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Israel
Slowdown of Economic Growth
The economy's behavior
during the 1961-72 and 1973-88 periods was starkly different.
The growth of capital stock declined modestly from an 8.9 percent
annual increase during the first period to a 6 percent annual
increase during the second period. A major decline occurred, however,
in gross domestic product (GDP--see Glossary). From a 9.7 percent
annual growth rate in the first period, GDP fell to a 3.4 percent
annual growth rate in the second period. Furthermore, labor inputs
(measured either as employed persons or total hours of work) declined
from the first to the second period. The annual increase in employed
persons from 1961 through 1972 averaged 3.6 percent; employed
persons increased only 1.5 percent annually from 1973 through
1981. Similarly, total hours worked increased by an annual rate
of 3.9 percent during the first period as compared to 1 percent
during the second period. If the growth of the economy is measured
as GDP per employed person, then Israeli performance declined
from 6.1 percent to 1.9 percent over the two periods. If GDP per
hour of work is used, Israel's performance declined from 5.8 percent
to 2.4 percent. Finally, if GDP growth is measured per unit of
capital, it declined from 0.8 percent a year between 1961 and
1972 to -2.6 percent a year from 1973 through 1981.
Until 1973 the rise in labor and capital productivity was the
major growth-generating ingredient in the Israeli economy, accounting
for about 43 percent of total output growth and for 72 percent
of the increase in output per worker hour. By contrast, beginning
in 1973, increases in capital stock accounted for 64.7 percent
of total growth. The contribution of labor and capital productivity
to total output declined to 18 percent, and its contribution to
the increase in output per worker hour declined to 25 percent.
Between 1961 and 1981, the relative contributions of capital per
unit of labor and of total labor and capital productivity to the
increase in labor productivity were reversed. In large part, this
reversal explains the slowdown in Israel's growth after 1972.
Three factors apparently led to a decline in the growth of business
sector employment from 1973 through 1981. First, the growth rate
of new people entering the labor force dropped, primarily because
net immigration declined from an annual increase of 3.8 percent
in the 1961-72 period to 2.5 percent in the 1973-81 period. Second,
because of the increase in the income tax rate at higher levels
of income, the average rate of labor force participation among
men declined from 73.6 to 64.9 percent, while the rate for women
increased from 29.2 to 33.4 percent. Fewer families found it worthwhile
for the husbands to work at highertaxed , high-paying jobs; instead,
the wives worked at lower-paying, lower-taxed jobs. Finally, the
influx of Arab employees from the West Bank and the Gaza Strip
declined in the 1973-81 period. In all, the share of business
sector employment relative to the whole economy declined from
77.2 percent in the 1961-72 period to 73.6 percent in the 1973-81
period.
By 1988 the potential sources of large-scale net immigration
had almost run dry. Since 1979 (as of 1988, 1979 was the last
year during which the Soviet Union had permitted large numbers
of Soviet Jews to leave) the rate of net immigration had been
low; during several years, it had been surpassed by emigration.
In 1987 immigration increased slightly, although this addition
to the labor pool was insufficient to increase Israel's growth
rate. The immigration of Oriental Jews had also decreased significantly
by the 1980s. Given the low probability of sizable immigration
from the United States or the Soviet Union, observers concluded
that a return to the rapid economic growth of the 1950s and 1960s
depended on Israel's ability to substitute alternative sources
of sustained growth. Possibilities in this area were the new,
science-based and high technology industries.
Data as of December 1988
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