NBER WORKING PAPER SERIES
ISRAEL'S CRISIS AND ECONOMIC REFORM:
A HISTORICAL PERSPECTIVE
Michael Bruno
Working Paper No. 3075
NATIONAL BUREAU OF ECONOMIC RESEARCH
1050 Massachusetts Avenue
Cambridge, MA 02138
August 1989
This paper is part of NBER's research program in International Studies. Any
opinions expressed are those of the author not those of the National Bureau of
Economic Research.
NBER Working Paper #3075
August 1989
ISRAEL'S CRISIS AND ECONOMIC REFORM:
A HISTORICAL PERSPECTIVE
ABSTRACT
This article analyses the roots of the deep crisis that has afflicted the
Israeli economy since 1973 and the attempt at economic reform and recovery
since 1985. All of these are discussed against the background of the long-term
evolution in Israel's structure and growth process. At the center of the
analysis lie the implications of an oversized government and especially the
devastating effects on growth and inflation of the large and persistent public
sector deficit on top of the growing tax and public expenditure levels. The
norm of "living beyond one's means" at the public sector level has also
severely affected the norms of behavior of the private, household as well as
business, sectors.
Since 1985 there have been signs of recovery originating from the
balancing of the budget and the relative stabilization of the currency. Labour
and capital markets are gradually becoming more flexible and real interest
rates are coming down. Even so, inflation rates are not yet down to
international levels, continued budget balance is not assured and excessive
wage increases have substantially diminished profit rates and investments in
the business sector. Structural problems, rooted in economic mismanagement of
the crisis years, are surfacing.
Resumption of a sustained growth process requires persistent budget
balance and a substantial additional reduction in public expenditure and tax
levels. Structural reforms, only barely started, have to be persistently
followed in the labour and capital markets, in the fiscal system, and in the
further opening up of commodity and financial markets to competition from both
home and abroad.
Michael Bruno
Bank of Israel
P.O. Box 780
Jerusalem
Israel
1. Introduction
The Israeli economy, like Israeli society, has always provided a
fascinating area of esearch. Although the state was burr in l748.
economic structure had been laid down at least 25 vears earlier.
Within just a few decades, a thriving, modern and diversifeu ecorcnv
crew up here on the basis of the first small economic oase which was
established by the N20s. From the early twenties, the uisnuv. trim
country's Jewish population, rose from only 80,000 to 600,000 in 1948 a
7.5—fold increase), while the gross national product crew 25 times o.er
the same period. In the first twenty five years since independence,1c48
to 1972, the country's population quadrupled, while its GNP increased
10—fold. Thus, in the space of 50 years, the population grew 30 times,
while its economic activity increased by a factor of 250. truly
astonishing figures when compared to any other country. There IS
1
This article is based on a lecture given in March 1989 as part of a
special public lecture series held by the Israel National Academy of
Sciences during the country's 40th anniversary of independence. A Hebrew
version appeared in the Economic Quarterly, July 1989. I am crateful to
members of the Bank of Israel Research Department (mentioned individually
in the appendix) for part of the data used in the article. I would like
to thank Maggie Eisenstaedt of the Maurice Falk Institute for Economic
Research in Israel for the diagrams (except for No. 11) and Soroon
Shifman for the English translation of this article from the Hebrew
version. Finally, my grateful acknowledgements are due to Avi BenBassat,
Yaakov Lavi, Mordechai Fraenkel, David Klein and Amos Rubin for
their useful comments on a previous draft.
a The year 1922 can be taken as a reasonable starting point. It was at
least, the first year for which we have properly defined economic
indicators, compiled and analyzed by the late Robert Szereszewski, who
fell in action during the Six Day War (the study appeared posthumousl.in
1968)
-2—
orobably no other economy in the world where, in the course of half
acentury (from 1922 to 1972), per cpita GNP rose from just 15'!. to one
half of the corresponding U.S. figure, and reached a level equivalent to
three quarters of the average prevailing in Western Europe.
But 1973 was marked by an unprecedented crisis. Economic growth
virtually came to a halt, the balance of payments deficit rose to
alarming proportions and, worst of all, Israel began to eaer-1ence
nflatin on a scale which only the generation of our parents had known,
albeit more briefly and more intensively, in Europe during the l920s.
The Yom Kippur War of that year heralded a decade and mare of economic
stagnation. This period, sometimes known as the lost decade, was a
time of deep economic and social crisis in every sense of the word,
affecting nt only the countrys economic structure, but also norms of
socio—economic behavior.
fter 12 years, the stabilization plan of 1985, may be heralding the
beginning of a turning point. There have been considerable achievements
on the stabilization front. However, with respect to structural
adjustment, the economy resembles a bruised and battered war veteran, on
the road to recovery, but still not quite rehabilitated. Only after
another five or ten years (perhaps on the State's 50th anniversary) we
may be able to say if this was a real turning—point with regard to long
term growth.
Bearing these facts in mind, we shall ask a series of questions
grouped around two sets of issues:
1. What were the nature and causes of the economic crisis Israel had
experienced since 1973? Was it mainly the result of international
developments or did its origins lie closer home? This question has
already been the subject of considerable research. Here I would refer
to a series of research papers written at the Maurice Falk Institute
during the height of the crisis, in 1982—84. Nonetheless, it would be
interesting to take a fresh look at the diagnose of the crisis from the
See The Israeli Economy: Maturing Through Crises, edited by V. Ben—
Porath, Harvard University Press, 1986. ll of the articles in this
publication, most of which will be mentioned subequently, are very
relevant to the present discussion.
—3—
vantage point of the first stages of recovery. In order to chart the road
to further recovery an in—depth understanding of the roots of the crisis
is required.
2. In what sense, if at all, did the economy show signs of real recovery
during the past four years? Economic developments since 1987 and
particularly during the States 40th anniversary year. 1988, were notable
for the extent of structural economic problems which have surfaced. In
view of the more recent developments, what is the chance of achievina
steady economic growth within a reasonable period of time, while securing
increased price stability and at the same time adapting to the trends
towards greater integration especially in The New Europe of ic'927 What
economic reforms are necessary in order to achieve these targets?
In the following pages we will try and answer these questions, using
past long—term and especially the more recent economic developments as a
background.
2 Growth, Productivity and Inflation over the years 1960—86
We start by examining the development and composition
sector GDP——the contributions of factors of production,
labor, and the 'unexplained residual, total productivity, wh
the effects of changes in factor quality and utilization, as
other elements that might help explain why output shoul
faster than factor input. For this purpose, we will use the
framework which was first applied by Dr. . L. Gaathon' to
economy.
of business
capital and
ich captures
well as any
d have grown
analyt ical
the Israeli
Figure 1 shows the
1950 by sub—periods.tm
average rate of growth,
length of the period
characterized by a very
of a significant labor
average business sector GDP growth rate since
(The height of the rectangle describes the
while its width corresponds to the relative
). The two periods, 1950—60 and 1961—72, are
fast rate of GDP growth. This growth is composed
force contribution deriving from successl.ve waves
See A. L. Gaathon (1971); see ala 3. Metzer (1986) and M. 5yrquin
(1986).
The figures on which the rates of growth are based are contained in
Table 2 in the appendix.
of immigrat
accompanied
the growth
Fig. 1 highlights
from some 10 percent
percent in the years 19
1961—67 (which includes
second rectangle in
1967—72. when the contr
force was augmented
territories, business
percent ( ), before
1973. The diagram also reveals
Firstly, there was a very
labor to GDF growth after 1973.
employment dropped from appr
percent (see Table 1 in the app
be explained by the decline
influential in reducing busines
large entry of new members
sector. By the very nature of
direct contribution to business
Secondly, there was a
element whose contribution fell
growth to only 0.6 percent d
grew at an average annual rate of 12
to just a quarter of this figure after
several other notable features.
significant decline in the contribution of
The growth rate of the business sector
oximately 4 percent a year to only one
endix). This phenomenon can only partly
in immigration after 1973. No less
s sector employment was the increasingly
of the labor force into the public service
their employment, these workers make no
sector GDP.
sharp drop in the residual productivity
from 4 percent in the years of rapid
uring the years 1973—81, while it fell even
-4—
ion, as well as the substantial capital investment which
the growth process and made it possible. Some 30 percent of
in the GDP can be attributed to each of these two factors of
production. Overall productivity accounts for the 40 percent unexplained
residual. The 25 years prior to the birth of the State were, by and
large, characterized by the same growth patterns. [see Syrkins figures
(1986)].
the dramatic fall in the growth rate after 1973,
to an average of 3—4 percent up till 19814 and 1.
82—84. This drop is even sharper when the period
the recession of 1965—67) is taken out of the
Fig. 2. Between the Six Day and Yom Kippur Wars,
ibution of large—scale immigration to the labor
by an inflow of workers from the administered
sector GDP
declining
more (to the point of negative productivity growth) in 1982—84. These
reductions in productivity growth are all the more noticeable considering
that, surprisingly enough, capital stock continued to grow rapidly even
after 1973 (see the middle segment of the rectangles in Fig. 1). The
growth in capital stock can be attributed to the unprecedented government
subsidization of investments, whereby half of investment finance
consisted of a government grant.t At least part of these investments
were made in unprofitable activities and led to the accumulation of
substantial, unutilized capital stock, financed at highly negative real
ir.terest rates. The eventual need to replace this credit by more
realistically (and later, excessively) priced market credit resulted in
financial imbroglios from which the economy is still suffering today.
See, for example, a recent article on the moshav economy by Sussman,
Kislev and Lerman (1989).. The continued large growth in capital stack
concurrent with progressively declining productivity shows that there was
a substantial waste of resources, illustrating only too well the argument
that large—scale subsidization of investment does not necessarily lead to
viable economic growth.
Fig. I also shows the rise in output after 1984. During 1985—87,
business sector product grew by an annual average of nearly 6 percent,
more than half of which derived from increased productivity. The
cumulative productivity growth in these three years exceeded the
accumulated growth in productivity during the entire 12 years of the
recession, as can be roughly gauged by comparing the appropriate areas of
the rectangles in Fig. 2. If we also consider the slow-down recorded
during 1988 and take an overall view of the four years 1985—88, this
recovery will appear less impressive, but no less exceptional. It is
still too early to say whether this growth in economic activity was a
one—time achievement, which was to a large extent fueled by the continued
fast rise in private consumption, as we will see below, or if it
signalled the beginning of genuine renewed growth. At a later stage, we
will discuss the conditions necessary for ensuring that the average
growth rate of 1985—87 will henceforth continue, and be accompanied by
renewed investment. The direct contribution to the business sector GDP
of the capital stock in 1995—88 was marginal, as is shown in the figure,
reflecting the reduced rate of investment throughout the economy. This
effect will also be discussed later.
st of it is ex—post subsidization derived from the availability of
unlinked development loans at a time of rising inflation — see
n and Meridor (1982).
—5
Mo
huge,
Litvi
1973, as we have noted, marked an unprecedented and
juncture for the economy, which plunged into a long.
Since that year also saw the world economy sink into a
d once again ask to what extent Israel's economic woes
to external factors, or whether they resulted from
to properly respond to the international crisis and
adjust the structure of the economy to the new economic environment.
Fig. 2 provides a comparison
between 1960-87, the rest of the
and semi—industrialized economies
1960s,' in terms of inflation. GDF
Fig. 2 highlights the fact
(1960—73), the Israeli economy deve
two groups, in terms of GDP and
rate was only slightly higher than
world. As the figures in Fig. 2
by the inflation and recession
economies suffered from inflation,
lesser extent than Israel.
of developments
industrialized world'
• to which Israe
and per capita GDP.
that during the
loped significantly
GDF per employee,
that prevailing in
show, the industrial
of the 1970s
but not from impeded growth), but to a
This difference became acute in the early
-, The left—hand rectangle of each grouping in Fig. 2. represents all of
the QECD economies, while the right—hand one describes the semi—
industrialized economies. In the absence of sequential data on the
latter for each period, a sample of ten was used for the years 1981-a?
[for further details see Bruno (1986)). For 1981—87, these are the
economies defined by the IMF as manufacturing exporters. Korea,
Singapore and Yugoslavia appear in both groups, while the second group
includes Hong Kong. Taiwan, Hungary. Rumania, India and Turkey. A
partial comparison shows that the difference between the two groups in
terms of average developments over time was not significant.
Accordingly, the right—hand rectangle can be regarded as a representative
point of comparison.
—6—
The year
extremely grave
drawn—out crisis.
recession, we shoul
can be attributed
policy which failed
in the Israeli
5 (OECD ec
1 belonged
eco nomy
onomies)
in the
th years
han the
nflat ion
rialized
were hit
r i a ii zed
rapid grow
faster t
while its i
the indust
countr ies
semi — indus t
—7l9SOs,
when GOP per employee fell and inflation rose sharply in Israel
while the latter was declining elsewhere.a
After the implementation of the economic stabilization program in
1985, Israel's relative position, as regards inflation as well as its
GDP growth rate, improved considerably (inflation, however, remained
substantially higher than in the average of the other country
groupings). Fig. 2 highlights the persistently high growth rate of the
semi—industrialized countries with which Israel had so proudly compared
itself in the l960s. It is still not certain whether Israel's 5.7
percent average growth rate indicated in the diagram will be maintained
in the years to come. Two conclusions can thus be drawn from Fig. 2.
Firstly, Israel's economy deteriorated significantly more than other
countries during the years of the world crisis, particularly when the
industrialized countries had already begun to recover from the
recession." Secondly, even though there has been a relative
improvement in recent years, Israel still lags behind these countries,
as regards bath inflation and the growth rate.
A more detailed analysis of the performance of the industrial
economies indicates that while all of them suffered from continued
unemployment and inflation (stagflation) resulting from the oil and
other raw material price shocks, they managed to adjust, albeit to
varying degress of success, through appropriate policies. The most
successful country in this respect was Japan, which had and still has
very high fuel and raw material import requirements. Vet by conducting
proper fiscal and wage policies, Japan not only succeeded in extricating
itself within a few years from the the severe recession it entered in
1973—74, but also managed to revolutionize its industrial production
processes, ensure that failing industries were closed down and generally
" In this context it is important to point out that the semi—
industrialized groups represerted here does not include the high—
inflation Latin American countries (Argentina, Brazil and Mexico).
A previous article (Bruno, 1986) provides a detailed study of the
effects of the external shocks and Israel's failure, in comparison to
other countries, to run a suitable structural adjustment policy.
the lack of a suitably respo
external factors. Israeis
lam Kippur War and the resul
cannot exolain the depth as
There were two major
changing environment. One
government, but also in th
incomes and outlays — a cons
second element, which is not
payment of excessive real
nsive economic policy, rather than to
situation was, of course. agcravated
ting heavy defense burden. Yet this
well as the duration of the crisis.
manifestations of the failure to adapt to the
was the under lying failure, mainly of the
e business and household sectors, to balance
tant attempt to live beyond ones means. The
totally unrelated to the first, was the
wages relative to labor productivity, which
3. The cumulative damace resultinQ from an uncontrolled public service
sector
Fig. 3 presents the main data on public sector income and
expenditure as a percentage of the gross national product for the sub—
periods extending from 1960 to l988.' Expenditure has been divided
into four main groups (left—hand rectangle in each pair): 1. Civilian
consumption and transfers (including services, and transfers to nonprofit
institutions and households). 2. Investment and subsidies
(including subsidies on basic commodities>. 3. Interest on the
government debt. 4. Defense expenditures.
Income (represented by the right—hand
divided into two sources domestic total
rectangle
gross tax
'' Here, the public sector includes the
authorities, the .3ewish Agency and the Bank of
1983 are based on Meridor (1985). The summary
appear in Appendix Table 3.
—8turned
the situation to its own benefit. Smaller European countries such
as ustrIa and Finland are other positive examples. Israels failure to
extricate itself from the world recession, not to mention its
embroilment in an even worse crisis must, therefore, be attributed to
Pu
b v
a
rely
the
lone
led to a sharp progressive fall in the rate—of—return on capital in the
business sector. We start by discussing the most important issue: the
evolvement of the public sectors income and expenditure system.
in each
revenues
pair) is
and direct
central
Israel.
data for
government, local
The data up to
the whole period
—9—
transfers from abroad. The gap between the two rectangles in each pair
in Fig. 3 represents the public sector deficit as percentage of GNP.
It is interesting to note the substantial rise in the size of the
overall public sector deficit even while the economy was still growing.
From a state of rear balance during the first half of the 1960s (as was
also the case in the 1950s), the economy went into a deficit equivalent
to 12.6 oercent of the GNP in the "Golden Age' between the Six Day and
Yom Kippur wars (1967—72>. During this period, there was a rise in
civilian consumption, investment and subsidies and, particularly,
defense expenditures. At the time, the economy did not require any
significant increase in tax rates as rapid growth made easy borrowing
possible both domestically and abroad (see the subsequent discussion on
the development of the internal and external debt). The government was
also able to borrow substantial amounts from the Rank of Israel, and
thereby print money in an economy which was characterized by relative
stability and a growing demand for real balances.
Thus, the first seeds of trouble were sown as far back as the boom
period between the two wars. This was an expansionary period dominatd by
a 'we can do anything psychological mood. It was thus possible to
increase every sector of government spending and 'wave every flag" at
once — the flags of defense, development and, in particular, of social
welfare. Towards the late sixties and early seventies (when the War of
Attrition ended and a local version of a 'black panther movement became
prominent) welfare issues once again became the focus of economic policy
debate, at a time when there was no real balance of payments constraint
problem and the only gradually emerging sign of trouble was some
domestic imbalance in the economy (mainly showing in excess demand for
labor). At this time an extensive national insurance transfer
system was introduced (mainly in the form of child allowances, as well
The flag—waving analogy is taken from the controversy surrounding
the approach of the then Defense Minister, Moshe Dayan, who claimed that
we cannot wave all the flags at once. In his view, top priority still
had to be given to defense, even when compared to pressing social
issues.
- 10 as
other welfare allocations), and increased health and education
budqets. The prevailing attitude among relevant circles, (with many
economists and present company included), was that with such a thriving
economy (business sector GDP grew in the inter—war years by an average
of 12 percent per annum), greatly incrpased exports and no real threat
to the balance of payments, the time was ripe for redistributing the
national cake for the benefit of the underprivileged sectors of soctety.
The impetus given to social expenditure should have been stopped after
the onset of the crisis but it was not.
Table 3 in the appendix shows that the growth in social
expenditure, so prominent in Fig. 3 — derived totally from an increase
in transfers from 5 percent of GNP in 1960—66 to 9 percent in 1967—72,
16 percent after the start of the recession in 1973 and even more in the
years 1995—88. There was an even higher relative growth in the various
types of subsidies, mainly those allocated through cheap investment
finance, the significance of which we have already discussed. With the
concurrent growth in the interest rate on the excessive internal and
external debt, and the further growth in defense expenditures (which
were now financed by increased U.S. aid), government spending reached an
all time high of 76 percent average of )3NP in the years 1973_Bit. At the
same time, gross taxation grew by a substantial 9 percent to reach 48
percent of ShIP. [Net taxation, after allowing for transfers, grew at a
much lower rate. However, it is gross taxation that affects negative
growth incentives.) Despite increased foreign aid disbursements, the
overall public—sector deficit rose to an unprecedented 17.3 percent of
GNP during the recession. This average figure applied, with only minor
variations, for an entire 12—year period. While isolated attempts were
made to curtail the budget (in 1976 and 1979), the excessive public
expenditure, accompanied as it was by very low growth, can only be
described as short—sighted, irresponsible behavior on the part of
successive, over—indulgent governments.
Fig 3 marks the sharp drop in the deficit from the crisis period
of 1973—84 to the post—stabilization period of 1985—88, whereby the
budget became almost balanced. (The average deficit during 1985—88 was
one percent, a level similar to that prevailing in the years 1960—66).
In 1988, it rose aga
we will discuss below.
10 percentage point
defense and subsidies,
and a slight rise in
percent of GNP. Such a
growth, as it discoura
To conclude, the
of the 1970s crisi
priorities in response
external (raw material
internal (heavily increased defense
population and labor force growth rate).
which was cut after 1973, and which
damage, was direct government investment i
in the appendix).
The harmful implications of the large deficit, and
the public sector, have manifested themselves in a
which will
the external
persistent bal
adjustments —
lubricated and
sustained shi
contributed to
market, and
the same time,
freedom of monetary policy. The expansionary public
prevented the movement of the increasing labour force into
sec tor.
It is
involvement
crisis pen
formation,
commodity
the very size of
number of areas,
also important to point out the nature of government
in the income redistribution process. In the course of the
od, rather than support own human and tangible capital
government intervention increasingly took the form of direct
subsidization, extension of welfare and child allowances and
11
in, to between 3—14 percent, generating risks which
The fall in the deficit was marked by a sharp,
drop in expenditure (most of it was taken from
while interest expenditures continued to rise),
taxation, which reached a record level of over 50
high tax rate does not, of course, stimulate
ges the incentive to work, save or invest.
above—mentioned figures show that with the upsurge
s, the government failed to change its order of
to changing circumstances, whether these were
price shocks and the ensuing world recession) or
expenditure, and a reduced
The only part of the budget
may well have caused long—term
n infrastructure (see Table 3
be detailed below, and particularly in a rapid increase in
and internal debt. The growth in the external debt led to
ance—of—payments problems and to the need for price level
devaluations and Subsidy cuts — which, given the well—
accomodative wage—price—money supply mechanism, led to
fts in inflation rates. The growth in the internal debt
the crowding—out of the private sector from the capital
discouraged private finance of investment and growth. Pt
the increased internal debt limited the degrees of
sector also
the private
— 12 —
other forms of support that are not conducive to self—relxance. This
came as a political and social response to the demand to increase the
share of the national cake among the underprivileged, with no effort
being made to condition such support by incentives to work harder and
produce more. It may be assumed that this factor also contributed to
the fall in the growth rate which we have already mentioned. Finally,
irresponsible budgetary policy by the government also affected similar
behavior on part of
will be discussed f
We will now go into more detail on
mentioned. The first of these concerns
cumulative high public deficit to the increasi
debt. Fig. 4 highlights the growth of the
20 percent of the GNP before 1967, to between
eve of the crisis. At that time, the profitab
justified its finance by foreign borrowing.
longer applied to the doubling of the ratio
and 1BhP during the subsequent decade (more on
detailed figures on the internal debt before
more striking than that of the external debt.
le, accumulated an internal debt equivalent to 200 of
not indexed (by contrast to the Israeli internal debt,
ndex—linked) and was eroded during the inflation of the
After years of budget—balancing and even budget
British economy may reach zero debt within the
future.
also illustrates the reversal of these
as a direct result of the balancing of
the individual, both as producer and consumer. Thts
urther below
some of the topics already
the contribution of the
ng external and internal
external debt from a mere
40 and 50 percent on the
ility of capital formation
But the same argument no
between the external debt
this below). We have no
1970, but its rise is even
From 50 percent of GNP in
at the height of the crisis.
on program (by which time
nted to more than double the
agents, both households and
zed to finance a massive
direct capital formation.
public debt accumulation of
that during World War II
percent
abi 1 izati
debt amou
economic
mob i Ii
ther than
economies
is true
1970, it increased to almost 140
before the implementation of the st
the combined external and internal
1BhP!). Most of private savings of
companies, was thus primarily
accumulation of government bonds ra
Among reasonably well—ordered
such magnitude is unprecedented. It
or examp
it was
ch is i
years.
the
Britain, f
1BhP. But
all of whi
post—war
surpluses,
foreseeable
Fig. 4
after 1995,
trends that occurred
the budget and of the
Apart from the size of
cle and cost of the debt, the
very tgnficant factor. On the
amount of resources available to
We will now examine the empi
the public sector Fig. 5). The
unemployment rate as a percent
from the temporary sharp rise at
unemployment rate in Israel has
was particularly true during the
to 8—11 percent in Western Europe
unemployment start to rise to
mentioned, this low
the government deficit, which affects the
mere size of government expenditure is a
one hand, such level of expenditure
ivate sector
aspect of the large expansion of
curve in Fig.5 describes the
the labor force since 1960. Apart
me of the 1966—67 recession, the
much lower than in Europe. This
(when it was 3—'+ percent compared
y in the early 1980s did Israeli
between 5—6 percent.' As previously
by any higher
Part of the external debt reduction relative to GNP, it should
noted, is connected with the change from debt to grant financing
defense purchases as well as the fall in the value of the dollar.
13 It could be claimed that the level of the internal debt noted rere
represents a lower limit. This qualification is based on the risk that
the government may at some future stage be forced once again to turn a
private debt into a public debt as the result, for example, of
actuarial deficits in private sector penson funds).
The slight rise only in unemployment after the economic
stablizat ion program of 1985, at a time when the budget deficit was
— 13 —
balance of payments respectively.' The progressive reduction of the
internal debt to GNP ratio projected to 1989-93 in Fig. 1 depends on a
renewed balancing of the budget from 1990. the necessary conditions for
which will discussed later. If these conditions hold and SNP once again
grows, at an annual rate of 5—6 percent, the external debt ratio will
fall by 1992 to its level at the end of the 196O, while the irternal
debt will take another 10-15 years to decline to 50 percent of GNP. An
ongcinq reduction in the internal government debt component is the main
prerequisite for the reforms which are necessary in the capital and
money markets.
requires a high level of taxation, whi
hand, government expenditure on factor
ch hampers g
inputs has a
rowth.
direct
On the other
impact on the
the pr
ovment
lower
age of
the ti
been
1970s
). Oni
level cannot possibly be explained
be
of
- 1'. —
rate of employment in the business sector (in which, as stated, there
was a dramatic fall-off in new employment after 1973. as happened in
Europe at the same time). The reason can be quite clearly found in
concurrent, substantial rise in public sector employment, from 20—22
percent of the total workforce in the early seventies, to 28-30 percent
by the end of that decade, as can be seen from the middle curve in
Fig.5. The upper curve15 combines the percentage of employees in the
pubiic sector and in the financial sector; it also increased very
significantly as a direct by—product of high inflation, but declined
thereat ter.' The gap between the upper curve and a 100 percent level
(not shown in the figure) represents the percentage of employees in the
non—financial business sector, which, as stated, fell substantially and
only began to rise again after 1983—84.
slashed, is proof that the restrained budget did not have any Keynesian
denand—reducing effect but, on the contrary, led to increased aggregate
supplyl On the other hand, the unemployment rate in 1988 and 1989 rose
quite substantially as a result of previous excessive rises in real
wages, an unusual increase in labour force participation rates, and as
part of the considerable restructuring and labour shedding that has been
underway in the business sector.
The percentages of employees in the two upper curves of Fig.5 have
been calculated on the basis of total employment in the economy and not
the total labor force, as is the case with the unemployment rate curve.
This discrepancy only marginally affects any comparisons which are made
between relative employment and unemployment figures.
See the figures in Table 5 of the appendix. These should be taken
as mimimum indicators of employment in public and financial services.
During the period in question, there were additional employees in the
business sector who were involved mainly in "public services" (such as
internal defense) or "financial management" instead of production, and
therefore these too should have been placed in separate employment
category. A highly important issue not discussed here is the
categorization of the relative contribution of that part of the business
sector involved in production for defense purposes. See Berglas (1986)
and Halperin (1987).
- 15 The
striking changes in the distribution
more poignant when incremental shares
employment are calculated. Between 1958 and
normal growth, the non—financial business
the increase in the overall number of emplo
public and financial sector taking up the
situation was almost completely reversed be
share of the non—financial business sector
(that is, 73 percent of the total additi
was in the public and financial sector).''
trend was once more dramatically rever
absorbed 90 percent üf additional labor, wh
',ardly grew at all — took only 10 percent.
employment began to rise again, concurrent
and the deficit, it is to be hoped that
development.
in the standard
dramatic downturn
period of rapid
usually rose at a
particularly true
recession of the
the years 195—7E
of employment are even
of the various sectors in
1972, which were years of
sector absorbed 73 percent of
yees in the economy, with the
remaining 27 percent. This
tween 1973 and 1981, when the
fell by a third to 37 percent
ons to the number of employees
Between 1985 and 1787 this
sed and the business sector
ile the public sector — which
But in 1988, public sector
with a growth in expenditure
this was only a temporary
of public
the labor
reducing
hampered
the worst
hould be
direct
r ivate
rise
unconnected to
• Throughout the ent
1973, private consumpt
per capita GNP. This
between the tempor
the 1973 crisis, that
rate of
V The respective figures for the entire period from 1973 to 198i were
+8 and 52 percent, respectively.
To conclude this chapter, we can see that every aspect
sector policy — with regard to high taxation, misallocation of
force, distorted subsidization of investment (while
governments own investment in infrastructure) —
effectively
sound economic growth. Before we begin to discuss one of
results of the over—grown public sector — inflation — it s
stressed that the government's lack of restraint had a
behavioural impact on the response of economic units in the p
sector. The effects were particularly noticeable in the excessive
of living, which became quite
in the economy after 1973
growth until the crisis of
rate lower than the growth in
for the time of rapid growth
mid—sixties and the onset of
when per capita GNP grew at an annual
the
ire
ion
was
ary
is,
— 16 —
capita private consumption rose at by an annual level
Subsequently, from 1973 to 1982, the standard of
to rise almost unabated, at an annual rate of 3.0
average growth in per capita GNP fell to just 1.1
be mentioned later, the manufacturing sector was also
the penchant for "living beyond one's means".
but we will
which are relevant to our present discussion.''
The main source of inflation was the cont
mentioned in the previous chapter. This
essential condition for the outbreak of i
However, the link between the budget deficit
conventional text—book one, Since there
between the size of the deficit and the
articles mentioned in footnote 19).
remained more or less stable for over 15 years,
the 1970s
985 economic
this here,
inflationary process
inued government deficit
"original sin" was the
nflation in the 1970s.
and inflation is not the
was no time series correlation
rate of inflation (see the
The high level of the deficit
while inflation rose in
percent and from
increased by 4.2 and
Barkai (1988) and
consumption after
immigration and the
to divert private r
' For a detailed
the articles by Liv
and Fischer (1996)
1955—65 by 5.8 percent, wh
5.2 percent respectively.
Klinov (1986). The cant
1973 can be partly exp
fall in demand for housing
esources from investment to
analysis of the high infla
iatan and Piterman (1986),
all contained in V. Ben—
in Israel see
and Bruno
1986). For an
see Bruno
percent, while per
of 3.6 percent.la
living continued
percent, while the
oercent. As will
characterized by
4. Aspects of the high inflation process and its termination
Much has been said about the nature of inflation during
and l9BOs, and about the various features of the July 1
stabilization program. There is no point in repeating all of
briefly review a few aspects of the
these two figures in previous periods wasi8 The difference between
smaller. Between 1950-55, for example, per capita GNP
ile per
These
inued
lamed
which
consumption
tion process
Bruno (1986
Porath (ed.,
capita
figures
rapid
by the
made
rose by 4.6
consumption
appear in
growth in
slow-down in
it possible
analysis of the eomponents of the stabilization program,
(1985)
— 17 —
steowise fashion (see Fig. 6). Fart of the reason for this progressive
acceleration can be found in the connection between the budget deficit
and the balance of payments deficit, and the government response in the
form of devaluations and subsidy cuts. The transformation of price
level shocks into accelerating rates of inflation has less to do with
"the original sin" than with "adaption to living with the sin itself".
We here refer to the accomodative monetary process and the exchanee
rate—prices—wage—money linkage system which were part of the economy's
attempt to protect itself from the cost of inflation. But it is
precisely the linkage system and monetary acomodation which enhanced
rapid price increases. Eventually these factors eliminate the existence
of a stable monetary anchor within the economy and allow the inflation
orocess to diverge even while the budget deficit remains more or less
stable.
A classic example of so—called immunization against inflation is
the attempt to constantly adjust the exchange rate and devalue in line
with the prevailing rate of inflation. This adjustment process was
perfected with the policy of creeping devaluation (crawling peg) adopted
in June 1975. Apart from a short period of a freely floating exchange
rate (after the "economic turnaround" of October 1977), this
characterized the exchange rate regime for the subsequent decade, until
July 1985. The advantage of this regime lies in its ability to maintain
a more or less stable real exchange rate for exports. In the course of
time, this advantage became quite apparent. The export sector, in fact,
was protected as an isolated enclave throughout the whole period of the
crisis. Thus, export revenues grew at an average annual rate of 12
percent during the two decades from 1965 to 1984. Further evidence of
the effect of this protective exchange rate adjustment policy was the
growing share of industrial exports as a percentage of overall
manufacturing output, from 20 percent in 1965 to 37 percent in 1975 and
52 percent in 1984. (In 1986, this share stood at 56 percent L.a'
a'> These estimates appear in the chapter on the manufacturing sector
in respective Bank of Israel Annual Reports and are based on input—
output analysis.
Nevertheless, the real cost of continuous exchange rate adjustment at a
time of a high budget deficit was the complete loss of a monetary anchor
which also led to huge cumulative aggregate output and product ivty
losses.
Analysis of the inflationary process indicates there were two
important land marks in the loss of the monetary anchor and the upsurge
of inflationary expectations. One was in June 1975. p,ihen the cra'dinq
peg was introducec, [on the relevance of this date to the shift in the
expectation—formation process, see Gottlieb, Melnick and Piterman
(1985)). The second turning point was the introduction of the Patam
(foreign currency denominated) bank deposits as a close substitute for
regular domestic money at the time of the October 1971 economic
turnaround' [for more on this, see Bruno and Fischer (1986)). These two
events help to explain how 'the gene was helped out of the bottle' —
inflation rates leapt up after 1979 and 1983 in response to the price
shocks caused by the devaluations of i977 and October 1983. The 1tter
date was the time of the bank—share crisis and the failure of the
"5 percent-by—5 percent" attempt to reduce inflation by gradually
lowering the rate of devaluation. The first step-devaluation made by the
National Unity Government in September 19814 also led to a jump in
inflation (see the peak of the inflation curve in Fig.6).
A two—pronged attack, on "the original sin" of the budget deficit
and "the adaption to living with the sin" formed the two pillars of the
July 1985 economic stabilization program. The success of the program lay
in a totally balanced budget and the synchronized sharp reduction,
within a social oonsensus agreement, of the rate of increase in prices,
wages, credit and the exchange rate. Stabilization of the exchange rate,
first against the dollar and then against a basket of trade—weighted
currencies (since August 1986) provided the main anchor for price
stability (conditional on wage stability — a weak point in the program
which will be discussed later).
Looking back, there is no doubt about the program's success, both
in terms of internal stabilization of the currency and in renewed
external financial credibility. When inflation was slashed, however, it
was left at a level of 15—18 percent a year. Although relatively low,
not 5howfl here) in the curve. These two devaluati
cut in conjunction with a social contract between the
Hitadrut and the employers. At the time of writing
still too early to say whether the hopes for an addi
triflation to a yearly level of 10—12 percent towards
will be realized.
A prerequisite for sustained growth in Israel
reduction of inflation to the level prevailing among
partners. The preconditions necessary for reducing
balanced budget and maximum wage restraint — are al
increasing the growth rate. Failing to achieve either
conditions will threaten growth, the balance of payments, the ability of
industries to compete on export markets and overall economic stability.
What is more, it will be impossible to maintain stable macro—economic
policies and there will be need for recurrent anti—inflationary measures
of the type that dampen economic activity or else the need to boast
economic activity in a way that hampers price stability (i.e. stop—go
policies). Reduced uncertainty and stable macro-economic policies are
themselves a precondition for achieving both stability and growth
objectives.
5. The path to renewed steady growth
The previous section detailed the very rea
made in the direction of greater internal
Consumer price indexes not included in the graph for the first
quarter of 1989 (compared to each previous month) were +.7, 1.7 and 0.5
percent for January, February and March respectively. The ability to
devalue in a manner which would raise the level of prices but not boost
the rate of inflation dependS, among other things, on a renewed cost-ofliving
wage agreement.
- 19 this
rate is still very high compared to that prevailing amonq Israels
trading partners. The January 1987 devaluation, necessitated by
excessive wage rises, led to a temporary blip in the inflation curve
(see point 87:1 in Fig.6). The aggregate 13.5 percent devaluation of
December 1988 and January 1989 will have caused anotrier temporary blip
ons were carried
government, the
(mid—1989) it is
tiorial drop in
the end of 1989
is a further
Israel's trading
inflation — a
so essential far
of these two
1 progress that
and external
has been
currency
-20 stability
after 12 years of continuous turmoil, even though the comolete
stability target has not yet been achieved. Reducing inflation
resembles the medical achievement of drastically reducing the patients
fever. But the question remains as to whether the surgery itself has
been successful. In other words, is the economy on the way to real
recovery? Have the structural changes that are npcesary for putting
the economy on the road to steady arowth been made? In this section we
will discuss a number of structural changes that have taken place.
bearing in mind that so far, these have been far less impressive thar
the effort made to reduce inflation.
The period 1985—87 was marked by an upsurge in economic activity
and a substantial rise in productivity, but, as we will mention later,
since the middle of 1987 output has flattened off. There are increasing
signs that the 1986—7 boom may have been a temporary though favorable
output response to the lowered rate of inflation. This was primarily
stimulated by a substantial increase in domestic demand caused by an
excessive rise in real net wage incomes and in private consumption.
while the basic structural problems of the economy remained unsolved.
The resumption of sustainable growth in the business sector, as
distinct from a temporary boost to economic activity, depends on a
:ontinual release of resources from the public sector, in manpower
reserves becoming available, on keeping wage rises in line with
increasing productivity and on reducing the overall tax burden. An
important indicator of sustainable growth is the level of new capital
formation taking place so as to ensure that capacity at least keeps pace
with output growth. For some time, output can draw up on unutilized
capacity, but ultimately, the surest guarantee of renewed growth is a
suitable flow of investment spured by the producers own profit
incentives and not by excessive government support, as was
the case in the 1970s.
We will start by discussing savings and investment behavior over
time, and then examine the two main determinants of the volume of
investment — the cost of capital and its profitability Fig. 7 shows
that gross domestic jnvestment declined from 27—28 percent of GNP
It would be useful to divide gross investment and the growth in
-21 —
during 1960—72 and the early years of the crisis (197'.—79) to 22
percent in l98O—8'. In the subsequent four years (1985—88), there has
been a further decline of some + percentage points. Note that the ageing
of capital stock, part of which is now obsolete, indicates the existence
of an even more serious problem in terms of net investment (after
discards). This should be even more disturbing in .'iew of the fact that
technological innovation usually gets embodied in new tangible capital
formation. P rough estimate of the gross investment necessary for
capital stock to keep pace with a 5—6 percent growth in business sector
GDP suggests that within the space of a few years, investment must be
raised from its current level of 18.5 percent to at least 21—23 percent
of GNF.
L.Jhat is holding back increased investment today? In the past, it
could be argued that limitations on domestic saving and on foreign
borrowing were the effective limits on investment. The tip of the arrow
in the right—hand bar of each period described in Fig.7 indicates the
volume of total saving, divided up into private and public saving, as a
percentage of GNP.e4 The figure shows that from 1960 right through to
capital stock by their principal destinations — dwellings and producer
durables — something which is missing here. Nevertheless, the general
trend in gross domestic investment is a good illustration of the problem
beinq discussed. Nlayshar (1986) provides a detailed analysis of savings
and investment developments until 1983.
Investment in the first six years after 1973 was promoted by
massive and excessive public finance and, as will be seen, it was not
accompanied by any rise in profitability. During this period, the real
interest on development loans was negative, amounting to —17 percent!
[see Lityin—Meridor (1983)]. From 1979 onwards, most of the subsidy
embodied in unindexed loans loans was abolished. It can be assumed that
this change only became effective after 1981 because of the
administrative time—lag of preyiously approved projects in the pipeline.
The length of the arrow represents the volume of public saving. Its
direction is first positive and subsequently negative, in the crisis
periods (1974—79, 1979—84).
—22 -
198. investment exceeded domestic saving, that is, part of the gross
investment was financed by imported capital. [Let us remember that by
national accounting definitions, the difference between domestic
investment and total saving is equivalent to the difference between
total imports and exports plus unilateral transfers from abroad (the
current account).] But since the stabilization program, total saving has
grown slightly (private saving declined, but so dtd government
dissaving), while gross investment fell to less than total saving that
is, there was a surplus on the current account). In other words, neither
the volume of total saving nor the availability of overseas finance were
effective limitations on investment. Let us, therefore, move on to
discuss the cost of finance and investment profitability.
Figures on the real yield—to—maturity of government bonds can serve
as an indicator of long—term real interest rate developments. Fig. B
shows a marked increase in the yield after the 1983 bank shares crisis
' This is a mirror image of the steep rise in private consumpt
(which grew by an average of over 5 percent a year per capita), over
above disposable income. The rise in consumption explains the large,
temporary, increase in economic activity during 1985—87.
at A detailed review of the preliminary effects of
capital market can be found in A. Ben—Bassat (1989).
See Lavi (1988).
1985 (becauseand until the start of the stabilization program in
reduced public confidence in the government's abili
the start of the program, the yield has fallen sharol
prevailing in the mid—1970s. There was a similar
cost of government bonds, from approximately 6 percen
today. After the reform in the capital. market in
issues on the capital market increased. Concurrently,
from some 8 percent, as of 1986, to less than 6
figures for 1986—88 are contained in Table 8 of the
short term credit costs mainly affect working capital
current production, it is sometimes asserted that
interest rate, particularly the rate on overdraft f
demand for investments.m7 Fig. 9 also points to
of
ty to repay). Since
y, to the levels
fall in the issuing
t to 3.5 percent
early 1987, private
issuing costs fell
percent today. The
appendix.et While
inventories and
the unlinked shekel
acilities, affects
fall in
ion
and
if
the reform in the
a significant
—23 —
this marginal rate (the highest charged). The distance between the
nominal interest curve in the graph and the inflation curve provides an
estimate of the real interest rate. During the first months of the
stabilization program, the latter grew enormously, to as much as 10
percent a month but subseqently dropped and, except fr a short period
in early 1987 (when it rose after the January 1987 devaluation),
continued to fall, from 33—39 percent in 1986—87 to 19 percent in the
last quarter f 1988. Interest on fixed—term credit, however, and
particularly average interest on short—term credit (including both
directed and foreign—currency linked credit) fell to much lower levels,
to 10 and 6 percent respectively in the last quarter of 1988 (see the
figures in Table 9 of the appendix). During the first half of 1989 these
interest rates have fallen further.
Even if it can be argued that certain interest rates are still
higher than is desirable for the long run, it is hard to argue that the
cost of capital could be an effective hindrance to the resumption of
capital formation. We note, however, that it is the balanced budget
that allowed both long and short term interest to be cut. The budget
deficit increased in 1988 and there is a danger of it rising further in
1989. This would increase government borrowing and might bring about a
renewed rise in 1ong—trm Interest rates. Thus,
ary policy is to be maintained and
lanced budget is essential.
look at business sector profitability. This measure is
if the
short—term
oresent
interestexpansionary monet
is to be cut, a ba
Let us now
derived from the na
returns to labor
employed); the resi
sector. The upper
percentage of bus
1967—72, the share
gradually after 1
tional accounts value added estimates by deducting
(including the imputed return to labor of the selfdual
is divided by the capital stock of the business
part of Fig. 10 illustrates the share of labor as a
mess sector GDP. In the rapid growth period of
of labor fell dramatically, but began to rise
975, and, apart from temporary falls in 1981—82 and
198L1—95, continued to do so until after 1988 (to a rate approximating 85
percent of GDP). The distributive share of labor also measures the ratio
to GDP per employed person. A significant growth in the
GDP usually over
of the wage rate
wage component of indicates an excessive
productivity. During the years of rising inflation l97579, this
rise in wages
-2'. resulted
from the workers desire to over-insure themselves against the
effects of inflation. In the period since the stabilization orogram.
when business sector wages rose by 20 percent while productivity
increased by only 10 percent. This resulted from a combtnation of wage
arrangements which had not been adjusted to the lower rate of inflation,
institutional constraints (the cost—of-living aqreement. the minimum
wage law, wage linkage between employees in both failing and profitable
enterprises), and producers' readiness to accede to wage demands in the
mistaken) hope that they would be bailed out by government policies
such as frequent devaluations.
Dividing the product share of capi
product share of labor) by the capital-ou
yields the gross rate of return on capital
steeply along with the excessive rise in
of 1967—72, the latter stood at 15—19 perc
the lowest ever level of just 6 percent
profitability should be taken as only a ro
of both ailing and profitable industries.
of the rate—of—return, gross capital stock
effective capital being smaller (because of unpro
made in the l970s, that should be written off
industries, capacity may never may be fully utilized).
matters is the marginal profitability expected
investment, which may be considerably higher than
profitability. A major cause for concern and certainly
for the paucity of investment even after the stabilizati
in the high share of labor and the low share of capita
in the past few years. Immediately after the stabil
began, the business sector's relative tax burden grew,
smaller net earnings. Demand for investment is also
affected by uncertainty over future earnings, which in
by numerous factors — such as expectations regarding
economic stability, future economic policy and the general political
climate.
What is the chance that gross profitability will henceforth
or, in other words, is there a chance that wages will at
tal
tput
as
wage
ent,
(the comolement of
ratio (capital stock
can be seen, it
s. During the Golden
but subsequently fel
the
/GDP)
fell
Age'
1 to
in 1988. The average level of
ugh guide as it is an average
Note too that the denominator
may be upward biased, with
fitable investments
so that in some
Actually what
on incremental
actual average
the main reason
on program lies
1 (the residual)
ization program
leading to even
liable to be
turn is governed
the extent of
rise
least
from the cost—of—i
n the rules of t
placed on nationwide
shown at tne industr
wage linkage (linkinq
public sector wage
have been moderated
have been striking
industries have been
is the willingness to
at Israel Aircraft
cont
with
he cane in the labor mar
wage agreements with
y and enterprise level;
groups of workers in
agreements, for example
and adjusted to lower in
cases where nominal
cut (Koor, for example).
dismiss workers in the
Industries, The Shipyar
Rising unemployment along
ly helped to halt excessive
The moderating
period of structural
occupation or sector
rise resulting from
by a concurrent fall
effect1 however, can only be partial, sknce in a
change, there can be unemployment in one industry,
concurrent with labor shortage elsewhere. A wage
a shortage in one place is not usually balanced out
in wages somewhere else.
-25
temporarily rise more slowly
one occasion during the yea
real wages certainly began to
than p
rs of
level
roduct lvi ty,
rapid growth
off, while
saw a fall in real wages following the
as happened on more thar
? In 1988 the increase in
the first quarter of 1989
iving agreement. There are also signs
devaluation and its
f
ket: less imp
greater flex
there is less
the private
cost—of—liv
lation; and f
wage rates
Particularly
course of res
ds and Solel
s ter i Ii za t ion
of a change
ortance is now
ibility being
insistence on
sector with
ing agreements
inaily, there
in trouble—hit
important too
tructuring as
Boneh (a major
racting firm owned by the Histadruth).
the other factors mentioned have recent
wage rises in the business sector.'
Recent experience such as, for example, in the British economy,
shows that changes in the rules of the game in the labor market very
much depend on the government's determination to change conventional
attitudes, even at the price of higher unemployment. Successive Israeli
governments have always felt obliged to maintain full employment and
guarantee security of tenure. This is partly a result of the trauma of
According to the new cost—of—living agreement which came into
effect on April 1st, 1999, no compensation will be given to wages for
monthly inflation rates below 0.5 percent, while increments amounting to
85 percent of any price rise in excess of 0.5 percent will be paid twice
a year.
-26 the
1965—66 recession, when unemployment rose above 10 percent. One of
the ootential threats to the July 1985 stabilization program was the
fear that unemployment would grow to above 8—9 oercent. If one is going
to persist in implementing structural chanqes in the economy, it may
become necessary to accept an unemployment rate of around 7-B percent
for some time ahead.
The main danger of an excessive wage increase is tn the oubiic
sector, wnere the threat of large—scale dismissals is almost nonexistent.
s public sector wages have lagged behind those n the
business sector since the stabilization proqram, there is a danger that
tnej may now pick up again. Should this happen, the effect of the
factors that have moderated wage rises in the business sector may also
be weakened. Here again the outcome hinges on the handling of public
sector policy. The imposition of riqid rules there will also have an
impact on the business sector.>
. What reforms are needed?
So far, we have mentioned two prerequisites for resumed growth and
a further disinflation. These are a balanced budget, to be achieved by
trimming the relative size of the public sector, and moderation of wage
rises to a level below the growth in productivity. In the former area
there was some degree of success during the first three years after the
stabilization program, but the future of budgetary restraint is now at
risk. On the wage front and in the labor market we may now be observing
the first signs of progress. These two conditions are both necessary,
but are not sufficient. The main reason behind the crisis of the l970s.
Considering that public sec
particularly among senior ranks, and i
unemployment, wage rises in the publ
parallel increase in efficiency, i.e.
of Clause B of the public sector w
scarcely been acted on till now. Recent
Commission (on public sector wages)
right direction, but do not in themsel
persistent excess employment in the pub
are relatively low,
considerable disguised
should be coupled with a
ng workers on the basis
tor wages
n view of
Ic sector
dismissi
age agreement, a clause which has
reform proposals by the Sussnan
would adjust wage scales in the
yes deal with the problem of
lic sector.
-27 as
we have seen, was the failure to adapt to the far—reaching external
changes, both on the government level and among individual producers and
consumers. Real economic recovery demands behavorial changes in both
sectors, including in the nature of their interdependence. necessary
condition for renewed economic growth is the consistent
implementation of structural reforms in the main areas of economic
activity where the government is heavily involved.'
.l. Government involvement; its extent and operation
Iluch has been said about the importance of wiping out the budget
deficit. s stated, a balanced budget is not enough to bring about a
steady reduction in the governments relative weight in the economy,
which is among the highest in the world (over 50 percent of GNP, see
Fig. 3). The division of labor between the government and private
economic agents must be altered. Fundamental structural changes should
be initiated and government services greatly reduced wherever the
government has no clear advantage over the private sector, and the
government service provided is not run according to economic principles.
Blatant examples f this situation can be found in health and
hospitalization insurance, but they are also to be found in
education.' The government must concentrate only on areas in which
there may be market failures and where it has a natural economic
advantage, such as the development of physical infrastructure for
transport services, basic research, R8.D, higher education and
development areas. At the same time, the government should rid itself of
Further details are contained in the program submitted to the
Government by the Bank of Israel in January, when new economic policy
measures were adopted. See A Plan for the Resumption of Growth and the
Lowering of Inflation, Bank of Israel, Jerusalem, December 1988,
Hebrew) (henceforth referred to as the Bank of Israel plan). Similar
proposals have been put forward by Neubach Sadka, and Razin (1988).
In this respect, the recent decision not to charge a minimal fee
for visits to a doctor and not to charge high school education fees are
the exact opposite of reduced government support. part from this,
radical organizational changes are necessary in the health sector in
order to increase efficiency.
direct holdings in enterprises and from excessive interference in
business management. Only reduced government activity will make it
possible to decrease the overall tax burden, which runs counter to the
main incentives to growth — the desire to work, save and invest. With
respect to taxation, it is also necessary to implement reforms which may
not decrease the average tax burden, but which do reduce marginal tax
rates while increasing the tax base (Sheshinski Commission proposals).
The government must also review its social welfare activities and
move from forms of asststance which do nothing to encourage personal
responsibility (such as subsidies, child allowances and unconditional
unemployment benefits) to helping those who help themselves. An example
proposal to replace payments to parentsis the of large families with
direct financial assistance to discharged soldiers in the formation of
physical and human capital (like the "Threshold Fund" suggested as far
back as the 1970s by this writer, as well as by others). The partial
government assistance provided to problem enterprises as part of a
recovery and debt rescheduling program also falls into the category of
helping those who help themselves'. Such aid is conditional on a clear
proof that an enterprise or economic unit (Koor industries and the
kibbutz movement, for example) has developed a plan based on strict
self—discipline and that it has the ability to recover fully within a
few years. Clearly, such government assistance can only be provided if
it does not transcend limits in the overall state budget, where avoiding
a deficit is, as stated, the main prerequisite for economic recovery.
In Fig. 11, the forecast for 1989—92 presupposes an average drop of
approximately one percent a year in the ratio of expenditure and
taxation to GNP between 1989—92.
6.2. Reforms in the money and capital markets.
Excessive government intervention in the money and capital markets
was one of the reasons for the lack of growth in the 1970s. Several of
' For the budget to be balanced as soon as 1990, a
substantial, immediate cut is necessary. Public sector consumption in
1989, except for defense imports, must remain constant, while in 1990—92
it can then grow at an annual rate of not more than 1.7 percent. See the
Bank of Israel Program, December 1988,
-28 -
6.3. Improving the price mechanism and the opening up the economy
Apart from wage flexibility, discussed in the previous section,
further measures are needed to moderate the rigid price mechanisms which
stand in the way of reducing inflation to Western levels. A whole range
of administrative restrictions which still either ban or curtail imports
must be abolished in order to further expose local production to greater
competition from abroad. Existing restrictions hinder competition in
domestic markets, thereby lessening the effect of the exchange rate as a
means of stabilizing prices. Effective exchange rates should be
completely unified towards full integration in the world market. There
is also a need for more closely controlling domestic monopolies which
do not face competition from imports.
Another area requiring a more liberal
capital, providing that inflation actually does
monetary policy can be maintained. Greater
will help reduce interest rate spreads and 1
market, in view of the drastic changes which
market during the next few years, with special
1992.
the reforms initiated in
fruit. But there is
other involvement by the
— 29 these
markets during 1985—87 are now bearing
still a need for the reduction of budgetary and
government. The effectiveness of reform in
i th
the
increased
interestthis
area depends on a balanced budget, together w
competitition in the banking system in order to bring down
rate spread. Selling government—held bank shares, after
voting rights, to business orqanizations and individuals w
opportunity to improve the structure of the banking
subsidization of banking services to the government shoul
abolished, together with the direct subsidization of
interest rates. The banks must be exposed to comp
externally (by capital imports) and internally (e.g. by
short—tern commercial bill market in the stock exchange)
a few examples from a long list of structural correct'.
changes in taxation, which will increase competition in
capital markets, reduce the interest rate spread and
capital market as the main channel for financing caoital
ensuring equal
ill provide an
system. The
d be gradually
pension fund
etition, both
developing a
These are but
ons, including
the money and
reestablish the
formation.
stance is the flow of
fall and control over
flexibility in this field
iberalize the commodity
are expected in the world
reference to Europe by
- 30 -
7. Concluding Remarks
Fig. 12 gives an overall view of major economic developments in
terms of inflation, the civilian import surplus as a percentage of BNP,
and the growth rate of business sector SDP from 1965, through the years
of crisis and until the partial recovery from it since 1Q85.
Particularly striking is the sharp fall in the growth rate of business
sector SDP in 1988, only part of which was foreseen during the second
half of 1987 [point a. in the diagram indicates the 1988 National Budget
forecast made in September 1987]. Part of the fall — some 1.5—2
percentage points — can be attributed to the intifada, which began in
December 1987 [point b. in the diagram]. The remainder derived from
other factors connected with the government's reluctance to take major
policy decisions during an election year (devaluation and various
reforms were held back, for example) and with unexpected structural
difficulties. The forecast figures for A989 to 1992 are conditional on
the implementation of budgetary cuts and a suitable wage policy,
together with the previously mentioned reforms. Only if these conditions
are met is there likely to be a fall in inflation to the average level
prevailing in the West (5—8 percent a year), a drop in the civilian
import surplus to 6 percent of GNP - to be covered by grants and other
unilateral transfers — and gradually increased business sector GDP
growth to the target rate of 6 percent a year.
These forecasts are strictly conditional. All the reforms in the
areas mentioned (the budget, wages etc.) demand, first and foremost, a
fundamental rethinking of the role of government. They also recjuire a
radical change in the way the private sector operates. Lessons of the
past indicate the need to break away from the amorphous system of mutual
guarantees that has characterized relations between the government and
the private sector, within the business sector and within large
conglomerates. Examples of the latter are to be found in the Kibbutz and
Moshav movements and in the F-1istadrut enterprises. The fundamental
weakness of a system of mutual reliance is its avoidance of clear—cut
personal and corporate responsibility for sins of omission and
commission by producers or consumers that are part of such larger
economic systems.
— 31 —
The crisis and the ensuing recovery have made it necessary to
fresnly review the basis of Irael socto—economic system. There is
need to redefine the nature of societys responsibilities towards its
weaker sub-groups. Is there any contradiction between the increased
competition and efficiency which create greater wealth, and the concern
over a more equitable divison of this wealth? Heightened concern over
rair shares of the increased national wealth produced in the lOs. it
should be remembered, actually led to the contraction of growth since
then and impaired the efficiency with which output and wealth were
produced. This, in turn, has impaired the ability to further reallocate
significant slices of the national cake.
To avoid repeating such mistakes, one needs to reCetermine the
minimum amount of infrastructure and health, education and welfare
services which the government should provide whether u
?ot) to various sectors of the population. Confinement to
will allow market forces to act more freely and provide mon
for own—financing by the individual, ultimately leadi
efficiency. In other words, it will increase the size of
cake, which shrunk so noteably during the years of the crisis.
Which socio—economlc model is best—suited for Israel
Since 19B5, it has been lucky enough to excape the divisi
model that ha been observed in many Latin American count
there a tendency to follow the U.S. pattern, where
enterprise is the rule or of Britain during the past few
semi—industrialized countries such as Singapore and South
Israelis more inclined to emulate European countries
Finland or Austria, where free competition exists side by
considerably greater degree of worker participation and
for social objectives? In this respect, there is a lack
thought cut new long—term strategy, and there is apparent
national consensus on the long—term socio—economic goal
in Europe, Israel
and l9oOs-style we
ensuing vacuum has
Despite the lack of
model on which it could
n I ver
this
e opp
ng to
the
sally or
minimum
ortuni ti
greater
national
to aspire to?
ye and unstable
ries. But is
maximum free
years, or of
Korea? Dr are
such as Sweden,
side with a
a clear concern
of any well
ly no redefined
s. Although. as
has witnessed some retreat from the concept of
lfare state, this withdrawal is only partial
not yet been filled
a 1950s
and the
a well—defined and accepted socio—econOmic
be based, much of the 1985 stabilizatiOn
— 32 —
program's success derived from the achievement of a social consensus
over such key issues as balancing the budget and changes in the cost—of—
living agreement. A similar consensus seems to exist on the general
direction of the necessary structural reforms. Even t the long—term
goal
is not clearly defined, only few would deny the need for a drastic
reduction in the current level of government intervention. Yet it is
far from certain whether the government and the public at large fully
understand that sustained growth and internal economic stability depend
on resolute, single—minded policy implementation, which may have it;
sacrifices in the short run and only bears fruit after a considerable
time. In this respect, the recently growing tendency, much encouraged by
major representatives of the business sector, to regard "growth
incentives" as ad hoc, micro—economic measures offering short—term
benefits, gives cause for concern. Rather than constituting the threads
of a new macro—economic fabric suited to the needs of the 1990s and the
21st century, these are really just a series of stop—gap measures, whose
ral distortions, usually only perpetuate them. There
of this than the sad experience of the 1970s and the
The government has done much to enhance its public credibility by
the measures it has taken since July 1985. Now, it needs to continue
along the same path unswervingly, even if the country has apparently
extricated itself from the former dire economic straits (and apparently
is the operative word). Only time will judge whether government policy
since July 1985 has led to a genuine turnabout in the restructuring of
the economy and the renewed opportunities for growth.
cost is far from negligible, in the style of 1950s and 1960s government
micro— intervention. It is not so easy to explain to producers and the
public at large that real growth hinges on creation of the right macroeconomic
environment, which may be easy to define but is hard to create,
as are the attempts to reduce taxation and interest rates (which are
themselves ultimately dependent on a balanced budget). The same applies
to macro—economic reforms manifested in such obvious "micro" forms as a
more flexible price and wage system. But if such conditions are actually
brought about, they will undoubtedly lead to economic growth, without
the need for any other micro—economic incentives, which rather than
ironing out structu
is no better proof
early l9BOs.
- 33 —
REFERENCES
Ben—Porath, oram, ed.
ises. Cambridge. M
Berqias, Eitar (i8).
ed. (qvi. Pp. 173—91
Bruno. Michael l9S5).
its Early Phase,'
October), 207-B23.
Bruno, Michael (1986).
Economic Performance,
Pp. E76—301.
(1986. The_Israeli_EconoiMntflrO
ass., and London: Harvard Univest/ Press.
'Defense and the Economy. In Ycram Bmn—Pjrath.
"Economic Stabilization: The Emergency Plan in
Economic Quarterly (Hebrew), 31 (No. 126;
'Extrnal Shocks and Domestic Response: Macro—
1965—1982.' In Yoram Ben—Porath. ed. (nv).
"Sharp Disinflation Strategy: Israel 1985,'
), 380—408.
Fischer (1986). "The Inflationary Process:
In Voram Ben—Porath. ed. (qv). Pp. 371"Does
Military Technology Affect
paper; Falk Institute.
Changes in the Industrial Structure."
Pp. ll9-13.
he Effect of te Interest Rate on Co
and Business Investment in the IsraelI
at the Sapir Forum on Economic Policy;
of Growth and theBan< of Israel (1988). A Plan for the Resumption
Loeririq cf Inflation. Jerusalem. Hebrew)
Barkal, Ham (1988). 'The Economy Smnce the Six
Quarter1 (Hebrew). No. 138. November).
Ben—Bassat. Avraham iS8). Capital Market R1orm
First Results." (Research Department Discussion
Bank of Israel.
Day ('Jar. Economic
in Israel
Paper.
-—Goals and
Jerusa 1 err:
Bruno, Michael (1986>.
Economic Policy. 2 (April
Brurio, Michael, and Stanley
Shocks and Accommodation.
37'+.
Gaathon. A. L. (1971). Economic Productivity in Israel. New York:
mi
3(
1985)
catcrs
No.
Praeger.
Gottlieb, Daniel, Rafi Melnick, and Sylvia Piterman
'Inflationary Expectations in Israel: A Multiple
Approach," Journal of Business and Economic Statistics,
April), 112—117.
Halperin, Ariel (1987).
Growth." Unpublished
Klinov, Ruth (1986).
Ben—Porath, ed. (qv).
Lay:, Yaacov (1988). '1
Private Savinq
(Paper presented
Economic
In Yoram
numpt ion,
E con am v.
Hebrew)
Israeli Industry.
— 34 —
Litvln, Un, and Leora Menidor (1993). The Grant Equivalent of
Subsidized Investment in Israel. Bank of Israel Economic Review,
No. 54 (April), 5—30.
Liviatan, Nissan. and Sylvia Piterman (l986. Accelerating inflation
and Balanceof—Paymeflts Crises, 1973—1984. In ram Ber-Porath. ed.
;qv). PP. 320—346.
Mayshar, Joram (1986). Investment Patterns.' In Vorain Ben—Porath. ed.
ov). Pp. 1C1118.
Neridor, Leora (Rubin) (1985). 'Financing Government ExpenditurE—
Israel: 1960—1983.' Unpublished Ph.D. thesis submitted to the Hebre',.
University of Jerusalem. (Hebrew with English summary).
Metzer. Jacob (1986. 'The Slowdown of Economic Growth: A Passing
Phase or the End of the Big Spurt? In Yoram Ben—Porath. ed. )gv).
Pp. 75—100.
Morawetz, David 1975). Capital Utilization in - ______
(Discussion Paper No. 753.) Jerusalem: Falk Institute.
N4eubach, Amnon, Efraim Sadka, and Ass3f Razin (1998). Economic 3rowth
——Looking Toward the 1990s. Tel Aviv: Maaniv Books. (Hebrew).
Syrpuin, Moshe (1q86). Economic Growth and Structural Chanqe: An
International Perspective.' In Yoram Ben—Porath. ed. qv)
Pp. 42-74.
Szereszewski, Robert, (1968). Essays on the Structure of the Jewish
Economy in Palestine and Israel. Jerusalem: Falk Institute.
?usman, P., V. Kislev, and Z. Lerrnan (1989). Loans to the Moshavim
-—Lessons from Experience. (Research Paper No. 8904.; Rehovot:
Center for Agricultural Economic Research, The Hebrew University of
Jerusalem. (Hebrew).
— 35 —
Table 1. Business Sector GOP. Factor Input,
and Productivity in Israel
1950—1988
(annual percentage growth)
1950—60 1961-72 1977-81 1982-8'+ 1995-87 185-B9
GDP 11.2 9.7 3.. 1.9 5.7
Labor input 3.3 2.7 0.6 1.3 1.5 1.0
Capital input 3.2 2.8 2.2 1.1 0.9 0.9
Total productivity
'..2 0.6 —0.5 3.3 2.5
Factor tnput calculated by weighting
the rate of growth of each factor by
its share in business sector GDP
(approximatelY 75 percent for labor and 25
percent for capital, with variable
weights). Total productivity is calculated as
a residual: GDP growth rate weighted growth rate of factor inputs.
SOURCE: 1950-91: Syrquin (1986) and
Metzer (1986), on the basis of GaathonS
method (1971).
1Q82—8., 1985—87: Bank of Israel Annual Report 1987, p. 18.
1985-88: EstimateS of the Bank of Israel Research Department (YaacOb
Lavi), January 1989.
— 36 —
Table 2. Inflation and Economic Growth: International Comparison. 1960—1987
1960—73 1974—80 1981-84 1985-87
A. Rate of GOP growth (per employed person
Israel 9.2(5.5) 3.3(2.2) 3.5(0.1) 5.'(3.5)
Semi—industrialized countries 6.7(2.7) 6.0(3.0) 6.0(3.9) e.6(5.2
Industrial countries '+.7(3.6) 2.6(2.0) 2.2(1.8) 3.0)1.4)
B. Annual rate of inflation
Israel 7.4 57.8 19.2 19.2
Semi—industrial countries 6.3 18.5 10.3 6.7
Industrial countries 4.7 10.8 6.8 3.1
SOURCE (A): 1960-80: Bruno (1986).
1981—87: Israel——Bank of Israel Annual Report, p. 22; Industrial
countries (OECD total) and semi—industrialized countries
(exporters af industrial goods)-—IMF World Economic
Outlook. 1988, pp. 111, 115—117.
SOURCE (B): 1960—80: Bruno (1986).
1981—87: Israel——Consumer price index data, Central Bureau of
Statistics; Other countries——IMF World Economic Outlook,
pp. 120, 123.
- 37
Table 3. Public Sector Expenditures and Their Financing. 1960—1987
(percentage of GNP)
1960-66 1967—72 1973-84 1985-87
1. Total public sector expenditures 55.3 76.) 55.ô
Public civilian consumption 11.8 11.3 11.6 11.0
Transfers 5.4 9.1 16.0 17.4
Public sector investments 4.9 5.4 4.1 3.1
Subsidies (plus indirectly
on credit) 3.4 5.6 12.9 5.1
Real interest payments 1.6 2.9 5.7 10.5
Defense expenditures 9.7 21.1 25.7 18.6
3. Total revenues
Taxes and income from property 32.6 38.6 47.7 50.o
Unilateral transfers from abroad 3.0 4.1 11.0 13.9
4. Total deficit 1.3 12.6 17.3 1.1
SOURCE: Bank of Israel calculations for 1960-83. See L. Meridor (1985).
Note: In Fig. 3, civilian consumption and transfers have been grouped together.
as have investments and subsidies.
— 38 —
Table 4. The External and Internal Debt as a Percentage of GNP.
1964-1992
Year External debt Irternal debt
23.3 --
1965 22.4 --
1966 24.8
1967 24.7 --
198 31.2
1969 37.0 --
1970 42.0 55.6
1971 47.7 66.3
1972 41.7 64.8
1973 38.8 77.8
1974 44.0 92.3
1975 53.5 97.5
1976 61.1 103.9
1977 60.5 110.6
1978 67.1 120.6
1979 63.8 122.4
1980 57.8 121.3
(981 60.5 123.5
1982 66.9 120.8
1983 68.6 123.4
1984 80.2 132.5
1985 84.3 136.7
1986 67.9 124.8
1987 57.4 112.9
1988 47.3 119.7
Plan
1989 44.4 119.5
1990 39.4 113.9
1991 35.4 109.4
1992 31.7 104.8
Debt at year end.
Net internal debt (at average prices).
SOURCE: Research Department of the Bank of Israel (D. Gottlieb.
1989—92—-Bank of Israel plan, December 1988.
- 39 Table
5. Sectoral Composition of Employment, 1960—1988
(thousands)
Non—financial Financial ota1
Public services business sector* Industry Sector Em1oyment
1960 144.6 547.4 147.2 . .
1981 159.9 576.2 161.1 ..
1962 156.7 620.2 176.9 ..
1963 166.4 831.3 184.2 .. 797.
1944 175.0 667.1 196.4 .. 842.1
1965 186.0 680.8 202.2 .. 868.9
1966 190.6 671.0 206.4 . .
1967 188.7 630.3 184.9 .. 819.1
1968 203.7 694.3 214.8 .. 898.1
1969 214.7 717.7 223.8 . . 932.4
1970 229.7 717.1 232.6 25.7 972.5
1971 240.6 750.9 241.7 29.1 1,020.6
1972 251.9 807.8 254.4 30.6 1.090.3
1973 269.0 843.3 281.2 34.4 1,146.7
1974 284.8 835.8 287.1 36.9 1.157.'
1975 300.2 829.3 283.4 40.4
1976 308.5 836.8 283.8 39.4 1.184.5
1977 321.0 848.0 288.2 45.3 1,214.2
1978 348.2 874.1 297.5 51.0 1,273.3
1979 360.0 894.2 312.3 53.4 1,307.8
1980 366.0 893.7 306.2 56.6 .31o.3
1981 379.2 901.6 307.7 61.5 1,342.3
1982 385.2 915.3 305.2 63.3 1,33.8
1983 390.5 953.2 315.6 67.7 1.-11.5
1984 396.1 971.1 323.9 a5. 1.'33.i
1985 402.9 974.1 325.5 64.5 1,441.5
1986 405.9 995.4 339.1 64.2 1.45.6
1987 404.2 1,045.7 348.2 62.7 1,512.5
1988 418.7 1,079.0 338.2 64.8 1,562.5
*Includes the financial sector until 1970.
SOURCE: Research Department of the Bank of israel; based on Central Bureau of
Statistics Labour Force Survey.
— L4o —
Table 7. Total Savings. Gross Domestic Savings, and the Balance—of Payments
Current Account1. 1960—1989
(percent of GNP at current prices according to the official exchange rate>
1960—72 1974—79 1990-84 185—88
1. Total saving 22.6 20.3 18.0 20.5
a. Private (20.6) (28.0) (23.9) (16.91
b. Public ( 2.0> (—7.7) (—5.9)
2. Fixed investment [.9 25.4 21.8 18.1
27.6j 27.2 22.2 18.5
3. Change in inventories [ 1.7 1.B 0.4 0.4
4. Net current account (123>e —5.0 —6.9 —4.2 2.0
There is a break in the series at 1980, after which the public/private
breakdown conforms to the 1988 SNA. The two series were chained in 1980.
Advance payments for defense imports have been calculated as actual imports
and have been included in defense imports.
SOURCE: Research Department of the Bank of Israel (Yaacob Lavi).
— —
Table 8. Real Interest Rates (ex—post) on Credit And Asset Holdings of the
Public, from 1986—1988
(percent per annum)
Asset holdings of the public
Indexed Lix year
Short—term credit to the public Private
bond
one month
treasury
irde'ed
governmentOverdraft Term
facilities credit Total' issues" bills bonds
1986 33.4 16.6 8.2 7.9 -0.9 6.0
1987 38.5 20.1 18.8 6.7 2.5 4.8
1988 25.4 14.5 13.8 6.2 -2.4 4.0
1988 I 29.0 15.2 14.7 6.7 -2.8 4.3
II 24.3 13.1 13.1 6.4 —5.1 4.2
III 29.8 19.7 21.5 5.8 1.0 4.1
IV 18.7 10.1 6.2 5.8 -2.5 3.5
— Including directed credit and foreign—currency linked credit not detailed in
the table.
Including a 1.6 percent imputed issuing cost. The 1986 figure is the average
for July to December.
SOURCE: Table VIII—2 in the Bank of Israel Annual Report 1988 (Hebrew edition).
— 142 —
Table 10. Business Sector GOP and the Gross Share of Labor and Capital 1961-1988
(current pric
Gross
Returns Gross Returns to rate of
Loan to capital labor return tc
GDP subsidy 1+2 labor stock percent capital
(1) (2) (3) (4) (5) (6) (7)
Thousands of NIS
1961 369.1 272.6 698.4 3.9 14.0
1962 440.9 333.6 956.8 75.7 11.2
1963 526.0 399.5 1,110.B 76.0 11.4
1944 605.2 462.6 1,256.8 76.4 11.3
1965 720.0 588.4 1,433.8 78.7 10.6
1968 757.6 629.9 1,603.5 83.1 8.0
1967 788.8 640.5 1,725.5 81.2 8.6
1968 964.0 706.7 1,902.5 73.3 13.5
1969 1,120.3 746.3 2,128.0 66.6 17.6
1970 1,286.8 938.2 2,491.0 72.9 14.0
1971 1,614 1,122.1 3,081.0 69.5 18.0
1972 2.101 1,392 3,951.8 66.3 17.9
1973 2,585 1,756 5,299.6 67.9 15.6
1974 3.627 2,350 7,987.0 64.8 16.0
1975 5,297 243 5,540 3,260 12,046.1 61.9 16.7
1976 6,647 490 7,137 4,695 16,272.7 70.6 12.0
1977 9,603 626 10,229 6,831 24,306.0 71.1 11.4
1978 15,575 815 16,390 11,302 43,301.9 72.6 9.9
1979 27,699 1,848 29,547 21,576 78,766.2 77.9 7.8
1980 47,341 3,913 71,254 49,456 180,044.7 73.4 5.9
1981 169,681 7,529 177,210 120,700 427,322.8 71.1 11.5
Millions of NIS
1982 374.6 14.5 389.1 278.8 972.2 74.4
1983 935.5 29.6 965.1 743.2 2,372.5 79.4 8.1
1984 4,720.1 133.1 4,853.2 3,507.4 12,295.5 74.3 5.9
1985 16,954.4 483.4 17,437.8 12,598.9 46,750.6 74.3 9.3
1986 25,725.5 628.3 26,351.7 20,369.2 71,783.9 79.2 7.5
1987 32,522.5 683.5 33,206.0 27,026.1 89,177.0 83.1 6.2
1988 38,910.0 513.0 39,423.0 32,790.4 103,187.3 84.3 5.9
Plan'
1989 45,966 37,940 123,530 82.5 6.5
1990 50,992 41,315 130,815 81.0 7.4
1991 55,873 44,825 138,815 80.2 8.0
1992 61,299 48,680 147,945 79.4 8.5
Percent of capital stock.
SOURCE: Research Department of the Bank of Israel, 1989—92 data based on Bank of
Israel plan. December 1988.
-a
CD
a)
-s
-'I
-a
CD
—I
c)
a)
-s
-s
CD
a)
rs
(0
(J1
-n
-s
-u1
-.0
'-'-C
ZI-O
rn0
(0'—'
(DC)
CflO
cI)(Dm
OP)
'00--I
(On)
o1Oo.
(Do
O'O-
—C)
—
%Annualincrease
00
-L
(0
UI
0)
0
4-
p3
C
-L
Ag 2: Inflation and Growth: International Comparison, 1960-1987
____ ,i,I
I
I
0
OECD
Israel
ICs
SQ
I
200 •------- - -
—
10 —
8—
7//i
1985-87
Growth
6
4
2
0
S Per ernpoyee
1960-73 1974-80 1981-84 1985-87
a-
z0
0
C
0
C—
47 —
Fig 3: Public—Sector Expenditures and Their Financing, 1960—1988
60 --—--—- —— -----—
10
Public—Sector Expenditures
1967-72 1973-84 1985-88
70 — Delense Investment & s.jbsidies
Cv,Iion consmptOr'
60
40
30
20
0
1960-66
- Ag
4: Israel's kternaI and External Debt as Percent of GNP
140
120
100
80
i
60
40
20
0
1965 1970 1975 1980 1985 1990
- Figure
5. Employment and Unemployment Rate, 1960—1992
35 -
30
Public and financial sectors
Public sector -
15 -
10 j Unemployment
-L.__.__./'
— —
0 i I I I I I•
60 1965 1970 1975 1980 1985 1990
SOURCE: Employment—Appendix Table 5.
Unemployment rate—1960—88, CBS, labour force surveys data.
1989—92, contingent forecast of the Bank of Israel's December 1988
program.
C-)
— —
Fig 6: Israeli CP1 Inflation
(t'flnuaJ % - q.iartec to carespondng iartec)
1•
500
400
300
200
100
0
66:1 68:1 70:1 72:1 74:1 76:1 781 801 82'.l 84:1 86:1 88:1
— L9
Fig 7: National Savrig (Private and Public) and Gross Domestic Investment
30-
25 —
a,
0
0
16-
10
5—
0——
vestment
I
Priv. say.
Public say.
1960-72 1974—79 1980-84 1985-88
0
Oii
m
m
Zm-10)
0m
m
-1
C
z
0z
I".)a'
GD
'1
0
GD
L.l
U'
U
()
w
0z0(I)
(0
(7'
(0
O)
GD
— 51 —
Figure 9. The Marginal Interest Rate and the Consumer Price Index
(monthly rate of change)
Interest rate
30 CPI
rJ\'
iI/ I
25 /J \
ire- /
I
15 -J \ /
\I\IN
:
—— — ——
1984 1985 1986 1987 1988 1989
— 52
Fig 10: Share of Labour in Prockict and Rate of Return to Capital, 196 1—1988
goShare
of labour
—
::•• (bu*ess sector)
orf return
0 i
v
I
1961 1965 1970 1975 1980 1985 1990
L')
©©©
,I.0)
©00©©
-n
-S-S
.4.
0
r"
CD
V
0,
>(
(a
CD
ol
(D
-4.
01
'.5'
.
lIIIIIIlIIItIII!_tII!_i.L'
i)
0
Q)
0•'
0
C
0I.-
Q)
El
C-
00
0
C
1)
0
a-
-c
0
0
1)
0
C
0
0
0
C
C
— 54 —
Fiq 12. Inflation, Trade Deficit and Growth, 1965—1992
400I
— 1st half of year
II 2nd half of year
200—
-.-.-.....-.
00Inflation
........
I
II
I.'
.
I
24
22
p • p
65—72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 9 92
Avg.
20
18
Civilian Trade Deficit (goods and services)
16-
14-
12(Export
—
10civilian
import)
8-
6—
4—
2
0
65—7273
Avg.
8
74 75 76 77 78 79 80 81 82 83 84 35 8 87 88 69 90 51 9
6
4
2
0
2
65—72 73 74 75 76 77 78 79 80 81 82 83 84 85 85 87 88 39 90 51 92