The Economic Dilemma in Israel

...El Al loses $30-40 million annually because of the shutdown—a waste that grows progressively harder to justify when the government, for example, is firing 200 workers from the Timna copper mines near Eilat to save $3 million, or just about what it costs to pay the interest on the money that has to be borrowed to subsidize the airline...

...People sold their industrial and commercial shares to buy up the foreign money...

...If he fails to implement the required cutbacks, he may have to deal with the breakdown of entire sectors of the economy and large-scale unemployment— leading to his defeat either in the Knesset or at the polls...

...Exports were up only 1 per cent last year, against an unbelievable 38 per cent leap in imports...

...But the government's eight-vote edge depends on several small factions as well, including the four votes of the ultra-religious Agudah Party, which has more freedom than other coalition members because it does not participate in the Cabinet...

...But it probably is true that the disproportionate reactions on foreign policy matters reflect extreme nervousness over the domestic situation...

...He subsidized domestic products outright, and by keeping the shekel at an increasingly inflated exchange rate encouraged the consumption of imports as well while undermining the competitiveness of Israel's exports...

...of American aid in 1984-85...

...Similarly, Israelis seem to have become more openminded about opposition arguments against the establishment of new settlements in the West Bank and Gaza, and against taking a hard line on further withdrawal from Lebanon...

...Indeed, the first three quarters of 1983 witnessed a national shopping spree that lifted automobile sales 30 per cent, washing machine sales 16 per cent, and video sales over 200 per cent...

...An angry public is increasingly inclined to compare the near 600 dead and 3,000 wounded in the war to the total of two casualties sustained during the entire year that preceded the launching of "Operation Peace for Galilee" in June 1982...

...The major element in the government, the Likud bloc, is an amalgam of the Prime Minister's own Herat Party and the Liberal Party...

...The spending orgy was no coincidence...

...ANOTHER TEST FOR SHAMIR The Economic Dilemma in Israel by eliahu salpeter Tel Aviv The honeymoon that followed the early December announcement in Washington of the U.S.-Israeli strategic cooperation plan —whose details are now being worked out here—lasted barely two weeks...

...Soon the prices of all ordinary stocks dropped drastically, so investors turned to selling off the shares of the country's four principal banks...

...Israel's economy, they note, has practically stopped growing...

...This added $400 million to the country's trade deficit, bringing it to $5.1 billion (partly offset by aid and other nonreimbursable income...

...Finally, Aridor outraged the public with a proposal to make the dollar Israel's official currency—and the next day he was gone...

...It was abruptly replaced by angry outbursts from Israel's top officials protesting American pressure on them to lift the naval siege of Tripoli—where Palestine Liberation Organization (PLO) chief Yasir Arafat and his troops were waiting to be evacuated on Greek ships after their defeat by Syrian and PLO rebel forces...

...The still unexplained exchange of over 4,000 PLO fighters captured in Lebanon, plus 100 convicted terrorists serving jail sentences, for four Israelis held by Arafat has led to sharply stepped-up guerrilla activity in Israeli-occupied southern Lebanon...

...It was the direct consequence of a policy decision made in 1981 by Yoram Aridor, who replaced Yigal Hurwitz as Finance Minister after Hurwitz' tight-fisted policies began to improve the economy but greatly depress the Begin government's rating in public opinion polls...

...Nobody doubts anymore that unrestrained government expenditure is primarily responsible for the runaway spiral...

...Columnists have recalled that Menachem Begin, in his 1977 election campaign, won great applause when he said he could not sleep because of the 38 per cent annual inflation tolerated by the incumbent Labor government...

...Aridor reversed field...

...Periodically the postal service ceases to function, teachers send pupils home, and civilian employees of some defense agencies stage slowdowns...

...For the average Israeli, however, inflation continues to be by far the worst plague—though the General Confederation of Labor fears that unemployment may soon rank a close second...

...The government, and the country, are indeed in deep trouble...

...Typical of Agudah's extortions was the government's decision to halt the operation of El Al, the national airline, on the sabbath...

...Total foreign debt stands at well over $20 billion, and the servicing costs will eat up the entire sum Eliahu Salpeter, a regular NL contributor, is a correspondent for Ha'aretz...

...When it came to implementation, though, practically every minister thought of a reason why his department should be exempt, with the result that almost none of the reductions were actually put into effect...

...Jerusalem's rage then reached a higher pitch after the State Department helped to arrange (if it did not, as Israel suspects, initiate) Arafat's December 22 meeting with Egyptian President Hosni Mubarak in Cairo...

...Cohen-Or-gad has warned that Israel may soon be unable to obtain further loans abroad...

...Last summer, before Begin resigned as Prime Minister, the Cabinet decided to cut 70 billion shekels ($ 1 billion at the time, or about 5 per cent of total outlays) from the budget...

...Things cooled down after the panicky days of early October—when the government was forced to close the stock market and bar the conversion of the shekel into hard currency—although to what extent is not yet clear...

...Meanwhile, almost constant price hikes, amid budget cuts or freezes, have prompted a wave of legal and wildcat strikes in Israel's extensive public sector...

...As for the individual Cabinet members, they all agree in principle on the need for fair, across-the-board belt-tightening...

...On the other hand, many have threatened, more or less openly, to bolt the coalition if the full measure of cuts (reportedly about 7 per cent) in the 1984-85 budget now being drafted is applied to their departments...

...Forecasts for '84 vary between the "optimistic" 200 per cent offered by government spokesmen and the 300-400 per cent prophesied by the more dour academic economists...

...In 1983 GNP increased by 1 per cent at best, in contrast to the strong revival of the American economy and the moderate improvement in Western Europe...

...Officially, prices rose 143 per cent in 1983, with about half of that coming in the last three months...

...Since these securities (which were highly overvalued too) formed the backbone of many pension funds, the government began to spend tens of millions of dollars a day to maintain their prices...

...More important, the ward-level political needs and fundamental ideological differences among the parties providing the ruling coalition's narrow maj or-ity make the formulation of a coherent economic policy extremely difficult...

...Yet the government is spending at least $500 million a year on settlements and some $370 million on holding the Awali River line, at a time when budget cuts have compelled hospitals to dip into emergency stores and forced some social welfare institutions to close...

...Nor are people unaware that every day Israel stays in Lebanon costs about $1 million...

...In retrospect, both the initial enthusiasm and the subsequent wrath were somewhat exaggerated...

...Begin won re-election in '81, and Israelis lived high until just after his resignation, when the inevitable crash occurred...

...To begin with, the austerity measures that Prime Minister Yitzchak Shamir's government adopted its first day in office slashed subsidies on many basic items, leading to the sudden price increases that have triggered all the strikes...

...Of all Israel's interrelated economic ills, new Finance Minister Yigal Cohen-Orgad considers the foreign currency crisis the most urgent...

...It would be unfair to say the government put on a show to distract Israelis from their paramount problem, the deteriorating economy...

...Because the shekel was overvalued, dollars, German marks and Swiss francs had become the best bargains here...

...Even if the unexpected happens, most economists consider the projected cutback inadequate under present circumstances...

...The changeover, alas, is not going very smoothly...

...Cohen-Orgad then came on the scene and substituted his "Big Crisis—Let's All Pull Together'' approach for Aridor's blithe "All is Well" assurances...

...As Israeli troops spend their second winter mired in Lebanon, more and more voters are criticizing the ruling Likud coalition's conduct of military and diplomatic affairs as well as its handling of the economic mess...

...Nevertheless, private consumption went up 7 per cent...

...The Prime Minister is in a double bind, therefore: If he tries to do what is necessary, he risks losing his majority...

...Many observers saw this as the straw that broke Begin's resolve to remain in office...

...Now the Cabinet wants to cut 60 billion shekels (whose dollar value has dropped to about $600 million), but few Israelis anticipate a different outcome...