View of the National Water Carrier that brings water from the north to foster agriculture in the Negev
Courtesy Embassy of Israel, Washington

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, the7f7 he 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