Poised for Takeoff? : Mideast: With new rules in place and a new wave of immigrants, some Israeli economists say the country is ready to soar. Others aren’t so sure.

Jacob Frenkel, governor of the Bank of Israel, beams these days when he talks about his country’s economy. Things, he says, are finally going right after years of high inflation, massive government spending, huge debts and poor productivity.

“We are poised for a takeoff, and once it comes I think we will soar,” Frenkel says.

While Frenkel, the former chief economist of the International Monetary Fund, praises the tough monetary and budgetary controls Israel imposed to pull itself out of runaway inflation, he looks to the absorption of nearly half a million highly educated immigrants from the former Soviet Union to propel the economy ahead.

The immigrants, numbering about 7,000 newcomers a month, are viewed by some here as another chapter in the Zionist dream of bringing all Jews to Israel--and by others as that many more people to feed, clothe and house until they get jobs.

But Frenkel sees them as the engine--”a jet engine, a rocket engine,” he adds--of future economic growth.

“In Israel’s economic history, the real jumps in GNP have come with the big inflows of immigrants,” Frenkel said. “This is a huge increase--a 12% increase in the labor force--and what fantastic quality! It is a historic opportunity for us, a quantum leap.”

Where 16% of the U.S. labor force is classified as scientific or professional, compared to 11% in Japan and 16% in Germany, nearly 25% of Israeli workers were in that category before the wave of immigration from the Soviet Union began three years ago--and among the working immigrants, fully 70% are in that category.

In Frenkel’s view, the Israeli economy of the future will be international--both exporting and importing. He also sees advanced technology playing a big role in the economy and the high concentration of scientific and technical talent among immigrants as a draw for international investment in Israel.

Israel’s $60-billion-a-year economy is already benefiting from the fiscal and monetary reforms undertaken in the last five years and from the massive immigration. Last year, the value of locally produced goods and services, the gross domestic product, grew 6.5%, far outpacing most industrialized economies, where growth averaged 1.6%.

While growth is likely to slow to 4.5% this year because of cutbacks in government-financed construction, economists believe that it will accelerate to more than 7% in 1994 and the years that follow.

At Bank Hapoalim, the country’s biggest, economists also see evidence of strong and sustained growth led by big increases in exports, greater private consumption as the immigrants find jobs, and continued, though controlled, government spending on the country’s infrastructure.

“In any industrialized economy, our growth rate--4.5% this year, 6.5% last, 6% to 7% next year--would be great, but given where we came from, it is extraordinary,” said Nadine Baudot-Trajtenberg, a senior economist at Bank Hapoalim.

“At the start of 1985, we had inflation reaching 1,000% a year, and our foreign and domestic debt was multiplying outrageously, almost faster than we could count it,” she said. “Stabilization was thus a major achievement, and this growth marks a significant, though still partial, rehabilitation of our economy.”

Last year, inflation was 9.4%, under 10% for the first time in more than 20 years and nearly half of the previous year’s 18%. On a per-capita basis, the gross domestic product grew 3%. Investment as a percentage of GDP was 15% last year. It is expected to rise to 17.5% this year and to reach 20% by 1995. Export earnings rose 11% and are continuing to grow this year. And share values on the Tel Aviv stock exchange soared 75% even after being adjusted for inflation.

Israel’s economy remains burdened by its heavy defense spending, but that is now down to 14% of GDP compared to 35% at its peak in 1975.

Israel’s growth has been led by exports of electronics, precision tools, optical instruments and chemicals, said Tsipi M. Galyam, deputy director general for economic affairs at Israel’s Finance Ministry: “Our difficulty is that we cannot grow on the basis of our domestic market; we need a world market for our plants to operate at the optimum size.”

But Galyam acknowledged that Israel’s stabilization program, which limits government spending, “means that we depend on exports for economic growth and accept a larger amount of unemployment than we are used to or like.”

Unemployment is now at 11.2% of the work force and likely to rise. More than 152,000 Israeli families live below the poverty line, according to government estimates.

There are other worrying figures. Inflation this year is likely to climb above 10% again, perhaps reaching 12% or 13%. The trade deficit is running at more than $6 billion a year, an increase of two-thirds in the last three years despite greater exports. And 31% more Israeli firms went bankrupt last year than in 1991.

Roby Nathanson, director of the Institute for Economic and Social Research of the Histadrut, the Israeli trade union federation, finds in these figures serious cause for concern, and he scoffs at suggestions that the country is ready for an economic takeoff.

Nathanson would like greater government spending to bring unemployment down to no more than 7%, as well as government-led efforts, including marketing subsidies, to expand Israeli exports.

The 7-month-old government of Prime Minister Yitzhak Rabin, he said, needs to move more boldly in undertaking economic reforms, including changes in the tax system to promote productivity and to reduce the burden on the Israeli middle class.

Other measures, Nathanson said, should include the promotion of small businesses, especially those that will enter the export market; professionalization of the Israeli armed forces to reduce unemployment and cut the amount of time reservists must serve; vocational training for the long-term unemployed, and government assistance for companies hiring immigrants or new graduates.

“We need a social pact, a set of measures that will motivate our people and mobilize the resources we need,” Nathanson said. “We had that opportunity when this government came into power last July, but we have wasted all those months.”

An even sharper critique, this from the right, comes from Alvin Rabushka, a leading Israeli economist who divides his time between Stanford University’s Hoover Institution and the Institute for Advanced Strategic and Political Studies in Jerusalem.

“Paralysis,” Rabushka declared, summing up the Israeli economy last year. “The Likud-led government (of Prime Minister Yitzhak Shamir) failed to accomplish a single important economic reform during the first half of 1992,” he said. “The Labor-led government (of Rabin) did no better during the second half.”

Rabushka, campaigning for the development of a full market economy, charged that--contrary to its many boasts of restructuring--Israel remains heavily dependent on foreign assistance. The government, he notes, continues to bail out bankrupt companies, subsidize agriculture and hold onto state-owned enterprises that should be sold to private entrepreneurs.

“The truth is that this economy cannot take off until real markets are permitted to develop in capital, in commodities, in labor, in resources,” said Zev Golan, associate director of the Jerusalem institute.

Foreign capital has not flowed in the way Israeli officials hoped, although the government is now negotiating the establishment of an export processing zone, proposed by Rabushka’s institute, to attract as much as $750 million in initial investments and possibly create 20,000 jobs in the first year.

Israeli companies themselves have themselves raised large amounts of capital in recent months, according to Ptachia Bar-Shavit, manager of Bank Hapoalims economics department, but have been slow to invest it.

“They seem overly cautious, and that is the biggest bottleneck in launching Israeli businesses on a path of rapid growth,” Bar-Shavit said. “Our businessmen don’t lack entrepreneurship. But they have been through very tough times in the 1980s and become cautious as a result. So they are staying liquid and wanting to be doubly sure of everything. Maybe the government needs to lead more boldly.”

Yet Frenkel, Galyam and other economists counter that Israel, in fact, is a good place to invest--and getting better as it emerges from decades of over-regulation. But new policies, they say, must be worked out with care rather than speed so as not to upset current growth trends or reinforce state control of the economy.

“Some very courageous decisions will have to be made,” Galyam said, “but they have to made thoughtfully.

“In privatizing the (four state-owned) banks, for example, we should push ahead faster with deregulation and liberalization to ensure there is competition when they are sold. We can privatize a public utility quickly, but it might be better, if it is a natural monopoly, to retain it and improve its management rather than try and regulate it.

“Our military industries, to take another example, are in crisis, but it will take a lot of nerve to close what should be closed,” Galyam said. “We have to search for the viable parts first, look at other means of supply and then work out a plan. The point is, do it right.”

Israel’s Improving Economy

Israel’s leaders now believe their country’s economy is finally on the right track after years of high inflation, massive government spending, huge debts and poor productivity. The inflation rate has improved dramatically: 1993 estimate: 10% Annual growth in Gross Domestic Product has also improved: 1993 estimate: 6%

Source: Bank Hapoalim Economics Department