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Israel elections Thursday, 13 May, 1999, 07:39 GMT 08:39 UK
Israel's new economic challenge
By News Online's Dominic Casciani

It's the home of one of the fastest growing centres of technological enterprise in the world. But this burgeoning new home for technology companies is not in California - it's Silicon Wadi in Israel.

Israel Elections Special Report
Israel's leaps and bounds in the electronics and software sector have pushed the nation into the top-10 list of world hi-tech centres.

More than 100 companies a year spring up in Silicon Wadi, creating electronics exports worth $5.7bn in 1997. Software exports alone are growing by 25% as year.

In a celebrated example of Israel's apparent electronic economic miracle, America Online recently bought Mirabilis for a reported $400m after the Israeli firm built a vast world-wide market for its ICQ instant Internet communications software.

It is an example of the kind of economic success leaders on both sides of the political divide are promising to deliver in return for the electorate's support on May 17.

The Four Challenges

Since its founding more than 50 years ago, Israeli prime ministers have faced the "four challenges" of Israel: its defence, its ability to cope with immigration, the need for infrastructure and the foundation of a modern welfare system including health and education.

Defence spending has remained historically far higher than in the club of industrialised nations Israel aims to join.

Security spending reached 45% of GNP in 1973 - the year of the Yom Kippur War but is slowly falling, freeing up more tax payers money for investment elsewhere.

Israel has also displayed a remarkable ability to absorb Jewish immigrants.

By 1997 more than 2.6 million had arrived - tens of thousands more will land at Ben Gurion international airport before the year's end.

As Israel slowly moves towards a sense of consensus over the peace process, questions are being raised over how its leaders will modernise an economy full of contradictions.

Country of contrasts

While the hi-tech sector flourishes, many large corporations and concerns, including the airline El Al, remain in state hands, outperformed by international competitors.

Israel's defence forces are considered among the best equipped in the world but work on a Trans-Israel highway has yet to begin.

Continually rising per capita Gross Domestic Product has marked Israel out as the Middle East success story - but economic growth is slowing.

Inflation is being checked by high interest rates and the nation may never have reached 1999 without an estimated $111bn in aid from its own citizens, foreign Jewish fund-raising groups and the United States over the last 50 years.

Critical examination

Mr Netanyahu's critics say the despite the hi-tech growth, he has failed to undertake promised reforms to build on Israel's reputation as an emerging market.

The Netanyahu administration pledged to create a lean economy by selling off vast swathes of government-owned industry and maintaining fiscal discipline.

At the outset of the election race, he proclaimed the success of privatisation policies with revenue from sell-offs reaching $2,374m in 1997.

The prime minister argued that his economic policies have made it impossible for the nation to return to a lumbering socialist-style economy while a myriad of free trade agreements were opening markets for Israel's increasingly confident industries.

But Mr Netanyahu's challenger, Labor's Ehud Barak, says the administration, pinned to the wall by its coalition partners, has failed to divert funds away from politically-expedient causes and into public infrastructure.

Mr Barak also accused Mr Netanyahu of neglecting health and education services and of being responsible for unemployment reaching 8.7%.

The fiercest clashes came in February when the Knesset finally passed the budget two months after finance minister Yaakov Neeman resigned in the row over proposed funding of $200m to religious groups and settlers.

Calling for spending on health and education, Mr Barak said the most important areas of the society had lost out because of the government's "daylight robbery" to fund "fictitious religious associations".

Social divisions remain between affluent urban voters and developing communities, who perceive a "haves and have-nots" society emerging from the Netanyahu laissez-faire policies.

The prime minister has angrily rejected recent claims that he approved more social spending ahead of the election to buy off these voters.

He has pledged to continue reform and privatisation and has blamed the global economic crisis of last year for the sluggish performance.

Since launching his offensive over the economy, Mr Barak has pulled back from some of his most trenchant criticisms.

There have also been calls from some commentators in the Israeli media for a broad economic coalition similar to the 1985 government which eventual crushed hyper-inflation.

But even if Israel continues down the road to becoming the "Silicon Valley of the Eastern Hemisphere" as Mr Netanyahu predicts, there is one factor that cannot be overlooked.

Former Prime Minister Shimon Peres once said that every dollar that the country spent on improving the lot of the Palestinians was $2 Israel did not need to spend on defence.

Israel's economic fate will be determined by the region's stability - whoever wins on May 17.

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