The paper examines the macroeconomic and institutional sources of environmental development in Israel's water sector, for example changes in drinking-water quality, sewage treatment and aquifer depletion trends.

It is shown that Israel's economic growth process was, by and large, accompanied by environmental improvements in the water sector; but it is the institutional approach which provides a cohesive explanation of how environmental changes took place. Implementing reforms in Israel's water sector without adequately addressing the institutional aspect might thus undermine the success of such plans.

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