The challenges of maintaining national security while absorbing and integrating massive waves of immigrants have characterized the economy of Israel throughout its statehood. Defense spending remains one of the world’s highest per capita, and immigration strains the availability of jobs and housing. Lack of natural resources and economic isolation from surrounding Arab states add further challenges. In spite of these factors, Israel’s economy has grown rapidly, and Israelis enjoy a high standard of living. With a total gross domestic product (GDP) of $100.84 billion in 1999, Israel’s per capita GDP of $16,520 was one of the highest in the world.

The increase in the Jewish population was the most distinctive cause of the rapid rise in the gross national product after 1948. Although most immigrants had to change occupations, a nucleus of highly skilled labour facilitated economic expansion. The establishment and rapid growth of institutions of higher learning and research helped increase the nation's potential. Large amounts of capital arrived in the form of money involving no financial obligation by the state. This included gifts from world Jewry, reparations from the Federal Republic of Germany for the persecution of Jews by Adolf Hitler, grants-in-aid from the U.S. government, and capital brought in by immigrants. It has been supplemented by loans and commercial credits and by foreign investment.

Israel has a technologically advanced market economy with substantial government participation. It depends on imports of crude oil, grains, raw materials, and military equipment. Despite limited natural resources, Israel has intensively developed its agricultural and industrial sectors over the past 20 years. Israel is largely self-sufficient in food production except for grains. Cuts diamonds, high-technology equipment, and agricultural products (fruits and vegetables) are the leading exports. Israel usually posts sizable current account deficits, which are covered by large transfer payments from abroad and by foreign loans. Roughly half of the government's external debt is owed to the US, which is its major source of economic and military aid. The influx of Jewish immigrants from the former USSR topped 750,000 during the period 1989-99, bringing the population of Israel from the former Soviet Union to 1 million, one-sixth of the total population, and adding scientific and professional expertise of substantial value for the economy's future. The influx, coupled with the opening of new markets at the end of the Cold War, energized Israel's economy, which grew rapidly in the early 1990s. But growth began moderating in 1996 when the government imposed tighter fiscal and monetary policies and the immigration bonus petered out. Growth was a strong 5.9% in 2000. But the outbreak of Palestinian unrest in late September and the collapse of the BARAK Government - coupled with a cooling off in the high-technology and tourist sectors - undercut the boom and foreshadows a slowdown to 2%-3% in 2001.