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Finally, the Israeli government has pared back social welfare spending since 2004, and that
has added to the ranks of the poor by reducing or eliminating state aid. Before the cutbacks,
benefi ts to the poor had been growing since the 1970s, surpassing the size of the defense bud-
get. But policymakers came to the conclusion that the benefi ts were serving as a deterrent to
employment as evidenced by Israel's low labor force participation rate.
FOREIGN TRADE
Given a small economy with few natural resources, Israel is highly reliant on imports for basic
necessities. Its imports range from energy and transportation equipment to farm products
and defense materials, and even its exports contain a high proportion of imported raw materi-
als or components and are manufactured with imported machinery. Polished diamonds, for
example, are Israel's single biggest export item in dollar terms, with sales overseas amounting
to $9.6 billion in 2007. But cutters and polishers had to import all their rough stones at a cost
of $8.8 billion.
To cover the country's import bill, Israel must export, thereby making trade an especially
large component of the economy. Exports account for about 30 percent of Israel's output, and
imports make up about the same proportion of resources available to the economy. But for
nearly all of Israel's history, its trade balance has been in defi cit. In 1950, imports were seven times
the level of exports, and although this gradually narrowed over the next three decades to a ratio
of 2:1 in 1960 and 1.3:1 to 1.4:1 in the 1970s and 1980s, they remained high by global standards.
Not until 2004 did Israel post its fi rst-ever trade surplus, counting both goods and services.
There are two reasons for the improved trade picture. The fi rst is the high-technology sec-
tor, whose products now account for about one-third of Israel's industrial exports. Not only
did technology exports jump fourfold between 1995 and 2008, but their profi t level is also
considerable.
Although Israel has persistent merchandise trade defi cits, they have generally grown narrower over the past
three decades. The defi cits temporarily widened in the early 1990s as a surge in immigration increased de-
mand for imports. (Data: Israel Central Bureau of Statistics. Chart: David Rosenberg. Drawing by Bill Nelson.)
 
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