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WORKING | PAPERS Debtand MacrooonomIcAdjustnent Country Economics Department TheWorldBank September 1988 WPS91 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Poly, Planning,andR_ewch Israel's Stabilization Program Nissan Liviatan A disinflation strategy that involved eliminatingthe fiscal deficit and changing the rules of the government-labor game reduced inflation,in Israel from more than 400 percent a year in 1984to a low 20 percent a year in the third year of the program. TUePoicy. Planxing, nd Research Ccmplex disuibutes PPR Wo&kingPapes to disoininte the findings of work in progrss and to in developmeritissues. These papers cany the names of enaounge the exchange of ideas among Bank atuff and all others in=ed the authors, reflect only their views, and should be used and cited accordingly.The findings, interpretations, and conclusions are the authorsown.Iley should not be attibuted to theWorld Bank, its Board of Directors,its management. or any of its menber countries. PlKPlanning, and R srch Debt and Mlroownomc Tlhestabilization program Israel launched in July 1985 combined orthodox fiscal and monetary policies wiut a heterodox incomes policy. The orthodox elements included a sharp reduction in the fiscal-operational deficit - 8 percent of GNP in the first six months - and tight monetary policy. The heterodox element was to freeze wages and prices and peg the exchange rate to the U.S. dollar. Wage and price controls were relaxed in 1986 and 1987, leaving exchange rate policy (later pegged to the basket of currencies) as the anchor in the new system. The national coalition government succeeded in neutralizing pressures for deficit Adjustment| srwending.Under government pressure, employers' organizations and organized labor reached a wage agreement in July 1985 that prevented substantial unemployment. This approach not intended for use in normal times - proved effective in administering shock treatment. The result? At the _nd of the program's third year, inflation is running a low 20 percent annually, compared with more than 400 percent in 1984. Whether stabilization will survive the November 1988 elections remains to be seen. The stabilization programs in Argentina (in 1985) and Mexico (in 1988) were similar in the initial stages to Israel's. This paper is a product of the Debt and Macroeconomic Adjustment Division, Country Economics Department. Copies are available free from the World Bank, 1818 H Street NW, Washington DC 20433. Please contact Nissan Liviatan, room N11-063, extension 61763. 'Ce PPR Working Paper Se1ies disseTninatesthe findings of work under way in the Bank's Policy, Planning,'and Research Complex. An objective of the series is to get these findings out quiclcly,even if presentations are less than fully polished. The Suldings,interpretations, and conclusions in these papers do not necessarily represent official policy of the Bank. Copyright i) 1988 by the International Banlcfor Reconstruction and Developmenflhe World Bank Table of Contents Psi. Title . Introduction........ I. . The Current State of Stabilization . . . . . . . . 1 .. . 4 . . . . . 1. The Nominal System 2. Real Effects of Disinflation II. The Change of Regimes. ................ 1. 2. 3. 4. S. 6. 7. 8. 9. 9 The InflationaryRegime The Change in the Rules of the Game The Focus on the externalPosition The Effect of Reducing Inflationon Reserves The Role of U.S. Aid Real Aspects of fiscal Policies FinancialAspects of the Fiscal Adjustment Domestic Investmentand MonetaryPolicy Summing Up the Influenceson the ExternalPosition III. Evolution of Policiesin the Course of Stability 26 1. Fiscal Policy 2. Monetary Policy 3. ExchangeRate Policy IV. Policy Dilemmas.. . . . . .. . . . 29 1. The Low InflationStep 2. The Issue of Real Appreciation .. Footnotes and References.. Tables .. 3. . . . Figures . . . . . . . . . . . . . . . . . . .... . . .. .. . . 36-38 39-47 . . . . . . . .. . . . . . . . . . . . . . . . . . 48-50 Introduction Israel'sstabilizationprogram,which via launchedin July 1985, was of the Oheterodoxsvariety, namely one which rombliedorthodoxelementswith incomes policies. The orthodoxpart cQnsistedof a sharp reduction in the fiscal (operational)deficit,of the order of 8Z of GNP in the first six months, and a very tight monotary policy during this period. The heterodox componenttook the form of an initialwage-price freeze which, togetherwith pegging the exchange rate to the U.S. dollar brought about a sharp reduction in lnflation- from around 152 per month in the first half of 1985 to 3.5Z in August-Septemberand to 1.5-22 later on. Under the pressure of the goverrment the workers' and employers'organizationsreached a wage agreement in July 1985 which signified the publlc's support for the program. Prices were made more flexible and controlswere graduallyremoved in the course of 1986 and 1987. Israel was not alone in followingthis type stabilizationstrategy. The Austral program in Argentina (1985) and the recent stabilizationpolicy in Mexico (1988) are of a similar variety,at least as far as the initial stages are concerned. It is also very likely that future stabilizationprograms in chronic inflationcountrieswill adopt a basically similar approach. The intereit in the Israeli stabilizationprogram extends thereforebeyond its domestic implications. This is especiallythe case since the program has been doing quite well so far (as will be describedbelow). -2- Israel's stabilizationprogram is nearing now the end of its third year ane inflation is still running at a low level of about 202 annually,as comparedwith over 4002 in 1984. Disinflationis not supportedany more by the comprehensivesystem of price controlswhich characterizedthe initial phase and the coverageof controls teturnedto its normal level. The main nominal anchor in the system is the exchangerate which was practicallyfixed relativeto the basket of currenciessince the last devaluationof January 1987. The year 1987 witnessed accelerationof growth in the economy which was not accompaniedby any marked deteriorationin trade accoui phenomenonwhich underminedmany exchange rate based stabilizations. The current account was practicallybalanced in 1987 and reserveswere at record high levels comparedwith recent years. The public sector'sbudget remai,Led nearly balancedand the governmentinitiateda number of reforms in the area of direct taxationand capitalmarket regulationswhich, togetherwith price stability,contributedto the recoveryof domestic investmentafter years of decline. On a differentlevel, price stabilityhas become a political asset which none of the major parties in the four-year-oldcoalitiongovernment would wish to damage. In spite of the nearing electionsthe two major partners in the coalitionhave acted more as watchdogs to each other, rather than as competitorsin over spendingin their respectiveministries. In this paper I shall try to analyze the major factorswhich made the transitionto low inflationpossible. We shall deal with such issues as the role of the U.S. aid and of domestic fiscal adjustment,of monetary and .exchangerate policies and of the change in the rules of game concerning government-laborinteractions. The paper will focus on the evaluationof the -3- program from the 1987 perspectivewithout devotingmuch space to the initial heterodox shock which was described in various other papers. 11 From the point of view of this objectivethe data which summarize the developmentsin 1987, which have now become available,are particularly useful. This is so since this yas the first year in which the economy can be said to have recoveredfrom the heterodox shock of July 1985 and adjusted to the low inflationenvironment. A related topic with which we shall be concerned is the evolutionof the disinflationarypolicies in the course of the program. Here again the 1987 data will help us in diaentanglingthe transitoryfrom the more lasting elementsof the Israeli disinflationstrategy. In the final part of the paper we shall deal with the policy dilemmas which face the governmentat the present stage of disinflation. In spite of the rosy picture of 1987 one cannot ignore some problematic, featuresof the program. One disturbingfact is that the fixed exchange rate policy followed in the past year and a half has not succeeded in reducingthe level of the crawling inflationand consequentlya process of real appreciationhas been taking place continuouely. This may have contributedto the recessionary symptoms in the first half of 1988. One of the main merits of the Israeli stabilizationwas its ability to avoid a heavy cost in terms of unemploymentby adoptinga well-coordinated heterodoxprogram based on a great degree of cooperationwith organized labor. However,while this approachproved to be effective in administeringthe shock treatmentit is not intendedto be used in the same way in normal times. It is especially high after the big achievement of bringing down inflationfrom a very level that the public suspectsthat the governmentwill not fight to eliminate a low inflation step. This, however, may set an expectational patternwhich may lead to unstable developments. Much of the success in stabilizationwas due to the formationof the national coalitiongovernmintwhich succeededin neutralizingpressures for deficit spendingand wage increases. As the Novemberelections are approachingthe ability to maintain the foregoingframeworkis put under severe stressesthe outcome of which is still uinknown.These pressures are already domestic in the preliminary reflected fiscal deficit The policy since issues the last involving indicators quarter which show an increase in the of 1987. the low inflation step and the real appreciationwill be discussed towards the end of the paper. I shall begin with a brief summaryof nominal and real effects of disinflationas viewed from 1987 perspective. I. The Current State of Stabilization 1. The nominal System For the past two and a half years inflationhas been runnizig at an annual rate of about twenty percent. In the immediateperiod followingthe July 1985 heterodox shock, over 902 of the consumer'sbasket was under price controls, in a frameworkof a wage-pricefreeze designedto break inflationary inertia. However, as a result of the decontrolprocesswhich started in the beginningof 1986 the coveragewas reduced to 46Z in January 1987, while by the end of that year only 20-25? of the consumers,basket was still under control. This correspondsto the traditionallevel of price controlswhich covers some basic foodstuffs,governmentservicesand goverunentcontrolled monopolies. Thus at the present stage controls (or the threat of their reimposition)play only a minor role in keeping inflationat a low level. The basic nominal the program is the exchange anchor which supports rate. Although the exclunge rate with respect to the basket of currencLeshas been held practicallyfixed to maintain principle, the exchange rate the government 7 the governmentis not commltted since January indefinitely retains : the present the option with the developoentin nominal wages if of realigning level. In the exchange rate it will deem it necessarytthis optlon has not been excercisecihowever, in the past 18 months. Since the beginningof the stabilizationprogram the public's credibility in the government'scommitmentto avoid inflationaryshocks has increased. One sign of this is the average low level, development and lack of trend, in the black dollar premium (see fig. 1). The reduction of inflationary of the program is of course reflected expectations following the initiation in the sharp reductionin nomdnal interestrates which is commensuratevith the reductionin inflation (see table 1). the level While the nominal of actual inflation interest rates the interest on shekel deposits stabilizedat rate on credit lines in the domesticmarket (denominatedin shekels)stabilizedat a higher level. The meaning of the large spread 21 in interestrates (table 1) is not fully understoodbut it presumablyreflectsmostly factorsnot related to inflationaryexpectations(one of these highly respect concentrated banking system and another to activitiesin the domestic The increase are monopolistic market). practices by the is tight monetary policy with 31 in the weight of nominal (non-indexed)liquid Pssets iti a coamon expressionof the reductionin inflationaryexpectations. The continued growth of M 1 and H2 relativeto GNP (see table 2) indicatesa growing confidencein the increasedprice stability. -6- It must be stressedthat the foregoingindicatorsreflect basically short term attitudes and do not say much about the robustnessof the nominal system to shocks. Some indicationin the latter directionwas the surprisinglysmall effect of the January 1987 devaluation(of ten percent) on the accelerationof inflationin the course of the year. One of the reasons for this phenomenonwas the 'cooperative'nature of this devaluationto which we shall return later on. Another indicatorfor the robustnessof the nominal system concerns the length of nominal contracts. The most significantindicatorin the area Is the structureof the cost of living agreement. Here rsther slow progress has been made, the main aspect of which was the increase in the trigger level of inflation for COLA purpcses from a cumulative42 to 71 from mid-1986.4 Some further progress in this directionis expectedwith the new collective wage agreement. In financialmarkets lengtheningof nominal contracts is foun4 in many areas. For example, there is a shift to longer term (non-indexed)time deposits and there appears rather firms than overdraft has also length facilities. increased of nominal contracts The transition small tendency by firms The length significantly. 2. Real Effects surprisingly a greater of consumer Tne general is increasing continuously loans impression extended is that but at a moderate by the pace. of Disinflation to the low Inflation increase plateau 51 in 1984. The fact increase such during stage In spite of the extremely the first of the heterodox has been achieved in unemployment which reached from 71 in 1986) compared with successes to use fixed-timeloans tight of stabilization that with a 62 in 1987 (dropping unemployment (comprising did not 6-9 months), monetarypolicy, constitutesone of the main approach. This was - 7 - achievedby breaking inflationaryinertia due to lagged wage indexationby means of a wage-price freeze (thuspreventinga rise in real wages when the exchangerate was stabilized),and by reachingan agreementwith labor for a temporaryreduction in real wages during the first stage. The first stage was also characterizedby a sharp reduction in the dcmestLc fiucal deficit down the financial (which turned markets into and constituted a surplus a first in 1986) whLch calmed step in establishing credibilityin the program. The second stage, which coincided roughlywith 1986. was characterizedby a sharp recoveryof domesticdemands (8.5 in real terms) without a correspondingincreasein output (realGNP grew only by 3.32). This was a surprisingdevelopmentin view of the eliminationof the fiscal deficit. The consumptionboom assoclatedwith this etage and the related developments will be analyzed marked real more fully appreciation later. The rise and an increasing which were characteristic feitures in demands was accompanled import surplus of many unsuccessful in constant exchange rate by a prices, based stabilizations. However, this pessimisticphase reverseditself in 1987 when the growth of domestic adjust demands tapered to the new environment, increasingby 5.2S. The rate off to 5.82 responded of real while output, more vigorously which began to to demands with GNP appreciationslowed down considerably indicatinga possible convergenceto a lower real exchange rate, which may. however, not be sustainable (we shall return The import continued to grow i cdollar surplus to this point later). terms but this reflects to a large extent the weakening of the dollar. Measured at constant prices the import surplus grew in 1987 at about the same rate as GNP, while measured moderately in current prices the ratio (from 6 to 7 percent). of the import surplus to GNP rose It is especiallynoteworthythat output of the business sector was growing at an acceleratedrate for the past three years reachingan exceptionallyhigh rate (7Z) in 1987. This was accompaniedby an unprecedented years) growth in total which accounted productivity for more than half (compared with the past of the growth of output fifteen (table 1). Host economiststend to attributethis remarkablegrowth performance to the redu:uionin inflation,to the contractionof the relative size of public sector and to the reforms undertakenin 1987. The drop in inflation reduced producers,uncertaintywith regard to relativeprices and shifted activitiesfrom the financialto the productivesphere. This process took place both within firms as well as on industrylevel through a change in the distributionof the labor-forcein favor of the non-financialsector. The governmentcontributedto the process by freezingthe number of employees in the public sector, so that practicallythe entire increasein the labor-forcein 1986 and 1987 was absorbedby the business sector (see AR 87,5/ p. 73). In additionthe goveramenttook the first steps in reformiug the structureof direct taxes which resultedin a reductionof personal income tax rates as well as corporatetax rates 61 (for details see AR 87, chapter on the public sector). These reformsmay have contributedto the continued rise in productivityand to nutput growth. In addition,price stabilityand the reduced corporatetax rate stimulatedthe upsurge of investmentin the business sector in 1987. The latter process was further encouragedby some initial,but important,steps in the directionof liberalizingcapital markets. There are some indications 1988 as is shown by preliminary well as from the behavior of a weakening evidence of imports of the growth momentum in from demand and production and commercialbank credit. data as It is therefore not clear as yet whether the growth performanceof 1987 was a transitory phase rather that a take off point for growth ln a stable environment. If the recessionary indications represent a real underlyingproblem then the question is to what extent are these developmentsdue to the policies adopted in the course of the program and in particular rate later II. policy pursued 18 months. in the past on when we shall discuss current We *hall policy dilemas. that brought to the fixed return exchange to these issues The Change of Regimes The InflationarZ In order to analyze Regime the factors about the change of regimeswhich characterizedthe transitionto the low inflation economy we must review briefly the forces behind the inflationaryprocess prior to 1985. This process was associatedwith two basic interrelatedmechanisms. One of these was related to the balance of payments crises of 1974, 1979, and 1983 which were partly due to externalcauses (the Yom Kippur war and the two oil crises) and partly to faulty exchangerate poiicies (the attempt to reduce the rate of devaluationin 1982-1983without a fiscal adjustment). The policy reactionsto these crises entailed severe nominal shocks which could not be confined to level-shocksto prices but were instead transformedto lovq term increasesin the inflationlevel (on this see Liviatan and Piterman (1986)3. One of the channels was related through to the need to reduce which the foregoing the real wage in order mechanism operated to cope with the - 10 - externalcrises in a setting of highly indexedwages. Under the circumstances prevailingat the time the method which seemed suitableto deal with the sitzationwas to erode the real wage by steppingup the rate of devaluation and the rate of 'nflationof governmentcontrolledprices which acted as a trigger for general inflation. Thsi mechanismwas especiallyevident in the balance of paymentscrises of 1979 and 1983. We may note that under a system of full wage indexationa given permanent reductionin the real wage requires a permanent increasein the inflationplateau [these issues are discussedmore fully in Liviatan (1 98 6b)J* The main lesson from the foregoingdevelopmentswas that attemptsby the governmentto erode the real wage by steppingup inflationled to an ever increasinginflationaryspiral. This brought up the idea of dealingwith inflationby means of a cooperativestrategy. This s3lutioa became potentiallypossiblewith the formationof the coalition governmentin 1984 which representedboth labor and right-wing parties. The new anti-inflationary prlicy at the end of 1984 took the form of a social pact (or 'packagedeal") to controlwages and prices. The policy failed, however,because it was not part of a coordinatednominal policy and, more importantly,it was not supportedby a sufficientfiscal adjustment [see Liviatan (198 6b)I. Another lesson from the foregoing inflationaryprocess is that in a highly indexed economy one cannot deal with inflationunder stressesin the balance of paymentsbecause the adjustmentin the real wage, which is ordinarilyrequiredin this type of situation,invites inflationarymeasures. A sound externalposition is thereforee prerequisitefor conductinga disinflationprogram. - 11 - So much for the mechanism associatedwith handling of balance of paymentscrises in an indexed economy. The other mechaism was assoclated with the domestic fiscal deficit. The latter deficit affectedthe inflationaryprocess in a rather roundaboutway. In particular,the revenue from money creationwas always rather small - around 2U of GNP. (In fact it remainedaround thls level after stabilizationin 1986-87 (see table 3)]. The large fiscal deficitswere finance insteadby indexed government debt which the public acceptedwillingly (much of this can be explained, presumably,by Richardianequivalanceconsiderations). Thus, till the early 1980's the fiscal deficit did not exert a direct inflationarypressure. However, the growing ratio of domesticdebt to GNP approacheda level (about 1.3) beyond which it became difficult to finance the public deficlt though new debt. This was reflectedby the growing proportionof the deficit which had to be financedby the sale of foreign exchange to the public in 1983 and 1984 (see table 3). The capital flight associatedwith this process led to foreign exchangedifficultieseven when the current account improvedin 1984. This state of affairs led to expectationsof a further steppingup of tho rate of devaluationwhich intensifiedthe pessimisticview about the ability to control inflation. As a result of these developmentsit became clear that any disinflationaryprogram must stop completelythe growth of the public debt, which implles a balanced budget. Only in this way could the government restore confidencein its ability to service the debt and avoid a foreign exchange crisis. - 12 - 2. The Change in the Rules of the Game In the new regime which followedthe July 1985 heterodox shock the governmentabandoned the policy of using devaluationsin a one-sidedmanner in order to regulatereal wages. Instead the governmentestablishedwhat appears to be a fixed exchange rate policy over long steps which implicitlyenables carryingout maxi-devaluationwithin the frameworkof a social contract. The first devaluationin this regime was the initial one of July 1985. The cost push effects of this devaluationwere sterilizedby means of an agreement (followingheavy governmentpressure) to suspend the COLA system for three agreed months, in the framework of a wage-price temporary reduction in real freeze, wages (as mentioned accompanied by an earlier). The only formal devaluationinitiatedby the governmentin the posts stabilizationera was in January 1987. The purpose of the devaluationwas to correct the excessive increasein real wages in the course of 1986. However, unlike the one sided policies in the pre-stabilization period it was carried out this time in cooperationwith the General Organizationof Labor (the Histadrut) and the organization of employers. In this "packagedeal the workers agreed to give up half of the COLA payment due in March 71 and the government contributions the cost direct to the national effect cost insurance of the devaluatlon effects were supposed reduced the employer's by a similar through amount. the COLAsystem. to be absorbed This sterilized The remaining by the employers. The use of the foregoingstrategy,which was facilitatedby the fiscal surplus,prevented the creationof a possiblewage-price spiral so that the low inflationplateauwas not disturbed. [see table 13]. We may infer from this experimentthat the governmentis most reluctant to carry out one sided devaluations. If this type of policy can be - 13 - repeated in the future then Israel seems to have solved the extremely dlfficultproblem of adjustingthe real wage by a nominal devaluationin a highly indexed settingwithout raising the inflationplateau. It is doubtful, however,whether the same method can be implementedon a long &irm basis under changingpolitical conditions. This is a questionwhich one cannot answer at the present stage. The Focus on the ExternalPosition The foregoing policy change of regime which required could not have taken place without relying a stable exchange rate on a sound external position. With a continuingpressureon the exchange rate, or with strong waves, such a policy would not be credible speculative been possible and it would not have to secure the workers, cooperationin maintaining stability. It is thereforeimportantto focus the analysison the external position. Indeed we can see in table 1 that all the conventionalindicatorsof the externalposition show a dramaticimprovementwith the stabilizationin 1985. The chronic current account deficit was reversed to a large surplus in 1985 and 1986 and remained approximately balanced in 1987. The import surplus,as percent of GNP, declined (table 2). Foreign exchange reserves increasedand the net externaldebt was stabilizedin dollar terms and declineias percent of GNP. Thus, it appears that the requirementthat nominal stabilizationshould rely on a sound externalpositionwas fulfilled. Since the transformationin the externalposition is consideredto be such a crucial aspect of stabilizationwe have to investigatethe internaland external developmentswhich brought about the change. We shall try distinguishbetween temporary and permanent aspects to of the changes which have taken place and differentLatebetween substantiveaspects and appearances. - 14 - The factorswhich affect the externalposition include exchange rate policy, foreign aid, fiscal and monetary policiesand various exogenous developmentssuch as changes in terms of trade. These factorsmay influence domestic absorptionand thereforethe import surplus. In addition foreign aid influencesunilateraltransferswhich are part of the the current account. The foreign exchangereservesare potentiallyaffected,among other things,by exchange rate stabilization,foreignaid and various expectational considerations(not unrelatedto the aforementionedset of factors). 4. The Effect of Stabilizinsthe Exchange Rate on Reserves Any policy which reduces inflationdrasticallyby pegging the exchange rate tends to influencethe foreignexchange reservesof the central bank because of the increaseddemand for money which induces capital inflows. However, in the case of Israel this mechanismwas of minor significance because the central bank enabled the public to convert its dollar linked deposits into domesticmoney at a fixed rate of exchange. Table 3 shows that the big initial shift in portfolio in favor of domesticmoney in the second half of 1985, amounting to 112 of GNP, took place without changing the base of M3 ,8 / implyingthat the entire portfolio shift was accomplishedby an exchangeof domesticassets only. This suggests that the change asset in reservescannot be explainedsimply by the change in the portfolio as a result of disinflation. The causality runs in the other direction - it is the Improvementin reserveswhich facilitateddisinflation. The stabilization effects on the it is considered real variables of the exchange rate may also have important (consumptionand investment)to the extent that to be temporary. We shall return to this aspect later. - 15 - 5. The Role of U.S. Aid One of the factorswhich helped to bolster he foreign exchange reservesof the Bank of Israel was the specialU.S. grant of 1.5 billion dollars (dividedinto two equal installmentsin 1985 and 1986). This may account for most the increasein reservesover the stabilizatlonperiod (see table 1) if we take into account that the additlonalincreasein 1987 was due to the developmentsfollowingthe devaluationof January of that year. It is conceivablethat reserveswould not have increasedand that the grant would be spent, say, on consumption. However,because of the temporary nature of the grant we expect it to be added to savings without affectingthe flow of total consumption (Privateplus government)in the economy, as permanent income theory would predict. This aspect is one of the reasons for the bulge in the current acco;mt in 1985 and 1986. In spite of the foregoingconsiderationthe reservesmay not have increasedbecause of capital flight resultingfrom lack of confidencein the program. However, the very boost to reservesmade the program more credible. Thus, the special grant performed the role of a financial*safetynet which did not have to be used in practice. Clearly,the special grant does not representany fundamentalcharge but it proved to be very effective in provLding the requiredconfidencefor the exchange rate policy. It is also importantto note that the special grant was conditional on Israel's implementationof a seriousprogram which had to involvemeasures which could potentiallystop inflation. It is because of this nature of the grant that it might have tipped the scales in favor of a drastic program. Thus, the significanceof the special grant goes far beyond its dollar value. - 16 - Another factor which affected the current accountwas the change in U. S. policy with respect to the form of financingits military aid to Israel, whereby long term loans at an annual rate of 0.9 billion dollars (close to 4 9 / Unlike the special grant, this of GNP in 1985 were replacedby grants. representeda change of a permanentnature which stopped the growth of the public debt to the U.S. governmentwhich constitutedthe major componentof Israel's foreign debt. The U.S. decided on this move at the end of 1984 and it was impltented independentlyof the stabilizationprogram. Taken by itself this factor can account for two thirds of the improvementin the current account GNP ratio between 1981 - 1984 and 1987, which amounted to 6 percentagepoints of GNP (see table 2). One obtains the same proportionsby computing the improvementin terms of current dollars. It is thereforeimportantto look more thoroughlyinto the significanceof this change, especiallyfrom the longer run perspective. As we shall see there are strong reasons to believe that the importanceof this factor has been exaggerated. It may be noted that Israel'sdebt to the U.S. governmentcannot be regardedas an ordinarycommercialdebt. In fact, it has been argued that the U. S. civilian (non-defense)grant was used de facto to finance the debt service. Indeed, the data in table 4 show that the civilian grant adjusted over the years to the increaseddebt service leavinga small surplus of 100-200 million dollars annually. In view of this considerationit is useful to look simply at the net financial resourcetransferthrough U.S. aid (grantsplus debt serviceminus new loans). Alternatively,one may look at the net resourcetransferminus direct defense imports (consideringthese as tied). Table 5 shows that there has not been any drastic change in these flows in the post-stabilization period (the improvementcan amount to at most lZ of GNP). - 17 - The foregoingconsiderationsmay suggest that the relevant indicator to look at for the purpose of the issue in question is not the current account but rather the, basic account,which is the sum of the former and long term capital imports (this correspondsto a 'balanceof payments,,which includes short term capital flows and the change in central bank's reserves). Measured in current dollars the basic account'. showa an improvementin 1987 as comparedvith 1981-1984of about 200 million dollars,which can be contrasted with an improvementof about 1.2 billion dollars in the current account. Thus, from the point of view of the basic account there has not occurredany fundamentalchange in the externalposition. Indeed, if it is true that the improvementin the current account is due mainly to the switch to grants then it is an indirectpiece of evidence that this change did not increasethe economy'spermanentincome. Otherwise the change would increasetotal (privateplus public) consumptionso as to offset most of the effect of the increasedgrants on the current account. The foregoingdiscussionis not meant to claim that the switch to grants was not significantat all. Surely it reduced the uncertainty concerning policy debt the continuation of the U.S. accommodative to the growing service and presumablyhad a favorableeffect on the attitudeof the financialmarkets to Israel'sborrowingpossibilities. The foregoinganalysisseems to suggest that the switch to grants had a greater effect on Israel's liquidityposition than on its permanent income (assummdngthat the increaseddebt servicewas to be financedby additional grants). Indeed, if we look at the basic account in table 1 we see that Israel was not in any fundamentaldifficultiesin its balance of payments before the stabillzation. It seems that it was mainly the cyclic deterLorationsin the balance of payments, and the policy reactionto them, that led to the accelerationof inflation. - 6. 18 - Real Aspects of Fiscal Policy The basic facts concerningthe cut in the domesticfiscal deficit are summarizedin table 6. Comparing the stabilizationperiod 1985-198710/ with the pre-stabilizat_on period 1980-1984we find that the fiscal deficit of the public sector (in the operationalsense) was cut by 8.6Z of GNP about half of which are net taxes and the rest is public consumption (publicsector investmentvaried very little). Comparing 1987 with 1980-1984,we still find that the cut in the fiscal deficit, 112 of GNP, is again divided roughly in 11 / half between net taxes and public consumption. In spite of the sharp decreasein d1sposableincome in 1985, followingthe tax hike, and regardlessof the fact that disposableincome regained its 1984 level only in 1987, private consumptiondid not respond to this situation,but rather started an upward surge which took an extreme form of a 14? rise in 1986 and 7? in 1987. The questionwhich arises in view of these developmentsare the following:Why did not consumptionrespond to the increasein taxation? Why did it in fact rise remarkablywhen real disposableincome remained depressed for three years? Is there any connectionbetween the increasein private consumptionand the reductionin public consumption? It is quite clear that private consumptionneed not respond to the drop in disposableincome in 1985 (see table 1) because this shock effect may have been consideredas temporary. This is understandablein view of the fact that most variationsof net taxes in Israel were of a temporarynature, being related to electioncycles (as in 1981 and 1984), to unexpectedjumps in inflation which eroded temporarilythe tax base as a result of the Tanzi effect (as in 1984), and so on. The reactionof the private sector to these - 19 - variationshas been by an large in line with the permanent income theory, or with the Richardianequivalenceapproac.. Figure 2 shows quite clearly the remarkablenegativecorrelationbetween public and private saving over the past 15 years. However,while this type of reactlonmay explain lack of responseto the initial shock it cannot explain the increasein consumption,relativeto GNP (table 10) when disposableincome continued to be depressed. In the followingdiscussionI wish to explore several theorieswhich might explain the apparentcontradictionbetween the private consumptlonboom and the contractionaryfiscal policy. a. One interpretationcenters on the assumptionthat people perceive the exchange rate stabilizationas being temporary,i.e. as a period of low inflatLonto be followedby a resumptionof inflation. Suppose that ln this setting,modelled by Calvo (1987),consumptionof liquidityservicesand ordinary consumptionare complements (this is also consideredby Obstfeld (1985). Then ordinary consumptionwill rise in the stabilizationperiod when consumptlonof liquidityservicesis cheap. This factor operates regardless of the time path of fiscal deficits. Another feature of the (presumed)temporarinessof stabilizationis related to the tendencyto increasethe purchaseof durables,as has been noted by Dornbusch (1985). Indeed one observesa large increasein purchase of durables in 1986 (table 9). However one should note that thls followedtwo years of a low level of purchases followingan earlier boom. One should also note that non-durableconsumption (which constitutets about 902 of total consumption)rose by 102 in 1986 and by 72 in 1987, which shows that the consumptionboom is not confinedto durables. - 20 - In the Calvo model the stabilizationof the ezchange rate should a1so raise the trade deficit,which was not the case in Israel (table 10). This is explained,in part, by the reductionin public consumptionwhich matched the increasein private consumption(comparing1981-94with 1987, Table 10). Thus fiscal policy with respect to public consumptionoffset the expansionary effect generatedby the (presumably)temporaryexchange rate stabilization. b. An alternativeinterpretation, which is referredto briefly in AR87 chapter 2, takes an oppositeview of expectations. Thus suppose that people really believe that stabilizationis here to stay and they also believe in the permanenceof the cut in public consumption. Assume further that people use public consumptionas an indicatorof their permanent level of net taxes.1 2/ This can be justifiedon the basis of the greater stabilityof public consumptionrelativeto nut taxes (see table 7). Now it may be assumed that people expectedthe stabilizationto be based on the eliminationof the fiscal deficit. On the basis of past experience achieved they may have thought by a rise in net taxes. that the balancing of the budget will be In practice,however,half of the cut in the fiscal deficit was in the form of a reductionin public consumption. Since the latter is an estimateof permanentnet taxes people found themselveswith higher permanent disposableincome which induced them to increasetheir consumption,in spite of the fact that their measured disposableincome went down. To put it differently,permanent disposableincome went up because the increase in taxes was less than expected. It should be noted thr.tthis theory explainsnot only the emergencyof the consumptionboom but also its magnitude, which should be roughly equal to the decline in public consumption. - 21 - According to this interpretationthe reductionin public consumption appears to be the cause of the consumptionboom so that on the whole fiscal policy was neutral with respect to the import surplus. What was then, in retrospectthe benefit of cutting the fiscal deficit through public consumptioninsteadof making the full adjustment through taxation? One of the advantagesin making the adjustmentthrough public consumptionis that in a world of uncertaintythe latter form is a more credibleway of convincingthe public of the permanenceof the fiscal adjustment,which has favorableeffects on the financialposition of the economy. Secondly, unlike the model of Ricardianequivalence,taxes are distortionary. This is especiallythe case in Israel whose gross tax rate is among the highest in the world. Raising taxes still more is most undesirable. Thirdly,the cut in the relativesize of the public sector made it possibleto divert the entire incrementto the labor force to the (nonfinancial)business sector, thus contributingto a more desirableform of growth. c. An additionalinterpretationcan be given on the basis of the distributionalaspect of stabilization. AR 87 points out that the stabilizationprogram brought about a sharp increasein net (disposable)wage rates in 1986-87. This was so because the gross real wage rate increased sharply in these years (especiallyin 1986) while the rates of direct taxation on labor income actually fell [thiswas offset by a sharp increase in the taxationof non-wage incomes in 1986. (See AR87 ch. 5)]. The dominant factor mas however,by far, the increasein gross wages. Table 8 shows that the decline in the net wage rate (per employee post) was mild in 1985 and the increasewas sharp in 1986 comparedwith total disposableincome (table 1). Assuming that the marginal propensity - 22 - to consume out of wage income is higher we obtain a possible explanationof the consumptionboom. Iu fact table 8 shows that net wages and consumption were quite closely correlatedin the 1980's. 13/ According to this interpretationthe change in the income distributionin favor of labor outweighedthe effect of a reductionin total disposableincome as far as private consumptionis concerned. However,was the increase in gross wages (whlich wac the dominant featuresof this process) an independentfactor or was it due to demand pressures generatedby the exchangerate stabilization? The answer to this questionis not quite clear (we shall return to this issue later). d. It has been pointed out that the greater sense of securitywhich came with stabilizationtended to increaseprivate consumption. But, as is well known, the effect of uncertainty (as is the effect of the interestrate) on consumptionis ambiguous. I would suggest that the differentinterpretationsgiven above should not be consideredas mutually exclusive. Thus it might well be the case that in the early phase of stabilizationthe public was much more skepticaland behaved accordingto the Calvo model and then, as the program gained more credibility,the more optimisticinterpretationtook over. To the extent that wage pushes were importantthey can be added to the other interpretations. 7. FinancialAspects of the Fiscal Adjustment The foregoingdiscussionsuggestedthe possibilitythat the fiscal adjustmentdid not have an appreciableeffect on Lotal domesticdemand and consequentlydid not affect the import surplus. However, the eliminationof the domestic fiscal deficit had a most sinpificant effect on the financial markets by restoringthe confidencein the government'sability to service the _ 23 - debt. This renewed confidencereduced the threat to the reservesof the central bank and provideda firm supportfor the fixed exchangerate policy. One indicatorof this transformationis in the compositionof deficit finance (see table 3). Prior to stabilizationthe proportionof foreign exchange sales increasedrapidly till it reached 8.62 of GNP in 1984 (this accountedfor two thirds of the deficit comparedwith one quarter in 1982) However, after stabilizationthese net sales fell gradually to zero. Another indicatoris the behaviorof the derived capital import of the private sector,which measures the excess of the current account over the sales of foreign exchangeto the private sector. This measure indicatesthat the capital exports,^.ich characterized1984 and the first half of 1985 turned into capital imports from the second half of 1985 (see table 12). Similarly werrorsand missions" of the private sector indicatean intensificationof capital flight in 1983 through the first half of 1985, a process which stopped abruptlyin the second half of 1985 and did not reappear since. The foregoingdiscussionsuggeststhat the main role of the fiscal adjustmentwas in its effect on the financialmarkets rather than on the trade account. 8. Domestic Investmentand MonetaryPolicy The offsettingeffects of private and governmentconsumptionimply that national saving out of GNP was not affected in any significantmanner by the stabilizationprogram. This means that the improvementin the trade accountwas related almost entirelyto the reductionin the investmentIGNP ratio. One can see in table 10 that the improvemcntin the trade account/GNP ratio matches the reductionin the investment/GNP ratio. - 24 - The fall in investmentcannot be consideredas an autonomous development. The decline in investmentin ,ixed assets began in 1984 and it was part of a policy of improvingthe trade balance in the wake of the crisis which followedthe abandonmentof the policy of slowing down the rate of devaluationin 1983. This was accomplishedby tighteningmonetary policy which led to an increasein the real interestrate (see table 1) and to an improvementin the trade account. The tightermonetary policy followingthe initiationof the stabilizationprogram in 1985 raised short-terminterestrates on free credit to the domesticmarket even more. This policy discriminatedagainst finance of domesticactivitysince interestrates on loans to exporterswere not affectedappreciably. In particular,this policy hit hard construction activitywhere the interestcomponent in costs is relativelyhigher. Thus in 1985 and 1986 investmentin residentialconstructiondropped 12 and 8 percent respectivelyin real terms (AR87,p. 31). Since constructionaccounts for more than 40Z of total gross investmentwe may infer that tight monetary policy played a significantrole in cutting investment. In 1987 there was a recoveryof domesticinvestmentfollowingthe surge in economicactivitybut the level still remainedbelow normal. Real interestrates on credit lines to the domesticmarket still remainedvery high (about 2.5Z per month). Although these high rates on loans,which exceed by far the deposit rates, are consideredexcessiveby the Bank of Israel, yet the fact remains that they hamper constructionactivitiesand perhaps other forms of investmentas well. Since the ratio of capital to output has been fallingin the past three years and since real interestrates are expectedto fall in the future one may expect a recoveryof investmentin the years ahead with a possible - 25 - negativeeffect on the trade balance. However,with improvedconfidencein the economy this need not create difficultiessince higher investmentwill contributeeventuallyto future output and exports. 9. SummingUp the Influenceson the Exte)nalPosition Table 10 sums up the changes in the import-surplus,following stabilization,in terms of domesticuses. When we compare 1987 with the 1981-1984average,in terms of current ratios to GNP, we find that private and public consumptionroughlyoffset each other, with the changes being in the order of 5.5t of GNP. This means that the improvementin the trade account by about 3.5Z of GNP is "explained*mainly by the cut in investment. The foregoingcomparisonswhich are based on ratios of various variablesto GNP, measured in current prices,may be problematicwhen the exchange rate is consideredas overvalued(as might be the case in 1987 as a result of the fixed exchange rate policy). In this case the import surplus will be downwardbiased. In order to check this point we carried out the same comparisonsusing constantprice variablesas computedby the Central Bureau in table 11. They show essentially of Statistics. The results are suzmmarized the same picture as the current price ratios and thereforedo not require additionalcomment. Accordingto one of the earlier interpretationthe reductionin public consumptiongeneratedan increasein private consumptionwhich offset the effect of the former on the trade account. The improvementin the trade account is then attributablemainly to the tight monetarypolicy which brought about a reductionin the investment/GNPratio. Thereforethis improvement cannot be consideredas being due to fundamentalchanges. - 26 - Indeed, the most significantchange in the externalpositionwas of financialrather than of a *real"nature (meaningthe trade account and relatedmeasures). This was the eliminationof the constant injectionof liquiditythrough the large fiscal deficitswhich threatenedto lead to recurrentfinancialcrises, especiallyin the foreignexchangemarkets. If the changes in the current accountwere not fundamental,does it mean that the present state of affairs is not sustainable? Not necessarily. First, as we noted earlier, it is not quite clear that the state of the balance of payments in the pre-stabilization era was not sustainable. Secondly,even if a fundamentalimprovementwas indeed requiredit may still take place in the future with the stimulusof growth provided by a stabilized economy and by the benefits of reforms in the tax structureand in the capital markets. III. Evolutionof Policiesin the Course of Stabilization14/ 1. Fiscal Policy Since the beginning of the stabilizationprogram till the end of 1987 the governmentmaintainedconsistentlya virtuallybalance budget with domesticdeficit runningat about 1Z of GNP. The persistentbehaviorwas maintainedboth with respect to direct domesticpublic sector demands and net taxes. However since the last quarter of 1987 through the second quarter of 1988 there are indicationsthat the public sector deficit is increasing. This is based on estimatesof the central government'sdomesticdeficit,calculated on a cash basis from the Bank of Israel accounts. According to these estimatesthe domestic deficit in the last three quarters (includingreal interestpayment on the public debt) was around 4Z of GNP. While this - 27 - reflects, probably, the temporary stresses due to the oncoming elections it may exert a destabilizing influence on the delicate balance achieved by the program. We have mentioned earlier that in 1987 there was a change in taxation policy with the introduction of the reform in direct taxes (see footnote 6). Taken by itself this would have reduced the government revenues by 3S of GNP (AR87 estimate). However. the increased efficiency in tax collection due to the low inflation (the Tanzi effect in reverse) offset the foregoing tendency so that the share of net taxation in GNP remained unchanged. 2. Monetary Policy The spite of the fixed exchange rate regime the government used monetary policy in an active manner throughout the program. This was made possible by the tight controls on capital flows. At the beginning, monetary policy contained domestic activity and discouraged capital flight through very high real interest rates for loans to the domestic market (even if we assume high values for inflationary expectations). Figure 3 shows the significant spread between domestic and foreign interest rates (adjusted for devaluation) which existed since nominal interest rates stabilized in the first half of 1986. It can be seen that this spread remained constant even when the black market premium fell significantly. One of the manifestations of the central bank's active stance was the tight monetary policy implemented in the beginning of 1987 in order to prevent an acceleration of inflation following the January devaluattLA. This exercise raised domestic interest rates (figure 3) and induced large capital inflows, in spite of controls, which reversed themselves later in the year when expectations of devaluation were revived. Thus although capital flows limited the possibility of conducting monetary policy, yet the controls on these flows left enough room to use the policy quite effectively. - 2b - In the course of the program there was a shift from using commercial bank credit as an intermediatetarget to a wider concept - net domesticcredit (NDC). This shift seems justified in a fixed exchange rate regime where the focus is on foreign exchange reserves. With NDC being defined so as to satisfy the equation: Honey- NDC + reserves one may regard the targetirgof NDC, given Money', as targetingreserves. The concept of money chosen for this purpose is M3 which includesH2 plus deposits linked to foreign exchange (PATAM),15/ the reason being that the demand for M3 is more stable than for M1 or M2 (see table 2). As a result of this targeting real bank credit was allowed to grow 16/ fast while real M3 growth was restricted. In fact M3 relativeto nominal GNP declined slightlybetween 1986 and 1987 (see table 2). While this policy indicatesan effort to keep reserves from falling it does representat the same time an accommodatingmonetary policy towards inflationwhich continuedat a rate of 202 per annum. We may infer thereforethat the basic nominal anchor was the exchangerate; monetary policy provided indirectsupport for this anchor by guardingforeign exchangereservesbut not directlyby settingnominal targets of NDC or for money. 2. Exchan8eRate Polic, In the first stage of stabilizationthe exchangerate was pegged to the U.S. dollar in an act which symbolizedthe new era of stability. Once the weakening of the dollar became an anticipatedphenomenonthis policy was Implicitlyone of planned devaluationat a slow rate, which amounted to a devaluationof 162 with respect to the basket of currenciesin the first year of the program. 17, - 29 - Since August 1986 the exchangerate was pegged to the basket of currenciesand since then it was devaluedby 1O in January 1987 and by about 3.5Z till the first quarter of 1988. On the whole, since the third quarter of 1985 till the first quarter of 1988 the exchangerate of the basket was devaluedby 352 while the consumersprice index rose by 56Z. Since it is unlikely that this differencewill be allowed to widen or even to persist one may infer that the emergingexchangerate policy is one of long steps (many people expect the next devaluationwithin the frameworkof some agreementto sterilize,at least partially,its effect in the cola. The authoritiesclearly rejectedthe policy of a crawlingpeg based on mini-devaluations.This is motivatedby the objectionto legitimizethe crawling inflationand also by the desire not to commit oneself to any rate of inflationbefore the post-stabilizatIon conditionsbecome clearer. A floating exchange still rate is unthinkablein the present situationbecause the economy is highly secondly indexed because understanding and therefore under with the latter labor very regime susceptible to nJminal shocks and it is more difficult to reach an about wage policy. IV. Policy Dilemmas 1. The Low Inflation In the early to 1 5-2 percent stages annually of the stabilization per month it was thought However, as time passed became clearer Step that (see table and inflation that program, this is a temporary showed no sign of falling economy is on some low inflation 13). when inflationfell What could be the reason step phase. further it of about 20S for having an inflation in excess of the industrializedcountrieswhen the budget was balancedand the central bank had ample reserves? -30- The theory of inertia due to staggeredprices does not seem to be an appropriateexpianationsince in this case we should observe a declining trend for inflation. Similarly,the wage price spiral due to lagged indexation adjustmentwas neutralizedby the controlsand the package deal at the beginning of the progeam. One of the explanations rate policy exchange followed rate for this phenomenon was the exchange in the first year. As noted earlier,by pegging the to the dollar shekeldepreciated offered relative when the latter to the basket was weakening, of currencies the by 162 in the first year. 17/ This may have out the economy into an expectationalorbit of about 202 inflation. Why did the authoritiesnot peg the shekel to the basket of currenciesLuediately when it became known that the dollar was likely to continue weakening? It is argued that maintaininga fixed exchange rate with respect to the basket would imply an absolute reductionin the exchange rate of the dollar. This would requirean absolute reductionin the prices of exports to the dollar area. If wages and prices of inputs exhibit downward rigidity then this may entail unemployment(See Bruno and Piterman (1987)). However, this argument still does not explainwhy prices, in a poststabilizationenvironment,should exhibit greater rigiditythan in the industrializedcountries,which somehow overcamethese difficulties. An alternativeexplanationfor the low inflationstep is that people do not expect the governmentto fight in order to reduce furtherwhat appears to be a low Inflation from a high level level after to the present the big achievementof reducing inflation one. Thereforethey expect the governmentto accommodate wage and price Increases cannot explain which do not exceed critical level. why the critical level is around 202 per year but one may One - 31 - mention that a low inflationstep of this order of magnitude has been observed in other successfulstabilizationsin chronic inflationcountries (as was the case followingthe 1964 stabilizationin Brazil, or in Chile in the 1980's). In supportof this argumentwe may note that the only method which seems to have worked so far in reducinginflationin a susta'nablemanner was neither monetary nor exchange rate policy but rather the heterodox shock of July 1985. However,one cannot expect realisticallythat the governmentcan mobilize the politicalpower to repeat the same steps to subdue a low inflation,which by itself is consideredas a big victory. Moreover, the very fact that the governmentused controls and package deals to avoid unemployment when it reduced inflationunderminedits credibilityto accept a recessionas part of its disinflationaryeffort, which reducesthe effectivenessof monetary policy. In view of these considerationsthe public expects the governmentto accommodatemoderatewage and price increases,which puts the goverment in a difficult dilemma. The danger in accomuodatingthe low inflationstep is that the process of maintainingdomesticinflationabove the world level for a long time to likely to be unstable. It is difficult to reduce the degree of wage indexationwhen it is known that the economy faces recurrentjumps in the exchange rate (with uncertaintiming). So the system remains susceptibleto other big nominal low inflation period therefore step. shocks which are bound to come sooner On the other hand, a non-accomodative of unemployment which is not acceptable that the dilemma of the low inflation politically. step or later policy and rock the may imply a It seems is some form of the olf trade-offbetween inflationand unemployment. In orthodox stabilitation (using a monetary crunch) this issue appears immediatelywhile in a heterodox stabilizationit emerges at a later stage. - 32 - 2. The Issue of Real ADpreciation One of the disturbingfeaturesof the stabilizationprogram is the continuingreal appreciation,amountingto 15? between 1985 and 1987 (see table 1). This is generallya featureof exchangerate based stabilizations which are heading towards a crash. However,ordinarilythe real appreciation is associatedwith a sharp rise in the import surpluswhich is not quite the case in Israel. In the course of the stabilizationprogram the import surplus as percent of GNP (in current prices) rose by 1.5 percentagepoints in 1986 and by 12 in 1987). This does indicatea worseningof the import surplus but not at an alarming rate. We also recall that the level of the import surplus in 1987 was still far below the pre-stabilization period. We may look alternativelyat a comparisonbased on quantitymeasurep of domesticuses and of GNP (the indifferencebetween these being the import 1 surplus). These indicatorsshow that while in 1986 the growth of domestic uses exceeded GNP by 5, the excess dropped to 0.52 in 1987. This difference and some additionalconsiderationssuggest that we should deal separatelywith 1986 and 1987 (extendinginto 1988). One of the accepted interpretationsof the fast rate of real appreciationin 1986 is the foregoinggrowth in domesticdemandswhich presumablyoriginatedfrom the greater sense of securitywhich followedthe success of the program in its initialphase. (An alternativeinterpretation could be providedby the Obstfeld-Calvoapproach). This is the demand pull interpretationof the real appreciationin 1986. - 33 - It has been pointed out, however,that the increasein demands in 1986 followeda year of most depresseddomesticdemand (see table 10). Comparing the quantitylevels of domesticuses (relativeto GNP) in 1986 with earlieryears we find that the level of domesticdemands in the latter year was about the same as in 1984 and much lover than in 1983 while relative prices of exports and importswere much lower in 1986. These facts suggest that the real appreciationin 1986 may be due to cost pushes from the labor 1 8/ This view is supportedby market after the relaxationof wage controls. the sharp rise ln labor costs in 1986 and by the fact that unemploymentwas higher than in 1983 and 1984 (see table 1). The demand-sideview of the real appreciationin 1986 does not explain much about the continuedreal appreciationin 1987 because the growth 1* latter year was balanced. 19, The wage push theory is also problematic because lt does not seem to be consistentwith the remarkablegrowth of output in the business sector and the drop in unemployment. The upshot of the discussion foregoing real exchange rates of the balance is that it is difficultto explain the behavlorof the or the real period by means wage in the post-stabilization between domesticuses and GNP. Explanationsbased on cost push considerationsare not particularlyillui-nAtingeither in vlew of the acceleratedgrowth in 1987. An alternativeapproachto the issue of real appreciationcould be based on the idea that stabilizationhas brought about a structuralchange in the financialand productivesphereswhich changed the equilibriumreal exchange rate. For example, the improvedliquiditypositionof the economy may have reduced sector. precautionary demand for foreign exchange by the private Given the restrictionson capital flows this may have cause a real appreciation. A similar conclusion can Le obtained if the reduction in - 34 - uncertaintyhad a relativelylarger impact on productivityin the sector of tradeables. The reductionin government'sdomesticpurchases of tradeables may have worked in the same direction. However, the verificationof these hypothesesrequiresdetailedresearch. If the real appreciationwas in fact due to structuralchanges then it need not be a cause of concern. There are however reasons to believe that. part of the real appreciationcan be attributedto unduly strong attachmentto the fixed exchangerate policy in face of inflationaryexpectationsof the type describedin the proceedingsection. In order to clarify this point we may suppose that in the course of 1986, and especiallysince the pegging of the exchange to the basket of currenciesin August, people were expectinga correctivedevaluationat some uncertain (but not very distant)date.2 0 / The actual devaluation(of 1OZ) took place in January 1987. Therefore the expectedlabor costs in 1986 were lower (especiallyin the second half) than the observedones and the opposite is trust of the real exchangerate. Thereforethe data exaggeratethe real appreciationin 1986. The correctionin real wages and relativeprices brought about by the devaluationcan be seen in table 14. The same considerationcontinued to work even more forciblyin 1987 because then the exchange rate was practicallyfixed with respect to the currencybasket while domesticinflationcontinuedunabated. This led to a rise in real wages and drop in relativeprices of exports and importsduring the year till following the devaluation in the beginningof 1988 nor after that this day (July 1988). According to this view there is really no contradictionbetween the balance growth in 1987 the real appreciationbecause the expected real exchange rate may have remainedconstant. Indeed,as figure 1 shows, the - 35 - black dollar premium rose continuouslyafter the devaluationin the beginning of the year till many people began to believe that devaluationwill be postponed (perhapstill after the Novemberelections). While in the January 87 devaluationthe workers accepted a (temporary)cut in real wages it seems that it was not possible to repeat the same agreement in the beginningof 1988 because of the approachinggeneral elections. Hence employers realizedthat real wages are indeed higher than previouslyexpected and the oppositewas true for the real exchange rate. The realizationthat real wages may stay at a high level for some time may explain the recessionarytendenciesin the economy in the second quarter of 1988. 21, The foregoing ,agreed devaluations' analysis brings - namely that out a weakness their of the present implementation regime of is restrictedby the political conditionsregardlessof the economicnecessity. The dilsmma is that returningto one sides devaluationswhen the economy is still highly indexed may bring back the old wage-exchange this dilemma will be solved disinflation. rate spiral. is one of the key issues for The way in which the continuation of - 36 - FOOTNOTES See Bruno (1986)and Liviatan (1986a) 2 The spread with respect to nominal (ex post) dollar linked loans for domesticactivitywas considerablysmaller. The latter interestrate remained about 1-1.5 percentage points above inflationin monthly terms. Even this representsa large spread, especiallyif we take into account that the expectednominal rate on these loans exceeded the actual one because the same thing applies to devaluation(especiallyin 1987). S Interestrates on loans to exporterswere kept close to international levels. 4 In additional,the degree (percentageof compensation)of wage indexationwas reduced from 80Z to a range between 70-80S dependingon the time which elapsed between consecutiveCOLA payments. 5 We shall use this notation for Bank of Israel Annual Report 1987 (Hebrew),with similarnotation for other years. 6 Within the frameworkof the tax reform the income tax rate on undistributedcorporateprofitswas reduced from 61 to 45 percent. As for personal income tax, the two highest steps of the tax rates - 50 and 60 percent - were abolished,with the maximum rate being reduced to 48S (howevera temporary surchargewas imposed on the latter bracketwhich raised it to 532 till December 1987). 7 One form of compensationfor the workers was the government'sobligation to freeze prices of a number of 'basLcecommoditiestill April 1988. The base of 13 consists of the money base (base of 42) plus the reserve requirementsof the private banks (depositedin the Bank of Israel) against foreign exchange linked depositsof the private sector. Since the latter require a 1002 backing of reserves (again in the form of foreign exchange linked deposits),the shift towardsnon-linkeddeposits followingdisinflation,created excess reserveswhich were partly sterllized by raising reserve requirementon shekel deposits. 9 Total U.S. governmentaid to Israel in 1984 was about three billion dollars which consisted of 1.8 billion in military aid (half of which was a grant) and 1.2 billion dollars as a *civilian (non-defense grant). Note that the change from loans to grants does not affect the net resource transfer in the short run and therefore should not be reflected in the changes in the foreign exchange reserves. 10 Strictly, partial 11 Two other facts about the fiscal adjustment are worth noting. 1985-87 with 1980-84 in terms of average ratios of GNP we find the stabilization fiscal adjustment period began in July took place in the first 1985 but in fact a half of this year. Comparing that - 37 - domestic defense expendituredsdedcreasedby 2.6 percentagepoints of GNP while civilianpublic consumptionwys reducedby 1.5 percent of GNP. Thus most of the cut in public consumptiondid not compete directlywith private consumption. On the revenue side, net direct taxes, as S GNP, were not affectedby stabilizationso that the entire increasein net taxes took place in indirecttaxes. 12 Whien the government'sbudget 4s,intertemporalybalancedw tG ;tT -b ,her; G anatTare the permanent flows (properweighted averages)of governmentconsumptionand taxes as seen at time t,tb is the stock of the public debt at t and r is the interest-rate. Permanentdisposableincome is then given b tY :tG tY :tT + Eb where Y is permanent national income. 13 It should be pointed out however that the variationsin 1981 and 1983 in both variableswere related to direct policiesof slowing down inflation. 14 On these issues in the first two years see Bruno and Piterman (1986). 15 This implies that NDC in the sum of net domesticcredit to the governmentand to the private sector provldedby the Central Bank and the private banking system. 16 The growth in domesticbank credit was offset by a contractionof net-domestic credit to the government. Thus the governmentcontinuedto borrow from the public for non-fiscalreasons (the justificationfor this policy is not clear. 17 Comparing their 18 One of the manifestations of the wage push were the lxge minimum wage, which continued at a slower pace in 1987. 19 In the sense that domesticuses increasedin the same proportion constantprices). 20 It is the variation in expectationsabout the timing of devaluationwhich may cause inexplicablemovements of the black dollar premium. 21 Part of the recessionarytendencymay perhaps be attributedto the consequences of the political unrest In Israel'soccupied territories. quarters of 1986 and 1985. increases in the as GDP (in - 38 - REFERENCES Blejer, H. and N. Liviatan (1987), *FightingHyperinflation- stabilization StrategiesIn Argentinaand Israel, 1985 - 1986', IMP Staff Papers, Vol. 24, No. 3, 409-438. Bruno, M. (1986), 'Generatinga Sharp DisinflationtIsrael 1985'. NBER, Working Paper No. 1822. Bruno, H. and S. Piterman (19S7), 'Two Years of the StabilizationProgram: Israel 1985-19870,EconomicQuarterly (Hebrew),September1987. Calvo, G.A. (1987), 'Balanceof PaymentsCrises in a Cash in Advarce Economy', Journal of PoliticalEconomy, 94, 1319-1329. Dornbush,K. (1985), 'InflatLon,exchange rates and stabilization",NBER Working Paper No. 1739. Liviatan,N. (19 8 6a), 'Inflationand Stabilizationin Israel - Conceptual issues and Interpretationof Developments',IMP Working Ps-ner,November 1986. Liviatan,N (19 8 6b)), 'The Evolution of DisinflationaryPoliciesin Israel', Working Paper. Liviatan,N. and S. Plterman (1986), 'AcceleratingInflationand Balaace of PaymentsCrises, 1973-1984',in Ben-Porat,Y. ed., The Israeli Economy Maturins Throush Crises, Havard UniversityPress. Obstfeld,M. (1985), 'The Capital Flows Problem Revisited:a StylizedModel of SouthernCone Disinflation",Review of Econnic Studies,52, 605-26. - 39 - Table 1 Economic Indicator1981 - 1987 1981 1982 1983 1984 1985 1986 annual change (S) in real terms 1987 1. Real disposableincome 14.2 2. Private consumption 12.0 3. Public consumption,(excl. defense imports) 1.4 4. Gross investmentin fixed assets 3.7 5. Gross domesticproduct (GDP) 3.8 6. Total domesticuses (Const.prices excl. defense imports) 6.5 7. GDP business sector 4.7 8. Total productivity (businesssector) 3.0 9. Real Wage rate 11.1 10. Real labor cost per unit of output (businesssector) -1.6 -2.6 7.7 2.8 8.3 8.7 -6.8 -11.1 0.5 2.8 14.2 7.3 8.1 2.9 2.2 1.5 -1.0 -3.5 1.8 5.1 12.6 -11.3 -7.8 -1.6 13.7 1.0 2.6 2.4 3.7 3.3 5.2 7.2 0.0 7.0 3.1 -4.7 2.8 -2.2 5.0 8.4 5.3 5.8 6.9 -1.0 -0.9 -0.1 4.7 -0.3 -2.5 4.1 -6.8 3.0 11.6 3.4 8.2 6.8 5.4 -5.6 0.7 8.4 3.0 5.9 6.7 7.1 6.1 I. Demands,Outputs and the Labor Markets ------------------------------------------------------ 11. Unemploymentrate 5.1 5.0 4.5 $ billion, current prices II. Balance of Payments 1. Current Account -0.9 -2.0 -2.1 -1.1 -1.1 0.8 (0. 3) (0.0)A -0.3 2. Unilateraltransfer 2.9 2.6 2.9 3.4 5.1 5.4 4.8 3. Import surplus (excl. defense) 4. Basic account 2.1 0.3 3.0 -0.8 3.8 0.3 3.3 -0.4 2.1 1.2 2.7 1.3 3.4 0.1 (0.4)A (0.5)A 13.4 15.6 18.3 19.7 19.3 19.2 19.2 3.8 4.3 3.8 3.3 3.8 4.9 6.0 5. Net externaldebt 6. Net international reserves --------------------------------------------------------------------- __------__--- Index 1980 - 100 7. Relativeprice of exports 8. Relativeprice of imports 98 93 91 92 92 82 77 96 91 85 87 93 83 80 - 40 - 9. 1981 1982 1983 1984 1985 1986 1987 102 107 111 107 107 110 107 1.5 1.2 1.3 1.6 0.5 1.1 Terms of trade III. Prices and Interest Rates (X) Monthly change (X) 6.0 6.2 7.2 7.5 9.3 9.7 15.2 15.2 9.1 8.0 5.6 6.2 9.4 15.7 8.4 1. Consumerprice index 2. Wholesale price index 3. ExchangeRate (basket of currencies) --------------------------------------------------------------------- 4. Interestrate on loans 5. Interest rates on deposition __------__--- 8.7 N/A 7.6 N/A Monthly (Z) 9.0 19.8 15.3 N/A 14.5 8.4 Sources Bank of Israel Annual Reports (AR) and data base of Research Department. 1.13 Includingtransfersfrom abroad. 1.4: For economy as a whole. Deflatedby CPI 11.1 Defense imports include always advancesfor purchases in order to smooth these import data. II.9: Of exports nd non defense imports (exc. capital services). 111.3: Bases on five currencies. 111.4: Overdraft facilitiesfor domesticmarket activities (in domesticcurrency). 111.5: CD rate. ^ Excluding special US grant. 4.0 1.3 4.0 1.4 - 41 - Table 2 EconomicIndicatorsam Z of GNP 1981 I. Fiscal Domesticdeficit Total deficit Gross taxes Not taxes 5. Net ezternal debt 6. Net domestic debt 1. 2. 3. 4. 5. 1983 1984 1985 1986 1987 7.3 7.8 46.1 26.2 42.0 120.0 16.6 19.0 38.2 18.3 50.0 128.0 7.3 2.2 451 27.7 51.0 138.0 1.4 -2.8 48.4 32.4 39.0 130.0 1.2 0.1 47.6 32.1 34.0 121.0 2.8 6.3 20.7 21.6 8.7 1.9 5.4 23.3 20.8 12.8 2.3 9.4 25.1 23.3 16.2 4.0 13.8 23.4 25.1 13.4 5.0 18.6 25.2 30.8 12.0 9.7 4.5 6.1 7.0 4.8 (1.7) 79.0 2.9 (0.4) 63.0 (public sector 1. 2. 3. 4. 11. 1982 13.2 10.2 15.4 12.1 42.6 45.5 18.5 24.5 38'.0 38.0 122.0 125.0 Monetary Hi M2 M3 Total bank credit Net domesticdebt 3.9 5.7 19.0 NA 3.4 6.1 19.6 23.5 NA TII. International 1. Import 2. Current account 3. Net externaldebt 9.6 10.9 12.1 -4.0 -8.3 -7.9 -6.8 62.0 65.0 76.0 Sources Bank of Israel Annual Report and data base of Research Department Based on real interestrates. Domestic plus foreign M3 - M2 plus deposits linked to foreign exchange. Net domestic credit to private and public sectors, defined to satisfy H3 - net domesticcredit plus foreign exchange reserves of the Bank of Israel. IIIls: xzcluding defense imports. 1.1s 1.2: 11.3: 11.5: Excluding Z special US grant. -0.8 53.0 _ 42 - Table 3 Domestic Deficit oi Public Sector and Its Financing (Z of GNP) 1982 1983 1984 10.0 6.0 12.3 9.3 2. Change in M3 base 2.6 2a. (additionto the base Of 13 1.7 3. Net increasein domestic debt 5.3 4. Sale of foreigncurrency 2.6 S. Intereston monetary base -0.6 7.6 3.9 2.3 -6.3 6.3 -1.6 1. Domesticdeficit 1985 whole 2nd year half 1986 1987 6.0 3.9 2.7 0.9 -0.4 -0.5 1.7 3.0 6.5 10.6 1.9 2.7 0.0 8.6 -0.2 4.6 4.8 -1.1 5.3 2.2 -1.0 3.2 2.5 -1.4 3.1 -0.1 -2.0 Composiitonof Deficit Financings Source:AR87, p. 224 1. Includesreal interestpayment on domesticdebt. 2. M1 - M2 plus foreign exchange-linked deposits. 3. Includes also changes in the balance of monetary loan to banks (treatedas a negativemonetarybase. Table 4 Debt Service 1. Debt service to U.S. government 2. Civilian grant 3. (2) (1) Sources (2) and Civilian Million $ Grant 19771981 19821984 1985 1986 1987 495 625 130 883 1,100 217 1,055 1,200 145 1,079 1,200 121 1,129 1,200 71 AR86, AR87. Civilian grant 1985 and 1986. excludes special U.S. grant of $750 million in - -43 Table S Not US Aid ML11ions $ 1982 1983 1984 1985 1986 1987 19811984 19851987 1,595 1,805 2,174 2,080 2,391 2,122 1,861 2,198 57 650 465 198 540 395 312 378 1981 1. 2. Net Financial US aid 1,871 (1) minus dLrect defense 76 imports Sourcet (1) Bank of Israel Annual Reports. Excludes special grant of 1985 and 1986. Referred to in text as 'net Financial resource transfer* (grants plus debt service minus new loans). Table 6 Public Sector Consumption, Investment, and Net Ta"es, (Z) of GNP Public consumption (domestic) Public investment met taxes Domestic deficit Sources (1) 19801984 (2) 19851987 32.2 3.2 23.5 12.0 28.2 3.1 27.9 3.4 (3) (2) - (1) -4.1 -0.1 4.4 -8.6 (4) 27.4 3.5 29.7 1.2 -4.9 0.3 6.2 -10.9 AR87, p. 90. Hot tazes Public consumption (diostic) Sources (4) - (1) 1987 Table 7 Net Taxes and Public Consumption. 1981 (1) of GNP 1. 2. (5) AR87, pp. 90, 98. - 1984 1981 1982 1983 1984 18.5 32.4 24.5 32.6 26.2 31.8 18.3 32.7 _ 44 - Table 8 Real Wage Per Employeeand Per CapLta ConsumptLoD 1. Per capita consumption 2. Real wage (gross) 3. Real wage (net) 1981 1982 1983 1986 1987 1984 1985 Annual rate of change (Z) 10.5 11.1 15.2 5.7 -0.9 -2.9 6.1 4.7 3.1 -8.6 -2.5 -6.8 -1.0 -6.8 -2.2 12.5 11.6 13.5 Sources AR87, ch. 4. 2. and 3.s Private and public sector. Table 9 Durable and Won-durableConsumption 1. Durable purchases as percent of total consumptLon 2. Annual lncrease (S) in constant prLcest a. durable purchase b. non-durableconsumptLon Source: A£87, p. 28 2. is ln current prLces. 1986 1987 1984 1985 9.7 8.5 10.6 11.0 -31.5 -2.5 -0.7 0.7 47.1 10.2 12.6 7.6 6.3 8.2 7.7 - 45 - Table 10 Component. of GNP in 1981 - 1987 (Z of GNP (current prices]) 1. Private consumption 2. Public consumption (domestic) 3. Gross Investment 4. Import surplus 5. Gross nat. saving out of GNP 6. Current account 7. Gross nat. saving (total) (1) (2) (3) (4) (5) (6) (7) 1981 1982 1983 1984 1985 1986 1987 (8) 19811984 (9) 55.1 56.7 58.2 55.5 57.7 6C.9 61.9 56.4 +5.5 33.2 31.1 30.7 32.1 28.4 26.1 25.9 31.8 -5.9 21.3 23.1 23.2 22.1 18.4 19.1 19.2 22.4 -3.2 9.6 10.9 12.1 9.7 4.5 6.1 7.0 10.6 -3.6 11.7 12.2 11.6 12.4 13.9 13.0 12.2 12.0 0.2 -4.0 -8.3 -7.9 -6.8 4.8 2.9 -0.8 -6.8 6.0 17.3 14.8 15.3 15.3 13.6 16.2 18.4 15.6 2.8 (7) - (8) Calculated from data base of Research Department of Bank of Israel 4. Converted dollar values to shekel by average official exchange for each year. Same calculation used for nominal GNP. Import excludes direct defense imports. Items (1), (2) and (5) add up to unity. (1) + (2) + (3) Table Domestic 1. Private consumption 2. Public consumption 3. Gross investment 4. Total domestic uses Uses as Percent rate surplus - (1) - (4). (7) - (3) + (6) 11 of GNP in Constant Prices (1) (2) (3) (4) (5) (6) (7) 1981 1982 1983 1984 1985 1986 1987 (8) 19811984 56.9 60.7 64.1 58.3 56.6 62,5 64.3 60.0 4.3 30.5 31.1 31.0 30.7 29.3 27.4 26.5 30.8 -4.3 20.5 23.3 25.0 22.7 19.6 20.7 20.4 22.9 -2.5 107.9 115.1 120.1 110.6 111.2 113.7 111.7 105.5 Sourcet Research Department. Bank of Israel, Data Base. Line 4 minus 100 imports) in constant (excluding defense yields the Import surplus to GNP. relative prices (9) (7) - (8) -2.5 - 46 - Table 12 Balance of Payments of the Private Sector, 1981 - 1987 (millions$) 1. 2. Current account Basic account 3. 4. 5. Errors and omnissions Purchaseof foreign exchange from Bank of Israel Derived Capital import 1985 II I 1985 1986 1987 -2,069 -1,442 -217 -51 -268 -769 -940 -1,000 -1,269 -254 -40 -294 -616 -609 -1.022 -418 -433 197 -236 231 161 512 1,588 2,000 677 105 782 659 99 883 480 -558 -406 110 840 1981 1982 1983 -434 -1,395 -489 -1,515 38 40 380 54 1984 -460 54 Sources Years 1981-1984: AR86, p. 202; 1985: AR85, p.225; 1986 - 1987: AR87, p. 189 The data from the differentannual reports are not fully consistentwith each other because of revisions. Table 13 SelectedPrices Indices,1985-1988,Quarterly (annualizedrates of change (Z) within period) 1. 2. 3. 4. Consumer price indez Controlled pricesga Industrial price index Exchage rate NIS/currency basker 1987 II III IV I 1986 II III IV 221 362 247 29 8 30 13 30 19 16 10 19 18 456 464 416 -2 9 46 13 10 22 14 16 9 13 205 233 203 33 16 22 11 12 32 14 18 20 17 241 279 126 14 8 8 5 3 I 60 -1 Sources AR86, p. 51 and AR87, p.50 a. 1988 I 1985 II III IV I The index of controlledprices comprises some 'basic'foodstuffs and public utilities. It covers about 26Z of CPI. 0 7 2 - 47 - Table 14 Nominal and Real Schekel exchangerate atainst Dollar (1) 5-curr. basket (2) ExchangeRates 1985 Relative price of Relative price of exportgal imnortsbi (3) (4) - 1988 Real Wages rate per unit of outputcl (5) I II III IV 0.733 1.015 1.487 1.481 0.572 0.827 1.273 1.329 115 113 110 107 89.1 83.9 75.5 80.0 1986 I 1I III IV 1.486 1.485 1.491 1.489 1.387 1.420 1.481 1.445 108 97 98 97 104 97 100 99 96.7 101.2 97.2 104.9 1987 I 1I III IV 1.601 1.597 1.608 1.573 1.660 1.679 1.678 1.697 101 95 94 94 103 94 96 96 100.3 102.8 102.9 113.1 1988 I 1.575 1.717 116.7* Source: AR87, p. 53, 179. a/ b/ Prices of exports and imports in domesticmarket relative to price index of domesticuses. In industry. Deflatedby dollar price of industrialexport at effective rate for export. * Preliminary. PPR WorkingPaper Series Title WPS70 WPS71 WPS72 VocationalEducationand Economic Environments: Conflictor Conve-gence? School Effectson StudentAchievement in Nigeria and Swaziland The RelativeEfficiencyof Public Schools in DevelopingCountries WPS73 Taxationand Output Growth in Africa WPS74 Fiscal Stabilizationand ExchangeRate Instability: A TheoreticalApproach and Some Policy ConclusionsUsing MexicanData WPS75 WPS76 WPS77 WPS78 WPS79 WPS80 WelfareDominanceand the Design of Excise Taxation in the Cote d'lvoire On the Shadow Price of a Tax Inspector Author Date Contact Arvil V. Adams AntoineSchwartz August 1988 T. Hawkins 33678 MarlaineLockheed Andre Komenan August 1988 T. Hawkins 33678 EmmanuelJimenez MarlaineLockheed VlcentePaqueo August 1988 T. Hawkins 33678 JonathanSkinner August 1988 A. Bhalla 60359 Andrew Feltenstein StephenMorris August 1988 A. Shalla 6035) Shlomo Yitzhaki Wayne Thirsk August 1988 A. Bhalia 60359 August 1988 N. Campbell 33769 Shlomo Yitzhaki Yitzhak Vakneen IncentivePoliciesand Agricultural Performancein Sub-SaharanAfrica Bela Balassa and Trade Economists,Institutions Restrictions: A Review Article J. Michael Finger QuantitativeAppraisalof AdjustmentLending Bela Balassa August 1988 N. Campbell 33769 Emerging Issuesof Privatization and the Public Sector Samuel Paul September1988 E. Madrona 61711 °PR WorKingPaper Series Title WPS81 ReachingPeople at the Periphery: Can the World Bank's Population, Health,and Nutrition^perations Do Better? WPS82 Microeconomic Theory of the Household and NutritionPrograms WPS83 Welfare Costs of U.S. Quotas in Textiles,Steel, and Autos WPS84 Black Markets for ForeignExchange, Real Exchai,ge Rates and Inflation: Overnightvs. Gradual Reform in Sub-SaharanAfrica WPS85 Wage Responsiveness and Labor Market Disequilibrium:Exploringthe Componentsof Open Unemployment WPS86 WPS87 WPS88 WPS89 WPS90 WPS91 ExternalBalance,Fiscal Policy and Growth in Turkey Vocationaland TechnicalEducation in Peru Costs, Payments,and Incentivesin Family PlanningPrograms ExportQuota Allocations,Export Earningsand Market Diversifications A Frameworkfor Analysisof Mineral Tax Policy in Sub-SaharanAfrica Israel'sStabilizationProgram Author Date Contact RichardHeaver September 1988 S. Ainsworth, 31091 Dov Chernichovsky Linda Zangwill September 1988 S. Ainsworth 31091 Jaime de Melo David Tarr September 1988 C. Cabana 61539 Brian Pinto September 1988 R. Blade-Charest 33754 John A. Ross StephenL. Isaacs September1988 S. Ainsworth 31091 Taeho Bark Jaime de Melo September1988 C. Cabana 61539 Robert F. Conrad Zmarak M. Shalizi September1988 A. Bhalla 60359 Nissan Liviatan September1988 N. Liviatan 61763 Ramon E. Lopez Luis A. Riveros Ritu Anand Ajay Chhibber Sweder van Wijnbergen Peter R. Moock RosemaryT. Bellew