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Macroeconomic Analysis of Israel

Abstract

A macroeconomic analysis of Israel helps in comprehending its performance and policies adopted to attain economic growth. Israel’s exemplary leadership, market economic system, and great international trade relationships have helped achieve its current economic status and reveal the potential opportunities for advancement. In addition, the comparative advantage enjoyed by Israel in some essential products helps boost its exports to attain more benefits from international trade. Despite the current Israel-Palestine war, the country’s economy has demonstrated good performance enabled by high production and a well-organized labor market. Additionally, Israel undergoes numerous trade, infrastructure, and political barriers, but it has maintained reasonable GDP levels, low unemployment rates, and high literacy rates. However, Israel has adopted several reforms and expansionary fiscal and monetary policies to encourage economic growth and improve the country’s reputation.

Introduction

Macroeconomic analysis is crucial in understanding the performance and working of an economy to enhance comparison with other countries. The examination creates room to determine the weaknesses in the economy to adopt the right policies for boosting the overall performance to avoid an economic meltdown and improve the living standards of the residents. Some of the key macroeconomic indicators to enable the analysis include the gross domestic product (GDP), unemployment, inflation, and economic growth (Mankiw, 2016). The paper selects a country to carry out a macroeconomic analysis to determine unemployment, inflation, and political situations and reforms.

Name of Country

The selected country for analysis is Israel to help in understanding its overall performance and the various reforms adopted to achieve its anticipated objectives. Israel is situated within the Middle East and borders Egypt, Syria, Lebanon, and Jordan, as shown in figure 1 (The Heritage Foundation, 2021). However, the country is also strategically located at the intersection of three continents, particularly Africa, Europe, and Asia, promoting trade and increased interaction.

History of the Country

The history of Israel emanates from Abraham, who is termed the source of Islam and Judaism. However, Israel declared an independent state in 1948, which generated the Arab-Israeli conflict as Lebanon, Syria, Jordan, and Egypt began attacking the newly formed country. Over the past ten years, Israel has witnessed unending clashes with Palestine due to contradictory claims of the ancestral land. Despite the conflicts over the last decade, the country has recorded outstanding growth following the exemplary leadership from the prime ministers and the president (The World Factbook, 2021). As a result, the country has entered into various bilateral and multilateral agreements to refine its overall performance.

Shows the map of Israel (The World Factbook, 2021).
Figure 1 shows the map of Israel (The World Factbook, 2021).

Country’s Economic System

An economic system is defined as the structure a country uses to distribute and produce services and goods and allocate resources. Israel adopts a free-market economy that has highly been associated with its current growth and increased ease of doing business. Market economic systems primarily operate as free markets as the government has little interference. The regulation in this type of market arises from the individuals and the market forces of demand and supply (Layton, Robinson & Tucker, 2018). Israel’s economic system has attracted more start-up companies to enter the market to capitalize on the various opportunities.

Global Involvements Concerning Israel and the United States

The United States happened to be the first nation to recognize the independence of Israel and its capital city, thus revealing how the two countries have been great partners. The indestructible bond between the U.S and Israel is geared at promoting regional security, economic success, and the establishment of bold democracies. The two countries have engaged in security cooperation to attain a permanent solution to the Israeli-Palestinian war and other countries experiencing conflicts. The countries have also entered into bilateral economic relations through a free trade agreement to advance their commercial and economic relationships (U.S. Department of State, 2021). Israel and the U.S also partner to enhance cultural and scientific exchanges to encourage innovation and multicultural awareness.

The Political System, Government Structure, and Economic Changes in Israel

Israel continuously adopts reforms geared at promoting growth and stability compared to other countries to boost the citizens’ quality of life and well-being. Israel’s political system has witnessed a governance crisis and political fragmentation leading to the adoption of changes to achieve lasting stability and better governance (Mizrahi, 2018). The fundamental changes over the last five years entail electoral reforms and boosting the two biggest political parties to avoid post-election violence, promote better representation and compel leaders to focus on developing the country.

Israel’s government follows a parliamentary system that is led by the prime minister. Over the past five years, the main changes related to government structure revolve around the rule of law by developing better laws, improving administrative structures, and acquiring democratic principles. This is concentrated on enhancing accountability and responsibility while maintaining respect for the law to create a prosperous and secure society (Mizrahi, 2018). Lastly, the economic changes in Israel over the past five years have helped in advancing the performance of the economy through increased output. The changes entail increased public investment, acquisition of better taxes, and amplified privatization to stimulate economic growth.

Macroeconomic Analysis

Israel’s economy is well organized to maintain high production levels while determining the appropriate countries to acquire the needed commodities to prevent shortages that may negatively affect the national income and generate unethical practices. Domestic production creates room for surplus, which coerces Israel to determine the best destination for exports to enhance trade (Murphy, Pierru & Smeers, 2019). The total value of exports for Israel is about $58.51 billion, although it has been fluctuating over the past years due to changes in local production and international market demand, as shown in figure 2 (World Integrated Trade Solution, 2021). The primary economic sectors within the country include industrial manufacturing and technology. The implementation of quality education standards and increased government support has created a massive population of skilled and competent workforce and further necessitated high investment in research and development to spur innovation (The World Factbook, 2021). This has made it easy for the technology sector to remain successful by producing quality products.

Israel’s Main Export

The major technological exports include computer software and hardware that generate colossal income to Israel. Based on industrial manufacturing, the country exports cut diamonds, machinery and equipment, pharmaceuticals, refined petroleum, textiles, and medical apparatus. Additionally, the country exports vital agricultural products such as green-house food products and citrus fruits like lemons and oranges. Among the various products, the main export for Israel is diamonds which make about 20% of the total exports. Israel exported diamonds worth $11.2 billion, thus being one of the world’s biggest suppliers of diamonds (The Observatory of Economic Complexity, 2021). Some of the significant export partners for Israel include Belgium, Hong Kong, the United Kingdom, China, and the United States.

Value of Israel’s Exports in the past years (World Integrated Trade Solution, 2021).
Figure 2 value of Israel’s Exports in the past years (World Integrated Trade Solution, 2021).

Specialized Industries, Military Products, or Natural Resources that Give Israel a Comparative Advantage Internationally

Comparative advantage is considered the capability of a country to produce specific services and products at a reduced opportunity cost compared to other countries. This allows the country to sell the products and services at a low price to increase the demand levels and create the need to upsurge the output levels (Boone, Kurtz & Berston, 2019). Israel has a comparative advantage internationally in the industrial manufacturing industry, particularly in producing chemicals, glass, and stone-like diamonds, as shown in figure 3. The high investment in modern technology and availability of skilled and affordable labor allows the country to manufacture the products at a lower cost as compared to other countries (Katz, 2018). However, the comparative advantage of Israel changes from one country to another, thus forcing the products within a possible trade agreement to vary. For example, Israel has a comparative advantage in citrus fruits, electron-diagnostic devices, stone, and chemical products compared to the United States (World Integrated Trade Solution, 2021). Consequently, Israel should concentrate on producing products that have a comparative advantage to succeed in the international market.

Shows Israel’s comparative advantage by product group over the past years (World Integrated Trade Solution, 2021).
Figure 3 shows Israel’s comparative advantage by product group over the past years (World Integrated Trade Solution, 2021).

Economy, Production, and Trade

The consumption of a country determines the production and prices in both the domestic and international markets. A high level of consumption creates the need for more production of local and imported products to meet the demand levels and increase customer satisfaction (Layton et al., 2018). Israel has recorded growth in private consumption over the past years, a situation that is extensively linked with population growth and improved purchasing power.

Impact of Israel’s Consumption on Prices and Production Technologies of American Traded Goods

The consumption levels have increased from about ₪132 ($41) billion in 2011 to nearly ₪190 ($59) billion in 2019 but declined in 2020 to approximately ₪171 ($53) billion as shown in figure 4. The growth of population to about 9 million people is linked with the rise in consumption, while the drop in 2020 is associated with the emergence of the COVID-19 pandemic (The World Bank, 2021). The pandemic has largely resulted in job losses following the closure of companies to minimize its spread leading to a decline in the people’s purchasing ability.

Reveals Israel’s private consumption over the last decade (FRED Economic Data, 2021).
Figure 4 reveals Israel’s private consumption over the last decade (FRED Economic Data, 2021).

Most Israelis prefer consuming quality, safe and affordable imports that match their needs to overcome the shortages created by their scarcity in the market. The key imports from the United States include machinery, medical instruments, precious metal, aircraft, and agricultural products like soybeans, tree nuts, and distillers grains (Office of the United States Trade Representative, 2021). Israel’s consumption affects the prices and production technologies of the American traded goods. For instance, the current increase in consumption has forced the U.S to acquire advanced production technologies to improve the quality of products and match the diverse needs of Israelis. The high demand for American traded goods increases prices, thus generating a significant impact on the inflation levels.

Current Minimum Wage

The minimum wage is defined as the lowest level of pay that workers receive for services offered. Consequently, minimum wage acts as the price floor, which determines the level at which the employees may choose not to offer their labor (Manning, 2021). Despite the Israeli law failing to provide a clear definition of wage, it usually entails the monetary compensation arising from employment connection or the basic pay offered to workers without including benefits. Israel has set a legal minimum wage to ensure that no employee within the country receives less than the compulsory pay rate. The current minimum wage in Israel is ₪5,300 each month, which is approximately $1,613. This translates to ₪29.12 per hour or $8.86 each hour, thus being one of the countries that provide better remunerations to their employees. Employees within the construction sector are required to receive a monthly pay of ₪5,600 ($1,705), which converts to ₪30.76 ($9.36) for each hour (The World Bank, 2021). Employers who do not offer minimum wage to their employees risk tough penalties from the government.

Labor and Currency Issues that Affect Israel

Israel’s labor market is well organized with excellent regulations to ensure that it remains highly competitive to encourage more people to provide their services. Despite the adoption of progressive labor policies and regulations, Israel faces numerous labor issues that need urgent attention to improve economic performance. One of the issues is the widespread wage gap that is associated with pay discrimination. Israel is considered one of the countries with the highest gender pay gap where female employees end up attaining fewer wages as compared to their male counterparts, as shown in figure 5.

Illustrates the chart for the gender wage gap for various countries across the globe (OECD, 2021).
Figure 5 illustrates the chart for the gender wage gap for various countries across the globe (OECD, 2021).

Based on the chart above, Israel has a wage gap of 22.7%, thus being among the countries with the largest gender pay gap across the globe. The decision by most firms in the market to provide better salaries to male employees for offering the same services as their female counterparts tends to demotivate the female employees (OECD, 2021). Increased demotivation within the employees normally yields low-performance rates and high turnover rates. Consequently, Israel should adopt the right affirmative actions to enhance the provision of equal pay to all workers.

The second labor issue within Israel’s labor market is the increased immigration cases that negatively affect the local workforce. Israel adopts an open immigration approach that allows individuals that can verify to be Jews to settle within the country. However, asylum seekers and labor migrants find it hard to enter the country due to strict immigration laws. The net migration rate in the country is about 2.05 migrants in every 1000 people (Migration Policy Institute, 2021). The immigrants tend to occupy most of the jobs previously held by the locals leading to an increased unemployment rate hence the need to control the number of people entering the country.

Israel is also linked with key current issues such as fluctuations and reduced use of the Israeli currency by the Palestinian government. Israel has witnessed currency fluctuations that affect the local market prices of commodities (Levingston, 2020). In situations when the currency depreciates, Israel witnesses high costs of importing commodities while making the exports more competitive. On the other hand, appreciation of the currency minimizes inflation as Israel’s imports become cheaper, leading to a decline in prices. Therefore, the lack of stability within the currency makes Israel’s market unpredictable affecting the profitability of organizations. Additionally, the declined use of the Israeli currency in Palestine has affected the total value of the currency and trade between the two countries leading to low net exports (Kuttab, 2018). Palestine is focused on using other currencies and introducing its own currency to boost the performance of its economy.

Current War and Revolutionary Uprising Economic Factors Causing Israel to Grow Slower than Expected

The current war with Palestine has caused more destruction to property and loss of lives leading to reduced business activity and low output levels. This has forced Israel to record low revenue levels than anticipated, thus slowing down the economy. The war has further discouraged potential investors from investing within the country due to the fear of recording high losses forcing the country to record a lower growth rate than projected. Additionally, the high cost of living and increased poverty levels within the population have been considered the major economic factors that have made Israel grow slower than expected. The factors have significantly reduced the purchasing power of the residents, leading to low consumption levels hence minimizing the country’s GDP potential.

Gross Domestic Product and Employment

Israel’s gross domestic product has fluctuated over the past years due to various factors that have affected the economy. GDP is defined as the total value of finished services and products in a nation over a certain time. The GDP levels reveal an economy’s size and performance compared to other countries.

Israel’s Current Gross Domestic Product (2009-2018) Annual Aggregate

In 2009, Israel’s GDP $207.47 billion and increased to $234 billion in 2010, $261.47 billion in 2011 but fell to $257.17 billion in 2012. However, the GDP grew to $292.69 billion in 2013 and $310.05 billion in 2014 but declined to $300.12 billion in 2015. In 2016, Israel’s GDP rose to $318.62 billion, $352.67 billion in 2017, and $370.46 billion in 2018, as shown in figure 6 (The World Bank, 2021). Regardless of the fluctuations, Israel has recorded overall growth in the GDP since 2009, implying the excellent policies and strategies that the government has adopted attain growth.

Shows the graph for GDP levels in Israel from 2009-2018 (The World Bank, 2021).
Figure 6 shows the graph for GDP levels in Israel from 2009-2018 (The World Bank, 2021).

GDP Calculations under the Expenditure Approach

The expenditure method of computing the GDP is aimed at appraising the sum of the entire services and products acquired within a country. The method integrates the net exports, consumption, government spending, and investment to determine a country’s GDP (Mankiw, 2016). As a result, the approach reveals how the government and the private segment, particularly firms and consumers, spend in a specific nation in a given time. The consumption component entails all the private expenditures, which include expenses on services, durable products, and non-durable products. For example, in 2018, the total private expenditure in Israel was $224.2 billion (OECD, 2021). The second component is the investment, which entails all capital expenditures incurred by organizations to acquire their assets. In 2018, the total expenditure on business investment in Israel was $88.91 billion (OECD, 2021). The investment was directed towards supporting businesses to improve their productivity and profitability.

The third component of the expenditure approach is government spending which consists of the entire expenses that a government incurs to improve the economy and support the provision of services. For instance, in 2018, the total government spending for Israel was $93.58 billion. The last component is net exports which disclose the impact of the country’s trade with other countries. It is obtained by subtracting the total imports of a country from the aggregate exports. Israel’s net exports in 2018 were about $2.65 billion, indicating that the exports were more than the imports (OECD, 2021). Therefore, Israel’s GDP by expenditure method in 2018 was $409.34 ($224.2 + $88.91 + $93.58 + $2.65) billion.

Unemployment Rate and Literacy Rate

The unemployment rate in a country gauges how the labor supply is underutilized by determining the fraction of unemployed individuals within the labor force. The unemployment rate in Israel has declined over the past years, hitting a low of 3.78%, despite the emergence of the coronavirus pandemic. The literacy rate in Israel is 91.75%, implying that the country has established a quality curriculum and adequate educational institutions supported by continuous reforms (The World Bank, 2021). This has helped in creating a quality and competent workforce capable of introducing unique ideas to improve the country’s innovative capability.

Current Trade, Infrastructure, and Politically Impacting Barriers Facing Israel

Israel faces numerous barriers that prevent it from attaining its anticipated economic goals. The country faces both tariff and non-tariff barriers, especially from countries in which trade agreements have not been established, leading to low trade volumes or total inability to access the markets. Conversely, Israel also witnesses trade barriers such as import tariffs from countries in which it has already entered into trade agreements to limit dumping and unethical practices. The infrastructural barriers associated with Israel include a poor road network, particularly within the interior parts of the country, inhibiting smooth transport and high costs of power, which increase production costs of organizations (El‐Anis, 2021). Lastly, political instability witnessed in Israel due to increased riots and demonstrations increases the risks of theft and property destruction. The country further witnesses geopolitical challenges due to high insecurity rates arising from the Israeli-Palestinian conflict.

Conclusion

Israel is geared toward improving its economic and political climate by adopting the right reforms to achieve increased output and improve the living standards of the citizens. This will help in overcoming the deteriorating political situation while refining the economy to match those of developed countries. The current major populist changes in the laws within Israel range from electoral, humanitarian, and labor laws. The electoral reforms are aimed at ensuring that elections are carried out peacefully to avoid post-election riots and demonstrations that increase insecurity. The humanitarian laws are aimed at attaining a resolution to the Israel-Palestine war to ensure that human rights are protected and avoid crimes against humanity. The labor laws are concentrated on overcoming workplace discrimination to enhance equality, prevent child labor and ensure that workers obtain the correct remuneration. Based on the reforms, Israel is expected to become the best destination for doing business in the near future due to the conducive environment arising from outstanding political stability. Additionally, the reforms are projected to encourage ethical practices within organizations through equal pay to boost employee motivation hence increasing output levels.

The emergence of the COVID-19 pandemic has adversely affected the economy, forcing the Israeli government to adopt expansionary fiscal and monetary policies to stimulate the economy. Based on the fiscal policy, the government has cut taxes for some products to increase consumption which gradually yields an increase in the GDP. The government has also increased its spending on public programs and projects to offer employment and support to individuals affected by the pandemic. The expansionary monetary policy has compelled the government to increase the money supply in the market by lowering interest rates to encourage borrowing and purchasing government bonds. This will allow individuals and businesses to engage in income-generating activities to boost the national income through revenues.

References

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Kuttab, D. (2018). Palestine may replace Israeli currency to reduce dependency. Web.

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