ISRAEL AT 50

INSTITUTIONAL INVESTOR
May 1, 1998

This sponsored section was prepared by the Special Projects Department at Institutional Investor and written independently by Avi Machlis and Matthew Kalman, journalists based in Jerusalem. Cover artwork courtesy of Bank Hapoalism.

A NEW ERA OF OPENNESS

When the State of Israel was established in 1948, the founding fathers envisaged a centralized economy based on agriculture and inspired by socialist Zionism. Today, however, many trademarks of the early economy have been swept away. Israel's high-tech sector is now driving economic growth, while privatization and reforms are transforming Israel into a free market economy. "We will continue to break down monopolies and deregulate," says Finance Minister Yaakov Neeman. "This will encourage growth, attract foreign investment, and benefit the Israeli public."

In the early 1990s, Israel enjoyed rapid growth, fueled by a wave of immigration from the former Soviet Union and by the Oslo peace process, which began in 1993. GDP climbed by an average of 6 percent between 1990 and 1995. The rate slowed to 4.5 percent analysts expect sluggish growth in 1996, 1.9 percent last year, and analysts expect sluggish growth in 1998.

Even though the peace process has been stalled for more than a year, foreign investment increased from $2.8 billion in 1996 to $3.7 billion in 1997. Recent terrorist attacks, however, have severely damaged Israel's tourism industry, which accounts for 3 percent of GDP, and sonic analysts warn that if diplomacy collapses, investors may disappear. Still, Israel's government remains upbeat. "Foreign investment will continue to flow," Neeman declares.

Foreign interest has focused on the financial services and technology sectors. According to the Bank of Israel, of total direct foreign investment of more than 100,000, some 46 percent was invested in financial services and another 36 percent in technology.

Investors did not seem deterred by last year's slowdown. The government blames the by downturn on the high budget deficit left its predecessors, which compelled it to rein in spending and the Batik of Israel to …