Business-friendly and innovation-oriented economy
Israel is a country located in West Asia with a population of 9.5 million. It is one of the world’s most developed economies and a regional superpower, presumably armed with nuclear weapons. Geopolitical challenges, especially the Israeli-Palestinian conflict, did not hamper economic development. Labeled as the Silicon Valley of the Middle East, Israel is now among the top leaders in the best-educated workforce and innovation.
The economic growth of Israel was accelerated by liberalization in the 1970s and 1980s. Currently, the core of the economy is industrial production and high-tech industries. Israel ranks among high-income countries. In 2022, the GDP was $522 billion ($54,659 per capita). In the GDP structure, industry accounts for 17.2%, services for 72.4%, and agriculture for 1.3%. As for the business environment, micro, small, and medium-sized enterprises (SMEs) account for 99.5% (about 625,000) of all businesses.
Israel’s hallmarks are its numerous start-ups and research centers of multinational companies. However, as a resource-poor country, Israel relies heavily on imports for some of its energy, food, and semi-finished goods. Despite high rates and per capita income, poverty, which affects one-fifth of the population, remains a challenge. The energy transformation, based on solar energy, and achieving climate neutrality by 2050 is also challenging.
Population of Israel
Israel’s population is 9.5 million people. The largest ethnic group is Jews (74%), including Israeli-born (78.7%), European-born, American-born, Oceania-born (14.8%), African-born (4.2%), and Asian-born (2.3%). The second largest ethnic group is Arabs (21.1%). In turn, the largest religious groups are adherents of Judaism (74%), Muslims (18%), Christians (1.9%), and Druze (1.6%). Hebrew is the official language, while Arabic has a special status. The most common foreign language is English.
Israel’s population is experiencing an accelerated aging process. However, due to a high fertility rate, those aged 65 or older now account for 12.4% of the population, while those aged 15-64 account for 61.7%. The labor force numbers 4.37 million people. About 1.95 million Israelis (20% of the population) live in poverty. The urbanization rate is 92.9%. The largest urban areas are Tel Aviv-Yafo (4.4 million residents), Haifa (1.17 million), and the capital, Jerusalem (970,000).
Authorities shield the domestic labor market from an influx of foreign workers. Employers are required to prove that there is no Israeli citizen capable of performing the duties in question. Those who meet the legal requirements are granted a work visa. Only citizens from countries that have settled diplomatic relations with Israel are allowed to rent or buy property. In 2022, 136,000 foreigners worked in Israel.
Economy of Israel
As one of the world’s largest economies, Israel is a member state of the Organization for Economic Cooperation and Development (OECD). The most important sectors of the economy are high technology, industrial production, and diamond cutting and polishing. The authorities focus on expanding such sectors as medical technology, aerospace, automotive, semiconductors, agricultural and food technology, cyber security, water technology, and clean-tech industry.
An important sector is the defense industry. The value of military equipment exports has doubled in less than a decade, reaching $12.5 billion in 2022 (mainly aerospace technology, missile systems, and radars). Major developments have been achieved by Israel in energy. Over the past 20 years, Israel has transformed itself from a net importer to an exporter of natural gas, with proven reserves of 921 billion cubic meters. On the other hand, however, Israel has to import oil. In turn, tourism accounts for 2.6% of GDP.
The chemical, machinery, textile, and construction industries have also been experiencing growth. The renewable energy sector is also expanding, particularly in harnessing solar energy. The challenges for Israel’s economy are demographic and social. The increasing number of ultra-Orthodox Jews who devote all their time to studying the Talmud affects the labor market in employment figures. In this situation, the employment-to-population ratio may change in the coming years, and the level of social dependency may increase.
International trade
Israel is the world’s 29th largest economy by GDP, 48th largest exporter, and 42nd importer. Israel’s exports are worth $60.1 billion and imports $92.1 billion. Israel’s main trading partners are the United States, China, Germany, the United Kingdom, Turkey, Switzerland, the Netherlands, Belgium, India, Hong Kong, and France.
The group of most imported goods are electrical machinery (12.3%), industrial machinery (11.7%), oil and mineral fuels (9.91%), motor vehicles and parts (8.27%), precious stones and metals (7.52%), plastics (4.07%), medicines (3.98%), precision instruments (3.57%), iron and steel (2.79%), and organic chemicals (1.77%). Other goods include furniture, iron and steel articles, clothing, cereals, chemical products, wood, meat, cosmetics, paper, and footwear.
In turn, the group of most exported goods includes electrical machinery (17.2%), precious stones and metals (15.9%), precision instruments (12.2%), industrial machinery (8.3%), plastics (5.52%), chemical products (5.39%), aircraft (3.95%), oil and mineral fuels (3.74%), medicines (3.51%), fertilizers (2.67%), and arms (2.42%). Other goods include organic and inorganic chemicals, fruits and nuts, cosmetics, furniture, vegetables, paints, and dyes.
Trade agreements
Israel pursues an active trade policy, gradually increasing the number of trade agreements. So far, Israel has concluded 44 bilateral investment treaties (BITs). Of these, 36 are currently in force.
Israel has concluded free trade agreements with the following countries:
Canada
Colombia
Mexico
Panama
South Korea
Turkey
Ukraine
United Arab Emirates
United Kingdom
United States
Vietnam
Israel has also signed a preferential trade agreement with Jordan. In addition, Israel has concluded a Qualified Industrial Zones (QIZ) agreement with the U.S. to promote cooperation between Israel and Egypt. Under the agreement, Egyptian products manufactured in such a zone with a 10.5% Israeli share can be exported to the U.S. duty-free.
Agreements with associations of countries:
European Union (EU)
European Free Trade Association (EFTA)
Southern Common Market (Mercosur)
Israel-European Union relations
The European Communities first established contacts with Israel as early as the 1950s, and the first free trade agreement was signed in 1975. The relations deepened after the launch of the European Commission Delegation in Tel Aviv in 1981. Their current relationship is based on the Association Agreement, which entered into force in 2000. Part of it is an agreement on a free trade zone, and the provisions also include cooperation on political and social issues.
Cooperation follows the 2005 Action Plan, which stipulates gradual integration into EU programs and the EU acquis. Agriculture and fisheries, air traffic, and pharmaceutical agreements complement it. Israel received financial support under the European Neighborhood Policy until 2021. Currently, the funds come from the EU’s Multiannual Financial Framework 2021-2027. Israel and the EU officials meet to discuss the most vital economic issues each year.
Israel is the European Union’s 25th largest trading partner, and the EU is the largest partner for Israel. In 2022, trade in goods was worth 46.7 billion euros. EU exports were worth €29.2 billion and included mainly machinery, transportation equipment, chemicals, and other industrial goods. The EU imported goods from those categories worth €17.5 billion. On the other hand, trade in services amounted to €16.7 billion. The EU exported services worth €9.8 billion and imported services worth €6.9 billion.
Opportunities and challenges
The opportunities for foreign entrepreneurs are primarily in high-tech industries. The most promising areas are IT, biotechnology, nanotechnology, telecommunications, Internet of Things (IoT), artificial intelligence, and 5G technologies. Prospects for cooperation also include technologies for energy transformation. These include technologies related to solar energy, energy storage, biofuels, and technologies useful for water management.
Other promising areas of cooperation are the automotive (autonomous vehicles) and aviation (aircraft engines, advanced materials, radar) sectors. Considerable opportunities exist in the agri-food industry for exports of grains, legumes, beverages, frozen fruits, fish, seafood, and organic food. Manufacturers of construction equipment and appliances, paper products, and furniture are also in demand.
Further opportunities are related to the aging of the population, as this process creates new challenges for public services, especially health care, pharmaceutical, and medical technology industries. There is also potential in ICT sector services and the expansion of digital infrastructure. At the same time, given the need to narrow the gap between the high-tech sector and the rest of the economy, opportunities are found in less advanced sectors.