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Behind the Headlines Israeli Price Freeze: Consumers Rejoice, Manufacturers Worry and Economists Try

When the Cabinet announced Sunday that a three month price freeze was to come into force at once, the Israeli man in the street, and more important, his wife, naturally rejoiced. Prices have risen by an almost incredible 11 percent in the first five months of this year and very many Israeli families are finding it increasingly difficult to balance their budgets.

True, the government has agreed to the Histadrut’s demand for employed persons to be compensated by a midyear cost of living allowance. But the maximum monthly wage rise which the COL allowance will provide is about IL 70 (to be paid from the beginning of July) and a great many families, especially large families, will not find this adequate.

The “price stabilization” (it is not a blanket freeze) provides the following: 1) Prices of 14 staple commodities such as bread, milk, fish, eggs, chicken, oil, sugar, will remain totally frozen until Sept. 30. Any overseas price rises in these imported items will be covered by increased government subsidies; 2) Utilities such as electricity, water, telephones and personal services such as dry cleaners, hairdressers and restaurants will also be totally frozen; 4) All other commodities will be frozen unless the producer can prove that overseas prices have risen to such an extent as to cause an increase in the price of his own finished product of over two percent. He will also have to absorb the COL allowance calculated at 1.5 percent of his production costs, so in all he must absorb 3.5 percent before he can apply for a price rise.

MANUFACTURERS STEP UP PRESSURE

While the consumers rejoiced, the manufacturers decried the freeze. It had been their intense pressure which persuaded Finance Minister Pinhas Sapir to reduce the originally intended six month freeze to three months. But even three months was, in the manufacturers’ view, merely an election year stunt, not a serious effort to fight inflation.

Abraham Shavit, chairman of the Manufacturers Association, complained that the freeze would hit the only productive sector of the economy–industry. There was to be no parallel legal freeze on wages, and more important, no hard hitting government steps to curb public spending and drain the economy of surplus buying power.

The manufacturers’ reaction could be dismissed as the predictable response of an interested party were it not for the fact that it has been widely echoed by academic economists, newspaper analysts and others who can assess the government’s policies objectively.

The basic question is whether the price freeze is to be part of a broad frontal attack on the root causes of inflation, or whether it is only a vote-catching stopgap measure. The top level government committee which recommended the freeze stressed that it must be “Integrated into an overall economic anti-inflation policy, and will itself increase the chances of success of such a policy… The freeze is not a substitute for a long-term policy.”

But is there to be such a long-term assault on inflation? On Sunday the government decided to cut public buildings and the building of luxury apartments. These were moves in the right direction–but by no means far enough. The question of whether to raise interest-rates–at present laughably low–on government development and export loans is to be decided only when Sapir returns from abroad Bank of Israel Governor Moshe Sanbar is demanding this seriously deflationary step as effective and necessary, but the politicians, conscious of the elections ahead, are more cautious.

DANGER OF INFLATION

This is even more true of other wider hitting deflationary measures which the situation calls for but which the oncoming elections preclude. In the words of a Jerusalem Post editorial. “All the current talk about checking inflation has a hollow ring. With elections around the corner unpopular policies won’t be adopted…Suggestions to reduce purchasing power by imposing new taxes, by advancing the value added tax slated for next year, by reducing subsidies or by putting an end to public overspending have been dismissed not on their merits but because they are considered untimely. Attempts to avoid or cut the midyear COL allowance have not been pursued in order not to clash with the trade unions, and the proposal to raise interest rates on development loans and export credits has been rejected for fear of annoying investors.”

The editorial was written two days before the government’s freeze, but the Post and most other papers expressed the same doubts the day after the freeze was announced. Furthermore, experts are expressing doubts about the effectiveness of a price freeze in doing the very thing it is aimed to do–calm the consumer who sees prices rising before his eyes and therefore engages in panic buying, adding fuel to the flames of inflation. Commerce Minister Haim Barlev was confident that this effect would be achieved, but many economists feel the opposite is more likely. People will buy more than ever during the freeze period because they will feel certain that prices will leap as soon as it ends.

Also, the enforceability of the freeze is doubted by some. The Commerce Ministry has only a tiny staff of inspectors and the real enforcement officers will have to be the public themselves, Yet the public is notoriously lax when it is required to assemble comparative evidence such as bills and receipts from before the freeze and after and then register a formal complaint with the Ministry or the police.

Only time will tell whether the government is right and the analysts wrong about the merits of the freeze itself. And only time will tell whether the government–despite the oncoming elections–will use the time it has gained by imposing the freeze to assault the more basic causes of Israel’s inflation.

A plan for the establishment of 20 new settlements and two new regional centers in the Arava district of the Negev during the next seven years was disclosed in Jerusalem today by Raanan Weitz, head of the Jewish Agency’s settlement department Weitz said the plan called for intensive agricultural projects in the region. He said a population of close to 10,000 was expected in the sparsely inhabited Aravh region once the plan materialized.

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