Economic Growth in Israel - Essay Example

Executive Summary The OECD (Organisation for Economic Cooperation and Development) aims at providing support to the member countries to restore confidence in their market and institutions and foster new sources of growth through technology and innovation which would provide a basis for sustainable future economic growth. The data analysis provided by OECD regarding the major economic indicators of the member country Israel will provide a clear picture to its institutions and organisations about the current scenario of the economy and help them to propose appropriate solutions through the application of economic theories and practices. This report examines the macroeconomic aspects and policy issues faced by Israel and provide a relative framework and recommendations on how to support development in the country through successful integration of business organisation and public interventions. The report also highlights the economic outlook and forecasts of Israel through the analysis of relevant economic parameters provided by OECD. It was found that though Israel’s economic growth slowed down in 2014, but it again picked up at the end of the year and has been experiencing positive growth since then due to substantial investments and public intervention. Table of Contents Introduction 3 1.0 Economic Principles and Theories that Regulate the Growth of Israel 3 1.1 The Role of Economics towards Organisational and Business Thinking 4 2.0 Relationship between Macro and Microeconomic Theories 4 3.0 Application of economic theory to business contexts of Israel 7 3. 1 Managerial Decision Making Model 7 Conclusion 8 Reference List 10 Introduction OECD works with the prime motive of providing information on a wider range of topics to provide assistance to the government and other institutions of a member country to formulate appropriate polices that can help them to foster growth and stability in the economy. This report analyzes the major indicators of economic performance of Israel. The data of major economic indicators of Israel are collected from OECD and can be used to analyze how the growth and performance of the country can be improved based on its reports. There are variety of economic indicators like agriculture, energy, finance, governmental interference, employment, technology and research, health and environment on the basis of which OECD analyzes the performance and growth of Israel. The report also provides a relative framework for understanding the role of government and local organisations in their contribution towards long term growth and efficiency of the economy. 1.0 Economic Principles and Theories that Regulate the Growth of Israel The basic economic theories of demand and supply mechanism cost of production and elasticity of demand and supply contributes towards organisational and business thinking of a country. It is a challenge for the economists to explain how countries prosper in terms of GDP even if there was prevailing poverty and unemployment. A country’s GDP is facilitated by the division of labour and better organisational structure of the major sectors of the economy (Rader, 2014). The general economic theory of market states that, rise in aggregate demand in an economy can lead to rise in price level and supply which ensures market equilibrium (Dosi, Fagiolo and Roventini, 2010). The neo-classical theory which gives importance to the state intervention in restoration of market equilibrium in the economy is relevant for Israel as the government plays a principal role in performance of the market. Israel has now emerged as a developed economy instead of global economic crisis, due to substantial government support and participation. According to Boianovsky and Hoover (2009), the growth models of Kaldor and Young explains the concepts of increasing returns to scale and implications of knowledge on the productivity of an economy. The major drivers of growth in the Israel economy are advancement in technology and science through investment which have resulted in the development of manufacturing and agricultural sectors. The growth rate remained high at 3.5 % in the current year, which indicates rise in the production, investment and government spending (OECD, 2015b). 1.1 The Role of Economics towards Organisational and Business Thinking The organisational and business structure of an economy is regulated by a number of factors like cost of production, supply of factors, government incentives, rate of investment etc. The economic growth of Israel depends on the organisational structure of their business institutions. The fall in the general price level and interest rates, increase in labour force participation and regulation of wage policies are expected to have a superior impact on the production of the economy (OECD, 2015a). The increased government expenditure on the infrastructure like public transport, natural gas supply network and education has led to an increase in the private investment. The growth model of Solow can be used in this context to explain the rising GDP of emerging countries like Israel due to investment (Engel, J. S. and del-Palacio, 2011). It shows that with more capital investment and growth in the labour force, the economy move towards steady state equilibrium in the long run (OECD, 2015a). This highlights the fact that, with rising national income accompanied by investments in capital stock fostered the growth of the country over time. Its output growth is close to other developed OECD economies that explains the catch up effect of smaller economies (Dosi, Fagiolo, and Roventini, 2010) which means with larger investments over time a smaller country is bound to catch-up the growth rate of the advanced economies. Another factor that contributed to the economic growth of Israel is its rich natural resource of Oil. A country like Israel which is already experiencing a positive growth rate can easily afford further investments in research and technology which can be utilised for exploring its natural gas reserves. 2.0 Relationship between Macro and Microeconomic Theories The role of micro and macro economic theory is crucial in explaining a country’s growth perspective and future potential. The growth of a country in the long run is determined by a number of factors in the economy like human capital, investment in research and technological advances. The trade and integration of Israel with the world economy has also helped the country to attain positive growth rate as that have led to rise in the national income because of increase in the earnings of foreign income (North, 2012). The GDP is the most important economic indicator of country’s economic activities and Israel has been showing positive growth with very little fluctuations in GDP since past years. The GDP of Israel has been growing at a rate of 1.9 % in 2014 and expected to grow at higher rate in the next years. The factors like PPP (Purchasing Power Parity), income inequality, unemployment, rate of taxation and capital flow into the country influence the growth and productivity of an economy. The major contributing factors of economic growth in Israel are the increase in the purchasing power of households due to reduction in the personal tax rate and high rate of employment. The unemployment rate is 6.7 % of total labour forces of Israel which is lower than average unemployment rate of OECD (OECD, 2015b). The reduction in the public debt as a part of fiscal policies of their government has led to fall in fiscal deficit of the country. The total fixed investment of Israel is significant which is also an important factor contributing towards economic growth. Since 2009, there has been subsequent increase in the FDI inflows and FDI stocks into the country which has also been the driving force of economic growth in the country (OECD. 2015b). Thus, the macro economic factors of a country plays more important role than its micro economic factors in the development of Israel. The price level and employment has been stabilized by the market mechanism and appropriate wage policies by the government of Israel economy. The reduction in the rate of price inflation to 0.5% in 2014 from 1.6% in 2013 shows that Israel has adopted appropriate monetary policies, which led to financial and economic stability (OECD, 2015c). The income gap of Israel has been decreasing with the other OECD countries which can be analyzed from the Gini-coefficient of inequality which was 0.371 in 2012 (OECD, 2015b). The rate of personal income taxation is only 5.6% of GDP in Israel which emphasises the fact that the people have more disposable income. Further, a rise in the standard of education and welfare by the government has increased the growth potential of the economy through rise in the labour productivity (OECD, 2015c). The organisational and institutional structure of Israel economy was enhanced by a number of micro and macroeconomic aspects like stable money supply, low rate of income inequality and unemployment, reduction in taxation and balanced budget structure. On the micro economic aspect, stable market equilibrium is mainly due to proper price mechanism and labour wage policies (Scully, 2014). This has improved the macroeconomic indicators of economic performance as the inflation remained at very low rate due to price stability and rise in active labour force participation due to wage regulation policies adopted by the government (OECD. 2015a). The following graphs explain the positive economic performance of Israel economy over the past years due to the rising GDP and labour participation rate. Figure 1: Real GDP growth (percentage changes) (Source: OECD. 2015c, p.5) Figure 2: Labour force participation rate and unemployment rate (Source: OECD, 2015c, p.5) 3.0 Application of economic theory to business contexts of Israel The economic theory of growth and its key indicators can be used to analyze the business contexts of Israel. The government policies that ensured stable prices and a minimum wage rate in the economy have positive impact on the business of the economy. The regulation of a minimum wage rate and the price stability kept the cost of production of entrepreneur’s low which increased their profitability in the long run (Wickens, 2012). The appreciation of Israel’s currency ‘Shekel’ is another major factor contributing to the business development of the economy. The rise in the value of Shekel in terms of foreign currency in recent years has motivated the producers of the manufacturing sector and defence to import technology and raw materials mainly from the advanced countries. The appreciation of shekel has also raised the foreign exchange reserves of Israel through the rise in the export earnings. Thus, the monetary policies have affected the business performance in the economy of Israel to a great extent. Apart from the monetary policies, the fiscal policies of the government like substantial public expenditure and reduction in the tax rate also helped the business organisations. The increase in expenditure on health and education enhanced the quality of life of the workers and as a result, their productivity increased which led to rise in the profit margin (Bruton, Ahlstro and Obloj, 2008). The increase in investments by the government on research and innovations has been helpful to the business entrepreneurs to come up with newer and better quality products at a cheaper rate. The minimum wage policies of the government of Israel helped in the decline of poverty in the country to a large extent as more labour were employed. The availability of cheap labour reduced the labour costs of the manufacturers and their profitability increased (Minniti and Lévesque, 2008). 3. 1 Managerial Decision Making Model The managerial decision making models have been helping the business organisations in Israel to achieve their long term goals. The free market and automatic price mechanism in Israel has well-established the principles of economic autonomy during the development of the country. As a small and open economy, it depends on the competitive regulatory situation and established rule of laws to attract investment from international platforms (Turskis and Zavadskas, 2011). With reasonable government spending, the Israel government has not interrupted the industrial and manufacturing activities of the country. The business models help the institutions to undertake the best alternative solution to their problems (Fagiolo and Roventini, 2012). The government should keep on applying its efforts to improve the coordination of public involvement into the business organisation to better respond to the growing demand by increasing supply keeping the prices stable (O'Connor, 2013). Conclusion Israel has a booming market economy that attracts foreign investments and the growing technology sector has contributed towards its overall economic development. The growth of GDP in Israel has been relatively strong for the past years and unemployment has been at low level. The technological advances due to research and knowledge have attracted substantial foreign investments which helped in further capital accumulation and maintenance of balance in trade. The recent exploration of natural gas in the offshore has improved its energy resources and balance of payments scenario which is a boost for its manufacturing sector. However the average standard of living of the country still remains a challenge for the economy. There is need for far-sighted macroeconomic frameworks, structural reforms, competitive policies and environmental externalities to be incorporated into the business decisions of the corporate of Israel to have potential growth in the future. Reference List Boianovsky, M., and Hoover, K. D., 2009. The neoclassical growth model and twentieth-century economics. History of Political Economy, 41(1), pp. 1-23. Bruton, G. D., Ahlstrom, D., and Obloj, K., 2008. Entrepreneurship in emerging economies: Where are we today and where should the research go in the future. Entrepreneurship theory and practice, 32(1), pp. 1-14. Dosi, G., Fagiolo, G., and Roventini, A., 2010. Schumpeter meeting Keynes: A policy-friendly model of endogenous growth and business cycles. Journal of Economic Dynamics and Control, 34(9), pp. 1748-1767. Engel, J. S. and del-Palacio, I., 2011. Global Clusters of Innovation: THE CASE OF ISRAEL AND SILICON VALLEY. California Management Review, 53(2). Fagiolo, G. and Roventini, A. 2012. Macroeconomic policy in dsge and agent-based models. Revue de l'OFCE, 124(5), pp. 67-116. Minniti, M., and Lévesque, M., 2008. Recent developments in the economics of entrepreneurship. Journal of Business venturing, 23(6), pp. 603-612. North, D. C., 2012. Economic performance through time. Revista Universidad EAFIT, 30(93), pp. 9-18. O'Connor, A., 2013. A conceptual framework for entrepreneurship education policy: Meeting government and economic purposes. Journal of Business Venturing, 28(4), pp. 546-563. OECD. 2015a. OECD: Israel. [Online] Available at: [Accessed 26th September 2015]. OECD. 2015b. Economic Survey of Israel 2013. [Online] Available at: [Accessed 26th September 2015] OECD. 2015c. OECD Economic Surveys ISRAEL. [Online] Available at: [Accessed 26th September 2015] Rader, T., 2014. Theory of microeconomics. Massachusetts: Academic Press. Scully, G. W., 2014. Constitutional environments and economic growth. Princeton: Princeton University Press. Turskis, Z., and Zavadskas, E. K., 2011. Multiple criteria decision making (MCDM) methods in economics: an overview. Technological and economic development of economy, 2, pp.397-427. Wickens, M., 2012. Macroeconomic theory: a dynamic general equilibrium approach. Princeton: Princeton University Press. Read More