Israel THE ECONOMIC STABILIZATION PROGRAM OF JULY 1985
Sources: The Library of Congress Country Studies; CIA World Factbook
The Economic Stabilization Program adopted in July 1985 involved the simultaneous implementation of several measures. First, the exchange rate was devalued by 18.8 percent and was fixed at the level of NIS1.50 equaled US$1.00. This rate was allowed to fluctuate within a 2-percent band. Second, domestic prices were allowed to rise by 17 percent and thereafter were frozen with a stringent price control. Third, subsidies were reduced by US$750 million, as taxes were increased and a budget cut of US$750 million was implemented. Fourth, the regular anticipated cost-of-living adjustment was suspended. This resulted in a 20 to 30 percent erosion in real wages. Under Histadrut pressure, the government was forced to adjust wages to counter the effects of the devaluation. By March 1986, real wages had recovered their losses. Finally, monetary policy became extremely restrictive. Because the inflation rate was reduced to 20 percent by the end of the year, the return on unlinked shekel deposits became unprecedented. This situation induced a shift of capital from linked dollar deposits to unlinked shekel deposits. Although the government had conceived this program as a short-term, emergency program, it was extended several times because of its success. By the end of 1986, many of the price controls were removed with no visible "repressed inflation" appearing.
Many observers believe that this economic program was successful because its two anchors were the exchange rate and wage stability. The stability in these two prices, coupled with the new notion that inflation would erode the government's real revenues, forced the government to borrow more. The program's impact on the rate of inflation, which peaked at 445 percent in FY 1984, was little short of sensational. By the end of 1986, the inflation rate had stabilized at 20 percent--the lowest rate since 1972.
Outside factors also helped the success of this stabilization program. The program's introduction coincided with the acceleration of the fall of the United States dollar on international markets. Concurrently, the decline in oil prices lowered the cost of increased imports spurred by increased Israeli export and capital market earnings.
The success up to 1988 of the measures taken has encouraged the government to consider additional reforms. In the fall of 1987, discussion began regarding reforming the tax system, initiating a privatization program, and streamlining the tariff structure.
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Information on the Israeli economy is extensive. Basic data are contained in the annual Statistical Abstract of Israel published by the Central Bureau of Statistics and the Annual Report published by the Bank of Israel. The Ministry of Finance's annual Budget in Brief provides considerable data and text on the budget. Additional data and text are included in the Bank of Israel Economic Review (published quarterly) and Bank of Israel Recent Economic Developments (published irregularly), and in the Central Bureau of Statistics' Monthly Bulletin of Statistics. An additional general source covering a range of economic subjects is the monthly Israel Economist.
The best up-to-date work on the Israeli economy and Israeli developments from 1968 to 1978 is The Israeli Economy: Maturing Through Crises, edited by Yoram Ben-Porath. The best coverage of the period from 1948 to 1968 can be found in Nadav Halevi and Ruth Klinov-Malul's The Economic Development of Israel. Other, more specialized, books include: Israel: A Developing Society, edited by A. Arian; Salomon J. Flink's Israel, Chaos and Challenge: Politics vs. Economics; Fanny Ginor's Socio-Economic Disparities in Israel; David Horowitz's Enigma of Economic Growth: A Case Study of Israel; Michael Michaely's Foreign Trade Regimes and Economic Development: Israel; Howard Pack's Structural Change and Economic Policy in Israel; Don Patinkin's The Israeli Economy; Ira Sharkansky's What Makes Israel Tick: How Domestic Policy-Makers Cope with Constraints; and Michael Wolffsohn's Israel, Polity, Society, and Economy, 1882-1986.
The best report on economic developments in the occupied territories is Raphael Meron's Economic Development in JudeaSamaria and the Gaza District: Economic Growth and Structural Change, 1970-80. (For further information and complete citations, see Bibliography.)
Data as of December 1988
NOTE: The information regarding Israel on this page is re-published from The Library of Congress Country Studies and the CIA World Factbook. No claims are made regarding the accuracy of Israel THE ECONOMIC STABILIZATION PROGRAM OF JULY 1985 information contained here. All suggestions for corrections of any errors about Israel THE ECONOMIC STABILIZATION PROGRAM OF JULY 1985 should be addressed to the Library of Congress and the CIA.