Shoring Up Israel's Economy


The United States has played a critical role, beyond the allocation of foreign aid, in reinvigorating the Israeli economy. Through the Joint Economic Development Group (JEDG), the two countries' senior economic policymakers and private economists discuss trends in, and policy prescriptions for, Israel's economy.

In 1984, then Secretary of State George Shultz suggested a joint American-Israeli group to work continuously on Israel's economic challenges. Israeli Prime Minister Shimon Peres agreed. Since then, the JEDG, chaired by the Undersecretary of State for Economic Affairs and the Director-General of the Israeli Ministry of Finance, has met twice a year, in Washington and Jerusalem alternately.

The JEDG played a pivotal role in the formulation of Israel's ambitious stabilization plan of 1984, a plan that was welcomed in Washington. At the time, Israel was in serious economic distress. Years of shouldering the enormous defense burden imposed by Arab hostility, and the accumulated result of dependence on imported raw materials and fuel for Israel's industry — to say nothing of the continuing cost of absorbing waves of destitute immigrants and providing them with the full range of social services — had led to extensive borrowing and a huge foreign debt. Foreign reserves had plummeted, and inflation was raging at 450 percent per year and rising. The government was running a budget deficit equivalent to 17 percent of the gross national product.

Then something unusual happened. Within Israel, the many parties and different schools of thought pulled together, set aside their differences, and worked in a united fashion for national economic recovery.

In 1985, Israel implemented a stabilization program that included several major features: a large cut in subsidies on basic products and services like milk, eggs and transportation. This helped to cut the budget deficit from 17 percent to 8 percent of GNP; a large currency devaluation followed by a stable exchange rate against the dollar; wage and price controls and the cessation of direct indexing of wages and savings to inflation; and a monetary policy that would control the growth of credit, thus driving interest rates upward.

The New York Times later described the sacrifices of the Israeli people, and the message of the stabilization program, as "Everybody takes a step backward — together."

One of Israel's main concerns about the program was the possibility of massive unemployment. American economic aid encouraged the Israeli government to act decisively. U.S. aid provided a safety net of resources and reserves if things went wrong, strengthening public support for what all knew must be done.

As the Wall Street Journal described it, Israel's stabilization program worked like "a mini-miracle." Inflation fell sharply, and is now around 10 percent annually. The exchange rate of the shekel stabilized, foreign-currency reserves recovered, exports increased, and the budget deficit contracted.