Year in Review Israel’s Precarious Economy

While Israel is engaged for the first time in its history in the process of implementing a peace treaty with one of its neighbors, the precarious state of the nation’s economy poses a threat to its survival. The danger is compounded because in the economic sphere, appearances are deceptive.

To the casual observer, Israel this year was a country of booming prosperity, a flourishing healthy economy, full employment — too full in fact — and a well-heeled consuming public enjoying the good things of life. At least a half million Israelis vacationed abroad during the past summer, each allowed to take $3000 in foreign currency. New car sales soared to an all-time peak despite astronomical prices and the highways are jammed. Israel has yet to introduce color television; nevertheless, 110,000 color TV sets were sold in recent months.

Every Israeli fit to work has a job or can have one and the labor market is seeking at least 30,000 more workers. In addition to Israelis, the country provides regular employment for some 70,000 Arabs from the occupied territories who get their jobs legally through the labor exchanges and an estimated 20,000 more who circumvent the legal channels. Several thousand Lebanese from south Lebanon commute to jobs in Israel daily.

A GRIM REALITY

But this rosy picture conceals a grim reality. Israel this year was caught in the worst inflationary spiral in its history. The inflation rate is expected to exceed 80 percent by the end of the year, probably the highest in the world, and at the moment there seems to be no way to control it. Inflation is fueled by feverish consumerism. Israelis do not save their money because it shrinks rapidly in value. Those who do save invest in cost-of-living index related government bonds which only adds to the internal debt.

But Israelis are buying everything available. They are spending their money mainly on expensive durable goods such as cars, refrigerators and TV sets at ever higher prices. As demand increases, manufacturers hire more workers and are ready to pay higher wages. But the more Israelis consume, the less there is to export.

Exports increased at the meager rate of three percent this year and the country may face a $4 billion balance of payments deficit. Its cumulative foreign debt now stands at about $17 billion. At the current rate, it will reach the danger point of $25 billion in four years at which time the government will experience great difficulties in getting foreign credit.

TRYING TO FIGHT INFLATION

Fighting inflation is not an easy task for a government which depends on coalition partners to muster a majority in parliament. When the Likud government came to power two years ago, the controversial American economist, Milton Friedman, was invited here to offer suggestions. Friedman’s conservative philosophy and especially his view that a degree of unemployment is necessary to reduce inflation, raised an outcry in labor circles.

The Likud government cannot permit itself to create unemployment for that would surely lead to its downfall. So the government has taken only half-way measures against inflation with very little success. It has been unable to cut down on its own expenditures primarily because defense needs swallowed a third of the present IL 320 billion budget. And because of inflation, the budget will have to be increased by about IL 70 billion.

THE HOUSING PROBLEM

Connected to the inflationary spiral is the housing problem which is a social as well as an economic problem. Housing construction, a basic branch of the economy is slowing down. In the last two years, the price of an apartment has tripled, the price of land went sky-high and construction starts have diminished. Israel’s construction industry is not highly mechanized. Building is time consuming and more costly than in other countries. A small two-room flat in Tel Aviv, Jerusalem or Haifa costs over IL I million and there are no apartments for rent at reasonable prices.

This situation carries the kernel of social unrest as newly married couples find it impossible to pay for a home of their own. It contributes to the phenomenon of emigration among Israelis — yordim. In recent months the emigration rate was 2000 per month and it is not likely to be stemmed unless the price of housing can be brought down to affordable levels.

Israel has just informed the United States that its budgetary deficit for the fiscal year beginning Oct. 1, 1980 will amount to about $3.4 billion. But hopes are not high that the U.S. will cover that deficit with grants, considering the recession and inflation in America. Some American aid will, of course, be forthcoming. On the other hand, the U.S. will indirectly feed Israel’s inflation by pouring money into the new airfields to be built in the Negev, replacing those in Sinai.

Because of that danger, the entire project will be a closed venture. But no one will be able to prevent the foreign workers from spending their money in Israel nor will the American contractors deny themselves products and services on the local market, thereby competing with Israeli consumers.

PICTURE NOT ENTIRELY BLEAK

Still, Israel’s economic picture is not entirely bleak. Export industries have made enormous strides. Only last year, $550 million worth of Israeli goods that were the result of local research and development were sold abroad. The entire industrial export was $3.5 billion and there was a significant export of military hardware such as the Gabriel missile and the Kfir jet interceptor. Industry is shifting more to sophisticated electronic systems and there is a continuous stream of investments.

Regarding the gradual normalization of relations between Israel and Egypt, experts expect it will have little effect on Israel’s economy in the year ahead because local industry, geared to the requirements of the European market, will need time to adapt itself to Egyptian market demands. Moreaver it will take several years of peace before trade relations between the two countries will develop to a point where it will be a significant factor in their economies.

Summing up, Israel’s economic targets for the coming year are to put a brake on inflation; close the balance of payments gap; and step up housing construction. Mainly, the dangers of social unrest and increased polarization between the rich and the poor must be avoided.

CORRECTION: In the Year in Review article in the Sept. 14 Bulletin it was incorrectly stated that there are 400,000 Bedouins in the Negev. The figure should have been 40,000.