The Year in Review the State of Israel’s Economy

Economics has been called the “dismal science” and no characterization was better suited to the state of Israel’s economy during the year just ended. Inflation was rampant. Prices soared for all basic commodities and services. Unemployment increased. The Pound shrank and shriveled to a point where it begins to resemble the Wei mar Mark. There was labor unrest in all sectors. The rich seemed to be waxing richer and the burdens of taxation appeared to fall increasingly on the poor.

Most disquieting, however, was the government’s apparent inability to cope with the worsening conditions. Its anti-inflation measures only spurred inflation. It sabotaged its own policy of holding the line on prices by withdrawing State subsidies for bread-and-butter items. Its feeble attempts to soften wage demands drew the wrath of the trade unions and led to a wave of strikes, walk-outs and work slow-downs that paralyzed public services and forced plants to shut down.

Meanwhile, the professional economists and fiscal experts bickered, each one of them a prophet of economic salvation according to his own “true faith.” And the public, confused and angry, found their logical scapegoat in the man who presides over the national economy, Finance Minister Yehoshua Rabinowitz.

At no time in history and in no country in the world does anyone love the tax collector. Rabinowitz, as head of the Treasury, is regarded by most Israelis as the man with his hand in their pockets. He is the one who urges them to consume less while they must pay more. He also seems to many to have an unsteady grip on the nation’s fiscal levers. His most conspicuous trait, say his critics whose numbers are legion, is a tendency to make policy based on contradiction and paradox.

INFLATION FOUGHT AND NOURISHED

There is a recession in Israel. But not for all Israelis. The government fights inflation on one front and nourishes it on the other. For example, the Finance Minister was the most vigorous advocate of the value-added tax (VAT) that went into effect last summer. It is a tax paid on every stage of production from raw material to finished item and it is passed on mainly to the consumer. It has been likened by some to fighting the fires of inflation by pouring on gasoline.

Another example: State subsidies for such commodities as sugar, flour, cooking oil, eggs, bread and many other edibles and for fuel and public transportation consumed a huge portion of the national budget. Rabinowitz and his associates decreed that these subsidies must go lest the deficit becomes totally unmanageable. But if the national budget was relieved, the budget of the average householder took a severe beating. During 1976, inflation increased at a rate of 37 percent per annum. If this wasn’t the highest in the world, it was close to it.

AREAS OF SUCCESS

The Finance Ministry answers its critics by pointing to areas of success. They note that Israel’s balance of payments improved as the result of a remarkable increase in exports and a decline of imports. During 1976, Israel’s exports rose by 24.2 percent over the previous year. Its best customer was Europe.

The Treasury also boasts that it reformed the tax system in 1976. Income tax receipts increased by 47 percent which shows how urgently tax reforms were needed. At the same time “specific allowances”–salary increments paid to selected groups of public employees–were abolished. This raised a hue and cry among those affected but it has since diminished and the move seems to have been a genuine attempt to improve the state of the economy.

The Treasury can also take credit for strengthening exports by its so-called “creeping devaluation” of the Pound. Last year the Pound was detached from the U.S. dollar and linked to a basket of foreign currencies including the Pound Sterling, Swiss Franc, Dutch Guilder and West German Mark. This, of course, improved Israel’s position on the European market. But it reduced the buying power of Israelis at home.

The government succeeded in stabilizing the price of flats and housing, but only at the expense of a deep recession in the construction industry. It failed utterly in its declared policy of shifting the labor force from service to productive industries. Here again the government acted against itself. Civil servants get more pay–possibly for less work–in government offices than they would in private industry. As a consequence, government bureaus have a surplus of manpower while factories go begging for labor. More and more Arabs are now seen on the production lines.

WHAT’S AHEAD FOR 1977

What does the new year have in store? Ya’acov Lavi and Uri Litvin, economists of the Bank of Israel, expect consumer prices to increase by 27 percent this year, four percent more than estimated by the Finance Ministry. They also claim that unemployment will reach five percent; it stands presently at four.

“Creeping devaluation” will continue. Lavi and Litvin propose devaluation at a higher rate but not on a monthly basis as heretofore. They have recommended no devaluations in January and February because as long as domestic demand runs high, devaluation will only spur inflation.

Politics will of course affect the economic picture in 1977, this being an election year. There is a fair chance that Rabinowitz will not serve in the next Cabinet, assuming a Labor victory, or at least not as Finance Minister. But thoughtful observers concede that it is not fair to blame him for Israel’s economic woes. They are, after all, a direct result of the Yom Kippur War and the oil price increases that rocked economies much stronger than Israel’s–and, of course, an inevitable consequence of Israel’s huge defense burden.

Whatever Rabinowitz’s weaknesses, they reflect the conflicting interests of the general public. Workers want more pay for shorter hours. Consumers with any cash in their pockets don’t want to be forced to tighten their belts. Government bureaucrats seek more and more for their agencies and little personal empires. It is, after all, human nature.