ABSTRACT
Since the late 1980s, Israel's economy has grown at a fast pace. From 1986 to 1989, the growth rate of gross domestic product was 3.7 per cent. From 1992 to 1995, the growth rate averaged an impressive 6.0 per cent (Bank of Israel, 1997, p. 3). Two main factors were responsible for this renewed growth: the wave of immigration from the former Soviet Union and the peace process (Bank of Israel, 1996, pp. 1–3). Since 1990, 700,000 new immigrants have arrived in Israel, a change that affected both the aggregate supply and aggregate demand in the economy. The immigration wave resulted in a 12 per cent increase in the population and a larger increase in the workforce, especially in its skilled component. The relatively quick absorption of the immigrants in the economy, and the negative pressure it exerted on wages, led to an expansion in aggregate supply that was reflected in a growth rate that was faster than that of the economies of other developed countries, without causing significant inflationary pressures (Bank of Israel, 1996, p. 2). Aggregate demand increased as well because of a significant increase in consumption. For example, the housing demand of the new immigrants led to an expansion in the construction industry, which was the initial engine of the renewed growth process. The peace process began in 1991 with the Madrid Conference, continued with the Oslo agreement, and has, to date, concluded with the signing of the peace agreement between Israel and Jordan in October 1994. These political developments contributed to the growth process in several ways. First, they led to the development of economic ties with neighboring countries, though in modest dimensions. The much larger size of the Israeli economy and its higher level of development are often cited as the reasons for the modest scope of possibilities for trade between Israel and its neighbors (Kleiman, 1994, pp. 33–4). However, the removal of the secondary Arab boycott and the establishment of diplomatic ties with many nations had positive effects on the economy. Many Asian nations began to trade with Israel, which is particularly important since the Israeli economy is open and foreign-trade-oriented. In addition, the removal of the tertiary Arab boycott means that many multinational corporations (MNCs), which were reluctant to do business either in or with Israel because of fear that they would lose Arab business, are taking an interest in the opportunities available to them in Israel (Bank of Israel, 1996, p. 44).
