POLITICAL CONDITIONS
From the founding of Israel in 1948 until the election of May 1977,
Israel was ruled by successive coalition governments led by the Labor
alignment or its constituent parties. From 1967-70, the coalition
government included all of Israel's parties except the communist party.
After the 1977 election, the Likud bloc, then composed of Herut, the
Liberals, and the smaller La'am Party, came to power forming a
coalition with the National Religious Party, Agudat Israel, and others.
As head of Likud, Menachem Begin became Prime Minister. The Likud
retained power in the succeeding election in June 1981, and Begin
remained Prime Minister. In the summer of 1983, Begin resigned and was
succeeded by his Foreign Minister, Yitzhak Shamir.
After Prime Minister Shamir lost a Knesset vote of
confidence early in 1984, new elections in July provided no clear
winner, with both Labor and Likud considerably short of a Knesset
majority and unable to form even narrow coalitions. After several weeks
of difficult negotiations, they agreed on a government of national
unity, including the rotation of the office of Prime Minister and the
combined office of Vice Prime Minister and Foreign Minister midway
through the government's 50-month term.
During the first 25 months of unity government
rule, Labor's Shimon Peres served as Prime Minister, while Likud's
Shamir held the posts of Vice Prime Minister and Foreign Minister,
until they switched positions in October 1986. In November 1988
elections, Likud edged Labor out by one seat but was unable to form a
coalition, producing another national unity government in January 1989.
Yitzhak Shamir became Prime Minister, and Shimon Peres became Vice
Prime Minister and Finance Minister. This government fell in March
1990, however, in a vote of no confidence precipitated by disagreement
over the government's response to U.S. Secretary of State Baker's
initiative in the peace process. Labor Party leader Peres was unable to
attract sufficient support among the religious parties to form a
government. Yitzhak Shamir then formed a Likud-led coalition
government, including members from religious and right-wing parties.
Shamir's government took office in June 1990, and
held power for 2 years. In the June 1992 national elections, the Labor
Party reversed its electoral fortunes, taking 44 seats. Labor Party
leader Yitzhak Rabin formed a coalition with Meretz (a group of three
leftist parties) and Shas (an ultra-Orthodox religious party). The
coalition included the support of two Arab-majority parties. Rabin
became Prime Minister in July 1992, presiding over the signing of the
Oslo accords with the Palestine Liberation Organization. However, Rabin
was assassinated by a right-wing Jewish radical on November 4, 1995.
Peres, then Deputy Prime Minister and Foreign Minister, once again
became Prime Minister and immediately proceeded to carry forward the
peace policies of the Rabin government and to implement Israel's Oslo
commitments, including military redeployment in the West Bank and the
holding of historic Palestinian elections on January 20, 1996.
Enjoying broad public support and anxious to
secure his own mandate, Peres called for early elections after just 3
months in office. (They would have otherwise been held by the end of
October 1996.) In late February and early March, a series of suicide
bombing attacks by Palestinian terrorists took some 60 Israeli lives,
seriously eroding public support for Peres and raising concerns about
the peace process. Increased fighting in southern Lebanon, which also
brought Katyusha rocket attacks against northern Israel, also raised
tensions and weakened the government politically a month before the May
29 elections.
In those elections--the first direct election of a
Prime Minister in Israeli history--Likud leader Binyamin Netanyahu won
by a narrow margin, having sharply criticized the government's peace
policies for failing to protect Israeli security. Netanyahu
subsequently formed a right-wing coalition government publicly
committed to pursuing the peace process, but with an emphasis on
security and reciprocity. In 1999, with a shrunken coalition and facing
increasing difficulty passing legislation and defeating no-confidence
motions, Netanyahu dissolved parliament and called for new elections.
This time, the Labor candidate--Ehud Barak--was victorious. Barak
formed a mixed coalition government of secular and religious parties,
with Likud in the opposition. In May 2000, Barak fulfilled one of his
major campaign promises by withdrawing Israeli forces from Southern
Lebanon. However, by mid-autumn, with the breakdown of the Camp David
talks and the worsening security situation caused by the new intifada,
Barak's coalition was in jeopardy. In December, he resigned as Prime
Minister, precipitating a new prime ministerial election.
In a special election on February 6, 2001, after a
campaign stressing security and the maintenance of Israeli sovereignty
over Jerusalem, Likud leader Ariel Sharon defeated Barak by over 20
percentage points. As he had promised in his campaign, Sharon formed a
broad unity government that included the Labor and Likud parties, the
far-right parties, some smaller secular parties, and several religious
parties. The unity government collapsed in late 2002, and new elections
were held in January 2003. Sharon again won, and formed a new
government consisting of his own Likud party, the right-wing National
Religious Party and National Union party, and centrist Shinui.
The summer of 2004 saw renewed instability in the
government, as disagreement over the Gaza disengagement plan resulted
in Sharon's firing two ministers of the National Union Party and
accepting the resignation of a third from the National Religious Party
in order to secure cabinet approval of the plan (it was endorsed on
June 6, 2004). Continuing divisions within the Likud on next steps then
prompted Ariel Sharon to leave the party in November 2005 to form the
Kadima ("Forward") party and call new elections for March 2006.
However, Sharon was unexpectedly incapacitated in January 2006 due to a
severe stroke and leadership of Kadima shifted to Acting Prime Minister
Ehud Olmert, who on March 28 led the party to 29 seats in the Knesset.
Labor came in second with 19 seats, and Shas and Likud tied with 12.
After intensive coalition negotiations, a new, Kadima-led government,
with Labor as "senior partner", was sworn in on May 4, 2006.
ECONOMY
Israel has a diversified, technologically advanced economy with
substantial but decreasing government ownership and a strong high-tech
sector. The major industrial sectors include high-technology electronic
and biomedical equipment, metal products, processed foods, chemicals,
and transport equipment. Israel possesses a substantial service sector
and is one of the world's centers for diamond cutting and polishing. It
also is a world leader in software development and, prior to the
violence that began in September 2000, was a major tourist destination.
Israel's strong commitment to economic development
and its talented work force led to economic growth rates during the
nation's first two decades that frequently exceeded 10% annually. The
years after the 1973 Yom Kippur War were a lost decade economically, as
growth stalled and inflation reached triple-digit levels. The
successful economic stabilization plan implemented in 1985 and the
subsequent introduction of market-oriented structural reforms
reinvigorated the economy and paved the way for rapid growth in the
1990s.
A wave of Jewish immigration beginning in 1989,
predominantly from the countries of the former U.S.S.R., brought nearly
a million new citizens to Israel. These new immigrants, many of them
highly educated, now constitute some 13% of Israel's 6.7 million
inhabitants. Their successful absorption into Israeli society and its
labor force forms a remarkable chapter in Israeli history. The skills
brought by the new immigrants and their added demand as consumers gave
the Israeli economy a strong upward push and in the 1990s, they played
a key role in the ongoing development of Israel's high-tech sector.
During the 1990s, progress in the Middle East
peace process, beginning with the Madrid Conference of 1991, helped to
reduce Israel's economic isolation from its neighbors and opened up new
markets to Israeli exporters farther afield. The peace process
stimulated an unprecedented inflow of foreign investment in Israel, and
provided a substantial boost to economic growth in the region over the
last decade. The onset of the intifada beginning at the end of
September of 2000, the downturn in the high-tech sector and Nasdaq
crisis, and the slowdown of the global economy have all significantly
affected the Israeli economy. However, despite the recent conflicts in
Gaza and Lebanon, the Israeli economy grew during 2006.
Israeli companies, particularly in the high-tech
area, have in the past enjoyed considerable success raising money on
Wall Street and other world financial markets; Israel ranks second to
Canada among foreign countries in the number of its companies listed on
U.S. stock exchanges. Israel's tech market is very developed, and in
spite of the pause in the industry's growth, the high-tech sector is
likely to be the major driver of the Israeli economy. Almost half of
Israel's exports are high tech. Most leading players, including Intel,
IBM, and Cisco have a presence in Israel.
Growth was an exceptional 6.2% in 2000, due in
part to a number of one-time high tech acquisitions and investments.
This exceptional year was followed by two years of negative growth of
-0.9% and -1%, respectively, in 2001 and 2002. As a result of the
security situation and the associated downturn in the economy, there
was a significant rise in unemployment and wage erosion. This led to a
decline in private consumption in 2002, the first time that there had
been negative private consumption since the early 1980s. However,
following growth rates of 1.7% in 2003 and 4.4% in 2004, the Israeli
economy entered into a period of stabilization and recovery after the
deep recession of 2001 and 2002. Since then, the Israeli economy seems
to have returned to a trend of consistent growth. The Israeli economy
grew by 5.2% in 2005 and GDP per capita (U.S. $17,800) increased by
3.3%. The Israeli economy grew by an estimated 4.8% in 2006.
Exports of goods and services in Israel grew by 7%
in 2005. Service and agricultural exports each increased by more than
10% in 2005, whereas exports increased by 5.6% and imports rose to
4.4%. Tourism revenues increased by 22.7% as a result of the dramatic
increase following the intifada's subsidence.
Israel's private consumption increased by 4% in
2005. The largest growth in private consumption was in the purchase of
clothing, footwear, and personal effects, which increased by 10.2%,
following an increase of 5.4% in 2004. Consumption of consumer durables
grew much more slowly than in 2004, with an increase of only 3.4%,
compared with 14.3% the previous year.
In the Israeli business sector, business GDP grew
by 6.6% in 2005. According to CBS statistics, the transportation,
storage, and communications industries grew by 9.2%, following growth
of 6.6% in 2004. The GDP of the wholesale, retail, restaurant, and
hotel sector increased by 8.1%, up from 6.1% in 2004. The GDP of the
finance and business services sector in 2005 increased by 6.4%, up from
the previous year's 6.1% growth rate.
The general consensus among economists is that
Israel's economy is very strong and that its growth potential is in the
4% to 5% range.
The United States is Israel's largest trading
partner. In 2005, two-way trade totaled some $26.6 billion, up 12% from
2004. The U.S. trade deficit with Israel was $7.1 billion in 2005, up
33% from 2004, due largely to rising Israeli exports to the U.S. U.S.
exports to Israel rose 6.1% in 2005 to $9.7 billion, making Israel our
19th largest export market for goods. The principal goods
exported from the U.S. include civilian aircraft parts,
telecommunications equipment, semiconductors, civilian aircraft,
electrical apparatus, and computer accessories. Israel's chief exports
to the U.S. include diamonds, pharmaceutical preparations,
telecommunications equipment, medicinal equipment, electrical
apparatus, and cotton apparel. The two countries signed a free trade
agreement (FTA) in 1985 that progressively eliminated tariffs on most
goods traded between the two countries over the following 10 years. An
agricultural trade accord signed in November 1996 addressed the
remaining goods not covered in the FTA but has not entirely erased
barriers to trade in the agricultural sector. Israel also has trade and
cooperation agreements in place with the European Union, Canada,
Mexico, and other countries.
Best prospect industry sectors in Israel for U.S.
exporters are electricity and gas equipment, defense equipment, medical
instruments and disposable products, industrial chemicals,
telecommunication equipment, electronic components, building
materials/construction industries (DIY and infrastructure), safety and
security equipment and services, non-prescription drugs, travel and
tourism services, and computer software.
HISTORY
The creation of the State of Israel in 1948 was preceded by more than
50 years of efforts to establish a sovereign nation as a homeland for
Jews. These efforts were initiated by Theodore Herzl, founder of the
Zionist movement, and were given added impetus by the Balfour
Declaration of 1917, which asserted the British Government's support
for the creation of a Jewish homeland in Palestine.
In the years following World War I, Palestine became a Mandate and
Jewish immigration steadily i ncreased, as did violence between
Palestin'e Jewish and Arab communities. Mounting British efforts
to restrict this immigration were countered by international support
for Jewish national aspirations following the near-extermination of
European Jewry by the Nazis during World War II. This support led to
the 1947 UN partition plan, which would have divided Palestine into
seperate Jewish and Arab states, with Jerusalem under UN administration.
On May 14, 1948, soon after the British quit Palestine, the State of
Israel was proclaimed and was immediately invaded by armies from
neighboring Arab states, which rejected the UN partition plan.
This conflict, Israel's War of Independence, was condcluded by
armistice agreements between Israel, Egypt, Jordan, Lebanon, and Syria
in 1949 and resulted in 50% increase in Israeli territory.
In 1956, French, British, and Israeli forces
engaged Egypt in response to its nationalization of the Suez Canal and
blockade of the Straits of Tiran. Israeli forces withdrew in March
1957, after the United Nations established the UN Emergency Force
(UNEF) in the Gaza Strip and Sinai. This war resulted in no territorial
shifts and was followed by several years of terrorist incidents and
retaliatory acts across Israel's borders.
In June 1967, Israeli forces struck targets in
Egypt, Jordan, and Syria in response to Egyptian President Nasser's
ordered withdrawal of UN peacekeepers from the Sinai Peninsula and the
buildup of Arab armies along Israel's borders. After 6 days, all
parties agreed to a cease-fire, under which Israel retained control of
the Sinai Peninsula, the Golan Heights, the Gaza Strip, the formerly
Jordanian-controlled West Bank of the Jordan River, and East Jerusalem.
On November 22, 1967, the Security Council adopted Resolution 242, the
"land for peace" formula, which called for the establishment of a just
and lasting peace based on Israeli withdrawal from territories occupied
in 1967 in return for the end of all states of belligerency, respect
for the sovereignty of all states in the area, and the right to live in
peace within secure, recognized boundaries.
The following years were marked by continuing
violence across the Suez Canal, punctuated by the 1969-70 war of
attrition. On October 6, 1973--Yom Kippur (the Jewish Day of
Atonement), the armies of Syria and Egypt launched an attack against
Israel. Although the Egyptians and Syrians initially made significant
advances, Israel was able to push the invading armies back beyond the
1967 cease-fire lines by the time the United States and the Soviet
Union helped bring an end to the fighting. In the UN Security Council,
the United States supported Resolution 338, which reaffirmed Resolution
242 as the framework for peace and called for peace negotiations
between the parties.
In the years that followed, sporadic clashes
continued along the cease-fire lines but guided by the U.S., Egypt, and
Israel continued negotiations. In November 1977, Egyptian President
Anwar Sadat made a historic visit to Jerusalem, which opened the door
for the 1978 Israeli-Egyptian peace summit convened at Camp David by
President Carter. These negotiations led to a 1979 peace treaty between
Israel and Egypt, pursuant to which Israel withdrew from the Sinai in
1982, signed by President Sadat of Egypt and Prime Minister Menahem
Begin of Israel.
In the years following the 1948 war, Israel's
border with Lebanon was quiet relative to its borders with other
neighbors. After the expulsion of Palestinian fighters from Jordan in
1970 and their influx into southern Lebanon, however, hostilities along
Israel's northern border increased and Israeli forces crossed into
Lebanon. After passage of Security Council Resolution 425, calling for
Israeli withdrawal and the creation of the UN Interim Force in Lebanon
peacekeeping force (UNIFIL), Israel withdrew its troops.
In June 1982, following a series of cross-border
terrorist attacks and the attempted assassination of the Israeli
Ambassador to the U.K., Israel invaded Lebanon to fight the forces of
Yasser Arafat's Palestine Liberation Organization (PLO). The PLO
withdrew its forces from Lebanon in August 1982. Israel, having failed
to finalize an agreement with Lebanon, withdrew most of its troops in
June 1985 save for a residual force which remained in southern Lebanon
to act as a buffer against attacks on northern Israel. These remaining
forces were completely withdrawn in May 2000 behind a UN-brokered
delineation of the Israel-Lebanon border (the Blue Line). Hezbollah
forces in Southern Lebanon continued to attack Israeli positions south
of the Blue Line in the Sheba Farms/Har Dov area of the Golan Heights.
The victory of the U.S.-led coalition in the
Persian Gulf War of 1991 opened new possibilities for regional peace.
In October 1991, the United States and the Soviet Union convened the
Madrid Conference, in which Israeli, Lebanese, Jordanian, Syrian, and
Palestinian leaders laid the foundations for ongoing negotiations
designed to bring peace and economic development to the region. Within
this framework, Israel and the PLO signed a Declaration of Principles
on September 13, 1993, which established an ambitious set of objectives
relating to a transfer of authority from Israel to an interim
Palestinian authority. Israel and the PLO subsequently signed the
Gaza-Jericho Agreement on May 4, 1994, and the Agreement on Preparatory
Transfer of Powers and Responsibilities on August 29, 1994, which began
the process of transferring authority from Israel to the Palestinians.
On October 26, 1994, Israel and Jordan signed a
historic peace treaty, witnessed by President Clinton. This was
followed by Israeli Prime Minister Rabin and PLO Chairman Arafat's
signing of the historic Israeli-Palestinian Interim Agreement on
September 28, 1995. This accord, which incorporated and superseded
previous agreements, broadened Palestinian self-government and provided
for cooperation between Israel and the Palestinians in several areas.
Israeli Prime Minister Yitzhak Rabin was
assassinated on November 4, 1995, by a right-wing Jewish radical,
bringing the increasingly bitter national debate over the peace process
to a climax. Subsequent Israeli governments continued to negotiate with
the PLO resulting in additional agreements, including the Wye River and
the Sharm el-Sheikh memoranda. However, a summit hosted by President
Clinton at Camp David in July 2000 to address permanent status
issues--including the status of Jerusalem, Palestinian refugees,
Israeli settlements in the West Bank and Gaza, final security
arrangements, borders, and relations and cooperation with neighboring
states--failed to produce an agreement.
Following the failed talks, widespread violence
broke out in Israel, the West Bank, and Gaza in September 2000. In
April 2001 the Sharm el-Sheikh Fact Finding Committee, commissioned by
the October 2000 Middle East Peace Summit and chaired by former U.S.
Senator George Mitchell, submitted its report, which recommended an
immediate end to the violence followed by confidence-building measures
and a resumption of security cooperation and peace negotiations.
Building on the Mitchell report, In April 2003, the Quartet (the U.S.,
UN, European Union (EU), and the Russian Federation) announced the
"roadmap," a performance-based plan to bring about two states, Israel
and a democratic, viable Palestine, living side by side in peace and
security.
Despite the promising developments of spring 2003,
violence continued and in September 2003 the first Palestinian Prime
Minister, Mahmoud Abbas (Abu Mazen), resigned after failing to win true
authority to restore law and order, fight terror, and reform
Palestinian institutions. In response to the deadlock, in the winter of
2003-2004 Prime Minister Sharon put forward his Gaza disengagement
initiative, proposing the withdrawal of Israeli settlements from Gaza
as well as parts of the northern West Bank. President Bush endorsed
this initiative in an exchange of letters with Prime Minister Sharon on
April 14, 2004, viewing Gaza disengagement as an opportunity to move
towards implementation of the two-state vision and begin the
development of Palestinian institutions. In a meeting in May 2004 the
Quartet endorsed the initiative, which was approved by the Knesset in
October 2004.
The run-up to disengagement saw a flurry of
diplomatic activity, including the February 2005 announcement of
Lieutenant General William Ward as U.S. Security Coordinator; the March
2005 Sharon-Abbas summit in Sharm el-Sheikh; the return of Egyptian and
Jordanian ambassadors to Israel; and the May 2005 appointment of former
World Bank president James D. Wolfensohn as Special Envoy for Gaza
Disengagement to work for a revitalization of the Palestinian economy
after disengagement. Wolfensohn's direct involvement spurred
Israeli-Palestinian agreement on the Gaza ‘crossings" at Karni and
Erez, on the demolition of settler homes, water, electricity, and
communications infrastructure issues, as well as other issues related
to the Palestinian economy.
On August 15, 2005, Israel began implementing its disengagement
from the Gaza Strip, and the Israeli Defense Forces completed their
withdrawal, including the dismantling of 17 settlements, on September
12. After broad recognition for Prime Minister Sharon's accomplishment
at that fall's UN General Assembly, international attention quickly
turned to efforts to strengthen Palestinian governance and the economy
in Gaza. The United States brokered a landmark Agreement on Movement
and Access between the parties in November 2005 to facilitate further
progress on Palestinian economic issues. However, the terrorist
organization Hamas--building on popular support for its "resistance" to
Israeli occupation and a commitment to clean up the notorious
corruption of the Palestinian Authority (PA)--took a majority in the
January 2006 Palestinian Legislative Council (PLC) elections, with
Hamas leader Ismail Haniya as Prime Minister. The Israeli leadership
pledged not to work with a Palestinian government in which Hamas had a
role.
Shortly following Hamas' PLC victory, the
Quartet--comprised of the United States, European Union, United
Nations. and Russia--outlined three basic principles the Hamas-led PA
must meet in order for the U.S. and the international community to
reengage with the PA: renounce violence and terror, recognize Israel,
and respect previous agreements, including the roadmap. The Hamas-led
PA government rejected these principles, resulting in a Quartet
statement of "grave concern" on March 30, 2006 and the suspension of
U.S. assistance to the PA, complete prohibition on U.S. Government
contacts with the PA, and prohibition of unlicensed transactions with
the PA government. The Palestine Liberation Organization (PLO) under
the leadership of PLO Chairman and PA President Mahmud Abbas (Abu
Mazen), by contrast, remained consistently committed to the Quartet
principles.
Despite several negotiated cease-fires between
Hamas and Fatah, violent clashes in the Gaza Strip--and to a lesser
extent in the West Bank--were commonplace between December 2006 and
February 2007 and resulted in dozens of deaths and injuries. In an
attempt to end the intra-Palestinian violence, the King of Saudi Arabia
invited Palestinian rivals to Mecca, and on February 9, 2007, Abbas and
Hamas leader Haniya agreed to the formation of a Palestinian national
unity government and a cessation of violence. Hamas' rejectionist
policies and violent behavior continued despite the formation of the
national unity government.
In June 2007, Hamas effectively orchestrated a
violent coup in Gaza. Hamas also launched scores of Qassam rockets into
southern Israel in an attempt to involve Israel in the Hamas-Fatah
conflict. On June 14, Palestinian Authority President Mahoud Abbas
exercised his lawful authority by declaring a state of emergency,
dissolving the national unity government, and replacing it with a new
government with Salam Fayyad as Prime Minister.
The new Palestinian Authority government under
President Abbas and Prime Minister Fayyad has no elements controlled by
Hamas or any other terrorist group. The new government is dedicated to
peace and the Quartet principles and has been embraced politically and
financially by the international community, including Israel.
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