Senate Report Warns That Israel’s Economic Crisis Could Pose Serious Threat to the Security of Israe

Israel’s economic crisis “could pose as serious a threat to the security of Israel as any hostile neighbor in the region” unless swift, effective measures are taken, a Senate Foreign Relations Committee report warned this week.

“American foreign assistance can help Israel cope with its difficulties and can mitigate but cannot by itself arrest Israel’s problems of hyper-inflation, labor unrest, low productivity, declining revenues, growing unemployment and sluggish exports,” the report said. It called for “major domestic economic reforms” and the $1.5 billion budget cut now being applied by Israel’s unity government led by Premier Shimon Peres.

The report was prepared by two staff members of the Senate committee, Michael Kraft, a Near East subcommittee specialist, and Gerald Connolly, who specializes in economic aid issues, after visiting Israel and interviewing United States and Israeli officials in Israel and Washington.

ISRAELI TEAMS DISCUSS U.S. AID TO ISRAEL

Coincidentally, it was released Tuesday evening shortly after two teams of Israeli officials completed two days of talks at the State Department on increased U.S. aid to Israel.

One team led by Emanuel Sharon, Director General of the Finance Minitry, discussed with a U.S. group led by W. Allen Wallis, Undersecretary of State for Economic Affairs, the preliminary plans for the joint U.S.-Israeli economic group which will work out how the U.S. canbest help Israeli’s economic recovery program.

The joint group, which was established during the meeting between Peres and President Reagan at the White House in October, is expected to have its first meeting here in December.

The other discussion at the State Department was on security assistance and was led by Gen. Menachem Meron, Director General of the Israel Defense Ministry, and William Schneider Jr., Undersecretary of State for Security Assistance.

Israel is receiving $2.6 billion in military and economic aid, all of it a grant, in the current fiscal year. While the Israeli government has not yet worked out its specific request for the 1986 fiscal year, the Senate report notes that during his visit to Washington, Peres said Israel will need another $1.5 billion in economic aid for its recovery program.

BASIS OF ISRAEL’S ECONOMIC CRISIS

Kraft and Connolly go over the background of Israel’s difficulties in their report. “Israel’s economic problems did not develop overnight and cannot be cured quickly,” the report notes. “They can be traced to a number of factors, including the costs of developing a new country in three decades and the heavy defense and debt burden resulting from military aid loans since the October 1973 war.

“Defense spending, while a major element, is not by any means the only important reason for Israel’s economic problems. Israel’s economic difficulties are also deeply rooted in an elaborate system of indexed wages, subsidies, and social welfare programs. Israel’s political system of proportional parliamentary representation also has contributed to the problem of enabling small political parties to fight budget-cutting measures offecting their constituencies.”

In addition to the $1.5 billion budget cut, the report stresses the need for structural reforms, especially “the elaborate indexation machinery,” and “further agreements on price and wage controls.”

The report notes that “many experts also believe change is needed in existing law requiring the Bank of Israel to print enough money to cover the government’s spending deficits. Such practices have proved highly inflationary in the past seven years.” There have also been suggestions that Israel either introduce a new currency or peg the Shekel on a one-to-one basis with the Dollar, the report points out.

REPORT WARNS OF LIKELY INCREASED SOCIAL TENSIONS

But the report warns that “there will be a heavy cost to the Israel social fabric and to Israel’s own security as some of the needed reforms are implemented. Reductions in subsidies are likely to increase inflation. Social service cutbacks will hit hardest on lower income groups, especially Israelis from North African and other Arab countries. Arab workers from the West Bank and the Gaza Strip also will be affected by an economic slowdown.

“Increased social tensions are likely, along with rising unemployment and emigration of young Israelis, higher prices and labor unrest and decreased productivity. If the situation contiaues to drift, however, and an economic collapse results, the ultimate consequences for the country and the individual Israeli could be much worse.”

The report also points out that there “is a question of how far and fast a vigorous democracy can impose drastic economic reforms. The standard of living inevitably will drop. Economic sacrifices will have to be shared by all segments of the society.”

As for the U.S., the report suggests that the practice started this year of expediting economic aid during the beginning of the fiscal year, rather than quarterly, may have to be continued. An emergency aid package, which might include some relief for Israel’s $9.5 billion debt burden to the U.S., one-third of its foreign debt, “could prove decisive in turning around the Israel economy,” the report says.

ASSESSMENT OF THE FREE TRADE AREA

The report sees the Free Trade Area (FTA) between the U.S. and Israel as a more favorable alternative to other programs that now allow 90 percent of Israeli goods into the U.S. duty free. The report points out that economists believe that it will not have any significant short-term boost for the Israeli economy. But the report adds that the FTA would “further symbolize U.S. confidence in the long-range resilience of the Israeli economy, and its export industries.”

The report also urges the U.S. to take “additional military trade and cooperation measures which might lessen U.S. defense expenditures in the Mediterranean, while utilizing Israel’s maintenance and production and capabilities.”

One recommendation appears to be an indirect warning against expected Reagan Administration proposals to sell arms to Saudi Arabia and Jordan. “In considering proposed sales of sophisticated weapons to Arab countries, such as advanced fighter planes and missiles, the U.S. also should take into greater account whether the quality and quantities are such that they might be ultimately used against Israel, thus prompting Israel to buy more equipment as a precaution,” the report warns.

“A major factor in Israeli defense spending is its concern that the additional sophisticated Arab equipment may inflict higher casualties on the smaller Israeli forces.”

The report was submitted to Sen. Charles Percy (R. III.), the outgoing chairman of the Foreign Relations Committee, and Sen. Claiborne Pell (D. RI), the ranking minority member of the committee, to provide the committee with background enabling it to consider Israel’s situation when requests are submitted.

SOME CONSEQUENCES OF NEW LINEUP IN CONGRESS

The outgoing Congress was considered one of the most pro-Israel in history and the new Congress, including many of the new Senat{SPAN}##{/SPAN} and Representatives elected this month, is expected to be equally sympathetic to Israel. But a problem could develop if Percy, who was defeated for re-election, is replaced as chairman by Sen. Jesse Helms (R. NC), who has opposed all foreign aid and has made many numerous anti-Israel statements.

Helms promised his constituents that he would remain as chairman of the Senate Agriculture Committee where he can protect the tobacco farmers of North Carolina. But he is under strong pressure from the conservative right to take the foreign relations post. If he does not, the chairmanship will go to Sen. Richard Lugar (R. Ind.) considered a supporter of Israel. If Lugar is elected Senate Majority Leader, Sen. Charles Mathias (R. Md.) would get the chairmanship.

In addition, there will be three new members of the Foreign Relations Committee. Two will be Republicans replacing Percy and Senate Majority Leader Howard Baker of Tennessee, who retired, and one Democrat, replacing Sen. Paul Tsongas of Massachusetts, who also retired.

In the House Foreign Affairs Committee, there will be only one change, a replacement for Rep. Larry Winn (R. Kans.), a member of the Mideast subcommittee, who retired.

A major loss for steering Israel’s aid packages through Congress was the defeat of Rep. Clarence Long (D. Md.), chairman of the House Appropriations subcommittee on foreign operations. While his successor, Rep. David Obey (D. Wisc.), is expected to support continued aid for Israel, he is not expected to play the leadership role in support of Israel as did Long.