After having enjoyed for many years one of the fastest GDP growth rates among world economies, Israel continued the economic recovery it began in 2003, after a two-year distinct slowdown in almost all economic activities. This trend continued in 2007, according to all economic parameters. In the years 2006-2007, Israel's gross domestic product (GDP) continued its rapid growth, reaching 5.1 percent in 2006, in spite of the Second Lebanon War, which caused a temporary loss of 0.7% of the GNP. The speedy recovery and the continuation of the rapid growth were again led by the business sector, which expanded by 6.4 percent, resulting in a $20,138 per capita GDP in 2006.

In 2006-2007 Israel continued to achieve its main macroeconomic objectives: a very low, sometimes even negative rate of inflation, a very low budget deficit, and a limited increase in public expenditure. At the same time, Israel continued to attract foreign investments as well as enjoying a rapid growth in exports and a positive trade balance for the first time. These trends continued in the first half of 2007 and the forecast for the whole year was of continued economic growth with no inflation, a low budget deficit, and economic stability on all fronts.

In late 2008, as some of the world’s financial giants began to stumble and markets around the world seemed on the verge of collapse, no one was sure how Israel’s fragile, export-based economy would fare. As time wore on, however, Israel showed its economic strength lay not only in its capability for expansion during the boom years, but in its resilience during times of economic contraction.

Now, as the global economy haltingly emerges from recession, Israel has quickly regained economic momentum, shown first in a stock market which outperformed all Western bourses in 2009, and later finding expression in increased exports, declining unemployment and robust consumer demand.

Israel was well prepared when, in 2008, the effects of the financial crisis began to ripple across world economies. From a macroeconomic perspective, Israel found itself in one of its strongest positions since its inception. The budget deficit had been largely reined in and the national debt was greatly reduced, thanks to aggressive spending cuts and increased tax revenues. Israel was a sought-after target of foreign investment and was enjoying a positive trade balance for the first time in its history.

The crisis could have spelled an end to these halcyon days, but Israel’s growth proved to be robust enough to withstand the consequences of the financial downturn of 2008.

Three main reasons are often cited to explain Israel’s strength in the face of such severe challenges.
 

The first reason is Israel's conservative banking sector. A strong regulatory system and a moderate banking tradition kept Israel’s banks away from the adventurous instruments which proved so disastrous in the US and Britain. In addition, as world investors got jittery, they were assured by Israeli banks’ strong capitalization.

Another reason was the labor market’s elasticity in coping with the new reality. Major players, including the Histadrut (Israel's largest labor federation) understood the wisdom of accepting short-term pay cuts during the early stages of the crisis, and unemployment also increased significantly, in parallel with global developments.

As the economy recuperated over the course of 2009, wages and employment quickly returned to their previous levels, even as labor markets in the US and Europe remained sluggish.

However, the strength of domestic consumption over the course of the crisis is really what stands Israel apart in its macroeconomic adjustment. As the recession hit, Israelis cut their durable goods expenditures, but largely kept their nondurable goods spending even with pre-recession levels, cutting into personal savings to "smooth out" the drop in income. This was a primary factor in maintaining a stable GDP, and allowing the Israeli economy to weather the recession successfully. As the world moved out of recession in 2009, domestic spending on both durable and nondurable goods picked up quickly, further aiding the country’s recovery.

Long-term potential

The Israeli "economic miracle" is much more than a story of recession and recovery - it is the story of an economy that was built from scratch, survived numerous crises and severe economic deprivation, and has finally emerged as a successful, freemarket economy whose citizens enjoy a high standard of living.

With a population in 2010 of more than 7.5 million, Israel has been internationally acclaimed throughout the years, in particular for its extraordinary achievements in agriculture and agrotechnology, irrigation, solar energy, and in many hi-tech industries and start-ups. Based on intensive R&D, even in traditional industries, Israel today is not only the land of milk and honey but also the land of hi-tech, including software, communications, biotechnology, pharmaceuticals, and nanotechnology.

Free-trade agreements reached over the past three decades with the United States, the European Union and several countries in Latin America have facilitated Israel's expanding exports of goods and services - more than $80 billion in 2008 - as well as its participation in international business enterprises that contributed to the country's accelerated growth.

The date of May 10, 2010, will remain a remarkable milestone in Israel’s economic history. After years of struggling against pressures and challenges of all kinds, Israel has finally joined the ranks of the world's foremost economies, as it was granted membership in the Organization for Economic Cooperation and Development, the OECD.

The country's accession to the OECD will have substantive effects, as Israel is committed to the organization’s regulations governing sectors ranging from the environment to the pension market. Indeed, the accession process pushed Israel to make fundamental changes befitting a modern economy, including reduction of Israel's debt, maintaining fiscal and development policies, cutting taxes and making the capital market more sophisticated.

OECD membership will allow Israel greater access to certain types of managed investment funds, which are required to reserve a proportion of their holdings for developed countries.

But the true significance of Israel's OECD membership is the recognition by the world economy of the tremendous progress that Israel has made during its 62 years of existence.