A Foreign Aid Success Story
A decade ago 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 often 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.
The United States could have turned its back on its ally and told Israel to get its house in order on its own. It did not. Secretary of State George Shultz said in 1985, “Israel has all the qualities needed for economic success: an educated, dynamic people, impressive capacities for research and development of new technologies and outstanding universities.” Israel had to institute dramatic reforms, Shultz said, but the United States was prepared to help.
With the support of the Reagan Administration and overwhelming majorities in Congress, an emergency $1.5 billion aid package was approved to help Israel through the crisis. Simultaneously, Israel implemented a stabilization program that significantly cut subsidies on basic products and services like milk, eggs and transportation. This helped to reduce the budget deficit from 17 percent to 8 percent of GNP. A large currency devaluation followed. Wage and price controls were imposed and the direct indexing of wages and saving to inflation was discontinued. Finally, a new monetary policy was adopted to control the growth of credit and drive interest rates upward.
Two years later, the New York Times described the sacrifices of the Israeli people, and the message of the stabilization program, as “Everybody takes a step backward—together.”
U.S. assistance provided a safety net of resources and reserves that enabled the Israeli government to take the tough measures to restore the economy to health. And now we are seeing the results. In 1994, Israel had one of the strongest economies in the Western world. Its Gross Domestic Product increased approximately 7 percent, the business sector grew by 8 percent and exports increased 11 percent. One of the great fears when the stabilization plan was implemented was that unemployment would grow significantly. In large part because of the influx of immigrants in recent years, joblessness has been perhaps the country’s most serious economic problem. Last year, however, unemployment fell to 7.5 percent, from 11.2 percent in 1992. Inflation remains far higher than it should be, but last year’s rate of 14.5 percent is still a fraction of what it was a decade ago. Moreover, last year’s figure was higher than expected because of extraordinary rises in housing and vegetable prices. This year, inflation should be in single digits.
Most people do not realize that for many years Israel had one of the fastest economic growth rates in the world, faster even than Japan, until it was forced in the late 60’s and early 70’s to divert huge amounts of human and financial resources to defense to keep up with the profligate arms purchases of its wealthier Arab neighbors. Even before the current peace process began, Israel began to reduce this burden and today defense expenditures represent only about 8 percent of Gross Domestic Product.
Politicians can compete for credit, but progress in reforming the economy was made under both Labor and Likud governments. It is perhaps even more remarkable that most of what has been accomplished preceded the current peace process. The success of the negotiations will undoubtedly help sustain and accelerate Israel’s economic growth.
Israel still has many changes to make before its economic system reaches its full potential. Privatization, for example, has to continue and the tax burden on citizens and businesses needs to be reduced. Still, Israelis have a right to be proud of the development of their nation in 47 short years. And Americans can take pride in their role in fostering this economic miracle in the desert. The consistent political and financial support of the United States has helped make Israel one of the most vibrant democracies in the world and now one of the most economically successful.