THE DEVELOPMENT CHALLENGE: Israel has long been a strong ally of the United States. Israel strongly condemned the September 11th attacks on the United States, and the close bilateral relationship that the United States has with Israel serves the national security interests of both countries. USAID assistance provides Israel the funds it needs to promote economic reforms.
A fundamental U.S. Government objective in Israel is to reduce Israel’s balance-of-payment pressures as it continues to pursue the economic reforms required for financial stability and structural adjustments needed for rapid, sustainable growth. Since 1993, export competitiveness has improved, and inflation has been reduced. Expanding business investment and governmental infrastructure investment, coupled with sustained export growth, are helping Israel reach its gross domestic product growth rate potential of about five percent.
Israel's economy has responded favorably in recent years to the restructuring imposed after the crises and hyperinflation of the mid-80s. Since 1990 the economy has become increasingly sophisticated and technologically advanced. In FY 1999, Congress began a reduction of the economic assistance earmark in recognition of this progress. The government still faces economic challenges associated with absorbing nearly 900,000 immigrants since 1989 in a country of only six million. Israel's economy slowed down considerably in 2001 from the strong growth levels of 2000. The Israeli economy grew by six percent in 2000, with zero inflation. Foreign investment, mostly in the high-tech sector, soared, reaching a record $9 billion. Growth in 2000 would have been even greater had it not been for a sharp downturn at the end of the year. Growth plunged 10% (annualized basis) in the fourth quarter of the year from third quarter levels.
The end of the year downturn was caused by a combination of factors. The violence in Israel and the West Bank and Gaza led to a steep drop in the number of foreign tourists. Construction and agriculture were hurt by the sudden loss of Palestinian workers, unable to travel to jobs in Israel because of closures imposed by the Israeli military. A drop in economic growth in the United States led to a lower level of exports. Finally, the steep drop on the stock exchange resulted in a decrease in the rate of new foreign investment in Israel. Many Israeli high-tech firms list on U.S. stock exchanges (nearly 100 Israeli firms are listed, more than from any country outside North America).
The U.S. Government strongly supports Israel’s reform measures and underscores its support at the U.S.-Israel Joint Economic Development Group (JEDG), which traditionally meets annually. These high-level policy discussions also help to reinforce Israel’s commitment to the reform process. Beyond maintaining a stable macroeconomic environment, the reduction of unemployment will require reform of the financial sector, the reduction in labor market inflexibility, the continuation of trade liberalization, and an acceleration of the privatization program. The United States intends to promote Israel’s economic and political stability through continued support of its economy.
THE USAID PROGRAM: The United States, acting through the USAID, will provide $720,000,000 in FY 2002 funds to Israel as a cash transfer. These funds will be used by Israel primarily for repayment of debt to the United States, including re-financed Foreign Military Sales debt, and purchases of goods and services from the United States. The U.S. State Department will continue to encourage Israeli reform to reduce government spending and deficits, to improve tax and public wage structures, to increase privatization, to reform labor markets, and to continue to liberalize its trade regime.
In FY 2003, the anticipated cash transfer will be $600,000,000.
ONGOING PROGRAMS FOR WHICH NO FY 2002 OR FY 2003 FUNDING IS REQUESTED: None.
OTHER PROGRAM ELEMENTS: In addition to the cash transfer to Israel, USAID’s Global Bureau for Economic Growth, Agriculture and Trade manages a number of regional programs that involve Israel. The Middle East Regional Cooperation (MERC) Program promotes technical cooperation between Israel and its Arab neighbors, with particular attention to the development needs of those countries. The Cooperative Development Research (CDR) Program brings Israeli and developing country scientists together to collaborate in solving problems relevant to the developing countries. The Cooperative Development Program (CDP) provides funding for the State of Israel’s own general development assistance program, which is implemented by the Center for International Cooperation (known as MASHAV), a part of Israel’s Ministry of Foreign Affairs.
OTHER DONORS: The United States is the largest bilateral donor to Israel.USAID