Between 1948 and 1972, Israel's GNP rose by more than 10 percent per annum on average. Thereafter, Israel's growth rate slowed to an annual average of 2 percent. Not only was Israel's economic growth rate much lower after 1972, it was also far less stable. The reasons most often cited for this slowdown include a sharp increase in defense spending, the 1982-83 energy crisis, and increased expenditures on social welfare.

A breakdown of Israel's GNP into categories of consumption, investment, government expenditures, and net exports for the years 1960 through 1986, highlights some of the difficulties experienced by a small, open economy burdened with a massive defense expenditure. During this period, Israel experienced chronic current account deficits and increased government expenditures. The trade deficit, which accounted for an average of 20 percent of annual GNP from 1960 through 1964, reached a high of 35 percent in 1973. It declined to 16 percent in 1986, however, primarily because the real value of exports increased while the real value of imports remained unchanged.

Until the June 1967 War, defense spending ranged from 10 to 16 percent of GNP. Between 1970 and 1982, however, defense spending escalated to over 25 percent of GNP--a high ratio, even for the volatile Middle East. A significant share of defense spending originated from military imports. In the aftermath of the October 1973 War, military imports equaled 17 percent of GNP. About onequarter to one-third of this defense expenditure was paid for by United States aid. After 1984 the increase in United States aid reduced the defense burden in Israel virtually to pre-1967 levels. In 1986, the defense burden declined to 10 percent of GNP.

The sharp upturn in world oil prices in 1973 increased the cost of oil imports by more than 3 percent of GNP in that year. The oil price increases of 1979, which occurred at about the same time as the return to Egypt of the Sinai oil fields, are estimated to have had an even more devastating effect on the Israeli economy. The total direct losses to the Israeli economy caused by the increase in energy prices from 1973 to 1982 have been estimated at US$12 billion--the equivalent of one year's GNP.

In addition to these external shocks, the economy had to accommodate substantial increases in spending on domestic welfare programs in the early 1970s. In response to domestic social unrest, the government introduced large-scale social programs to improve education, housing, and welfare assistance for the urban poor. These programs were designed before 1973, but were implemented after the economy had begun to stagnate.

Data as of December 1988