Israel focuses on reform to stimulate its economy.

Israel regularly publishes an index called the "State-of-the-Economy Index", which is a composite of five other indices: Industrial production, trade and services revenue (equivalent to private consumption), imports, jobs, and exports. In the chart above, the composite index, shown in yellow, is plotted with the private consumption index.

The composite index has been virtually flat for most of 2005. In real terms it has been declining slightly - one or two basis points - every month. The Bank of Israel, the country's central bank, characterized the current state of the composite index as economic stagnation. The index advanced through 2004, but reversed direction in 2005.

No private consumption data was published for June, and the May number makes private consumption, which includes consumer spending, look as though there might be a recovery in that area, especially in the Market: Africa Mid-East Trendwatch chart.

We did plot, but did not include, a linear trendline in our preliminary study of the private consumption statistics. It was dead flat, as though drawn with a ruler.

What accounts for this vibrant country's economic doldrums?

The answer to this question is complicated, but there are some obvious, central issues.

There is a case to be made for Israel's economy being far too dependent on government control of key sectors. In the language of international finance, Israel needs structural reform, meaning privatizing government run industries and changes in a country's tax code.

The inefficiencies introduced into a market economy with too much government control exact a penalty on consumers, and Israel is nearly a textbook case for this truism.

The good news is that Israel is painfully aware of the reforms it needs to make and is currently embarked on a vigorous schedule of reform including...

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