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Special Interview Optimism About Israel’s Economy

February 6, 1981
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Despite its present economic woes and an inflation rate that skyrocketed to 133 percent last year, the highest in the world, Israel’s economy is “basically very healthy,” according to Prof. Haim Ben-Shahar, president of Tel Aviv University and a renowned Israeli economist.

Ben-Shahar’s optimistic view of his country’s economy–which is not shared by many–is due to the fact that during 1980 Israel improved its balance of payments despite an exhorbitant increase in its bills for the purchase of foreign oil and run-away inflation.

“Israel was one of the few Western countries that concluded 1980 without a deficit in its balance of payments,” Ben-Shahar pointed out in an interview with the Jewish Telegraphic Agency. “Israel increased its exports during last year by more than 25 percent, from $8 billion in 1979 to $10 billion in 1980. This achievement is underscored by the fact that all OPEC’s markets are closed to Israeli goods. This is, in my opinion, an outstanding achievement which indicates that the Israeli economy is basically very healthy.”

The 46-year-old American-educated Ben-Shahar explained that the “moderate” decline in consumption inside Israel, for one, and previous investments in the country’s science industry, for another, are the two major factors that help increase Israel’s exports. “Israel has developed a sophisticated electronics industry–computers, medical equipment, etc.–and is competing successfully, price and quality-wise, with such counties as Japan,” Ben-Shahar said.


He believes that Israel’s inflation is basically “an internal problem,” regardless of the world wide phenomenon of inflation.

“Israel’s inflation is due mainly to the fact that the government was not able to trim its defense and welfare budgets and did not increase its revenues from taxes,” Ben-Shahar said. “The combination of high government spending with low revenue rates increased the government’s deficit and added to the growing inflation.”

But, Ben-Shahar added, the reason inflation in Israel reached the staggering rate of 133 percent is the system of “compensations” in which automatic increases in salaries and in the value of savings and other forms of investments are granted to offset the rise in the cost living index and the eroded buying power of the Shekel. “As a result, there is a vicious cycle” in which inflation increases the amount of money in circulation and this in turn increases inflation, Ben-Shahar explained.

In the opinion of the noted economist, Israel’s inflation cannot be beaten at once. The first target should be the reduction of inflation to less than 100 percent a year. “An attempt to kill inflation in one shot,” Ben-Shahar warned, “will cause massive unemployment and an economic depression in Israel.”

Noting that the task of curing Israel’s economy will be borne by the next government to be elected this spring, Ben-Shahar outlined the major steps Israel will have to take towards economic recovery. They are:

A drastic cut in government spending, especially in the fields of defense and welfare.

Improvement in the tax system, “mainly in the area of corporate tax.”

Increased incentives for exports, despite the economic slowdown around the world. “This will bring an economic growth in industries for exports and will stem the growth of public services,” he said.

Ben-Shahar, who is also the author of the recently published study “Israel and the Diaspora: A New Strategy,” was in the United States for the opening of the offices of the American Friends of Tel Aviv University in Miami and Chicago.

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