Shoring
Up Israel's Economy
The United States has played a critical
role, beyond the allocation of foreign aid, in reinvigorating
the Israeli economy.
Through the Joint Economic Development Group (JEDG),
the two countries' senior economic policymakers and
private economists discuss trends in, and policy prescriptions
for, Israel's economy.
In 1984, then Secretary of State George
Shultz suggested a joint American-Israeli group to work
continuously on Israel's economic challenges. Israeli
Prime Minister Shimon
Peres agreed. Since then, the JEDG, chaired by the
Undersecretary of State for Economic Affairs and the
Director-General of the Israeli Ministry of Finance,
has met twice a year, in Washington and Jerusalem alternately.
The JEDG played a pivotal role in
the formulation of Israel's ambitious stabilization
plan of 1984, a plan that was welcomed in Washington.
At the time, Israel was in serious economic distress.
Years of shouldering the enormous defense burden imposed
by Arab hostility, and the accumulated result of dependence
on imported raw materials and fuel for Israel's industry
— to say nothing of the continuing cost of absorbing
waves of destitute immigrants and providing them with
the full range of social services — had led to
extensive borrowing and a huge foreign debt. Foreign
reserves had plummeted, and inflation was raging at 450 percent per year and rising. The government
was running a budget deficit equivalent to 17 percent
of the gross national product.
Then something unusual
happened. Within
Israel, the many
parties and different
schools of thought
pulled together,
set aside their differences,
and worked in a united
fashion for national
economic recovery.
In 1985, Israel
implemented a stabilization
program that included
several major features:
a large cut in subsidies
on basic products
and services like
milk, eggs and transportation.
This helped to cut
the budget deficit
from 17 percent to
8 percent of GNP;
a large currency
devaluation followed
by a stable exchange
rate against the
dollar; wage and
price controls and
the cessation of
direct indexing of
wages and savings
to inflation; and
a monetary policy
that would control
the growth of credit,
thus driving interest
rates upward.
The New York Times later described
the sacrifices of the Israeli people, and the message
of the stabilization program, as "Everybody takes
a step backward — together."
One of Israel's
main concerns about
the program was the
possibility of massive
unemployment. American
economic aid encouraged
the Israeli government
to act decisively.
U.S. aid provided
a safety net of resources
and reserves if things
went wrong, strengthening
public support for
what all knew must
be done.
As the Wall Street
Journal described
it, Israel's stabilization
program worked like
"a mini-miracle."
Inflation fell sharply,
and is now around
10 percent annually.
The exchange rate
of the shekel stabilized,
foreign-currency
reserves recovered,
exports increased,
and the budget deficit
contracted.
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