ECONOMIC CONSEQUENCES OF ISRAELI MILITARY EXPENDITURES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600030033-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 23
• Document Creation Date: December 22, 2016
• Document Release Date: October 20, 2011
• Sequence Number: 33
• Publication Date: March 1, 1970
• Content Type: IM

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0119JWP-I,T~m 90-33
Sellet
''j)', 25X1
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Economic Consequences Of Israeli Military Expenditures
WOUBUL
ER IM 70-33
March 1970
Copy No. 33
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP t
C,Qluded Iron. outnn.oI C
t downprndinry and
_._d.dnuifcolion _
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
March 1970
Economic Consequences
Of Israeli Military Expenditures
Introduction
Since the June 1967 war, Israel has greatly
increased its foreign exchange expenditures for
military purposes while sustaining very rapid
growth of the.economy and of civilian im?,orts.
The war also induced a large increase in foreign
remittances. In 1967 these more than covered the
added foreign exchange spending, and foreign ex-
change reserves rose greatly. In 1968 and 1969,
however, remittances declined, and Israel had to
draw down its foreign exchange reserves to about
$400 million. Israel is now projecting a continued
high level of military imports during 1970-74.
This memorandum examines the economic impact of
high foreign military expenditures during recent
years and considers Israel's capability to finance
its projected military expenditures.
Note: This memorandum was produced solely by CIA.
It was prepared by the Office of Economic Research
and was coordinated with the Office of Strategic
Research and the Office of Current Intelligence.
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The Pattern of Growth, 1950-65
1. Israel has a highly developed and dynamic
economy. The economy is industrialized. diversi-
fied, technically advanced, and institutionally
sophisticated. It continues to rely heavily on
foreign resources to finance investment, however,
which, together with immigration, helped to generate
an 11% average annual growth of real gross national
product (GNP) between 1950 and 1965.
2. Israel has grown rapidly despite a severe
paucity of natural resources, in large measure
through the efficient use of immigrant labor, many
of whom were already skilled. Net immigration,
which amounted to 165,000 in 1951 and then averaged
33,900 annually during 1952-65, accounted for 45%
of the increase in total population of about 4.8%
annually and probably for about one-half of the 5%
annual increase in employment.
3. Efficient utilization of immig:?ant labor
has required substantial capital investment.
Capital stock in real terms increased about 13%
a year during 1951-65, and the share of net invest-
ment in GNP varied from 18% to 29%. The average
annual net inflow of foreign resources (as measured
by the deficits on transactions in goods and
services) was equivalent to about 77% of net invest-
ment during 1951-65, and this ratio, although
fluctuating from year to year, has not changed
significantly since the early 1950s. About 70%
of the net capital inflow consisted of private
gifts, primarily from world Jewry and official
government compensation payments from Germany.*
Other sources of foreign funds have included
official foreign aid from the United States, sales
of Israeli Development Bonds, and a small volume
of direct private investment in Israel.
The 1966-67 Recession
4. Israel's economy suffered a major reverse
in 1966 when real GNP growth plummeted to 1%.
* As these inflows are not repaid, they are desig-
nated in balance-of-payments statistics as "uni-
lateral transfers. "
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Per capita GNP actually declined by 2%, aid private
investment, with the exception of some export in-
dustries, fell sharply. Although recovery began
in the second half of 1967, GNP rose by only 2%
for the entire year. This recession can be attrib-
uted largely to deflationary government actions
and to a sharp decline in construction caused pri-
marily by an unexpected fall in immigration.*
Government measures were designed to ease balance-
of-payments pressure through a combination of
reducing economic growth slightly to '7%-8% annually --
from 10%-11% -- and of accelerating export growth.
The impact of the deflationary policy on the economy
was far greater than anticipated, and the trade
deficit declined markedly. Because of a drop in
gifts and other remittances and capital inflows,
however, the balance of payments did not improve
(see Table 1).
5. Faced with large-scale unemployment, dis-
content over economic conditions in general, and
the proximity of national elections, the government
reversed its policy in the first half of 1967 and
attempted to reflate the economy. But, although
money became more plentiful and interest rates
were lowered, consumer spending remained sluggish,
and cautious businessmen were not investing.
Unemployment leveled off by June 1967 but remained
high at about 80,000, or 9% of the labor force.
The Post War Period
6. Except for a period of three to four weeks
of extensive mobilization, when unemployment was
reduced sharply, exports dwindled, and imports
declined, the Arab-Israeli war had little direct
impact on the Israeli economy. With the return of
most of the reserves to civilian life, the economy
returned to normal. A tax increase and a domestic
bond issue, designed in part to finance a prolonged
war, proved unnecessary, and the increase in taxes
was rescinded shortly after the war.
* Net immigration, which averaged about 44,000
annuaZZy during 1961-65,
declined
to about
23,000
in 1965 and then dropped
and about 5,000 in 1967.
to about
7,000 in
1966
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Israeli Balance of Payments a/
1963
1964
1965
1966
1967
1968
1969 b/
Current account
-446
-467
-448
-573
-520
-445
-532
-706
-889
Imports of goods and services
-844
-938
-1,025
-1,192
-1,231
-1,277
-1,440
-1
842
-2
140
Exports of goods and services
398
472
577
619
711
832
908
,
1,136
,
1,251
C/1
Long-term and medium-term
Ul
540
499
615
557
476
824
676
672
&
M
C17 ~
Unilateral transfers
346
331
346
335
327
292
521
425
455
0-]
Repayable capital
187
209
153
280
230
184
303
251
217
Short-term capital and reserves
-87
-73
-51
-42
-37
-31
-293
30
217
Gold and foreign exchange
reserves c/
Non-monetary short-term
-88
-21
-96
35
-201
98
304 d/
capital movements
Errors and omissions
10
-3
-3
40
33
4
-48
27
40
19
-39
-27
-77
-15
-25
43
-87
a. Because of rounding, components may not add to the totals shown.
b. Based on nine month data.
c. Reflects changes in net holdings of gold and foreign exchange within Israeli banking system. A
minus sign denotes an increase.
d. Assumes that non-monetary short-term capital movements and errors and omissions net out to zero.
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7. The June 1967 war acted as a catalyst,
however, in ending the two-year-old economic
recession. The war induced a very large increase
in foreign gifts, from $292 million in 1966 to
$521 million in 1967. In addition, the net inflow
of repayable capital increased from $184 million
in 1966 to $303 million in 1967, primarily because
of increased overseas sales of Israeli Development
Bonds. These receipts from gifts and loans greatly
improved the balance of payments and enabled the
government to pursue vigorously expansionary poli-
cies. Two supplementary budgets totaling $274 mil-
lion* were adopted. The extra funds were earmarked
for defense purchases, industry, tourism, and re-
training workers. The reflation program was effec-
tive; during the second half of 1967, compared with
a year earlier, unemployment declined by 18% and
GNP increased by nearly 11%. During 1968, however,
imports increased about 41%, and the current
account** deficit reached $532 million -- about 20%
greater than in 1966.
8. Israel used the British devaluation of
18 November 1967 as an opportunity to devalue its
own currency. The new Israeli exchange rate,
which maintained the pre-November ratio between
the British and Israeli pound, potentially made
Israeli exports more attractive in most other
countries. The government also expected that
this action would make foreign as well as domestic
investment in export industries more appealing.
The main impact of the devaluation was deliberately
limited to the export side; the government offset
most of the effect on import prices by reducing
tariffs and has since pursued a liberal import
policy to help absorb the growth in aggregate
demand as well as to support the growth of pro-
duction.
9. The strong upward trend in economic
activity continued into 1968. The decisive
victory over the Arabs, the unexpected inflow of
foreign capital, and a substantial increase in
government expenditures all combined to restore
* At the pre-November 1967 exchange rate of $1
to three Israeli pounds.
** The current account in the Israeli balance of
payments excludes unilateral transfers because of
their almost unique role in Israeli finance.
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Israeli investor confidence. As a result, gross
capital formation in real terms increased nearly
44% in 1968, to near the 1965 (pre-recession)
level. There were also substantial increases in
private and public consumption. Because the
recession had caused substantial unemployment of
labor and plant capacity, the economy was able to
respond to rising demand with extremely rapid growth
of production. In real terms, GNP in 1968 increased
by more than 13% and per capita GNP by nearly 10%.
At the same time, employment rose almost 10% while
the average unemployment rate fell from 9% of the
civilian labor force in 1967 to about 6% in 1968.
Despite a 14% increase in the money supply (26% if
quasi money is included), the consumer price index
rose only 2% because of large increases in produc-
tion and imports.
10. The pace of economic expansion remained
high through 1969 as GNP grew by 12% and investment
by 26%, even though the government shifted to mildly
restrictive monetary policies. Most of the remaining
slack in the economy was taken up as unemployment
fell to 4% of the labor force. Nevertheless, the
price level increased by less than 4%, primarily
because union-government wage stability agreements
continued to be enforced.*
11. Exceptionally rapid economic growth since
mid-1967 has increased imports substantially and
pushed up the trade deficit. The 1967 devaluation
apparently helped boost Israeli exports of goods
and services, which increased by 25% in 1968 and
an estimated 10% in 1969, but imports of goods
and services (including military purchases -- see
paragraphs 12 and 13) increased even more rapidly,
by 28% in 1968 and by an estimated 16% in 1969.
Civilian imports alone grew by more than one-half
between 1967 and 1969 and the current account
deficit, excluding military purchases, reached a
new high.
i4 Wage rates generally are controlled by agree-
ments between the government and the Histadrut
(the omnipresent labor union). The agreement in
effect during 1967-69 provided that labor will
not push for higher wages provided the government
does not raise taxes.
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12. Accompanying the rise in civilian imports
was a massive increase in military imports during
1967-69. The Israeli balance-of-payments category
"Government not elsewhere stated (n.e.c.)"* con-
sists of direct government imports -- primarily
military goods and services -- which increased
from $159 million in 1966 to $324 million in 1967,
$366 million in 1968, and an estimated $410 million
for 1969 (see Table 2). During 1967-69, Israel
spent more than $1.1 billion (an average of $370 mil-
lion annually) for direct government imports compared
with only $798 million ($133 million annually) during
1961-66. As a result of the combined growth of
civilian and military imports, the total current
account deficit increased from $445 million in 1966
to $532 million in 1967, $706 million in 1968, and
an estimated $889 million in 1969.
13. Inflows of capital and unilateral transfers
fell in 1968 and 1969 from their 1967 high as the
impact of the war on private contributors wore off
and were not sufficient to finance these deficits.
Israel was forced to draw down net foreign exchange
reserves by $98 million in 1968 (see Table 3) and
by an estimated $304 million in 1969. In effect,
the buildup of foreign exchange reserves between
1964 and 1967, which resulted from deflationary
measures and war-induced capital inflows, was
consumed during 1968 and 1969. By December 1969,
reserves had fallen to less than $400 million, or
the equivalent of only about two months' imports
of goods and services.
Problems for the Future
14. Israel's economic prospects for the 1970s
are clouded ',y major military expenditures the
government now expects to make during the early
1970s.** If these sums are actually spent, a
* This category almost certainly includes all
goods and services purchased on military account --
not only finished military equipment, but also
components for military equipment and imported
materials used in military industries.
** Analysis of Israeli military expenditures and
evaluation of Israeli military requireme7;ts are
beyond the scope of this memorandum.
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Israeli Balance-of-Payments Category
"Government Not Elsewhere Stated"
Annual
Million US $
Million
Annual
Year
US $
Period
Total
Average
1961
93
1954-69
2,280
14
1962
124
1954-60
372
5
1963
146
1961-66
798}
1,170
133
90
1964
129
1967-69
1,110
370
1965
147
1970-74
a/
2,910
582
1966
159
1967
324
1968
366
1969
410
1970 c/
A
525
B
555
1971 d/
575
1972
590
1973 d/
615
1974 d/
575
a. Based on the B estimate for 1970.
b. Preliminary estimate.
c. Israeli projection. A is the original estimate;
while B is the most recent estimate.
d. Israeli projection.
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Israeli Foreign Exchange Reserves
1961
1962
1963
1964
1965
1966
1967
1968
1969
Bank of Israel
279
419
515
545
643
621
715
663
382
Commercial Bank
85
71
69
76
84
101
120
162
N.A.
Treasury deposits abroad
12
16
31
22
22
8
133
91
N.A.
Gross reserves
376
506
615
643
749
730
968
916
N.A.
Less deposits of foreign residents
and foreign banks in Israel
80
100
121
128
138
154
191
237
N.A.
Net reserves
296
406
494
515
611
576
777
679
375
Change from previous year
110
88
21
96
-35
201
-98
-304
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sharp reduction in the growth of civilian imports
or substantial foreign assistance will be needed to
avoid a balance-of-payments crisis. For the next
five years, 1970-74, direct government imports --
that is, mainly military imports -- are planned
to average $582 million annually (see Table 4)
compared with $370 million a year during 1967-69
and only $133 million a year during 1961-66.
According to Israeli projections, the annual current
account deficit would run about $1 billion a year
through 1974. Such deficits would exceed anticipated
capital and unilateral. inflows by amounts ranging
from $105 million in 1970 to a high of $250 million
in 1973 and totaling more than $900 million over
the period 1970-74. Judging from current trends
and the recently announced 1970-71 Israeli budget,
which indicates continued expansionary economic
policies and also revises earlier military spending
plans upward, the balance-of-payments deficits in
1970 could considerably exceed $125 millic...
15. The Israeli projections probably understate
the potential balance-of-payments problems if the
projected military expenditures are in fact incurred.
Their current account estimates appear reasonable,
but those for capital and unilateral inflows appear
optimistic.
16. The Israeli forecast for imports of goods
and services appears to be based on an annual GNP
growth rate of about 8%. Historical relationships
between Israeli non-military imports and GNP growth
indicate that an 8% annual expansion in GNP would
require non-military imports of goods and services
to grow more than 9% a year for a 1970-74 total of
$11.3 billion.* The Israelis project virtually
the same import total ($11.5 billion); however,
the pattern of growth is somewhat different, the
rate of import growth being higher in the early
part than in the latter part of the period.
17. An 8% growth rate seems feasible, given
adequate foreign exchange receipts. The average
Gt'P growth rate since the early 1950s has been
* Non-military imports refers to all imports of
goods and services other than "Government n.e.s."
See the Appendix for a description of the regres-
sion analysis used.
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Israeli Balance-of-Payments Projections
1970
2"
1971
1972
Current account
-975
-1,105
-1,025
-1,050
Imports of goods and services
-2,475
-2,455
-2,675
-2,875
Non-military imports
-1,950
-1,900
-2,100
-2,285
Government n.e.s.
-525
-555
-575
-590
Exports of goods and services
1,500
1,350
1,650
1,825
Long-term and medium-term capital
Net unilateral transfers
520
595
525
515
Net repayable capital
330
405
3:,0
360
Overall deficit
1973
1974
-1,075
-1,025
-3,100
-3,275
-2,485
-2,700
-615
-575
2,025
2,250
825
800
510
490
315
310
-250
-225
197C-74 Y
1970-74 cI
-5,150
14,400
-14,380
-11,520
-11,470
-2,880
-2,910
9,250
4,225
2,560
1,665
9,100
2,635
1,740
-925
a. The A estimate for 1970 was part of the five-year balance-of-payments projections nade by the Israeli
in the fall of 1969 while the B estimate reflects those projections incorporated in the recently proposed
budget for 1970-71.
b. Using the A . i timate for 1970.
c. Using the B estimate for 1970.
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about 10%. It is unlikely, however, that either
the labor force or the stock of productive capital
will increase as fast in the next five years as
in the 1950s and the early 1960s. Immigration --
a major source of new labor -- has slowed, and,
with military expenditures up sharply, investment
probably will be a smaller share of GNP. In 1969
the share of investment in GNP was 25%; the 1955-65
average was nearly 31%. While the Israeli economy
grew by 13% in 1968 and 12% in 1969, a substantial
part of this growth was derived from utilization
of unemployed resources. Israeli officials claim
that 8% is an optimum growth rate under present
conditions, representing a compromise between the
goals of high employment, a rising standard of
living, limited deficits in the balance of payments,
and a low rate of inflation. A somewhat higher
growth rate possibly could be attained, but probably
at the cost of a significant amount of inflation
and a larger balance-of-payments deficit.
18. Israel's growing potential trade gap is
not likely to be reduced much by unexpectedly large
increases in exports. The Israeli expectation that
exports will grow about 11% a year seems realistic.
Although exports of citrus fruit and diamonds,
about half of total exports, probably will increase
relatively slowly, rapidly rising exports of a host
of small manufactured items probably will bring
the average up. Growth in the value of citrus
fruit exports (15% of total commodity exports)
probably will not exceed 8% a year despite larger
gains in volume because of anticipated price r
declines in the European market.* Diamond exports
(one-third of total commodity exports) may grow by
as much as 10% a year, well below the 17% obtained
during most of the 1960s. The reason for the ex-
pected decline is that Israel, which in the past
was able to increase substantially its share of the
world market for medium-sized diamonds, has now
Israel has concluded an ag?eement on preferen-
tial tariffs with the European Common Market,
beginning in 1971, that will reduce tariffs on
imp,,.rts from Israel, which totaled $86 mi Z Zi:'n in
1968, including $28 million of industrial products.
Europeans tariffs on Israeli citrus products will
be reduced by 40%.
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captured most of this market and that penetration
of markets for larger gems probably will be diffi-
cult because the polishing of larger gems requires
substantially different equipment and techniques
than those available in Israel.
19. The projected 11% annual growth of exports
clearly assumes profitable conditions for Israeli
exporters. This means continuation of the wide
variety of export promotion schemes already in
being and would require devaluation if domestic
inflation becomes excessive. Once domestic profit-
ability is assured, however, the volume of export
is little affected by price changes. Export prices
of polished diamonds, about one-third of the value
of commodity exports, are fixed in dollars by an
international cartel. Moreover, the demand for
other major Israeli exports, citrus fruits and
textiles, probably is not highly responsive to
price changes. Israel has concentrated on specialty
textiles and clothing, the export of which depends
more on highly skilled handiwork and fine design
than on price. Israel also has a substantial but
small export market in custom manufactures where
a willingness to fill small orders to specification
is critical. The expansion of such markets probably
depends upon changes in demand for specialty items
rather than on price. Even if exports expanded
more rapidly than is currently anticipated, however,
such expansion would provide only partial balance-
of-payments relief because a dollar of exports on
the average requires half a dollar of imported
inputs.
20. Israeli estimates of receipts from unilateral
transfers during 1970-74 seem less realistic than
those of imports and exports. These receipts are
projected at a level near the $521 million attained
in 1967. But the 1967 level reflects the strong
response of world Jewry to the war emergency and
was well above both the annual average of $337 mil-
lion during 1961-65 and the $425 million to $455 mil-
lion obtained in 1968 and in 1969. To increase
these transfers during 1970-74, the Israelis apparently
are relying on world Jewry's ability and willingness
to contribute more. In view of the evident Israeli
military superiority in the Middle East, tight money
conditions in the United States and Western Europe,
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and the slowdown in US economic activity, however,
it seems questionable that the projected contribu-
tions will be forthcoming.
21. Israeli estimates of repayable capital
inflows also seem optimistic. While such inflows
rose substantially in 1967, to $303 million, they
declined sharply in 1968 and 1969. The fall
stemmed largely from a decline in the sales of
Israeli government bonds, which earn far below
market interest rates, and, like outright gifts,
depend largely on the psychological impact of the
Arab threat toward Israel. On the other hand, net
direct foreign investment in Israel, which reflects
almost entirely economic motivations, fell from
$71 million in 1966 to $11 million in 1967 and to
$8 million in 1968. Such investment is unlikely
to increase substantially until the current
political and military unrest in the Middle East
is reduced. Conversely, however, relative peace
almost certainly would reduce bond sales substan-
tially.
22. Thus if Israel maintains a high rate of
economic growth and fulfills its planned military
imports, its balance-of-payments gap probably will
be greater than projected. For 1970, moreover,
Israel has raised its military import plan from
$525 million to $555 million and raised the projec-
tion of the current account deficit by an even
greater amount (from $975 million to $1.1 billion)
because of expected shortfalls in exports. To
finance this increased deficit the Israelis hope
to further increase their receipts from gifts and
bond sales and slightly draw down their reserves
(see Table 4).
Policy Options
23. Israel would like to fill the incipient
balance-of-payments gap by means of official
credits from the United States. If it is unable
to do this it has the following options:
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(a) Reduce military imports from
planned levels;
(b) Let foreign exchange reserves
run down and tap available sources of
short-term banking and commercial
credit;
(c) Hold down civilian imports by
slowing the growth of the economy and
by other means (austerity).
Which of these options might be used, for how
long, and in what combination, depends on many
things, including development of the military
situation, the extent of US military sales, Soviet
military support to the Arabs, and the growth of
Israel's own military industries.
24. If military imports could be cut substan-
tially the balance-of-payments problem would
disappear. For example, if annual government n.e.s.
expenditures were limited to the high 1967 level
of $324 million, with other balance-of-payments
projections being unchanged, then Israel would have
a cumulative balance-of-payments surplus of $335
million during 1970-74 instead of a deficit of
$925 million. Too little is known about the com-
position of planned military imports to permit a
firm judgment as to how easily they could be cut.
25. It is clear that Israel cannot rely on a
drawdown of reserves and on short-term banking
credits to finance large deficits over several
years -- the reserves are too small and the credits
too expensive. This approach could be used, how-
ever, to cover deficits that were expected to be
temporary, even for a year or perhaps two. There
is no doubt that Israel could obtain substantial
bank credit and its reserves are still in excess
of $350 million while prospective balance-of-payments
deficits are of the order of $200 million a year.
In any event, these funds provide ample flexibility
in establishing viable long-term economic and mili-
tary strategies.
26. Israel has a variety of policy tools that
could be used to hold down non-military imports,
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but could not prevent a reduction in the rate of
economic growth because of the economy's heavy
dependence on imported raw materials and capital
goods. Nearly every commodity and service produced
in Israel is dependent upon imports to some degree.
In 1968, imports of goods and services amounted
to about 45% of GNP.
27. The loss in aggregate economic growth
involved if non-military imports were held down
could be minimized through use of quotas and
tariffs. Imports of finished consumer goods in
1968 exceeded $110 million, or nearly equivalent
to the 1970 balance-of-payments deficit projected
by the Israelis. Nearly all of these commodities
could be eliminated by quotas or prohibit.i.vely
high tariffs without directly affecting the economy's
productive capacity. Use of these policy tools,
however, will be avoided if at all possible because
Israel recognizes that they lead to an inefficient
allocation of resources and would thus hinder the
export orientation that Israel must achieve to
become self-sustaining in the long run. During the
past decade, Israel has been actively liberalizing
its foreign trade. Nearly all quantitative restric-
tions have been eliminated and tariffs have been
reduced substantially.
28. If the wage-stability agreements should
break down, devaluation will become necessary. As
indicated earlier,* it would have little effect on
the volume of exports. Moreover, because Israeli
labor and plant capacity are nearly fully employed,
domestic production would not be able to respond
readily to the increased demand for domestic goods
that woulu result from the higher prices of competing
imported goods. Thus, to dampen inflation and
strengthen the beneficial. effects of devaluation on
the balance of payments, devaluation would have to
be accompanied by deflationary fiscal and monetary
policies designed to reduce total domestic demand.
29. The potential decline in economic growth
that might be associated with curtailment of civilian
imports in 1970-74 was calculated on the basis of
historical relationships between imports and GNP.
On this basis, each 1% cut in the GNP growth rate
would save some $60 million to $70 million a year
4 See paragraph 19.
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on the average in civilian imports during 1970-74,
or a total of $300 million to $350 million over
the period. The cumulative payments deficit would
be reduced from some $1.8 billion for an 8% growth
in GNP to perhaps $1 billion with a 6% rate,
assuming exports are unaffected. To eliminate
foreign exchange deficits entirely, the growth of
Israeli GNP would have to be lowered to less than
4% a year (see Table 5 for projected current
account deficit).
Calculated Israeli Balance-of-Payments Projections
for Various GNP Growth Rates 2/
Current Account Deficit
GNP Growth
a. For derivation, see the Appendix.
Rates
1970
1971
1972
1973
1974
1970-74
Million US $
8%
924
1,016
1,082
1,166
1,200
5,388
6%
890
943
963
995
964
4,755
4%
854
865
837
813
710
4,079
2%
817
788
713
636
480
3,434
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Conclusions
30. Israel probably cannot finance both its
planned military imports for 1970-74 and the
growth of civilian imports required to support
rapid growth of GNP without foreign assistance.
31. Israel could close the potential balance-
of-payments gap either by not increasing military
imports frcm recent levels or by restricting
civilian imports to levels that would support a
4% growth of GNP instead of the planned 8%, or
by some combination of these.
32. Foreign exchange reserves and access to
commercial credit give Israel considerable flexi-
bility in establishing viable economic and military
strategies and are sufficient to finance expected
deficits for a year or perhaps two if necessary.
33. In the current year, Israel is planning to
continue expansionary economic policies and has
revised its military import plan upward. These
policies will probably continue at least until
Israel knows the US response to its economic and
military aid request.
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Non-Military Imports and GNP
To forecast non-military imports of goods and
services at various levels of GNP during 1970-14,
these imports were divided into two parts:
(1) imports c.i.f. (merchandise plus insurance and
freight) and (2) all remaining services. A least
squares fit of the relationship between imports
c.i.f. and GNP was obtained for the years 1954-65
and 1968.* This relationship is described by the
equation M(t) _ -45 + 0.2335GNP(t) (where M(t)
represents imports c.i.f. in any of the years
under consideration and GNP(t) represents GNP in
the same years**]. These results mean that for
each $1 increase in GNP, civilian imports are
estimated to increase by $0.23. The correlation
between imports and GNP was high, with an R2 of
0.979.***
The correlation between GNP and other service
payments, which include such items as profits
repatriated by foreign investors, factor payments
abroad, nonmerchandise insurance, and Israeli
tourist expenditures abroad, was found to be rela-
tively weak. Other services were projected to grow
at a constant annual rate. Utilizing a double log
transformation and applying a linear regression,
with respect to time, this function was estimated
to be log OS(t) =21.62 + 0.069(t) for the 1954-68
period, with an R of 0.975. According to this
function, OS increases each year by about 17%.
The 1966-6? period Was excluded by use of a
dummy variable because a severe recession occurred
in Israel during these two years and the relation-
ship between import8 c.i.f. :znd GNP appeared to be
distorted.
'''' The constant factors in all equations are
expressed in million US dollars.
*" R2 is the square of the correlction coefficient
and represents the proportion of the total variance
of the dependent variable that is accounted for by
the variance of the independent variable.
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