ISRAEL'S ECONOMY GROWS DESPITE TERRORISM: From the Jerusalem Center for Public Affairs:

Maintaining a Thriving Economy in the Shadow of Terror

Professor Zvi Eckstein

Deputy Governor of the Bank of Israel

• Despite terror and war, the Israeli economy has one of the highest per capita growth rates in the Western world among all the states established between 1948 and 1974. If there had been no terror in 2000-2005, the economy would have continued to grow and would have almost reached where it is today as early as 2003.

• Public expenditure has declined from 65-70 percent of the GDP after the 1973 war to 47 percent - below the EU average and similar to the level in the Netherlands and the UK, but higher than the United States.

• Before the Second Lebanon War, the economy was producing a budget surplus and growing at a level of 6 percent in annual terms. During the 3rd quarter of 2006 there was a decrease in the rate of GDP growth, but after the war, in the 4th quarter, GDP growth was higher than 7 percent in annual terms. Industrial managers and other employers in the north of Israel understood the importance of exports and of the continuance of economic activity, and worked day and night, during and after the war, to fill orders from abroad.

• Inflation in Israel in the last twelve months has been almost minus 1 percent. The strengthening of the Israeli shekel against the dollar was the major factor affecting inflationary developments, and was a result of both local and global factors. Since 2000, total exports have equaled imports. In 2006 the current account surplus totaled $6.8 billion, an exceptionally high level both from the historical and international perspectives. The current account surplus is expected to be even higher in 2007.

• There was substantial direct foreign investment in Israel during 2006. This trend, which began in 2002, is a manifestation of Israel's integration within the global economy and is a result of both global and domestic factors. The Israeli economy is open and diversified. Nevertheless, Israel should open up even more by improving and regulating the financial sectors and by adopting international standards.

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