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"The country will continue
to face great difficulties,"
Rabushka said. "Things are
not happening there. Israel
can't get its political act
together. The Labor party
leaders are not likely to be
leaders of a free market
reform."
For budget, Israel earned a
poor to unsatisfactory rating
because the government
made little progress in using
its spending authority to in-
troduce growth-oriented
reforms into the economy.
For tax policy, Israel earn-
ed a poor grade largely be-
cause it made no attempt to
cut taxes, Rabushka said.
"If they would have cut
taxes, even if the economy
remained stagnate, I would
have given a higher score on
taxation," Rabushka said.
"The low grade of D
signifies the government's
confusion over the concept of
net taxation, which sub-
tracts transfers from gross
taxes to arrive at a peculiar
measure of the tax burden
that completely fails to take
into account individual in-
centives to work, save and
invest," Rabushka wrote in
the report.
Money and capital
markets received a C- grade
largely on the basis of the
Bank of Israel's success in
carrying out further lib-
eralization of the country's
capital markets, he said. Its
conduct of monetary policy
—targeting interest rates to
influence the level of econ-
omic activity and preserve
foreign exchange — was un-
satisfactory, Rabushka said.
"In the face of sharply ris-
ing unemployment, the
Bank of Israel failed to ar-
rest the rate of inflation,
which increased from 16.4
percent to 20 percent in
1989," he wrote.
In addition, Rabushka
said, currency was devalued,
the banks charged borrowers
rates of interest as high as
60 percent and depositors
received negative interest on
bank accounts.
For business, Israel
secured the highest mark —
slightly above average. This
mark comes from the success
of privatization, the selling
of government-owned prop-
erties to the private sector.
The relatively high grade
also reflects partial
deregulation of the gas and
oil markets, Rabushka said.
The grade would have been
higher, he said, if the labor
sector (Histradut) crisis
hadn't deepened. The
Histradut suffered enormous
operating losses from its in-
dustrial flagship, Koor In-
dustries, which began the
year in financial trouble and
ended on the verge of
foreclosure.
"So long as the Histradut
is both employer and
employee at Koor, there
seems little likelihood that
Koor or any other part of its
industrial empire will ever
become profitable enter-
prises, able to stand on their
own feet without govern-
ment subsidies, bailouts or
protection from competi-
tion."
Price controls barely
received a passing mark be-
cause of the devaluation of
the shekel, and the labor
market received a failing
grade because the country
continues to be dominated
by a single labor union, the
Government Federation of
Workers (Histradut).
The grade for interna-
tional trade was a bit better
— slightly below average —
due primarily to lower tax
and tariff barriers and to the
import of goods and services.
However, Rabushka noted,
the lower barriers were offset
when non-tariff barriers were
applied.
Ideally, Rabushka said,
the government should
strive to maintain stable
internal prices that would
allow it to maintain a stable
exchange rate. To do so, he
said, the government must
make an ironclad commit-
ment to price and exchange-
rate stability. Otherwise, he
added, the government will
be forced to periodically
devalue the shekel to pre-
vent overvaluation.
The grade for the interna-
tional trade category may
have been higher, he said, if
Israel had succeeded in at-
tracting significant foreign
direct investment.
Highlights of the Israel
economy's 1989 performance
were:
• Real gross domestic pro-
duct grew 1.1 percent.
• Private consumption per
capita fell 3.5 percent.
• Fixed investment
declined 3 percent.
• Industrial output fell 4.8
percent during the first
three quarters.
• Consumer prices in-
creased from a rate of 16.4
percent in 1988 to 20 percent
in 1989.
• Unemployment rose
from 6.5 percent in 1988 to
over 9 percent in 1989.
• Domestic defense spen-
ding declined 2.6 percent,
despite expenses stemming
from the Intifada, the upris-
ing in the West Bank and
Gaza. ❑
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