Behind the Headlines the Uniqueness of Israel’s Economy

The best and most dramatic demonstration of the uniqueness of Israel’s economy is the airlift and absorption of thousands of destitute immigrants from Ethiopia.

What other country, suffering from an acute economic crisis and threatened by recession and unemployment, would embark on a venture like that?

Finance Minister Yitzhak Modai, speaking to Anglo-Jewish journalists last week on the uniqueness of the Israeli economy, was barred from citing that obvious example. The details of the historic rescue effort were then still under censorship in Israel.

COGENT AND CONVINCING EXAMPLES

But the minister was not short of other cogent and convincing examples — all showing just what he’s up against.

* If chronic Latin American debtors, such as Mexico or Brazil, were to do nothing but work to pay off their foreign debts, spending nothing at all on themselves, it would take them six months to do it. Their foreign debts, in other words, is about one half of their annual gross national product (GNP).

For Israel, in the same hypothetical circumstances, it would take a whole year to pay off the foreign debt — and more than another whole year to pay off the internal debt — the money owed by the government to the citizens.

Israel’s commerce with the outside world is equal to its entire GNP. That is a stark indication of Israel’s overwhelming dependence on foreign trade for food, for raw materials and for industrial goods.

The United States, by way of comparison, trades to the value of four percent of its GNP. And even a “normal” country like Australia, trades to the value of 30 percent of its GNP, Modai said. The Israeli figure is veritably unique.

The government’s budget is more than 70 percent of the GNP. This, too, is vastly higher than in most “normal” countries. In the U.S. and Europe, the proportion is between 25 and 35 percent. The reason for Israel’s uniqueness in this, said Modai, is the crushing, unavoidable burdens which the State has shouldered throughout its history.

Defense accounts for 22 percent of the budget; social services over and above the basics account for a further 18 percent; and 38 percent of the government’s budget goes for debt-service.

“That leaves you with just 22 percent of the budget with which to give your people the things that governments normally give their people,” Modai observed. He noted that the uniqueness of the Israeli social services budget stemmed directly from the ongoing, lasting needs of immigrant absorption.

A TANGIBLE EXPRESSION OF SUCCESS

The huge external debt is not something to be ashamed of, Modai continued. On the contrary, it is the tangible expression of Israel’s incredible success in building an advanced nation in three-and-a-half decades while defending itself constantly against large and sophisticatedly-equipped enemies.

“When we began,” said Modai, “there was barely a nation, with hardly any infrastructure and virtually no raw materials. Five major wars and one major peace — all of these are enormously costly in money terms, apart from their other traumatic effects. That is the backdrop to Israel’s debt.”

He added two other points which are often taken for granted in reviews of Israel’s economic problems and achievements: the people are among the most heavily taxed on earth, and the administration, by and large, is “clean — that is, free of rampant corruption. In fact, in Israel if you want to be a President or a Minister, not only don’t you make money, it usually ends up costing you money.”

BACKDROP OF PRESENT DIRE CRISIS

This, then, is the backdrop, the Finance Minister continued. But Israel has suffered during the past decade from other “uniquenesses,” some of them objective factors, others brought on by economic mismanagement. Together, they have led her to her present dire crisis.

Since the 1973 Yom Kippur War, the cost of arms has soared far in excess of inflation, even Israeli inflation, as the Middle East arms race grows ever more deadly and advanced.

Israel had no option but to keep up. The problem, however, was that since the 1973 war its economic growth dramatically declined. In part this was due to the oil crisis. In 1979, for instance, Israel was spending 10.6 percent of its budget on oil imports.

The oil crisis, moreover, caused a world-wide shrinkage of trade, with foreign countries naturally adopting protectionist policies to shield their own industries. Israel found it all the harder to export, to compete.

While the oil price rise triggered a wave of rises in the prices of almost all raw materials, Israel had no raw materials of its own to “cash in on.”

EFFECT OF THE TRADE GAP

The grade gap grew ever wider, and the “regular” means of bridging it — U.S. aid, world Jewish investment and philanthropy, credit from commerical banks — grew ever more inadequate.

“This gab brought on our inflation,” Modai continued, “because the government naturally sought to bridge it by printing money. But while most inflations make governments rich and citizens poor, this one had the reverse effect because of that remarkable Jewish invention, linkage.”

The linkage of wages to the cost-of-living exists elsewhere of course. “But we Israelis developed it to a fine art. This ensured peoples’ income regardless of their productivity” and it spelled disaster.

The minister drove the point home with another pithy aphorism: “Israel,” he said, “is the only high-inflation country where the government is poor and the people are rich.” Because of the inbuilt linkage, the people failed to resist inflation sufficiently, and it just grew and grew. “That,” Modai concluded, “is why we have now come to the end of the road.”

The foreign reserves are being rapidly eroded as Shekel-holders flee to Dollars. Credit-lines threaten to dry up as overseas financiers study the parlous state of the Israeli economy.

The government plans to tighten up on tax-collection. Modai believes there are tens of thousands who get away without paying. It intends to streamline, to boost efficiency, to spur high-tech industry.

But all that is in the farther future. The immediate, inevitable though unpalatable remedy is to cut. To cut brutally into the bare flesh of government spending. The goal is $2 billion annually. During the current fiscal year (ending in March) only a paltry few hundred million will be trimmed. The really deep incisions are planned from April onwards.

Will the ministers agree? “They’ll have no choice,” Modai says philosophically. “For all their fractiousness, Israelis are very good at looking facts in the face when they absolutely have to.”