Israel Economic Review 1 (2003), 1–10
ISRAEL’S ECONOMIC GROWTH: AN INTERNATIONAL COMPARISON1
I examine the growth rate of GDP per capita in Israel, and compare it with the growth of many other countries. Although Israel’s growth rate was above average, its ranking changes when the comparison is conditioned on the initial level of development, as measured by GDP per capita. This is particularly the case when decade-long averages are used to compare growth rates, because it then transpires that Israel’s growth rate was relatively high only in the 1960s. Israel’s relative growth rate fell significantly in the 1970s and was extremely disappointing in the 1980s. An examination of the sources of the rise in total factor productivity
(TFP) in the 1970s and 1980s shows that slightly more than half the rise in TFP can be attributed to R&D investment and the rest to a rise in the level of education.
Israel’s population in 1992 was almost four times as large as in 1953, and by 1953 it had more than doubled since the establishment of the state in 1948.2 Whereas the population quadrupled between 1953 and 1992, per capita GDP rose by an annual average of 3.7 percent. This pace was not uniform, however, as Table 1 shows. In the first two decades the annual growth rate was almost 6 percent, and only in the 1990s did the growth rate accelerate appreciably again.
Evidently, the standard of living rose markedly in Israel in that period, despite rapid population growth. Mass immigration imposed significant burdens on the economy, which had to adjust in order to provide the new immigrants with employment and housing. As Yoram
Ben-Porath has pointed out, however, the aggregate data show a positive correlation between immigration and growth.3
The structure of Israel’s economy has changed unrecognizably since the establishment of the state. In 1953 agriculture accounted for 12 percent of GDP, manufacturing for 21 percent, and services for 25 percent. By the beginning of the 1990s, however, agriculture had dropped to 4.5 percent, manufacturing had risen to 30 percent, and services had risen to approximately
40 percent.4 Nevertheless, these changes—however significant—do not accurately represent what happened. In manufacturing, for example, the share of the traditional, labor-intensive industries—such as textiles—plummeted, while that of human-capital-intensive industries— such as electronics, optics, and scientific instruments—rose. The internal changes within manufacturing and the service sector were no less important than the increase in their share of
Department of Economics, Tel Aviv University.
Based on a lecture given at a conference of the Israel Economic Association in May 1998.
I have chosen 1953 as the point of departure for my comparison because it is the first year for which data exists on purchasing power parity adjusted per capita GDP—the index I have used for international comparisons. The data on per capita GDP are taken from the Mark 5.6 database of Summers and Heston, Penn-World
See Ben-Porath (1986).
In 1997 the share of the services rose to 50 percent, and that of agriculture fell even further, to 2.6 percent.
ISRAEL ECONOMIC REVIEW 1
GDP and the decline in that of agriculture. These trends are reflected in measures of total factor productivity (TFP) growth. Not only did the growth rate of per capita GDP decline over time until the 1990s, but the contribution of TFP to economic growth also fell. The slower pace of TFP growth led the slowing of the growth rate in income per capita in the years after the Yom Kippur War of 1973, which was particularly low in the first half of the 1980s, the period of rapid inflation. Only the Economic Stabilization Program of 1985 restored TFP to its former position as the jewel in the crown of economic growth, and created the…