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Israel's economy outperforms

  • Story Highlights
  • Israel's gross domestic product outpaced that of major economies in 2007
  • Country's economic growth expected to slow in 2008 as U.S. economy falters
  • Technology, pharmaceutical, chemicals industries fueling economic growth
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By Hilary Whiteman
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(CNN) -- Israel's economy has done remarkably well for a country involved in a prolonged and violent political struggle over the Palestinian territories.

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The are 3,361 high tech companies operating in Israel as well as 150 foreign research and development centers

The country's economy grew more than five percent last year -- faster than the U.S., Europe, UK and Japan.

While the Bank of Israel expects the country's fortunes to dip next year, along with the world economy, growth is still expected to exceed four percent. Not bad, given that the U.S., one of its biggest trading partners, is staring down the barrel of potential recession.

"The Israeli economy has managed to develop a kind of isolation from the political instability," says Yossi Mekelberg, Associate Fellow of the Middle East Program at Chatham House.

"It's almost isolated, mainly because it's based on hi-tech, pharmaceutical industries, and chemicals, and I think these are the things that are less conditioned by the political situation."

Israel says it spends a greater percentage of its GDP on hi-tech research and development than any other country.

According to the Israel Venture Capital Research Center, 3,361 hi-tech companies are operating in Israel. And they're attracting foreign interest and dollars. In the first three quarters of 2007, they raised more than $1.2 billion dollars in funding, 10 percent more than the same period the previous year.

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Yossi Vardi is an industry veteran. He backed his first technology business almost forty years ago and has so far lent his expertise to 65 fledgling companies.

"Our strength on the food chain is usually in the very early stages where you have to come with ideas, innovation and take great risks," Yossi Vardi says.

"The hi-tech industry is not a monolithic thing. In China, they do manufacturing. In India, they do coding. We are very good in the early stages, like Silicon Valley. And this is what the world is looking for in Israel."

The country's fortunes contrast sharply with the economic turmoil engulfing the Palestinian territories.

According to the World Bank, the Israeli per capita GDP is more than 20 times that of the Palestinians.

Two-thirds of Palestinian people are thought to be living in poverty, although some say the figure could be even higher.

Since the election of Hamas in 2006, private investment in the region has all but dried up.

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The government is relying on loans, remittances and donor aid, but it's not enough to cover expenditure. The World Bank estimated the Palestinian National Authority was running up a deficit of $100 million a month in the first half of 2007.

This week, after meeting with Israeli and Palestinian leaders, U.S. President George W. Bush called for them to make "painful concessions" to reach a peace deal.

Bush has predicted a peace treaty will be signed by the time he leaves office in 2009.

Yossi Mekelberg from the foreign policy think-tank Chatham House says a deal would create economic benefits for both sides of the divide.

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"I think the direct benefits of a peace agreement would be immense, both for the Israelis and the Palestinians," he says.

"When there is a peace agreement there will be more investment. The European Union, the United States, and others will investors will pour more money, as happened post-1993. And also, let's bear in mind there will be an extra growing economy that has more than four million people, the Palestinian economy, so, a peace dividend can be only positive. E-mail to a friend E-mail to a friend

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