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Israel: Land of Sustainable Growth?

by Avi Machlis

November 18, 1999 | 7:00 pm

The captains of Israel's economy told world economic leaders at the annual conference of the International Monetary Fund last month that Israel's sluggish economy is set for a revival after a three-year slowdown.

Rosy government forecasts have been backed by a series of recent reports issued by leading financial analysts, who see Israel's economy pulling out of the slowdown that has pushed unemployment up to nearly 9 percent since 1997.

But at the same time, some economic experts are warning that despite signs of an upturn, the prospects of Israel enjoying sustainable long-term growth are unlikely without a serious change in the composition of the budget and the political framework that creates it.

Speaking to the Ha'aretz daily newspaper from the Washington conference, Avraham Shohat, Israel's finance minister, said he believes Israel has turned the corner.

"One cannot say for sure that we have already reached rapid growth," Shohat said. "I feel that we're passed the lowest point. It depends on a lot of factors but there are definitely positive indicators."

Shohat said he believes the economy will grow at about 3 percent next year. Israel's gross domestic product -- the total amount of goods and services produced in an economy and a standard measure of economic growth -- grew only about 2 percent in both 1997 and 1998, and a mere 0.3 percent during the first half of this year. In contrast, the gross domestic product grew at a rapid rate of about 6 percent a year during the mid-1990s.

Shohat's optimism was confirmed by reports released last week by Salomon Smith Barney and Morgan Stanley Dean Witter, two leading investment banks, which argued that Israel's credit ratings should be raised. These ratings are measures of an economy's overall status and stability, and higher ratings can help a country raise funds at lower interest rates.

Both reports cited Prime Minister Ehud Barak's recent election, and his determination to forge regional peace and to maintain stable economic policies. Salomon Smith Barney said Israel's leaders have decided "that the country's future lies in deeper and broader integration with the world economy" and praised the government's "commitment to prudent economic policies and structural reforms."

The reports were referring to the Israeli Cabinet's decision to approve a budget for the year 2000 based on cuts of about $1.4 billion to projected spending for next year. This allayed fears that Shochat, who served as finance minister under the previous Labor-led government from 1992 to 1996, would continue his previous policy of high government spending, which fuels inflation.

However, when Knesset members and ministers returned from their Sukkot vacations, the annual slugfest over the budget promptly began. The budget must be approved by year's end.

This, say some critics, is the real problem. Even if the budget framework is reasonable, they say, political pressures prevent a distribution of funds to sectors that can give a boost to the economy and create jobs. The way to boost growth, they say, is not a matter of how much is spent, but how it is spent.

For example, government investment in public works projects such as roads and infrastructure is considered a key to economic revival.

Although the government has pledged to increase such spending, it is still unclear to what extent this will be reflected in the budget.

Pinchas Landau, a veteran Israeli economic commentator, said the current Israeli political system, in which every faction fights for funds without considering the bigger picture, has created a "warped and flawed" budget composition in which Israeli government expenditures will always rise -- and in the wrong directions.

In the long term, he said, this will be unsustainable: "Either it will just roll on until it blows up -- and that is the more likely scenario -- or there will be a change in the focus of the government.''

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