ISRAELI EXPORT PROSPECTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700040031-2
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 23
• Document Creation Date: December 20, 2016
• Document Release Date: March 30, 2006
• Sequence Number: 31
• Publication Date: October 1, 1972
• Content Type: IM

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Confidential
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Israeli Export Prospects
Confidential
ER IM 72-148
October 1972
Cn~.; No. 83
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CONFIDENTIAL
CENTRAL INTELLIGENCE AGENCY
Direc~orate of Intelligence
October 1 X72
INTELLIGENCE MEMORANDUM
ISRAELI E~CPORT PROSPECTS
Introduction
1. The economic development and prosperity of Israel, with its poor
endowment of natural resources, has been derived primarily from human
resources and imported capital. In 1971, gross national product (GNP) was
approximately US $5.55 billion or about $1,825 per capita, and less than
10% of this was accounted for by branches of the economy directly
dependent on natural resources -agriculture, forestry, fishing, mining, and
quarrying.
2. International commerce is vital to Israel's economic life. Imports
of goods and services are equivalent to about 55% of GNP and exports
to one-third. l ~ Therefore, raising exports of goods and services to a level
close to that of imports has been a prime long-run objective of successive
Israeli cabinets. This memorandum examines the Israeli export picture and
prospects for export growth in 1972-76.
The Record
3. Israel's exports of goods and services have increased faster than
impo*ts and m~.ach faster than GNP since the early 1950s. Nevertheless,
1. Substantially less than one-third of Israel's production, however, is exported, as
many exports -polished diamonds being a notable example - have a substantial impor'
content.
Note: This memorandum was prepared by the Office of Economic Research
and coordinated within the Directorate of Intelligence.
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trade in goods and services has always been in deficit. Supported by heavy
government assistance and aggressive sales procedures, exports of goods and
services increased by about 15% a year between 1952 and 1971 while GNP
increased 9% annuslly. In 1971 the deficit i;1 goods and services was $1.17
billion, or about one-third the value of all imports. Throughout Israel's
history, chronic defici7s on goods and services trans~t~tions have been
covered by massive inflows of transfer payments and capital. Israel has
benefited from reparation and restitution payments from 1~Vest Germany,
uilateral and multilateral aid, and private assistance through purchases of
development bonds and donations to the Jewish Agency. Immigrants have
brought in a good deal of money, and Israelis have received sizable
remittances from relatives in other countries. Capital has flowed in through
direct investment and commercial credit.
4. In its efforts to improve the balance of payments (see Figure 1),
the government of Israel has devalued its currency seven times (from $4.03
Figure 1
Israel: Balance-of-Payments Indicators
Million US $
3,500 -
o ---~-----~-
1962 63 64 G~ 66 67 68 69 70
'Goode and sen?icox on n balance-of-puyntents Laxis lf.o. b,l; includes trnnsnr:f.ionx
with residents of territar ies occrq~ied in 19f>7 L ut not. nnnoxed,
"End of year, /ntm?nationnl 7L7onetary Fund arcourtr.in~ of IJank of Israel assets.
Import;"
Exports
Reserves"
2
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in 1948 to $0.24 today}, subsidized exports, taxed imports, and employed
?controls including import licenses, import deposits, multiple exchange rates,
and restrictions on the conversion of Israeli pounds. It has also solicited
aid from foreign governments, international organizations, and private
individuals. However, efforts to improve the balance of payments have }tad
to overcome the deleterious effect of continuing inflation resulting in large
measure from the government's domestic policies. The consumer price index
increased 5.5% annually on the average during 1956-71. Israel's precarious
political situation and the need for heavy defense expenditures }rave
compounded the balance-of-payments problem, especi~~'.ly since the 1967
war. Imports of military equipment jumped from abo~ ~ $150 million in
1965 to $625 million in 1970 and have since continued at a high level.
Marketing of Exports
5. Israel conducts most of its trade with other developed countries.
In 1971, half of Israeli commodity exports went to non-Communist Europe,
a fifth to the United States, and nearly 8% to Japan, Canada, Australia,
and New Zealand. Less than 3% went to European Communist countries -
most of this to Romania and Yugoslavia. The dev~~loping countries of Asia,
Africa, and Latin America received about one??fifth of Israel's exports.
Export flows have changed somewhat since 1960, when 17% of Israel's
products went to less developed countries. The proportion of exports now
going to the United States also hay increased at the expense of that going
to Communist and non-Communist countries of Europe (see Figure 2). Had
the political situation permitted trade between Israel and the Arab states,
a larger share of Israeli exports would be going to less developed countries
because of the complementarities of the economies. Israel would be the
most competitive source for many types of machinery for Arab states, and
this trade would reduce Israel's heavy dependence on exports of diamonds
and agricultural products to the United States and Western Europe.
6. Israel's exports to the developed countries are dominated by
diamonds, agricultural products, and processed foods, but increasingly Israel
is selling manufactures in these markets. Exports to the United States are
made up largely of diamonds and clothing, particularly knitwear, whereas
sales in Western Europe are heavily oriented toward citrus fruit and other
agricultural products and processed foods. Exports to less developed
countries inc.~ide a wide range of manufactures such as communications
equipment, agricultural machinery, agricultural chemicals, pharmaceuticals,
plastics, textiles, and air conditioning equipment.
7. Israeli exporters of industrial products compete successfully with
producers in other developed countries by offering specialized good-quality
merchandise at competitive prices. Devaluations and subsidies have been
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Israel: Commodity Exports, by Destination`
1960 1965 1970
~ GroxN of returned axportx: accludinp tmAe whit Inrritorirx occupird in 19(ii.
Other Europe
Asia
Africa
United States
then Americas
Other and
Unspecified Destinations
instrumental in keeping Israeli prices competitive. Furthermore, many Israeli
exporters are aggressive merchandisers, and some have ties with foreign firms
that aid in the distribution of their products. In some instances, Israeli
products no doubt have benefited from what might be called the "Jewish
connection." In the words of a leading Israeli economic journalist, "The
unique and invaluable asset at the disposal of Israeli industry is of course
the assistance of Jewish business circles abroad, their readiness to cooperate
in providing contacts, whether technological or commercial." Such assistance
has been of special importance in the oy~ening of new markets for Israeli
products in developed countries and has included marketing advice and
introductions, publicity (For example, on the Israeli fashion industry), and
technical assistance in tailoring products to foreign standards -particularly
American. In general, Jewish importers in other countries probably prefer
to buy from Israel, although they are unlikely to purchase Israeli goods
that are riot competitive in quality and price.
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8. "Made in Israel" labels no doubt are attractive to Jewish
customers for some consumer goods, but the ini luence of this factor on
Israel's total exports is marginal. Although about two-thirds (by gross value)
of all commodity extorts are consumer goods, only some 15% of these
are products for which the country of origin would be significant. Clothing
accounts for the bulk of such items, and the remainder includes procesn,ed
foods, wine, and miscellaneous manufactured goods.
Structure of Exports
9. The structure of exports has undergone a secular shif? frorr.
agricultural to non-agricultural products, as a growing portion of citrus fruit
and other agricultural products goes to Israel's food processing industry.
Exports of fresh citrus fruit have been growing absolutely since
pr?-independence times, but in recent years they have declined in relative
importance even among agricultural exports. Citrus fruit now accounts for
somewhat more than 10% of merchandise exports, and other ag*icaiiu:~:
products account for about 5%. Processed foods, which are considered
non-agricultural, account for nearly 10% of merchandise exports see
Figure 3 and Table 1).
Israel: Commodity Exp-,rts, by Grou~*
1960 1965 1970
~ ;men of roturnnd exr.~rfs; excluding tmdn, with territories ocnupied in 19f,7.
L198D1i A):
Figure 3
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Israel: Merchandise Exports, by Main Category
a. Because of rounding, components may not add t a the totals shown.
b. Adjustments include the deduction of articles removed from the country by diplomats and tourists as
personal belongings and the deduction of trade samples, gold, leased equipment, and movies ~:nt out of
Israel.
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10. Of the non-agricultural exports, polished diamonds long have Feen
the largest single commodity by value, accounting for one-fourti~ to
one-third of all merchandise exports. Diamonds, however, are much less
important to Israel's trade balance than the export figures indicate, because
the finished product has an unusually high import content -over 80% of
the value of finished gems. A wide variety of other non-agricultural products,
ranging from electronic equipment to potash, make up an increasing share
of exports. Over the last decade exports of textiles and clothing, chemicals,
and products of the extractive industries have grown significantly. Textile
and clothing surpassed citrus fruit in 1970 to become the second largest
merchandise export and maintained this position in 1971. Among the most
rapidly growing exports in recent years have been clothing, certain
chemicals, plastics, electronic equipment, machinery and other metal
products, and products of the printing and publishing industry.
11. Exports of services are large and growing. They reached a value
of more than $870 million in 1971~2~ (see Table 2). Tourism brought in
Israel: ServicQS Exports, by Main Category
Freight
91.6
131.0
Merchandise insurance
5.4
5.9
Passenger fares
54.1
74.1
Charter hires
18.1
40.2
Port disbursements
15.6
22.3
Other transport
15.0
23.1
Other insurance
100.2
110.0
Travel
105.9
181.4
Investment income
64.8
122.8
Government, not elsewhere specified
28.0
33.7
Other services
96.7
127.0
'Total services (balance-of-payments
definitions; including occupied terri-
tories)
595.4
871.5
2. Including exports to the occupied territories, which cannot be broken out.
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more than $180 millio~t, and an additional $75 million was .taken in by
Israeli passenger carriers. Over 650,000 tourists visited Israel ~n 1971, four
tirnes the numb?.r of visitors received 10 years earlier and over 50% more
than in 1970. In addition, nearly 110,000 residents of Arab countries visited
the West Bank and Israel under a special new program. Hotel space is being
increased rapidly, but a shortage of accommodations constrains the #ourist
flow at peak periods. Israel's sizable fleet of merchant ships, including some
container ships and a number of tankers, together with the Trans-Israel
Pipeline, earned more than $130 million on freight transport in 1970, and
insurance services brought in more than $115 million.
Export Strategy
12. The government of Israel has striven constantly to encourage
export industries that would make the maximum use of available manpower
and the country's limited Natural resources. Among the first important
exports developed from Israel's natural endowment were citrus fruit and
potash. Diamond polishing was started by skilled craftsmen who had
migrated to Palestine fron~ the Netherlands in the 1930s and the 1940s.
Food processing was a natural outgrowth of increasing agricultural
production. The textile industry, processing some domestic cotton and wool,
was at first developed to provide employment for unskilled immigrants as
well as to reduce imports. The extractive industries were expanded to
capitalize on the availability of phosphates, bromine, and copper. Available
minerals also were ?.".~ basis for she chemical industry, which came to
provide exports of fertilizer, basic chemicals, and mare sophisticated
products. Facilities fur oil refining were developed to reduce imports and
to process small quantities of crude oil being extracted domestically. Refined
petroleum produces soon becan; a available for export, and by-products of
the refining became inputs for the chemical, plastics, and rubber industries,
all of which have become important exporters. Military needs dictated the
establishment of an electronics industry, which has bean successful in
exporting a growing quantity of equipment, much of it defense related.
13. Despite a policy of diversification, diamonds and citrus fruit,
which account for about 40% of merchandise exports, still make or b*eak
annual export performance. Thus, in 1970, commodity exports increased
only 6% when diamond sales declined because of recession in the US market
and earnings from citrus fruit fell because of a drop in European prices.
Conversely, in 1971, exports rose by 22% when sales of diamonds and citrus
fruit jumped more than 30%. In recent years, more emphasis has been placed
on the development of exports of products such as clothing,
pharmaceuticals, plastics, specialized instruments, and electronics. These
products have low shipping costs, a relatively high input of skilled or
semi-skilled labor, and a low import content.
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14. The Israeli government generally has tried to encourage exports
by raising their profitability through devaluation and subsidization. The
most recent devaluation was effected in August 1971, when the pound was
reduced by 17% to a par value of $0.24. Subsequent u.;justments in the
relationships between other currencies and the dollar have boosted the
devaluation of the Israeli pound to the order of 25% relative to currencies
of Western Europe and Japan. Even so, the Israeli pound is ~~vervalued,
as ii always has been.
15. Export subsidies last were given a big boost in August 1970. Some
5.5% of eovern;nent budget expenditure for the fiscal year that began on
1 April 1972 is earmarked for direct export subsidies. Exporters are given
subsidies varying from 0.84 to 0.89 pounds per export dollar received,
depending upon the percentage of product value that is added in Israel.
A rate of 0.50 pounds per dollar of value added irl Israel is in effect for
diamond exports. In addition to direct export subsidies, exporters receive
a rebate of impost duties (other than the surcharge in effect since August
1970) and of Israeli purchase taxes paid on raw materials and intermediate
products. Moreover, a portion of the property tax levied on exporters'
equipment arld inventory is waived, and under specified conditions travel
outside the country by exporters is exempted from the travel tax. Clothing
and textile exporters also have received special subsidies averaging 0.60
pounds per export dollar, but these now are being phased out. All
agricultural production is heavily subsidized.~3~
16. The government also subsidizes transportation and insurance costs
for exports and pays part of the cost of market research and sales promotion,
in foreign countries. Low cost loans a*e provided to cover working capital
needs. In addition to all this, the Law for the Encouragement of Capital
Investment provides for low cost loans, tax concessions, and outright grants
to defray part of the cost of investment in export industries as well as
in other favored ventures.
17. In the last two years resurging inflation has pushed up the costs
of Israel's producers, partly offsetting renewed government efforts to raise
the profitability of exports. Prices, as measured by t1iP GNP deflator, rose
9% in 1970 and 13% in 1971.
3. It is difficult to determine the effective exchange rate for exports, considering
all direct and indirect subsidies. On tl~e average, direct subsidies on exports -- including
agricultural subsidies and special subsidies on textiles and clothing -- amount to about
1S# 2.10 per dollar of value added in Israel, Subsides on textile products, however,
are about 1S# 3.65 per dollar of value added, whereas subsidies on agricultural products
are about IS# 1.65 and those on diamonds only IS# 0.50. Elimination of the special
subsidies on textiles will reduce the total payment on these l+roducts to IS# 2.15
per dollar of value added.
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18. The government exerts control over exports in a number of other
ways. In some instances -for example, the extraction of minerals from
the Dead Sea basin - it controls both production and exports throug;r
outright ownership of operatir;g companies. ~n the citrus industry, the Citrus
Control and Marketing Boards seek to maximize earnings from citrus fruit
by influencing plantings, improving growing techniques, and monopolizing
disposal of the crop. 'The Marketing Board divides output between export
and processing and decides the timing and destination of exports.
19. The government has simultaneously restrained imports and
stimulated exports by taking deflationary measures that reduce domestic
demand and free labor and other resources for employment in export
industries. In 1966 this course was followed with undesirab' and severe
side effects -slower economic expansion and a sharp rise in unemployment.
When a high level of employment had again been reached in 1969, efforts
were made to restrain the growth of demand sufficiently to keep consumer
imports within bounds and to prevent a diversion of resources from export
production to production for the domestic market. Taxes and compulsory
loans were increased, credit was restricted, incomes policy measures were
adopted, and government spending was restrained. Fiscal measures have not
been sufficiently restrictive, however, to bring domestic revenues into line
with domestic expenditures. The budget for the fiscal year beginning 1 April
1972 called for $155 million in borrowing from the central bank and $145
million in borrowing from other banks.
20. Israel has tried to expand its export market in Europe by securing
preferential treatment in the European Community (the EC or Common
Market). An agreement concluded i:i 1970 provided for the halving of EC
duties on Israeli industrial products in progressive stages; 80?l0 of the
reduction was to be effected by 1 January 1972. The six-member
Community buys about one-fourth of Israel's commodity exports. Through
1971 the impact of the preferential agreement on trade flows .vas not great.
Prospects for Further Increases in Exports
Overall Outlook
21. Considering anticipated growth of productive capacity, present
plans and pro~?ams, and recent performance, Israel seems capable of
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increasing exports by 15% annually for tl~e five-year period beginning 1
January 1972.141 Economic output has grown rapidly ever since the 1967
war, notwithstanding the existence of a full employment constraint since
1969, and continued expansion clearly is achievable. In 1971 the Ministry
of Finance pcblished an economic plan that foresaw a 14.9% annual rate
of increase for exports during the five years beginning 1 January 1971.t5~
The government of Israei is not committed to the goals or Y:,.iciCs
incorporated in the plan, but the plan is significant as an Israeli appraisai
of economic prospects. Our projection assumes that Israeli commerce will
not be disrupted by war or international monetary difficulties, that
immigration will continue at a relatively high rate, and that the government
will pursue policies that ~;~ill encourage investment, maintain full
employment, and keep exports profitable. A continuation of rapid
inflation -which seems likely -will mean a continuing need for additional
subsidization and devaluation; nevertheless, the process probably can be
continued successfully for the next several years. Given the uncertainties
involved, export growth could vary several perrentage points in either
direction from the projected 15% annual rata, but variation on the high
side seems more probable than variation on the low.
The Israeli Economy
22. Growing; ability to export will leave to be grounded on growing
capacity ?.o prod~4ce. Present capacity is fully committed, and domestic
demand is increasing inexorably. We expect real gross national product to
increase through 1976 at an average annual rate of about 8% per year,
extending the trend in effECt since the attainment of full employment in
1969. The Israeli economic plan foresaw GNY growth of 7.7% during
1971-75; however, jrowth of 8.8% was realized in 1971. We assume the
government will continue monetary and fiscal policies that maximize
4. Confidence in this estimate is reinforced by a regression analysis of export growth
over the past 20 years. Two regression equations were estimated for exports from 1952
through 19'11. The first is as follows: log X(t)=4.36+0.157T(t), where X(t) signifies
exports in current dollars in year t and T is a time variable. The R2 for the equation
is 0.995. The result indicates that exports in current dollars tend to increase 15.7%
per year. The second equation is the following: log Z(t)=5.55+0.147T(t), where Z(t)
signifies exports in year t valued in constant Israeli pounds including export subsidies.
The R2 is 0.986. This result indicates that exports in constant pounds tend to increase
14.7% per year. Export performance does not lend itself to forecasting by more elaborate
mathematical modeling, because most determinants of exports -- for example, demand
in customer countries, supply from rival sources, currency exchange rates, subsidies in
Israel, and taxes in customer countries -- are exogenous to the Israeli economy.
5. An annual rate of increase of 15.2% was foreseen if trade with the occupied
territories is excluded from consideration.
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expansion at the cost of accelerated inflation. We expect the` future growth
will result from an increase in civilian employment of 3.5?I~ to 4% per year
and an increase of 4%u per year in output per worker, or labor productivity.
The estimate of employment growth assumes co~,itinued full employment
and continuation of current trends in immigrati~an and natural growth of
the population. In recent years labor product?+ity has been increased by
5% per year cluefly by increasing the average amount of capital employed
with each worker and by modernizing equipment and techniques. Despite
~~rst gains already made, output per worker still is less than half that in
tl,.e United States. Considerable scope remains for raising labor productivity
by increasing and modernizing the capital stock and introducing new
tec;uiiques. However, as Israel approaches the contemporary frontier of
technology and raises its capita!-labor ratio, benefits can be expected to
come more slowly. Hence the slowing of productivity growth to a still
respectable 4~% per year is expected.
23. The civilian labor force of just o~: ~r a million is relatively skilled
and educated; the educational level of the Jewish component, some 90%
of tt~e total, is comparable to that of the Italian labor force. In general,
the Jews who have migrated to Israel from North Africa and the Middle
East have been less well endowed with education and skills than those tiom
Europe and the Americas. Somewhat more than. half the g*owth in the
labor force through 1976 should result from natural increase and less than
half from net immigration, even assuming a continuation of the current
heavy influx from the Soviet Union.
24. More tha-i 40,000 residents of the occupied territories now work
in Israel. The number probably will increase slowly because unemployment
in the territories has been greatly reduced. I-Iowever, underemployment
remains, particularly in Gaza. The wages earned in Israel by territory
residents contribute to the GNP of the territories rather than that of Israel.
Manpower from across the "green line," however, raises the return on Israeli
capital and adds flexibility to the economy. The employment of territory
residents can be varied by individual firms and by the economy as a whole
with little interference from the powerful labor unions.
25. Investment will continue to grow more rapidly than production,
probably increasing by more than 10~o annually through 1976. Businessmen
have poured firnds into investment since the 1967 wa:, encouraged by
prospects of rising aggregate demand. The 1967 war triggered an influx
of foreign exchange in the form of private assistance and signaled an end
to restrictive policies the: had protected the Israeli foreign exchange position
at the expense of a painful recession. Government spending, led by a surge
in defense outlays, has increased sharply in the post-war period. Economic
expansion and the uptrend in investment have continued to date and are
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expected to go on for several more years. Although relatively miyd restraints
.have been imposed in an of?ort to retard inflltion, the government has
made plain its determination to avoid a repetition of the pre-war recession.
Moreover, this determination is firmly and credibly based on an absence
of balance-of-payments pressure, thanks largely to heavy private assistance
and official US aid.
26. The goverr_rr~ent will continue to stimulate investment and to
guide much of it into export industries and import substitution industries.
The crucial factor in stimulating investment is the maintenance of favorable
prospects for sales and profits, and these prospects in turn depend heavily
on expected government policies Potential investors seem confident that
the government will maintain domestic demand with appropriate fiscal and
monetary policies and international competitiveness with subsidies acid
devaluations. In recent years, substantial =~ivestment has been made in metal
products industries, the cement products industry, textiles, chemicals, food
processing, printing and publishing, petroleum transportation and processing,
passenger transportation and tourism, and the aircraft industry. Considerable
investment, much of it from foreign sources, also has gone into the
electronics and plastics industries. Most of these industries will continue
to attract investment of expansion and modernization over the next several
years.
International Factors
27. Export prospe~:.ts depend in part on economic conditions in
customer nations, which fvt Israc! means primarily the United States and
the nations of Western Europe. Tl~ie economic expansion now in progress
in the United States benefits Israeli exports. Economic slowdowns recently
have dampened demand for imports in several West European countries,
but it is likely that these slowdowns will soon be overcome.
28. Expansion of the European Community to ins?ude the United
Kingdom and other countries will affect Israel's exports in a mixed fashion.
Britain takes about ] 0% of Israel's commodity exports, while the other
prospective members .in combination buy only 1%. Britain will align its
duties with the EC Common External Tariff in stages, with 40% of the
adjustment to be effected on 1 January 1974 and full alignment to be
achieved on 1 July 1977. British entry into the Community will raise
problems because present UK duties on citrus fruit, citrus juices, plywood,
and bromides -which together account for half of Britain's purchases from
Israel -are lower than the duties levied on Israeli products by the
Community. Furt'iermore, under the EC system of tariffs and preferences
some Israeli products will enter Britain on less advantageous terms than
competing products from certain other countries. For example, the UK duty
on Israeli oranges will increase from 5% ad valorem to 12% when Britain
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~:nposes EC tariffs, while the rate on oranges frortt Morocco and Tunisia
will c;?cline to 4Io, and oranges from Italy and Greec-~ will be given duty-free
entry. On the other hand, EC tariffs on some items ern lower than present
/3ritish duties. Tlius British tariffs oii knitwear now ranee from 18% to
25%, whereas the EC rate is only 8%. Suc}t important Israeli exports as
chemicals, textiles, apnarel, and electronic products generally will gain from
British aca:ssion to the European Community. Moreover, Israel is pressing
for concessions from the Community that woula limit the nP: be available until 1974. Although Israeli copper mining
is under pressure: from depressed world prices, considerable preliminary work
is going into the development of a second mine. Opening of the new mine
should reduce anit costs and might encourage the building of facilities to
refine ore into copper metal. Bromine production and export are increasing,
spurred by a favorable price situation. An increasing proportion of bromire
probably will be processed into compounds in Israel rather than exported
in elemental form. Phosphate exports are unprofitable and are likely to
be cut back further unless there is an increase in prices. A plant now is
being built to extract magnesium oxide and salicylic acid from Dead Sea
water. ,4nnual capacity levels of 55,000 tons of the oxide and 80,000 tons
of the acid are to be reached in mid-1973, with the entire output being
exported initially.
Agricultural Products
40. Agricultural exports probably will increase by only about 5% per
year through 1976. Exports of citrus fruit are not likely to grow rapidly
or regularly, but they will remain important. Competition in the European
market from other Mediterranean producers is becoming very strong, and
fruit from Italy, Greece, ivlorocco, and Tunisia will enjoy tariff advantages
in the expanded European Community. Israel will continue to respond to
mar)ret demands by changing the mix of citrus exports and will strive also
for qualitative improvement.
41. Exports of agricultural products other than citrus fruit, which
were only 5% of commodity exports in 1971, should grow by 10% to 15%
per year. Fastest growing exports in this category will be specialty products
for the European market -for example, flowers, artichokes, lettuce, celery,
carrots, melons, strawberries, bananas, avocados, and mangos. Some of these
products cannot be grown successfully in Europe, and others can be raised
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only for marketing in a restricted season. Plantings of these items already
are being expanded in response to favorable market conditions. Exports
of raw cotton, peanuts, chicks, and hatching eggs will increase unevenly
and less rapidly than the specialty products.
42. Earnings from services should increase by about 15% annually,
reaching a value of $1.75 billion in 1976 including exports to the occupied
territories. Tourism, the biggest single service category, should continue to
expand briskly unless repeated acts of terrorism foster continuing fear. The
number of tourists visiting Israel jumped 50% in 1971 and continued to
increase very fast until the summer of 1972, when terrorist acts caused
some curtailme~tt. Recent moves by Jordan relaxing restrictions on the
two-way movement of tourists across the Jordan River could benefit tourism
in both countries if contimied and broadened. If terrorism subsides, the
growth of tourism in Israel will be constrained primarily by the rate of
expansion of hotel accommodations. As the number of visitors to Israel
increases, the earnings of Israeli passenger carriers will increase
commensurately.
43. Israel's fleet of oce~;~. freight carriers has been expanded sharply
in the last few years, and capacity will continue to be ldded through the
mid-1970s. The merchant :laet totals more than 3 million deadweight tons
of shipping, including all fully Israeli-owned ships, of which half sail under
the Israeli flag. Vessels now being acquire.~l are mzinly tankers aid container
ships.
44. The Trans-Israel Pipeline is carrying increasing quantities of oil,
and capacity of the line is being expanded from the present 30 million
tons a year to 40 million. The pipeline operation is not profitable, however,
because the pipeline company services the line with tankers acquired on
multi-year leases before the recent big drop in tanker charges. The drop
in tanker rates has reduced the cost of bypassing the p?peline by shipping
Persian Gulf oil around Africa, thus putting downward pressure on pipeline
charges. The company is pinning its hopes for profitability on an increase
in its scale of operation.
45. Exports of other services will continue to grow. Israel sells a
sizable amount of engineering and construction services, primarily to less
developed countries. In the communications field, Israeli firms not only
sell equipment but design, install, and service nationwide systems. Israel ,
Aircraft Industries sells maintenance and overhaul services to foreign airlines
and air fences. In all these areas, Israel is in a favorable position because
it can sell the services of skilled people at relatively low prices. Also in
the service sector, Israeli insurance earnings are large and expanding.
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46. Israel's exports of goods and services (including exports to
occupied territories) have been increased by about 15% per year over the
last two decades and probably can be increased at a s. rilar rate for the
next several years. Earnings of $1.85 billion . in 1971 ~? sere 2.2 times the
1966 level, making Israel's exports on a per capita basis 10 times as great
as those of Egypt and comparable to those of the United Kingdom. Recent
export growth has been concentrated in the industrial sector. Polished
diamonds long have been the biggest single industrial export, but exports
of clothing, processed foods, chemicals, machinery, metal products, tires,
plastics, and electronic equipment are growing rapidly. 'although citrus fruit
has been a key export since before; independence, it is not keeping pace
with export growth in industrial goods. Currently agricultural exports are
trending toward non-citrus fruits, vegetables, and flowers. The value of
services exported is nearly as great as commodity exports, the most
important services being tourism, transportation of passengers and freight,
and insurance.
47. Israel's principal markets are Western Europe and the United
States, the latter having increased considerably in relative importance in
recent years. Taken together, all less developed countries account for about
one-fifth of Israeli sales, and exports to such countries are increasing. The
denial to Israel of Arab markets has limited exports to less developed
countries but probabl}~ has not seriously affected overall export growth.
48. Export gains have resulted largely from governmer.'. ~~~ ?_~~lation.
Export industries have been kept profitable despite domestic inflation by
periodic devaluations and heavy subsidization. The government of Israel
probably will continue to push export growth pragmatically with
subsidization and devaluation. If annual growth in exports of I S% is
maintaineu, exports of goods and services will exceed $3.7 billion in 1976
(including exports to the occupied territories). Quality apparel, selected
chemicals, machinery and other metal products, plastics, and electronic
items are expected to lead future growth in commodity exports. Growth
in services exports will be greatest in tourism, transportation, and
engineering and technology.
49. Israel is capable of stabilizing or reducing its deficit on trade in
goods and services in the coming years, but complete elimination of the
deficit is unlikely. The growth of civilian imports might be held to 12%
per year by firm measures, and it might prove feasible to keep
siefense-related imports near the present level for the next several years.
While Dotal defense-related imports would remain stable in this scenario,
19
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their composition would change ?~ith growing self-sufficiency in defense
production. Thus an increase in imports of materials for defense industries
Mould offset a decline in imports of finished military equipment. If exports
do in fact grow 15% per year and civilian imports 12% while defense-related
imports are limited to $800 million per year, the deficit will be slightly
lower in 1976 than in 1971. Projecting the growth of exports and civilian
imports still further at the same rates would erase the deficit in 1984 even
if defe~~se-related imports were allowed to reach $1.3 billion a year.
50. Exports could grow by as .much as 18% per year, particularly
if diamond sales continue to zoom, but this more rapid growth probably
would 1?ad to a relaxation in restraints on imports. Moreover, increases
in diamond exports would be largely offset by increases in imports of rough
diamonds. Hence the deficit on goods and services transactions probably
would persist very much as in the first scenario. A flareup of international
hostilities could cause defense-related imports to rise sufficiently to offset
any likely increase in export earnings. If the annual growth of exports should
slip much below 15%, the government would be hard pressed to effect
any reduction in the deficit on goods and services transactions, barring the
imposition of harsh restrictions that would trigger a major economic
recession.
51. In reality, there is little pressure on the government to eliminate
the deficit in goods and services. Israel now receives about $1.5 billion
annually in US government loans and grants, private donations and bond
purchases, personal restitution payments by the West German government,
and personal transfers (including immigrants' remittances). There also is a
substantial, though fluctuating, inflow of commerc;al capital. So long as
these inflows of foreign exchange continue, the government has no reason
to impose pzinful and unpopular measures that would restrain imports
sufficiently to eliminate the deficit. Elimination of the deficit would only
lead to accumulation of foreign exchange reserves or diminution of that
aid that makes life easier for the people of Israel.
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