments since 1985.

Macroeconomic Development since 1985

Following the 1985 stabilization program, economic policy aimed to maintain stability rather than restart economic growth. As a result, in the period 1985–1989, GDP grew by an annual average of 3.8 percent. The growth of GDP since 1990 is illustrated in Figure 4.1. It shows that the moderate growth of 1985–1989 was followed by a nearly unbroken upswing in 1990–1996. The turnaround was due to the massive immigration from the former Soviet Union accompanied by large imports of capital. This was followed by three years of much slower growth in 1997–1999, the result of slower immigration and much tighter fiscal and monetary policies. Behind these developments was the growth of the high-technology sector that resulted in major structural changes that are examined in this chapter and in Chapter 5. The upswing in 2000 was the shortest on record and was followed by two years of negative growth and one year of slow growth, resulting in three years of falling GDP per capita. This downturn was due to the recession in high-technology markets that came to a head with the National Association of Securities Dealers Automated Quotations (NASDAQ) crash in the autumn of 2000 and the beginning of the Second Intifada at almost the same time. In the period 2004–2009, GDP grew by an average annual rate of 4.2%. The reasons for this recent period of fast growth were quite different from those in earlier fast-growth phases and are explored further in this chapter.