ECONOMISTS AROUND THE WORLD SAY- WE-RE DOING FINE - 26-Sep-97

ECONOMISTS AROUND THE WORLD SAY: WE'RE DOING FINE

(Article by Sever Plotzker, "Yediot" 26.09.97)

Differences can be measured in terms of Professor Stanley Fisher's time. Our economic situation can be assessed by the amount of time Professor Fisher, head economist and leading member of the International Monetary Fund is ready to devote to Israel - that is, in inverse proportion: When Professor Fisher, a friend of Israel and Hebrew speaker, has a lot of time for us, our economy is in trouble. When he has no time, we are doing pretty well.

At this year's meeting of the International Monetary Fund and the World Bank, I noticed that we had been taken off the list of sick economies. "Listen", Stanley Fisher said to me, "I am very strapped for time. Look at what's happening in Thailand and Malaysia. Believe me, it's one big mess. You're doing pretty well right now, and if you continue this way, we'll never have anything to discuss."

What a difference! Two years ago at an IMF congress in Washington, Professor Fisher never missed a beat in explaining to us what trouble the Israeli economy was headed for. We were speaking after his return from a meeting with then Finance Minister (Avraham "Beige" Shohat) Bank of Israel Governor Yaacov Frankel as well as senior Bank and Ministry officials and high-ranking members of the IMF. The Monetary Fund had reached an assessment that the Israeli economy was headed for a crisis, particularly due to the swelling of the state budget. Fisher was shocked and hurt at the indifference and effrontery of the Finance Ministry officials when apprised of these evaluations. "Doesn't the Israeli government understand where these terrible deficits will lead?" asked Fisher, almost tearful.

About a year later we met at the Middle East Economic Summit in Cairo. While the new government celebrated the very fact of Israel's having been invited, Stanley Fisher was not celebrating. The deficit in Israel's balance of payments had increased, the government's budget deficit had deepened and Fisher was feverishly seeking a way to present his concerns to the new political establishment.

Another year has passed and the feeling at the IMF, which convened this week in Hong Hong, recently handed over to the Chinese, is that the Israeli economy has been saved. According to a senior member of the Fund, Israel has made dramatic reforms in its economic policy. The deficit in the balance of payments was cut and will be cut further. Rampant demand has been cooled. Professor Fisher sighed with relief. Not all the problems have been solved, but Israel has emerged from the danger zone, in his opinion. And most significantly, she did it herself. In closed meetings the heads of the IMF told the Israeli delegation: "We are very impressed with Netanyahu's tough decision to implement budget cuts and a slowdown of the economy, despite coalition tension and public ferment. The only advice we have left is: do not soften." International economic institution heads have fallen in love with Finance Minister Yaacov Ne'eman. He is a man after their own hearts.

The IMF's forecast for Israel is far more optimistic than the one being discussed in this country. Here are its highlights:

*According to the IMF, Israel's local production, an accepted measure of economic growth, will rise by 4.2% in the next year. The forecast of the Finance Ministry and Israeli commercial banks was about 3% for 1998. This is not a large numerical difference, but it is large from a societal point of view. If the Israeli economy were to actually grow by 4%, enough new jobs would be created to decrease inflation. The forecast is that industrial nations will grow in the next year by 3% per annum while developing nations will grow by 6%. We are in the middle.

*The consumer price index will rise in the next year by 7%. This is a very low forecast, the lower limit of the government's goal. A senior economist at the Monetary Fund assessed that we are capable of achieving this low inflation rate, even with the inevitable devaluation.

*The unemployment rate will drop to 7% next year, the same rate as in 1995.

*Israel's deficit in the balance of payments will continue to decrease, reaching about 3% of our local production. Such a deficit, according to the Monetary Fund, is not serious for a growing economy, nor dangerous. The Israelis can deal with it themselves.

These figures were given to me by the director of the IMF's research department on the basis of a single assumption: that Israel fully implements its planned economic policy.

This was the list of achievements. Now for the problems. In talks with senior members of the IMF the Israeli delegation was told: "What you must do is continue if you want to ensure that this year's achievements are not wasted. Do not flinch from the budgetary policy you have decided upon. Do not retreat from the liberalization of your foreign currency market. Do not retreat from privatization. Don't give up on pension reform or on cancelling wage linkage."

What about the devaluation of the shekel? This topic was at the focus of consultations with the Israeli delegation. The IMF directorship welcomed changes already made in the exchange rate policy, a change initiated by the Governor of the Bank of Israel, which caused ex-Finance Minister Dan Meridor to resign. A wide and flexible band of devaluations, currently in place in Israel, is recommended by professional economists as the most appropriate program for developing countries. It protects them from sharp revaluations and and forced devaluations. But the case of Israel is exceptional: The widened and newly flexible foreign currency market brought about a small, one-time devaluation, lasting less than two months and disappearing without a trace.

A high-ranking Israeli official told me: "The economists of the IMF believe that we must engineer a realistic, gradual devaluation of the shekel - not only to improve the profitability of export, but also 'to prove to anyone who borrows in foreign currency, gambling on the shekel's revaluation, that he is liable to pay dearly for his mistake. A dangerous speculator is one who was never punished by the market.' We accept this attitude. It is identical to our attitude, that of the Finance Ministry and that of the Bank of Israel. If only we knew how to do this in a small country with an open foreign currency market."

Perhaps by reducing interest, I suggested. But an economic politician and international economist whom Frankel and Ne'eman met recommended not reducing interest rates in Israel, and definitely not at a rate of more than half a percent, the Israeli economist told me. And what were the other alternatives discussed? The first is a one-time administrative devaluation, a government proclamation of a new shekel exchange rate. But the formula for implementing it and ensuring its survivability has not yet been found.

The second alternative is a 1% levy on importing foreign capital to Israel

(a leveling tax, in the words of the IMF economists), with a clear distinction between money which is "hot" for short periods, and investments. Such a tax was introduced in Brazil in 1993, with no small degree of success. We can assume that a tax on importing capital is one topic Ne'eman discussed with the Brazilian finance minister. The third alternative to devaluating the shekel is a special deposit (or "special liquidity commitment") which anyone who receives foreign currency credit will have to deposit at the Bank of Israel, without interest, for example, at a level of 5% of the loan. This "deposit" method was in fact once tried in the distant past, in the U.S.

These methods would necessarily bring about a controlled devaluation of the shekel, as the Finance Ministry, the Bank of Israel, and Israel experts in the IMF want to achieve. The verdict will soon be known. It was decided in Hong Kong.

Does the danger of financial disaster still loom over Israel as it does over certain Asian countries - for instance, Thailand, Malaysia and Indonesia, whose currency was devaluated by tens of percentage points, whose stock markets have crashed, and whose governments were compelled to announce budget cuts and cancel projects?

The answer given at the Hong Kong conference surprised me by its decisiveness. No and no again. Israel is in no danger of a financial crisis, unless the Middle East is drawn into "political madness". A non-Israeli economist, among the most senior economists at the conference, explained why he feels at ease (economically, not politically) regarding Israel. Malaysia and Thailand do not have sophisticated and reliable local capital markets. Israel does have one, and it is among the most developed. In Malaysia, Thailand and Indonesia, local banking is undisciplined and of poor quality. In Israel bankers and their supervisors have learned their lesson: They are cautious and strict.

Neither Malaysia nor Thailand have true democracies or independent central banks. In Israel there is democracy, and there is the Bank of Israel, which jealously guards its sovereignty. In Malaysia and Thailand the stock markets have swelled into one huge financial bubble; in Israel the stock market bubble already burst in 1993. The governments of Malaysia, Indonesia and Thailand interfere in the market too much. They are inefficient and they strongly opposed the devaluation. Everyone in Israel wants a devaluation, particularly the government, but we don't know how to do it.

For three days and four nights the Hong Kong congress held an international symposium on the topic of Asia. I listened, learned and agreed. The main cause of the crisis of Asian economies is the gap created in recent years between these countries' real economic capability and the unlimited aspirations of their political and economic elites.

Starting in the early '80s, the countries of east Asia developed rapidly, between 5 and 7 percent growth per year per capita. The growth had several sources: growth of the population, large savings, a unique blend of a market economy and government direction, liberalization reforms, new exposure to competition and international commerce, and the hardworking character of the people. It was a miracle whose fruits were distributed in a relatively equal way.

But in the last two years priorities changed. Looking back, the establishment told itself: we have reached the promised land, now we can change direction: from savings to ostentatious building; from investment in education, health and basic infrastructure to building skyscrapers and other real estate dreams; and in particular: from balanced and egalitarian growth to a renewed increase of economic inequality.

In this way the Asian miracle started to sour; the souring is a completely internal phenomenon.

The heads of the World Bank and the IMF are waiting for the failing politicians to quiet down, whereupon the fury surrounding Asian currency will pass. There will be political casualties, and that is a good thing. But from an economic standpoint, the Asian typhoon was inevitable. The reforms were dictated by reality.

The devaluations and stock market crashes will restore east-Asian policy-makers to sanity. The salvation and emergency-aid plans, which cost tens of billions of dollars, will not, after accounting, have even cost one cent. The Asian tigers have not turned into pussycats. They only put on weight in the wrong places. When they trim down, they

will be ready to pounce again.