HISTORY LESSON- ISRAEL-S ECONOMY - 23-May-96

(Article by Shlomit Lann, "Globes", 23.5.96, Weekend Supplement p.6-16)

STATE COUNCIL, PROVISIONAL GOVERNMENT: 1948-1949

Eliezer Kaplan was the first Finance Minister in David Ben Gurion's government. The Industry and Trade portfolio was given to Peretz Bernstein, a General Zionist. In July 1948, Kaplan declared the Israeli currency to be the Israel Lira (IL), which replaced the Mandatory Government's currency, at an exchange rate of approximately $4. A special department was established in the Anglo-Palestine Bank (which later changed its name to Bank Leumi) for the issuing of the Israeli Lira. The first notes were printed in New York. Until 1954, this department performed the functions of a central bank, including the printing of money for the government.

The government instituted an emergency regime, during which most public investment was used for immigrant housing and for increasing agricultural production. In November, the first census was conducted, yielding a total population of 782,000 people. In order to complete the task, a seven hour curfew was imposed as census takers went door to door. The 1948 consumer price index rose by 31.7%.

THE FIRST KNESSET: 1949-1951

Twenty-five parties participated in the first elections; only twelve entered the first Knesset. David Ben-Gurion was Prime Minister and Defense Minister, Eliezer Kaplan was Finance Minister and Dov Yosef was Budget and Supply Minister, or to use the popular phrase the Austerity Minister. In August 1949, after more than two months of discussion, the first state budget was approved by the Knesset IL 40 million. The next budget, of 1950-51, would already be IL 60 million.

The austerity policy was officially declared in March 1949 with the goals of decreasing price and wage levels. In September 1949, the lira's first devaluation took place, from $4 to $2.8. The austerity policy led to black marketeering and profiteering. In Autumn 1950, the government established a "Task Force for Fighting the Black Market", which never had much success.

The government's first crisis was economic: Ben Gurion demanded the elimination of the Budget and Supply Ministry, and the appointment of a businessman as Industry and Trade Minister. Against this background, he resigned along with his government. The second government he established included Ya'akov Geri as Industry and Trade Minister, and there was no Austerity Minister. In 1951, economic growth was 10% and inflation reached about 20%.

THE SECOND KNESSET: 1951-1955

In this Knesset there were four governments, two under Ben-Gurion and two under Moshe Sharett. The third government resigned around a religious crisis revolving around drafting women into the IDF, while the fourth fell due to Ben-Gurion's desire to settle in Sde Boker. The fifth fell due to a motion of no-confidence in the government surrounding the determination that Israel Kastner had cooperated with the Nazis.

During this period, there were two Finance Ministers: Eliezer Kaplan, who retired and shortly afterward passed away, and from June 1952 Levi Eshkol; three Industry and Trade Ministers: Dov Yosef, and after the General Zionists joined the government, Peretz Bernstein, and after he retired Peretz Naftali.

In October 1951, the United States approved a $65 million grant to help alleviate the difficult economic situation. In September 1952, a reparations agreement was signed with West Germany, which committed West Germany to pay Israel DM 3 billion.

Inflation, which was more than 60% in 1952, fell in 1955 to less than 5%. Economic growth, however, which was over 30% in 1951, fell in 1955 to 14%. The first employment survey was conducted in 1955, and the unemployment rate was 7.2%.

THE THIRD KNESSET: 1955-1959

David Ben-Gurion was Prime Minister and Defense Minister, and Levi Eshkol was Finance Minister. Now Israel's stable economic growth began. Growth began during the mid-1950's with a considerable emphasis on encouraging industry with Pinchas Sapir the father of industry as Industry and Trade Minister. Towards the end of the 1950's, full employment was nearly achieved. The unemployment rate in 1960 was less than 5%. The pace of growth rate was 9% at the period's beginning, and reached nearly 13% towards its end. Inflation fell during the period to around 2%.

THE FOURTH KNESSET: 1959-1961

The fourth Knesset had a solid coalition comprising 86 members of Knesset: Mapai at the height of its power with 47 MKs Mapam, Ahdut Avodah, the Progressive Party, and the National Religious Party. David Ben-Gurion resigned from the premiership in the wake of the the "Committee of Seven"

(seven ministers who in 1960 investigated former Defense Minister Pinhas Lavon's role in the "Lavon Affair").

The Agora replaced the Pruta in January 1960. Holland proposed that Israel become a member of the European Market. Industrialist Efraim Eilin announced that his factory would assemble American Studebaker automobiles. The nuclear reactor began operating at Nahal Soreq. The World Bank granted a $27.5 million loan to establish a port in Ashdod. In 1960, the growth rate was 6.6% and inflation was about 3.5%.

THE FIFTH KNESSET: 1961-1965

The Prime Minister and Defense Minister was David Ben-Gurion, and afterward Levi Eshkol. Until Ben-Gurion's resignation ("due to personal reasons"), Eshkol was Finance Minister. After the resignation in 1963, Pinchas Sapir became Finance Minister, in addition to serving as Industry and Trade Minister. With the exception of one year, Sapir remained Finance Minister until 1974.

The central problem was, like today, the balance of payments problem. In February 1962, the government announced a new economic policy and a huge devaluation of 66.6% in the lira which caused the dollar to jump from IL 1.80 to IL 3.00. This devaluation brought with it the cancellation of subsidies, damaged various economic branches and the linkage of mortgages to the dollar. In demonstrations against the raising of prices and taxes, Israelis screamed, "Even Hercules could not life these heavy taxes" and "Devaluation for the Poor Increase for the Rich." Throughout the period, growth stayed around 10%, and there was full employment with only 3.6% unemployed. Inflation, after falling to 4.4% in 1964, reached nearly 7% in 1965.

THE SIXTH KNESSET: 1966-1969

The sixth Knesset was the period of the big recession. In 1966, the government announced an economic restraint policies, whose main points were cutting government spending, exposing industry to imports, cancelling subsidies, and reducing local demand. This policy caused a drastic decrease in public building, the closing of factories and heavy unemployment. The government decided to pay unemployment compensation. The growth rate was less than 1% and inflation was 8%. In November 1967, the lira was devalued to 3.50 to the dollar, a devaluation of 16.7%.

The Six Day War put an end to the recession, and began a period of economic growth. In June 1967, the Knesset decided on "law and administration ordinance" that enabled the annexation of the territories. The Prime Minister was Levi Eshkol, and Sapir was Finance Minister, until he was appointed party secretary in 1968 and resigned from the Treasury in favor of Ze'ev Sharf, who until then was Industry and Trade Minister. With the outbreak of the war, the government was joined by ministers from Gahal and Rafi. With Eshkol's resignation in February 1969, Golda Meir was appointed transitional Prime Minister. In 1969, growth was 12%, inflation fell to less than 4%, and even the unemployment rate, which in 1967 reached a high of more than 10%, fell below 4%.

THE SEVENTH KNESSET: 1969-1974

The government began as a National Unity Government, headed by Golda Meir, with Pinchas Sapir as Finance Minister and Yosef Sapir, from Gahal, as Industry and Trade Minister. In August 1970, all of the Gahal ministers resigned, following the adoption of the Security Council 242 Resolution, and Pinchas Sapir, followed by Haim Bar-Lev, became Industry and Trade Ministers. In February 1970, a package deal between the Treasury, the Histadrut, and the industrialists was signed. In 1971-72, despite economic growth, social movements based on economic elements were formed, such as the Tents Movement and the Black Panthers. Golda said of them: "They are not nice." The 1973 Yom Kippur War marginalized these social issues, and for the next elections they were not on the public agenda. In 1971, the lira was again devalued by 20%, to a rate of IL 4.20 to the dollar. The defense budget rose significantly, at the expense of other budgetary items. There was an energy crisis. In 1973, inflation reached 20%, while unemployment, in contrast, fell to 2.6%.

THE EIGHTH KNESSET: 1974-1976

After 80 days with Golda Meir as Prime Minister, Sapir as Finance Minister, and Bar-Lev as Industry and Trade Minister, in coalition with the NRP, and the Independent Liberals, the Agranat Commission report was published. Golda Meir resigned. Yitzhak Rabin, the new Prime Minister, added Ratz to the coalition. The Finance Minister was Yehoshua Rabinowitz. In November 1974, the lira was devalued until it reached IL 6 to the dollar. The government cancelled subsidies on basic goods, and temporarily prohibited car imports. The annual inflation rate doubled to 40%.

By the end of the government's term, inflation had reached 30%. In 1976, other economic hardships were imposed: a 15% tax was imposed on imported services, including trips abroad; and the price of basic goods were raised. The devaluation crawled on and the dollar reached IL 7.50. In July, the first VAT, at 8%, was created, and 1976's economic growth ended at less than 2%.

THE NINTH KNESSET: 1977-1981

The beginning of the Likud era with Menachem Begin as Prime Minister. The Finance Ministers for the term were: Simha Ehrlich, Yigal Horowitz, and Yoram Aridor. The Industry and Trade Ministers were: Yigal Horowitz and Gideon Patt. The Energy Minister was Yitzhak Moda'i. In August 1977, following an additional creeping devaluation, it took more than IL 10 to buy one U.S. dollar.

In November 1977 the month in which Anwar Sadat visited the government, under the leadership of Ehrlich at the Treasury, abolished supervision over foreign currency. Inflation during the same year was 34.6%. In 1980, the rate took off to 131%, and in early 1980 the shekel

(IS) replaced the lira. Along with the liberalization in foreign currency controls, there was an increase in VAT to 12%.

In November 1979, Yigal Horowitz was called to the Treasury to save the situation. As opposed to Simha "I have," he became Yigal "I do not have," and called for monetary restraint. But the elections of 1981 were approaching and the people never liked impositions. Thus, half of a year before the elections, in January 1981, Yoram Aridor came to the ministry with "correct economics," whose main element was lowering taxes on imported goods. So inflation also jumped to 120%, and in February 1981 the Tel Aviv bourse fell by an average of 15%.

THE TENTH KNESSET: 1981-1984

The second Likud government was led by Menachem Begin and had a slew of economic ministers: Yoram Aridor at Finance, Gideon Patt at Industry and Trade, Yitzhak Berman at Energy, and Ya'acov Meridor at Economics. In June 1982, Operation "Peace for Galilee" began, later turning into the Lebanon War. Prices of basic goods were raised in August, as happened again in November and December 1983, until their prices practically doubled. The Bank of Israel brought into circulation the IS 500 note and then the IS 1,000 note. In July 1982, VAT was raised to 15%.

With Begin's resignation in August 1983, Yitzhak Shamir formed a new government. In October, a dollar buying panic was detected, and there was a crash in the bourse. The banks announced that they would stop covering bankshare losses, and huge losses were registered by shareholders. The Tel Aviv Stock Exchange closed and was only reopened after the bank shares arrangement was signed. An additional devaluation brought the dollar's value to IS 80.

After it became known that Aridor was planning a program of "dollarization" for the economy, he was forced to resign, and Yigal Cohen-Orgad took his place. At the end of his term, inflation was running at close to 400%. In August 1984, a new banknote, the IS 5,000, was introduced. Economic growth hovered around 2% and the unemployment rate was 6%.

THE ELEVENTH KNESSET: 1984-1988

The first National Unity Government, headed by Shimon Peres, had Yitzhak Moda'i as Finance Minister, Moshe Shahal as Energy Minister, Ariel Sharon as Industry and Trade Minister, and Gad Ya'acobi as Economics Minister. In November 1984, an IS 10,000 note was introduced. It was a difficult year, with increased taxes, layoffs and strikes, but despite the concerns the unemployment rate remained around 6%-7%.

In May 1985, VAT was raised from 15% to 17%. One month later, VAT came back down to 15%. The tax for travelling abroad was IS 300,000. The government's plan to stabilize the economy was debated for two straight days, the last day in June and the first day in July, resulting in a general decrease of 30% in real wages and close price supervision. The plan succeeded better than expected, bringing the economy's inflation rate down from 400% to approximately 20%. In February 1986, discussion began regarding a plan for economic growth, and a rift developed between Moda'i and Peres. Moshe Nissim became Finance Minister and Moda'i became Justice Minister. In September 1985, the New Israeli Shekel (NIS) which was worth IS 1,000, came into use. After the rotation, in 1987-88 with Moshe Nissim as Finance Minister, the country began to slide into a recession, with 9% unemployment. At the period's end, the growth rate was cut almost in half, to 3.6%.

THE TWELFTH KNESSET: 1988-1992

A National Unity Government, headed by Yitzhak Shamir, had Shimon Peres as Finance Minister, Yitzhak Modai as Economics Minister, Moshe Shahal as Energy Minister, and Ariel Sharon as Industry and Trade Minister. In 1989, Finance Minister Peres instituted an economic plan with new "decrees": budget cuts, taxes, and the raising controlled-products' prices. In June, the new shekel was devalued by 4.4%. In August, the number of unemployed reached 150,000, and this was before the massive immigration wave in December. In 1989, inflation reached 20%, while in March 1990 VAT was raised to 16%. Growth hovered between -0.5% to 3%. Unemployment, in contrast, reached 11% at the end of this period.