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U.S. DEPARTMENT OF STATE
ISRAEL: 1994 COUNTRY REPORT ON ECONOMIC POLICY AND TRADE PRACTICES
BUREAU OF ECONOMIC AND BUSINESS AFFAIRS





                              ISRAEL

                     Key Economic Indicators
        (Millions of U.S. dollars unless otherwise noted)


                                    1992      1993      1994  1/

Income, Production and Employment:

Real GDP (1990 prices)  2/        58,872    60,878    75,190
Real GDP Growth (pct.)               6.7       3.4       5.0
GDP (at current prices)  2/       63,962    73,544    85,716
By Sector:
  Agriculture/Forestry/Fishing     1,791     1,765     1,714
  Construction/Electricity/Water   6,460     6,619     7,029
  Industry                        13,490    15,812    18,686
  Ownership of Dwellings           4,478     5,369     6,429
  Finance/Business Services       17,001    13,679    16,286
  Government/Health/Education     14,391    16,621    19,286
  Net Exports of Goods & Services 20,779    22,143    25,000
Real Per Capita GDP (USD)         11,993    13,820    15,727
Labor Force (000s)                 1,860     1,960     2,020
Unemployment Rate (pct.)            11.2      10.0       7.8

Money and Prices:  (annual percentage growth)

Money Supply (M2)                     26        47       N/A
Base Interest Rate  3/              11.3      11.9       N/A
Personal Savings Rate               19.6      17.7       N/A
Wholesale Price Index                9.1       7.2         9
Consumer Price Index                 9.4      11.2      14.0
Exchange Rate (USD/shekel)           2.5       2.8      2.98

Balance of Payments and Trade:  (billions USD)

Total Exports (FOB)  4/            12.48     14.08     16.20
  Exports to U.S.                    4.0       4.6       5.2
Total Imports (CIF)  4/            18.56     20.24     22.50
  Imports from U.S.                  3.2       3.6       4.2
Aid from U.S.                        3.0       3.0       3.0
Aid from Other Countries             N/A       N/A       N/A
External Public Debt  3/           24.31     22.97     25.89
Debt Service Payments (paid)        1.36      1.40       1.6
Gold and Forex Reserves  4/          6.3       5.6       6.5
Trade Balance  4/                  -5.09     -5.05      -6.3
  Trade Balance with U.S.            0.8       1.0       1.0


N/A--Not available.
1/ 1994 Figures are all estimates based on available monthly
data in October 1994.
2/ GDP at factor cost.
3/ Figures are actual, average annual rates.
4/ Merchandise trade.

Sources:  Bank of Israel; Central Bureau of Statistics;
Ministry of Finance.








1.  General Policy Framework

    Israel is in the midst of a four year economic expansion,
with five to six percent growth projected to continue
throughout the decade.  Economists estimate that Israel's
economy will grow by over 5% in 1994.  Inflation, likely to
reach 14 percent on an annualized basis, has replaced
unemployment as the biggest cause for concern in the economy. 
Increased inflation is driven by soaring housing costs, higher
than anticipated private consumption, and costly public sector
wage agreements.  The best economic news is unquestionably
Israel's success in reducing the unemployment rate from over 11
percent in 1992 to approximately 7.5 percent in the third
quarter of 1994.  Given changes in the composition of the labor
force due to the recent wave of immigration, the rate of
unemployment may be approaching what some economists believe is
Israel's normal unemployment rate.

    An increase in imports relative to exports has caused the
balance of payments deficit to widen in the first half of
1994.  Increases in imports continue to outstrip export growth,
despite 10 percent growth in exports in 1994.  The import bulge
consists of industrial inputs (which may lead to increased
production), fuel, diamond and ship and airplane imports, and
continued increases in Israeli tourism abroad.  This trend of
increased imports moderated in the third quarter.  The trade
deficit increased by 28% during the first nine months of 1994,
in comparison to the same period in 1993.  The Government of
Israel estimates that the balance of payments deficit for 1994
will exceed 2 billion dollars.

    The United States continues to be Israel's single largest
trading partner.  Although the U.S. consistently runs a trade
deficit with Israel, U.S. sales of goods and services to Israel
are expanding.  In 1993, exports of U.S. goods and services to
Israel went up by 12 percent, and this trend continued in the
first nine months of 1994.  Total bilateral trade is estimated
to approach 10 billion dollars in 1994, with Israel accruing a
trade surplus with the United States of nearly 1 billion
dollars.  The U.S.-Israel Free Trade Area Agreement will be
completely phased-in as of January 1, 1995, with all tariffs
dropping to zero.  Israel retains non-tariff barriers for
sensitive areas like agriculture and processed food products.

    Israel's 1993 budget deficit equaled 2.5 percent of GDP. 
Israel finances its deficit through sale of government bonds,
sale of government-owned companies, tax revenues, unilateral
transfers from abroad, and borrowing on the international
market.  Under balanced-budget legislation passed in 1991, the
deficit ceiling was reduced by a set percentage every year.  In
1993, the government revised the legislation to replace
mandated reductions in future years with a general requirement
that each year's planned budget deficit target be less than
that of the previous year.  In 1994, the budget deficit is
expected to reach 3% of GDP.

    Total government debt is increasing, due primarily to
borrowing under the U.S. Loan Guarantee Program.  While Israel
lowered several purchase taxes, corporate income tax and income
tax rates for the middle class, in 1994 the tax burden rose
slightly to 41% due to bracket creep, increased private
consumption, and revenues from purchase taxes on sales of
homes, whose prices continue to rise ahead of inflation. 
Government policies such as continued capital market reforms
and shifting national priorities from housing construction and
roads in the Occupied Territories to investment in
infrastructure and human capital within Israel have laid the
groundwork for continued growth.

    Foreign investment is likely to increase as the peace
process advances and the Arab League Boycott weakens.  In the
course of 1994, Jordan, Morocco, Tunisia and other Arab states
extended new ties to Israel.  The Gulf Cooperation Council
(GCC) announced the discontinuance by its members of the
secondary and tertiary aspects of the Arab League Boycott.


2.  Exchange Rate Policy Framework

    Under the "diagonal" exchange rate mechanism introduced in
December 1991, the shekel floats within a band, five percent
above or below an established midpoint tied to a basket of
foreign currencies.  The midpoint is shifted gradually against
the basket on a daily basis, while the actual exchange rate
responds to the demand for foreign currency.  Since its
introduction, the diagonal mechanism has successfully
forestalled large speculative currency movements and attendant
swings in reserves and interest rates.


3.  Structural Policies

    Prime Minister Rabin's government, up for reelection in
1996, has made some limited progress on reducing government
intervention in the economy.  The Rabin government has 
achieved more in the areas of capital market reforms and
taxation, but has barely made a dent in the privatization of
large government-owned companies.

    Privatization efforts stalled in 1994.  In 1993, the
government of Israel raised USD 1.24 billion through
privatization.  In the first nine months of 1994, by
comparison, the government generated only 50 million dollars
through privatization.  Even if scheduled sales are concluded
of limited shares in the government-owned Shekem retail chain
and Israel Chemicals Limited (ICL), and sale of the Housing and
Development Corporation and the Mizrachi Bank are completed by
the end of 1994, revenues will still fall far short of the 1993
levels (USD 1.24 billion) and the Government of Israel's own
goals for 1994.  However, Israeli officials are gearing up for
1995, to lay the groundwork for USD 1.5 billion worth of sales.

    Ten government-owned firms account for 90 percent of
earnings of government-owned companies:  El Al, Bezek (the
national telecommunications firm), Israel Oil Refineries,
Israel Aircraft Industries, Israel Military Industries, Israel
Electric Corporation, Israel Shipyards, Zim (the national
shipping company), and the Housing and Development
Corporation.  Bezek, ZIM, Israel Shipyards and El Al are all 
targets for partial or substantial sale in the next twelve to
fifteen months.

    Capital market reform and liberalization of foreign
exchange movements initiated in 1987 have continued, sharply
reducing government involvement in the allocation of capital
and integrating the Israeli banking system more closely with
international financial markets.  Recent liberalizations
include:  elimination of constraints on private sector
investment in real assets abroad, allowing private sector
investment in foreign financial assets as well as long term
savings funds to invest in securities overseas, loosening of
foreign currency restrictions on Israeli citizens traveling
abroad, and opening the Israeli capital market to foreign
corporations.

    The overall tax burden for Israelis has increased over the
last few years, largely due to bracket creep.  The government
announced reductions in indirect taxes and income taxes in
1994, but initiated a new capital gains tax on stock exchange
earnings effective January 1, 1995.  In addition, new taxes to
pay for health and pension fund reforms may be implemented in
1995.  Tax levels are higher than rates in Japan or the U.S.,
but roughly comparable to European standards.  A U.S.-Israel
double taxation treaty went into effect January 1, 1995.


4.  Debt Management Policies

    Israel's net external debt increased in 1994 (8.9% in first
half of the year), due to increased borrowing under the Loan
Guarantee Program and increased deposits by foreigners in
Israeli banks.  The government's foreign debt reached $21.4
billion dollars or 79 percent of total external debt.  Israel's
debt to GDP ratio rose to 27 percent, up from 26 percent in
1993.


5.  Significant Barriers to U.S. Exports

    All duties on products from the United States were
eliminated under the 1985 United States-Israel Free Trade Area
(FTAA) Agreement as of January 1, 1995.  The FTAA liberalized
and expanded the trade of goods between the United States and
Israel, and spurred discussions on freer trade in tourism,
telecommunications and insurance services.

    Non-tariff barriers, such as purchase taxes, variable
levies, quotas, uplifts, standards and quantitative
restrictions, continue to impede U.S. exports, especially in
sensitive sectors like agriculture and processed food products.

    Although Israel has liberalized imports of all bulk
agricultural commodities except beef, extensive import
restrictions remain, including variable levies on such U.S.
exports as prunes, raisins, almonds, and baked goods. 
Quantitative restrictions, and in some cases, outright
prohibitions, affect primarily U.S. beef, plywood, poultry, and
dairy products. 

    In addition to these restrictions, the Government of Israel
has two unique forms of protection for locally produced goods. 
The first is Harama, or uplift, applied at the pre-duty stage
of import, and the second is TAMA, a Hebrew acronym standing
for additional quota percentage, which applied after imposition
of duty but before any assessment of purchase taxes.

    Harama is a pre-duty uplift applied to the CIF value of
goods to bring the value of the products to an acceptable level
for customs valuation.  Israel calculates import value
according to the Brussels Definition of Value (BDV), a method
which tolerates uplifts of invoice prices.  For purposes of
calculating duty and other taxes, the Israeli Customs Service
arbitrarily uplifts by two to five percent the value of most
products which exclusive agents import, and by 10 percent or
more the value of other products.  Israel has agreed to use
only actual wholesale price for large importers after 1995. 
Israel is not a signatory to the GATT Valuation Code.

    TAMA is a post-duty uplift designed to convert the CIF
value plus duty to an equivalent wholesale price for purposes
of imposing purchase tax.  Coefficients for calculation of the
TAMA vary from industry to industry and from product to product.

    In addition, purchase taxes that range from 25 to 95
percent are applied on goods ranging from automobiles to some
agriculture and food items.  The Government of Israel
eliminated or reduced purchase taxes on many products in 1994,
including consumer electronics, building inputs, and office
equipment.  Where still remaining, purchase taxes apply to both
local and foreign products.  However, when there is no local
production, the purchase tax becomes a duty equivalent charge.

    Israel has reduced the burden of some discriminatory
measures against imports.  Israel agreed in late 1990 to
harmonize standards treatment, either dropping health and
safety standards applied only to imports or making them
mandatory for all products.  Implementation of this promise has
been slow.  Enforcement of mandatory standards on domestic
producers can be spotty and in some cases (e.g. refrigerators,
carpets, and packaging/labeling for food items) standards are
written so that domestic goods meet requirements more easily
than imports.  The Government of Israel is still reviewing the
issue of package size standards to facilitate entry of some
standard U.S. units.  Israel has agreed to notify the United
States of proposed new, mandatory standards to be recorded
under the GATT.

    The Standards Institution of Israel is proposing a
bilateral Mutual Recognition Agreement of Laboratory
Accreditation with the United States that could result in the
acceptance of U.S. developed test data in Israel.  The proposed
program would eliminate the need for redundant testing of U.S.
products in Israel to ensure compliance with mandatory product
requirements.

    The Israeli government actively solicits foreign private
investment, including joint ventures, especially in industries
based on exports, tourism, and high technology.  Foreign firms
are accorded national treatment in terms of taxation and labor
relations, and are eligible for incentives for designated 
"approved" investments in priority development zones.  There
are generally no ownership restrictions, but the foreign entity
must be registered in Israel.  Profits, dividends, and rents
can generally be repatriated without difficulty through a
licensed bank.  About 100 major U.S. companies have
subsidiaries in the Israel and some 170 Israeli companies have
subsidiaries in the United States.  Investment in regulated
sectors, including banking, insurance, and defense industries,
requires prior government approval.

    Israel has one free trade zone, the Red Sea port city of
Eilat.  In addition to the Eilat Free Trade Zone, there are
three free ports:  Haifa (including Kishon), Ashdod, and
Eilat.  Enterprises in these areas may qualify for special tax
benefits, and are exempt from indirect taxation.

    Israel is a signatory to the Uruguay Round Procurement
Code, which provides wide coverage of Israeli government
entities to enable more open and transparent international
tendering procedures.  Legislation establishing the loan
guarantee program envisions a substantial increase of U.S.
exports of investment goods to Israel, as Israel makes use of
the loan guarantee funds.  To this end, the Israeli government
provides information to the USG on existing and proposed
tenders issued by government entities valued at over $50,000.

    The Government of Israel frequently seeks offsets
(subcontracts to Israeli firms) of up to 35 percent of total
contract value for purchases by ministries, state-owned
enterprises and municipal authorities.  Failure to enter or
fulfill such industrial cooperation agreements (investment,
codevelopment, coproduction, subcontracting, purchase from
Israeli industry) may disadvantage a foreign company in
government awards.  Although Israel pledged to relax offset
requests on civilian purchases under the FTAA, U.S. firms may
still encounter requests to enter into offset arrangements. 
Israeli government agencies and state-owned corporations not
covered by the Uruguay Round Government Procurement Code follow
this "Buy Israel" policy to promote national manufacturers.

    Recent legislation codified and strengthened a 15 percent
cost preference accorded domestic suppliers in many Israeli
public procurement purchases, although the legislation
explicitly recognizes the primacy of Israel's bilateral and
multilateral procurement commitments.  This preference can
reach as high as 30 percent for domestic suppliers located in
priority development areas.

    In addition to its GATT multilateral trade commitments and
its FTAA with the U.S., Israel also has FTAs with the European
Union (EU) and European Free Trade Area (EFTA) states.  With
respect to all other countries, Israel substituted steep
tariffs for non-tariff barriers previously applied to trade,
and has gradually reduced these tariffs.  The seven-year
phase-in of Israel's import liberalization program has diluted,
to some extent, U.S. advantages under the U.S.-Israel FTAA.  As
EFTA countries accede to the European Union, Israel's EFTA FTAA
will be superceded by the E.U.-Israel Agreement, currently
being renegotiated in an attempt to broaden and deepen the 1975
accord.  Israel has also begun negotiations of FTAAs or other
trade agreements with Canada, Turkey, Jordan, Egypt, and
individual Central and Eastern European states.


6.  Export Subsidies Policies

    The U.S.-Israeli FTAA included agreement to phase out the
subsidy element of export enhancement programs and not to
institute new export subsidies.  Israel has already eliminated
grants, and in 1993 eliminated the major remaining export
subsidy, an exchange-rate, risk-insurance scheme which paid
exporters five percent on the FOB value of merchandise.  Israel
still retains a mechanism to extend long-term export credits,
but the volumes involved are small -- roughly $250 million. 
Israeli export subsidies have resulted in past U.S.
anti-dumping/countervailing duty cases.  In 1994 the United
States Government cited Israeli subsidy of butt-weld pipe
fittings in an anti-dumping/countervailing duty investigation. 
Israel has been a member of the GATT Subsidies Code since 1985.

    The Israeli Parliament passed legislation in May 1994
authorizing creation of free processing zones (FPZs). 
Qualifying companies operating in the (still undetermined) FPZs
will be exempt from direct taxation for a twenty-year period,
and imported inputs will not be subject to import duties or
tariff or most health and safety regulations generally in
effect throughout Israel.  Companies will also be exempt from
collective bargaining and minimum-wage requirements, although
subject to other labor requirements.  The legislation was
originally intended to promote investment in export-related
industries, but the wording of the legislation as passed does
not limit applicant companies to exporters or providers of
services to overseas clients.  Accordingly, the FPZs will not
violate the U.S.-Israeli FTAA export subsidies commitment.


7.  Protection of U.S. Intellectual Property

    Standards of Intellectual Property Rights (IPR) protection
are adequate, but enforcement in some areas is weak.  U.S.
industry has complained that Israeli companies violate
intellectual property rights by illegal duplication of video
cassettes.  Unauthorized showings of films and television
programs by unregulated cable television systems has been
reduced to some extent as legal cable services become available
throughout the country.  Legislation is currently being drafted
to improve copyright protection in cable television
broadcasts.  This law provides for binding arbitration as the
appropriate remedy for disputes over broadcast rights.  Israel
is a member of the International Center for the Settlement of
Investment Disputes (ICSID) and the New York Convention of 1958
on the recognition and enforcement of foreign arbitral awards.

    Protection for software has been upgraded, and the two
major movie distribution chains generally comply with copyright
requirements.  The Government of Israel hopes to pass a general
overhaul of the copyright law in early 1995 to correct
weaknesses in status quo protection of IPR.  Israeli patent law
contains overly broad licensing provisions concerning
compulsory issuance for dependent and nonworking patents. 
Israel is a member of the Paris Convention for the Protection
of Industrial Property, the Universal Copyright Convention, and
the Berne Convention for the Protection of Literary and 
Artistic Works.  Further, as a signatory of the GATT Uruguay
Round and World Trade Organization (WTO) agreements, including
the Agreement on Trade Related Aspects of Intellectual Property
Rights (TRIPS), Israel is in the process of making all legal
and regulatory revisions necessary to meet all GATT TRIPS
requirements.


8.  Worker Rights

    a.  The Right of Association

    Israeli workers may join freely established organizations
of their choosing.  Most unions belong to the General
Federation of Labor in Israel (Histadrut) and are independent
of the government.  In 1994 about 70 percent of the workforce,
including Israeli Arabs, are members of Histadrut trade unions,
and still more are covered by Histadrut's social and insurance
programs and collective bargaining agreements.  Non-Israeli
workers, including the approximately 57,000 nonresident
Palestinians from the West Bank and Gaza currently working
legally in Israel, may not be members of Israeli trade unions,
but are entitled to some protections in organized workplaces. 
The right to strike is exercised regularly.  Unions freely
exercise their right to form federations and affiliate
internationally.

    b.  The Right to Organize and Bargain Collectively

    Israelis fully exercise their legal right to organize and
bargain collectively.  While there is no law specifically
prohibiting anti-union discrimination, the Basic Law against
discrimination could be cited to contest discrimination based
on union membership.  There are currently no export processing
zones, although the Knesset has passed legislation authorizing
creation of free processing zones, as discussed in section 6.

    c.  Prohibition of Forced or Compulsory Labor

    The law prohibits forced or compulsory labor, and neither
Israeli citizens nor nonresident Palestinians working in Israel
are subject to such practices.

    d.  Minimum Age for Employment of Children

    By law, children under the age of 15 may not be employed. 
Employment of those aged 16 to 18 is restricted to ensure time
for rest and education.  Israeli labor exchanges do not process
work applications for West Bank or Gaza Palestinians under age
17.  Ministry of Labor inspectors enforce these laws, but
advocates of children's rights charge that enforcement is
inadequate, especially in smaller, unorganized workplaces.

    e.  Acceptable Conditions of Work

    Legislation in 1987 established a minimum wage at 45
percent of the average wage, calculated periodically and
adjusted for cost of living increases.  Union officials have
expressed concern over enforcement of minimum wage regulations,
particularly with respect to employers of illegal nonresident
workers.  Along with union representatives, the Labor
Inspection
Service enforces labor, health, and safety standards in the
workplace.  By law, maximum hours of work at regular pay are 47
hours per week (8 hours per day and 7 hours the day before the
weekly rest).  The weekly rest must be at least 36 consecutive
hours and include the Sabbath.  Palestinians working in Israel
are technically covered by the laws and collective bargaining
agreements that cover Israeli workers.



  Extent of U.S. Investment in Selected Industries.--U.S. Direct
Investment Position Abroad on an Historical Cost Basis--1993

                    (Millions of U.S. dollars)
                                                                
              Category                          Amount          

Petroleum                                                (1)
Total Manufacturing                                      (1)
  Food & Kindred Products                      (1)
  Chemicals and Allied Products                (1)
  Metals, Primary & Fabricated                 (1)
  Machinery, except Electrical                 17
  Electric & Electronic Equipment             834
  Transportation Equipment                      3
  Other Manufacturing                          (1)
Wholesale Trade                                          25
Banking                                                   0
Finance/Insurance/Real Estate                           202
Services                                                133
Other Industries                                         (1)
TOTAL ALL INDUSTRIES                                  1,660 

(1) Suppressed to avoid disclosing data of individual companies

Source: U.S. Department of Commerce, Bureau of Economic
Analysis

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