NCPA - National Center for Policy Analysis

Aid Not Helping Israel's Economy

March 1, 1996

Government aid from the United States, Germany and others, along with generous private donors, allows the government of Israel to resist essential free market reforms, according to economist Alvin Rabushka.

Such foreign income, about $10 billion a year, is a substantial part of Israel's economy -- its gross domestic product (GDP) was only $87 billion in 1995. Half the foreign support comes from the U.S. government -- $3 billion in outright aid and $2 billion in loan guarantees. The money is used to finance generous health and welfare programs, a budget deficit and unprofitable businesses.

According to Rabushka's analysis, real economic growth in Israel is stagnating, despite the influx of 700,000 new immigrants in the past few years. In addition,

  • Taxes take between 40 percent and 41 percent of GDP, while government spending consumes about 60 percent.
  • Government is the majority shareholder in all the major banks, and owns more than 160 business enterprises and more than 90 percent of all the land.
  • It imposes marginal tax rates of up to 60 percent on direct income -- one of the highest rates in the world.
  • It subsidizes bankrupt farm communes, cooperatives and military industrial firms, bans the import of fresh fruit and vegetables, and imposes a wide variety of nontariff barriers on the free flow of other imports.

According to Rabushka's study, successive governments promised reforms -- such as economic deregulation, sale of state-owned banks and businesses and increased land sales -- but they have not been implemented. And Israel is expected to seek $10 billion to $15 billion in additional U.S. aid and loan guarantees if a peace agreement is concluded with Syria.

Alvin Rabushka, "Scorecard on the Israeli Economy: A Review of 1995," March 1996, Institute for Advanced Strategic and Political Studies, 1020 16th Street, NW, Washington, DC 20036, (202) 833-9716.


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