THE DETROIT JEWISH NEWS Friday, December 21, 1984
85
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prepared to help Israel, but only
after additional painful steps are
taken in Jerusalem to turn the
economic picture around.
"The economic crisis gripping
Israel today, if not swiftly and ef-
fectively addressed by the new
unity government, could pose as
serious a threat to the security of
the State of Israel as any hostile
neighbor in the region," a recently
released Senate Foreign Rela-
tions Committee staff report con-
cluded.
The 66-page committee report
is expected to be a major source of
information for members of the
panel, including its new chair-
man, Republican Richard Lugar
of Indiana, when they consider
the new foreign aid bill early next
year.
Lugar has refused to commit
himself to aid increases for Israel,
insisting only that he must first
study the question more seri-
ously.
Reflecting the prevailing atti-
tude of Shultz and other senior
Administration economists, the
Foreign Relations Committee re-
port noted that Israel's economic
problems are "fundamentally
structural and political" in na-
ture.
"The current problems are
rooted in an elaftorate system of
price and wage indexation, a set of
policies that rapidly expanded the
capital base but also resulted in
rapid inflation, swollen budgets,
an overvalued currency, and a
two-year drop in exports.
Paradoxically, the vigor of Israel's
democratic system of political
proportional representation has
hindered efforts to institute eco-
nomic measures by splintering
political parties and constituen-
cies and preventing a strong con-
sensus for actually implementing
economic reforms."
There is no doubt that Israel,
especially since the 1973 war, has
become very dependent on U.S.
governmental, American Jewish
and other forms of foreign assis-
tance. This was underscored in
dramatic terms in the Senate re-
port.
Last year, it noted that Israel
received some $2.6 billion in U.S.
governmental economic and mili-
tary assistance; another $1 billion
was provided by the United
Jewish Appeal and the many
other Israeli charities operating
in the United States; more than
$400 million in the sale of Israel
Bonds; and $384 million in West
German war reparations pay-
ments.
"These capital flows have pro-
vided a useful cushion for the Is-
raeli economy, without which a
credit crunch might well have oc-
curred. Even with this assistance,
however, Israel faces grave diffi-
culties and tough decisions."
What exactly do Shultz and his
advisers, therefore, have in mind
when they call for structural
changes in the Israeli economy?
What they don't have in mind,
unfortunately, is exactly what the
government has already im-
plemented — namely a three-
month price and wage freeze. This
step is seen by the Americans as
largely ineffective in the long run
— and possibly even counter-
productive. It does not, they be-
lieve, come to grips with the real
problems of runaway inflation
and balance of payments deficits.
What Administration
policymakers would like to gee in-
cludes:
• Seriously reducing or even
eliminating indexation all to-
gether. "Once begun," the Senate
report noted, again reflecting the
position,
Administration's
"hyper-inflation is always dif-
ficult to stop. This is especially
true in Israel where virtually ev-
erything is indexed. The system,
like a spreading firestorm, feeds
on itself."
• Drastically reducing the
printing of shekels. Indexation in
Israel, the Senate report points
built-in
a
contains
out,
mechanism for accelerating infla-
tion because the Central Bank is
required by law to print money to
cover the government's budget de-
ficits. U.S. officials would like to
see that law changed.
• Decreasing public consump-
tion, including considerably de-
eper budget cuts, in order to shift
resources into more productive
sectors of the economy. At the
same time, Israel will have to find
a way to increase exports by seven
to nine percent a year.
There is also a growing convic-
tion in Washington that Israel
will have no alternative but to
move toward some sort of "dollari-
zation" of the Israeli currency — a
proposal torpedoed last year when
it was privately floated by then
Finance Minister Yoram Aridor.
Shultz and other U.S. spe-
cialists favor this concept as prob-
ably the single most important
step in breaking the back of the
inflationary spiral. They are pre-
pared to have the U.S. Treasury
intervene during the transition
phase to help Israel's conversion.
Israeli public opinion is seen by
U.S. officials as becoming increas-
ingly prepared to accept this dras-
tic step.
"Many economists believe that
an actual change in Israel's cur-
rency — either introduction of a
new currency or pegging the
shekel on a one to one basis with
the dollar — is inevitable," the
Senate report said. "Although
earlier dollarization proposals
were short lived, the new unity
government has indicated a
willingness to re-examine the
issue in light of the shekel's
plummeting value against the
dollar."
All of this will not be easy.
There is no doubt that U.S. aid —
which accounts for approximately
12 percent of Israel's gross ntional
product, according to the Senate
study — will be crucial to the final
outcome. But as the study noted,
U.S. aid alone "will neither care
nor even significantly ameliorate
the structural problems that
afflict the Israeli economy .. .
U.S. aid can help alleviate the ef-
fects of reform measures on Israeli
society, but cannot substitute for
the policy reforms that Israel it-
self must undertake if its economy
is to return to a healthy and grow-
ing status."
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