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The
Costly Transition from Stabilization to
Sustainable Growth: Israel's Case
Michael Bruno
Sc
Leora (Rubin) Meridor
t
Discussion Paper 90.01
Januarv
1990
expressed in the discussion paper
are those of the authors
and do not necessarily reflect those
of the Bank of Israel .
Any views
series
91007
‫ ירושלים‬.780 .‫ד‬.‫בנק ישראל ת‬
‫מחלקת המחקר של‬
Research Department. Bank of Israel. P.O.B. 780, Jerusalem. 91007. Israel
M. Bruno and L. (Rubin) Meridor
The Costly Transition rfom Stabilization to Sustainable Growth: Israel's Case*
Abstract
Two years after Israel's successful stabilization of July 1985 and aftex­ a considerable
one­time increase in consumption and in business sector output and productivity the
economy went into a deep two­year slump, leading to a substantial irse in unemp­
loyment in the course of 1989. While some special unanticipated events may have
contirbuted to the depth of the recession its main cause is shown to be rooted in the
slow recuperation from the distortive effects of the inflationary era and from the
effect of rising labour costs, high initial real interest rates and a heavier taxation
burden. These were in large part endogenous to the post­stabilization process. A
similar delayed post­stabilization cycle is known from other histoircal episodes,
notably in Europe in the 1920s.
In addition to the detailed analysis of these events the paper discusses the
restructuring process going on in the economy as well as vairous financial aspects of
the stabilization process. Finally the paper analyzes the reasons for the persistence
of the 15­20 percent inflation rate. The analysis concerns structural factors as well
as credibility issues having to do with general macro policies and in particular the
slow learning process in the wage and exchange rate policy game.
We would like to thank Mordechai Fraenkel, Nissan Liviatan and Zalman Shitfer for
illuminating comments on an earlier draft, and Galit Gonen for research assistance.
Bruno and Meridor: From Stabilization to Growth
p.
1
I. Introduction and Overview of Main Developments 1987­89
By mid­1987, two years after the start of the July 1985 stabilization program, Israel
looked as if it had managed to extricate itself from the worst economic crisis in its
history at minimal cost. Not only did inflation come down from 500 percent to 15­20
percentper annum. The Government deficit came down from an average of around
15
percent of GNP through the preceding decade to a complete balance and even a
slight surplus in 1986. The external financial position of the country improved
dramatically, as is shown by the fall in the foreign debt and the substantial increase
in foreign exchange reserves. After a short initial recession with higher unemployment
in the second half of 1985 (phase I of the program) output in the business sector
went up by 6 percent on average in 1985­87 and unemployment quickly fell to below
its pre­July 1985
rateof 6 percent (for summary data see Table
1). Although many
obvious adjustment problems remained, this second phase (1986­87) seemed at the
time to heralcfthe almost complete successof the program in not only enabling the
economy to stabilize at relatively low real transition costs but also lay the foundation
for sustainable growth.1
In the second half of 1987 a recession developed which deepened into a real
slump in economic activity in 1988 and 1989, with GDP growth falling to around
1
percent per annum and unemployment gradually rising to 9.5 percent by the second
half of 1989, while inflation has apparently been stuck at a 15­20 percent annual rate.
Given the excessive private consumption boom of 1986­87 (average annual growth
rate of over
11
percent!)
it was only
natural to anticipate a subsequent cyc'hcal
downturn which in itself was expected to lead to a lower growth rate for 1988. Two
other factors played a role. One was the beginning of the uprising in the Adminis­
tered Terirtoires (Intifada) in December 1987, which temporairly reduced inter­
national touirsm and disrupted trade in goods and labour services with the terirtoires.
Another factor had to do with the policy disruptions and uncertainties of an election
year (the national election took place in November 1988, and municipal elections 4
months later). A major manifestation of that was the postponement of a decision to
* The detailed developments in the peirod until mid­1987 were analyzed in Bruno and Piterman's
(1988) paper for the Toledo volume and the subsequent Bank of Israel Annual Report for 1987,
published in May 1988. A longer­term view of the cirsis and the reform process was recently given in
Bruno (1989(.
Bruno and Meridor: From Stabilization to Growth
p. 2
adjust the exchange rate. The last adjustment had taken place in January 1987 and
growth in unit labour costs continued to erode export profitability. A seires of
speculative waves took place and reached their height after the elections, in
December 1988.
.
Shortly after the entry of a new government (wjth Mr. Peres as Minister of
Finance) two consecutive devaluations of
5
percent and 8 percent took place in
December 1988 and January 1989 as part of a new policy package that accompanied
the 1989 budget, also involving further reform steps in the money and capital
markets. An agreement with the Trade Unions was signed in February 1989 which
again (as in the 1985 and 1987 devaluations) temporairly suspended the existing
COLA agreement to partly neutralize the inflationary consequences of the devalua­
itons. A new agreement, to cover the peirod April 1989 to April 1990, was simul­
taneously signed, by which 85 percent compensation would be paid twice a year and
only for pirce increases exceeding a monthly threshold of 1/2 percent (6 percent
annual inflation).
The fall in revenues from touirsm and the delayed exchange rate adjustment
contirbuted to a real fall in total export receipts of 2 percent in 1988 (compared to
an 11 percent increase the year before
­
see Table 1). Together with the fall in
investment and pirvate consumpiton expenditures (see above) total expenditures
dropped and a substantial slowdown in GNP growth took place. This slowdown as
well as the moderaiton in wage adjustments accompanying the devaluation must have
contirbuted to the fact that 1989 for the first time since 1985 has shown substanital
real wage restraint and a fall in unit labour costs especially in manufactuirng (see line
8
of Table 1and line
1
of Table 2).
The ongoing recession caused a fall in tax revenues which explains the opening
up of a government deficit during 1988­89. If one applies a cyclical correction for the
deficit (cf. Table 1, lines 10 and 11), fiscal policy seems to have kept a restrained
stance through 1989. Monetary restraint could accordingly be relaxed. This tendency
was further strengthened bymid­ 1988 as the depthof the domestic recession became
apparent. Only towards the end of 3 988, when the speculative foreign exchange wave
heightened, did domestic interest rates irse again substantially, though only for a short
peirod. From January 1989 onwards the Bank of Israel resumed its downward pres­
Bruno and Meridor: From Stabilizaiton to Growth
p. 3
sure on interest rates (and on the Banks)2 which ifnally dropped to almost inter­
national levels by the second half of 1989. A similar pattern can be observed for
long­term rates which followed the sharp fall in yields on indexed government bonds.
The pirvate mortgage market, in particular. which was largely liberalized, exhibited
a dramatic fall in real interest rates (from 11­12 percent in the previous two years
to 5­6 percent by October 1989).
The fall in real interest rates and in unit labour costs tends to have a considerably
delayed effect on output supply. Only in the second half of 1989 (after another
4
percent devaluation in June 1989, thus making for a cumulative 18 percent exchange
rate adjustment since December 1988) did exportsstart growing again. Domestic
consumption demand seems to have gradually picked up at a few months' delay and
investments are recovering even more slowly. The year 1989 as a whole has been a
second low growth year.
The protracted recession, together with a process of restructuirng and labour
shedding and an unprecedented increase in labour force participation rates led to a
steep irse in unemployment rates from a previous average of 6 percent to over
9
percent in the third quarter of 1989 (see Figure 3). This development in itself
temporairly shifted the focus in the political arena to shotr­term employment issues
at the possible expense of longer­term reforms. With the recent upturn in economic
activity in the second half of 1989, the increase in unemployment seems to have come
to a halt*
The fall in imports due to the drop in the rate of economic activity and the
recovery in expotrs in 1989 have produced a sharp fall in the trade deficit. In fact, for
the ifrst time since 1986, the year 1989 has shown a surplus in the current account (to
the tune of
1
billion, after inclusion of unrequited foreign exchange transfers). Thus
the foreign debt both in absolute terms and relative to GDP (see line 14 of Table 1)
has continued its decline since 1985.
In retrospect, the protracted slump may have had structural explanations which
will be discussed in the next section. The cumulative experience
of stabilization in
Latin Ameircan countries as well as a closer look at the 1920s hypeirnflation
Given the highly concentrated Israeli banking system (5 banking groups comprising the bulk
of banking activity) strong direct 'moral suasion' had tobe applied by the Bank of Israel in May 1989.
Bruno and Meridor: From Stabiltaiton to Growth
p. 4
experience of Germany and Central Europe point to an almost universally observed
post­stabilization cycle with similar attributes. In the case of Israel, at any rate, this
third phase is a manifestation of slow structural adjustments that are in large part
endogenous to the post­stabilization process, in which the business sector has to
recuperate not only from the distortive effects of a 12­year cirsis but also from the
effect of rising real labour costs, high initial real interest rates and a heavier taxation
burden.
The next section (II) will accordingly attempt to disentangle, in greater detail, the
exogenous and endogenous components of the 1988­89 slump as well as the rising
open unemployment, partly replacing the previously disguised unemployment. Evi­
dence will be given of the restructuirng process going on in some major sectors of the
economy.
The subsequent section (III)
will take up the main developments in the capital
and financial markets. On the one hand, some major reform processes are going on
in both markets, following on the improved fiscal position and a determined effort
to reduce segmentation and liberalize money markets, and leading to a drastic fall in
both long and short­term interest rates. On the other hand, there has developed a
substantial post­stabilization overhang of financial entanglements in some major
sectors of the real economy, which have required substantial debt relief and re­
scheduling arrangements in which both the banking sector as well as the government
have been involved.
Section IV returns to a key macro­problem which has also characterized the
earlier stabilization phases
­
the size and timing of exchange rate step adjustments
in the faceof irsing, though gradually decelerating, loss of export competitiveness due
to real wage overshooting. While there is a definite learning process going on in the
labour market as well as in entrepreneuiral response, the problem of government
credibility and reputation building has been accentuated due to the effects of more
frequent adjustments of the exchange rate necessitated since the 1988 election.
The latter discussion naturally leads to another key question to be taken up in
section IV
­
why the inflation rate remained seemingly stuck in spite of the sharp
recession. While there is no one good explanation for this development (an exper­
ience which
is
apparently sharedby. some other recent successful stabilization
Bruno and Meirdor: From Stabilization to
Growthp.
5
experiences, such as in Chile and Mexico) a number of real structural as well as
nominal inertia arguments will be given, not the least of which have to do with the
ongoing processof government induced relative pirce and exchange­rate adjustments.
The last section (V) will try to assess where the economy is heading in the near
future.
II. Explaining the 1987­89 Recession: Unanticipated Shock or Inherent Adjustment
and Restructuring Process?
The recession that had developed in mid 1987 marks the beginning of a new (third)
phase after the stabilization program. Until that point in time, economists have
considered the stabilization to be a very successful one, both in substantially reducing
inflation and in creating only a temporary and slight irse in unemployment.3 Only
when the first figures of economic developmentin 1988 were revealed did it become
evident that a real slack is building up. The recession had deepened and reached its
peak by mid­1989, output decreased and unemployment surged to a post­1985 record
of 9.4 in the second quarter. The question that emerges is whether the recession was
caused by exogenous factors that have nothing to do with the stabilization of inflation
or whether it is an inherent outcome of the process of the stabilization.
We argue that both types of factors were active in building up the slump in the
economy. On the one hand there existed exogenous factors of a short­term nature
and in particular the consequences of the events in the West Bank and the Gaza
Stirp. These factors generated a slowdown in growth of a temporary nature. On the
other hand, one can detect other factors that are connected to the stabilization of
inflation and to the way it was implemented. Such factors can be deduced from theo­
retical ex­ante considerations and some of these can be found in other countires that
had undergone similar disinflation processes.
This section is organized as follows. First, we present the exogenous factors and
try to quantify their effect on output. Then, we point at developments that can be
attirbuted to factors stemming from the stabilization and characterize post stabi­
lization processes which can cause output losses. Lastly we address the question of
3
See among others, Bruno and Piterman (1988) and Cukierman (1988(.
Bruno and Meridor: From Stabilization to Growth
p. 6
why these losses became evident only with a two­year lag. Economic developments
were also influenced by the interactions between the two above mentioned types of
factors. Such interaction deepened and prolonged the recession.
The upirsing in the territories that began in December 1987 affected the Israeli
economy both through its contractionary effects on the supply of labour to the
business sector (mainly concentrated in the construction industry) and on the output
demand side (mainly a decline in touirsm and Israeli export to the terirtoires). The
1988 annual report of the Bank of Israel estimated the above mentioned contirbu­
tions to the business sector's product as a loss of 1.5 percent in 1988. By the same
token one can estimate the further, much smaller, effect of the aggravation of the
Intifada on the 1989's product and come up with an estimate of 0.3 percent for that
year.
However, the Intifada with its implications on future developments may have a
greater effect through firms' expectations and investment plans: It seems that at least
part of the pessimistic perception of firms (as evidenced in the Bank of Israel
Company Surveys) and the low investment especially duirng 1989 can be attirbuted
to the uncertainty generated by the political situation. Estimating the effects of
expectations on investment is of course a very hard task. A likely order of magnitude
may be obtained by compairng actual investment with the estimated demand for
aggregate net investment in the business sector based on an investment function
which involves output levels and increments as well as changes in profitability and
real interest rate levels (Lavi, 1989).4 Such compairson yields an investment short­fall
which would have caused an output­demand loss of 0.2 and 0.8 percent, respectively,
in 1988 and 1989.
<
(
During 1988, when inflation remained as high as 16 percent, the public had built
expectations for inflation that affected in turn the behaviorof wages and pirces. (See
Section IV for a detailed discussion.) The gap that had developed between traded
and non­traded goods pirces was not sutstainable and a devaluation became neces­
sary. We believe that such a devaluation somewhere duirng the first half of 1988
4 This study is based on annual observations for the period 1962­88. An additional long­run
effect on the output supply side is that coming rfom reduced potential capacity due to a very high real
interest rates in the pre­stabilization period. This is estimated by Lavi (1989) at 0.5 percent per
annum, but is ignored here.
BrunoandMeridor:From Stabilizationto
Growthp.
7.
would have prevented relative prices rfom further worsening and thus would have
prevented part of the exports decline. Around
4
percent change of the real exchange
rate erosion duirng the second half of 1988 can be attirbuted to the postponement
of the devaluation. By using standard elasticities (see Litvin and Meirdor, 1977) we
end up with 4 percent loss in exports, or an annual loss of two percent of exports.
This in turn would have accounted for 0.5 percent short­fall in business sector product
in 1988.5 The following table sums up the exogenous part of output contraction:6
1988
1989
1988­89
Direct effect of Intifada
1.5
0.3
1.8
Investment shortfall
0.2
0,8
1,0
Delayed devaluation
0.5
..
2.2
1.1
3.3
3.9
3.1
7.0
1.7
2.0
3.7
Sub­total
Difference between actual and
hypothetical)596( growth
Unexplained residual
.,
..;....
0.5
The actual short­fall (compairng actual business sector growth rates in Table
2
with a hypothetical 5 percent growth rate each year) amounted to 3.9 (5­1.1) and 3.1
(5­1.9) in 1988 and 1989, respectively, thus leaving 1.7 and 2.0 percent (or a cumula­
tive 4 percentage point) attirbutable to the other, presumably 'endogenous', structural
factors. Let us turn to these now.
5 By 1989 relative
again...
prices changed in the opposite direction and exports eventually started growing
.,
Ignored here are the mutliplier effects of aggregate demand which given the openness of the
economy, are very smail. Likewise we ignore the effect of the postponement of the devaluation on
imports, since the elasticity of imports with respect to relative prices is very small.
Bruno and Meridor: From Stabilization to
Growthp.
8
Experience from stabilization programs reveals two possible patterns of adjust.
ment processes from high to low inflation rates. The first involves an initial cost in
terms of output loss because of irgidities in wage and pirce adjustment stemming
from initial lack of credibility and/or backward linkages in wage contracts and the like
(as Fischer, 1977 and Taylor, 1979). When credibility is built up and expectations
adjust, the economy should move to a sustainable growth path, provided, of course,
that the fundamentals have been taken care of.7
The second pattern involves a peirod of expansion both in outpfut and consump­
tion after the first small loss due to irgidities, and then the boom ends up in another
recession. Such a pattern was evident in many of the Latin Ameircan countires' stabi­
lizations of the 1960s and 1980s.
Kiguel and Liviatan (1989) (see also Liviatan, 1989) distinguish between the two
different patterns, and argue that the latter characteirzes stabilization based on the
exchange rate. The recession
­
along this lineof argument­ isa necessary outcome
of the slow build­up of credibility with a pegged exchange rate. In order to build up
such credibility the economy has to go through a path of real appreciation. The real
appreciation teaches the pirvate sector a lesson: not to increase pirces or wages
relying on the authoirties to accommodate by a devaluation. However, this process
inevitably results in a loss of output We will argue here that a 'second' recession of
some delay can occur also when credibility has been built­up.8
The Israeli stabilization program has so far not succeeded in reducing inflation
to the Western level, rather to an annual rate of 15­20 percent. Such inflation is not
sustainable without realignments in the exchange rate. Indeed, since July 1985 until
December 1989 the exchange rate had been cumulatively devalued by about 32 per­
cent against the dollar (54 percent against the basket of Israeli major trading
currencies). Discrete devaluations took place at the beginning of 1987, at the end of
1988 and the beginning of 1989, and (a small one) in June 1989.
The real appreciation which was led by wage increases has eroded profitability
7 This stage of adjustment can be rather short as is testified by the orthodox stabilizations of
European hyperinlfations in the 1920s (Sargent, 1982).
The whole exchange rate and wage formation credibility issue is taken up in greater detail in
Section IV.
p. 9
Bruno and Meridor: From Stabilization to Growth
in the business sector as can be seen in Table 2. Real labor costs per unit of output
have increased by 20 percent from before the stabilization until 1989,9 and in the
manufactuirng sector it was even higher (28 percent for the same period). Although
the effect of irsing real wages was the most prominent one, aggregate supply and
profitability were also negatively affected by two other components: taxation and costs
of finance (seeTable 2), to be taken up in turn.
Stabilization processes are often followed by a sharp increase in tax collection.
Such an increase stems from the disinflation effect (the inverse Tanzi­Olivera effect).
In Israel, gross tax collections increased from an average of 43 percent ofGNP during
the high inflationary peirod (38 percent in 1984) to 48 percent
in 1986.
Such an
increase encompasses a sharp increase inboth direct effective tax rates and indirect
ones. Direct effective rates on the business sector increased from a low rate of 18.4
percent during 1984 (25 on average duirng 1982­1984) to a peak of 33.3 in 1986 and
stayed more or less stable ever since. The sharp increase in indirect rates from 4
percent of GNP in 1980­1984 to 10 percent in 1986­1988 should be divided between
ifrms and households but it too contirbuted to the squeeze in firms9 profitability. The
high effective rates that are the outcome of statutory rates set duirng the inflationary
peirod, (which at the time were translated intolower effective rates due to the
inherent lags) became "too" high (from a growth inducement point of view) and^are
now subject to a reduction.10
The development of interest rates completes the profitability picture. High real
interest rates are a common feature of post stabilization peirods. They either stem
from a deliberately tight monetary policy to supportthe disinflation process, from an
unintentional outcome of the interaction between expected and actual inflation or
from the problematic situation of conducting monetary policy duirng disinflation
9 We compare the average real labor cost per unit of output during 1982­84 to an estimate of
the labor cost in 1989. The gap between real age increases and productivity growth has, however,
fallen gradually between 1986 and 1988(the annual figures being, respectively, 6, 4 and 1 percent).
In 1989 real unit wage costs have actually faiien. Thus a gradual learning process has occurred. See
also Section IV.
Indeed, the Finance Ministry is now reducing company taxes and is also extending the reform
in income taxation, at the cost of a Wo higher Value Added Tax. The more general long­run problem
of the high tax burden can, of course, only be handled through a protracted decrease in the share of
public expenditure in GNP.
*
Bruno and Meridor: From Stabilization to Growth
p. 10
peirods.11 Moreover, high interest rates are an important ingredient of monetary
policy that supports a fixed exchange rate facing occasional and temporary speculative
attacks.
Real interest rates which were record high duirng the first few months after the
July 1985 stabilization decreased later on but remained at a high level (the marginal
real rate was about 35 percent on average during 1986­1987). Since 1988 these rates
came down significantly and by mid­1989 they were not much higher than in the
industiralized countires. However, the difficulties arising from the 5 year cumulative
financial burden are far more marked than the mere effect on production costs.
While they were not the dominant cause of financial cirsis they did contirbute to the
financial difficulties in a number of sectors. It should be stressed that such high rates
did not prevailin all the sectors. Manufactuirng, for example, faced relatively lower
rates due to a large component of subsidized export credit. For a detailed discussion
of financial issues, seethe next section (III).
Lastly we come to the most significant development that has been taking place
in the business sector since stabilization: the structural adjustments and the forced
rise in efficiency (through restructuirng and labour shedding) in face of the new
macroeconomic environment.
The July 1985 program dramatically changed the economic environment in
Israel. The drastic decline in inflation called for a pattern of firm conduct that is very
different from that prevailing before. During the inflationary era firms could
over­invest (due to cheap government credit) and also easily ignore inefifcient real
activities. The process of high inflation enables firms to achieve high profits mainly
through successful financial manipulation. Low inflation brought to light a set of real
inefficiencies necessitating a structural adjustment. Moreover, the government's new
attitude towards fiscal balance meant not only a reduction in current public activities
and expenditures, but also a sharp decline in'the government's willingness to bail out
unsuccessful pirvate firms,12 thus gradually forcing firms to take responsibility for
their own activities. Although on a macro level there is so far only slight evidence of
11
See Fischer (1986) and Bruno and Piterman (1988(.
1Z Only in major financial crises such as in the agircultural sector did the government step in. See
Section Ill below.
Bruno and Meridor: From Stabilizaiton to Growth
p. 11
the efifciency process, on the disaggregated level of sub­branches and some major
conglomerates we can distinguish a substantial real productivity increase after 1986.
Table
3
presents productivity figures for the total business sector as well as for
the manufacturing sector. We have chosen to analyze the manufacturing sector as it
represents about 1/3 of the business sector, and because its data are the most readily
available. In the aggregate business sector there is an increase in productivity after
the stabilization but it disappears duirng 1988 and 1989. In the total manufacturing
sector we can note the increase in productivity already
in 1989, some
of its sub­
branches are particularly marked by higher rates and in two major conglomerates (the
trade union owned Koor industries and in the Israel Aircraft Industry) which
encompass 16 percent of manufacturing we can trace the accelerated increase in
productivity throughout the peirod 1986­1989.
The case of the Israel Aircraft Industry (I.A.I.) is of particular interest since the
cancellation of the Lavi aircraft project at the end of 1987, which was a very painful
government decision taken after a bitter debate, signalled a major turning point in
government policy. LA.I. subsequently fired 5,000 of its 21*000 employees but
managed to recover its 1986 output by the end of 1989 while the share of exports in
total output increased from 60 percent to 80 percent. Koor reduced its 1985 work­
force of 34,000 by over 10,000 while increasingits productivity by 20 percent over the
peirod 1986­89. The reduction in employment of these two conglomerates alone
accounts for almost half of the total reduction in manufactuirng employment during
1987­89 (which amounted to 10 percent
Figure
9
­
see Table 3).
presents the number of bankruptcies and liquidations13 during the last
few years. It shows the increases after the disinflation andthe. following decrease
duirng 1986­1987. It also demonstrates the sharp irse in 1988­1989. It seems that the
firms' response to the changes that followed the stabilization vaired among different
sectors, sub­branches and individual ifrms. On the one hand, many ifrms got into
major difficulties that in certain cases necessitated bankruptcy proceedings or major
restructuirng using mass ifirng of labour.14 On the other hand, the average ifgures
13
The data collected here do not distinguish between the size of different ifrms.
14 We have data suggesting that the number of firms in difficulties increases sharply, but do not
present it here since its method of estimation is somewhat inconsistent over time.
Bruno and Meridor: From Stabilization to Growth
p. 12
imply that other firms were at the same time expanding both their employment and
output.
The above mentioned restructuirng process has very little to do with the slow
credibility build­up and the difficulties airsing rfom real appreciation. Moreover, the
adjustment to other changes such as the increase in effective tax rates and high
interest rates are also independent of the credibility issue. Furthermore, other
countires whose stabilizations have been very successful and achieved credibility
rather fast had also gone through a structural change causing a recession, which
usually lagged a couple of years after the disinflation stage. Each country has its
specific restructuring features resulting from the specific change in the macro
conditions that accompanied the stabilization programs. Garber (1982), for example,
has pointed out the emergence of a sharp recession in Germany two years after the
1923 stabilization. In May 1925 output began to slow down, the number of bankrupt­
cies surged, and unemployment expanded.15 In 1920s Germany, unlike Israel, infla­
tion declined instantaneously and the exchange rate remained unchanged for a long
peirod with no substantial real appreciation (lack of inflationary inertia could be a
major factor). Similar recessions were recorded in other European stabilizations.16
The extent of financial dififculties in Israel became apparent only gradually, At
the ifrst stage after disinflation, vairous ifrms had managed to rerfain rfom major
changes and adjustments by relying on more and more credit (see Piterman, 1989).17
It may be the case that some of them were expecting government help at some point
in time and the abstention rfom intervention which would have been typical in the
1970s became apparent only with the passage of time. For a more extensive discus­
sion see section III.
On top of the above mentioned factors, it seems that
in
the Israeli case there
15 Between May 1925 and the low pointof April 1926 industrial production dropped 17 percent
and the unemployment rate rose from 3.5 to over 20 percent [see Garber (1982), Tables VIII and X].
16 In Austria and Poland of the 1920s we find a similar recession a few years atfer the successful
stabilization [see Wicker (1986)]. See also Siklos (1989) for Hungary in the 1940s.
17 Koor industries, for example, used an ill­fated foreign loan of over $100 million (lfoated
through Drexel Burnham at over 13 percent interest) only to postpone its crisis from; 1986 to 1988.
In spite of considerable progress in output and employment restructuirng Koor has not yet recovered
from its financial difficulties.
Brunoand Meridor: From Stabilization to Growthp.
13
prevailed favourable conditions during 1986­1987 both internally and externally that
temporairly postponed the need for the restructuring. The consumption boom duirng
this peirod accelerated domestic demand on the one hand and on the other hand,
there has been an increase in foreign demand both due to an acceleration in world
trade and a change in the exchange rate of the dollar against the European cur­
rencies in a way that made Israeli exports to Europe
­
the major market
­
more
competitive.
The external conditions are of course exogenous but the internal development
in consumption demand is often mentioned as characterizing post­stabilization
peirods. Kiguel and liviatan (1989) attirbute this phenomenon to an initial lack of
credibility of the program. They view the consumption increase as advanced pur­
chases to forestall the bad times expected to come in the immediate future. We
would argue that the consumption surge can be given a different and more optimistic
interpretation. When a stabilization program succeeds in correcting fundamental
factors which were out of control before, there will be an increase in perceived
permanent incomeaird wealth which
in
turn will manifest itself in an increase of both
consumption and investment. It seems that in the Israeli case the signs of success at
the beginning of 1986, i.e., the dramatic decline of inflation, the elimination of the
government deficit and the other reforms that were on the agenda to be implemented
in the near future
­
were responsible for the increase in current consumption
(excluding non­durables), and the increase in investment both during 1986 and the
first half of 1987. Part of the increase in consumption and investment could also be
a response to
a cyclical downturn which started already in October 1983. However,
in the second half of 1987 and the beginning of 1988 negative signs began to show,
some of them related to the postponed effects of the stabilization and some of them
due to the political developments.18 There followed a decline in consumption, to a
smaller extent in current consumption and a larger decline in non­durables (which
tend to fluctuate more anyway).
Finally, let us repeat the observation made in the previous section on the steep
irse in unemployment which lagged behind the drop in output growth. This was the
.1
o
It is also possible that the public realized that the government was not as determined as before
to proceed with the planned reforms, as the election peirod was approaching.
Bruno and Meirdor: From Stabilization to Growth
.
p. 14
combined effect of the labour­shedding process as well as an unprecedented increase
in labour participation rates.
m.
Financial Factors in the Stabilization and Restructuirng Process
The period since 1985 has witnessed considerable changes in the real cost, compo­
sition and financial burden of credit in the economy.19 As Table 5 shows average
real short­term interest rates were quite high both before and shortly after stabi­
lization, particularly on free market credit whose share has been growing steadily.20
While there was quite a sharp drop in 1986, real rates climbed quite sharply in 1987
(due to considerable monetary restraint that temporairly accompanied the January
1987 devaluation) and then came down again in 1988 and 1989, with the gradual
relaxation of monetary restraint. By 1989 both nominal and real rates have come
down drastically.
As columns (4) and (5) of Table
5 show,
development of the real cost of credit
differed across sectors in the economy with Agirculture facing a much steeper irse
than the average for the economy ­ the reverse being the case for the Manufactuirng
sector [compare 1985 or 1987 with 1983 in col. (1), (4), (5)]. Comparison of the
interest rates on directed credit as compared id the free market rate [col. (2) and (3)]
and analysis of the differential change that has taken place in the share of free credit
by sector [col. (6) to (8)] provide an explanation of this development. Piror to 1985
both Agirculture and Manufactuirng as well as Services and Trade (not shown here)
were allotted substantial amounts of credit at low (negative real) interest rates from
the public purse, for both export as well as domestic consumption use. Since 1985
only production for exports has continued to obtain credit at subsidized rates while
the subsidy on this type of credit has also been substantially cut. With Manufacturing
being a relatively more export­based sector (nearly 50 percent of its output is
19 For­ analysis of the first phase see Bruno and Piterman (1988). For a more detailed and
updated analysis of financial factors in the stabilization process see also Piterman (1989).
M Additional disaggregation into Shekel and foreign­exchange­linked credit shows particularly
high real interest rates right after stabilization an average rate of 82 percent in the second half of
1985. (See Bank of Israel, Annual Report 1988, Table VIII­9.(
­
Bruno and Meridor: From Stabilization to
Growthp.
15
exported compared to only 20­25 percent for Agirculture), both its relative reliance
on directed credit has been higher and the drop in its share has been less than for
Agirculture.
The real interest burden on a sector is the product of the interest rate and the
ratio of credit to output. As col. (9) to (11) show this ratio has been fairly stable over
time both for Manufacturing and for the economy as a whole but has risen steeply
in Agirculture (while for Services and Trade, not shown here, it has fallen steadily
after stabilization, presumably due to economies in inventory requirements).
In Agirculture, more than in Manufactuirng, there has been a long term increase
in the credit to output ratio since the early 1970s, one of the main results of
inflationary distortions in the economy. Excessive investments in the 1970s were
financed by cheap long­term credit (at highly negative real interest rates21) rather
than from own accumulated profits which in turn were squandered on alternative
current uses (including pirvate consumption). By the beginning of the 1980s the
government stopped the practice of handing out unindexed loans. With the 1985
stabilization public long­term lending was virtually stopped. While the growth in net
real capital stock in Agirculture, for example, came to a halt already in the early
1980s the existing debt had to be recycled increasingly in the form of short­term debt
at high real interest rates, a familiar 1970s phenomenon reminiscent of the third
world debt problem. The financial leverage ratio of total outstanding debt to the net
capital stock in Agirculture rose over the 1970s from around 20 percent to 50 percent
and subsequently increased to reach 90 percent by 1987 [see Kislev et at, 1989).
At the first stage of stabilization the mere sharp reduction in nominal interest
rates creates a one­time automatic 'debt­rescheduling' effect coming from the fall in
the relative interest payment burden or the irse in the average 'loan repayment
peirod'.22 But once this adjustment has been made, the real financial burden starts
21 Litvin and Meirdor (1983) have estimated the average rate for the 1970s to be minus 17
percent, which implies a grant­equivalent amounting to one half of investment.
22‫ י‬As recently pointed out by Piterman (1989): On the assumption that the principal is roiled
over while interest payments arc paid on a current basis the average repayment peirod of short­term
debt (i.e., the ratio of pirncipal to the interest rate) rose from 5.5 months in the first half of 1985 to
10.6 in the second half and to 31.9 in 1986. It has stayed more or less the same in 1988 (29.2 months).
In other words this interest rate illusion is a one­time effect. Such 'rescheduling' can be effective in
the long run only if the real rate of interest is lower than the proift rate.
Bruno and Meirdor: From Stabilization to Growth
p. 16
to bite. In agriculture the ifrst major ifnancial crisis occurred in the Moshav
(co­operative) movement, and subsequently in the two biggest Kibbutz (collective)
movements. Both types of organizations have so far been marked by highly diffused
mutual responsibility for individual credit creation. In the (co­operative) Moshav
centralized credit and bookkeeping arrangements relieved the burden of strict
accountability from the individual farming unit. In the Kibbutz movement this type
of a 'soft budget constraint' marked the relationship of individual Kibbutzim
(collectives) to the central bodies of the whole umbrella movement which got its
funds rfom the government or the banks.
In the Kibbutz movement, the internal mutual reliance systems helped to delay
the crisis but also magniifed the size of the cumulative debt. This reached an order
of magnitude of more than 10 percent of GNP while their share of GNP
is only
half
of that25 In both cases the government participated in a debt­relief and debt­
rescheduling scheme worked out jointly with the banks and the respective borrowers.
The Moshav movement debt amounted to 1 billion dollars, of which 40 percent was
to be wirtten off by the banks and vairous other agencies and the rest to be re­
scheduled pirmairly by the government. This scheme is still being gradually imple­
mented on an individual Moshav basis. The Kibbutz debt relief program finally signed
only recently involves a
1
billion dollar wirte­off, two­thirdsof which was taken up by
the banks and one third is taken up by the government. In addition 1.5 billion dollars
will be rescheduled through government floating of bonds. The remaining 1.5 billion
is borne by the Kibbutz movement which has also undertaken
to take severe internal
restraining measures. Part of the program involved a radical change in the mutual
reliance system and a shift to individual Kibbutz financial planning with a link to a
commercial bank which will henceforth enforce the control of credit.
We have concentrated our discussion on agirculture, but it is important to stress
that some restructuirng and debt rescheduling schemes between banks and enter­
pirses have taken place with the manufactuirng sector, the most marked one being
a
The share of interest rates that are above 'normal' long­term rates in the increase of the debt
between 1984 and 1988 is estimated to beonly 30 percent, while the rest is to be ascribed to past
investments (which in part have to be wirtten off) and collective consumption uses (such as improved
housing conditions). It should be pointed out that the Kibbutz movement deirves only 45 percent of
its income from agirculture, the rest coming from manufactuirng and services.
Bruno and Meridor: From Stabilizaiton to Growthp.
the case of the above­mentioned Histadrut (trade­union)
17
­
owned Koor industrial
conglomerate. Here, too, the government participated in the recovery program but
so far only with a relativelysmall component of 50 million dollars.
We end this section with a biref mention of the reform process that has been
taking place in the financial markets in recent years. The process of disinflation
increased the relative demand for unindexed short­term assets whose share in total
pirvate assets quadrupled during the period 1984­87. This in itself increased the
liquidity of the banking system since the liquidity (reserve) ratios on unlinked assets
were lower than on other assets. The drop in the government deficit also enabled a
substantial increase in domestic credit expansion, which took place through a sharp
reduction as well as unification of mandatory liquidity ratios on unlinked assets (see
Table 6).u This process as well as a parallel relaxation of limitations on foreign­
exchange linked credit, have brought about the reduction in interest rates. Similar
developments have taken place in the capital market. Mandatory reserves on long­
term linked assets traditionally had to be invested in long­term government bonds or
non­marketable government deposits. Capital market reform has taken the form of
a reduction, since 1987, in these reserve ratios, a gradual increase in the marketability
of the domestic national debt25 and the opening up ofthe capital market to the free
floating of pirvate bond issues.
The real yields on government secuirties havedropped sharply, from 6­7 percent
in 1985 to below 2 percent in 1989, while a parallel process has taken place in the
cost of pirvate bond issues. Likewise the market for mortgages has been opened up
and as a result the real cost of mortgages has halved, from 1142 percent in 1987 to
5­6 percent in 1989. While this liberalization and reform process in the financial
markets is not yet complete, the economy has come quite a long way since 1985. The
real cost of capital is now much closer to international levels. It also seems that debt
wirte­offs26 and reschedulings have passed their peak.
The table and discussion are based on Piterman (1989).
■''
^ The share of marketable bonds in the total new government indexed bond issues has increases
from 4 percent in 1984 to 63 percent in 1988 [see Ben­Bassat (1989)].
The substantial write­offs have eliminated proifts in the commercial banks
rate for 1989 is likely to remain low at 4 percent on average.
in 1988.
The proift
Bruno and Meirdo.r From Stabilization to Growth
p. 18
IV. Inlfation and the Wage­Exchange Rate Policy Game
The relatively low inflation attained in consequence of the stabilization program was
maintained at a more or less stable rate, through 1986­1989, thus consolidating one
principle achievement of the program. However, no real further progress was made
in closing the gap between domestic pirce inflation and that prevailing in the Western
economies. While CPI inflation remained more or less the same, other pirces, in
particular wages and the exchange rate behaved differently.
During the last four years wages increased at much higher rates causing the real
wage to cumulatively increase by about 30 percent and thus substantially reducing
profitability. Only during 1989 when unemployment reached 9.5 percent do we see
a turning point: wages increased at a lower rate than pirces, resulting in a mild
reduction in real wages and a more substantial one relative to labour productivity.
(See Figure 4.)
As for the exchange rate, with the July 1985 Program a stable exchange rate
regime was announced. However, no absolute commitment to an exchange rate peg
was made, and duirng the last four years a number of devaluations took place.27 At
the beginning of 1987 a devaluation was carired out, at the end of 1988 there was
another (two­step) devaluation and finally a small one in June 1989. Table 7 shows
the average change in the exchange rate over the peirod. In particular, it demon­
strates the varying behavior over time.
Table 7 presents data for the inflation rates, breaking down the consumer pirce
index into tradable and nontradable goods and services. The rate of change of
nontraded goods pirces was much higher, 25 percent on average per year and slightly
decreasing over time, while the inflation of traded goods remained more stable at
about 12 percent per year independent of the timing of the devaluations. This is one
measure28 of the decline in the comparative advantage of production for exports
From the introduction of the stabilization program until August 1986, the exchange rate
remained fixed against the dollar resulting in an unplanned depreciation of the shekel against a wider
basketof currencies. Therefore, since August 1986 the exchange rate was pegged to a basket of Israel's
pirncipal trading countries' currencies.
^
This index relates only to CPI, whereas a more adequate index should relate to the GDP
deflator. However, we do not have a disaggregationof GDP prices to tradables and non­tradables. For
an alternative indicator of unit labor costs, see Table 1. It rose 9.5 percent in 1988 and subsequently
declined 4 percent in 1989.
Bruno and Meridor: From Stabilizaiton to Growth
p. 19
(and import substitutes) largely accounting for the poor export performance in 1988
(see section II).
Two intirguing questions emerge:
(1) Why did the inflation rate remain seemingly stuck throughout the last four years
in spite of the varying conditions? In particular, exchange rate behavior vaired
duirng this peirod, and the macro conditions differed over time: an expansion of
aggregate demand in the first two years and a recession in the last two.
(2) Why did wages increase so much, was it an unintentional overshooting reflecting
mistakes of inflationary expectationsof workers and employers? or was it,rather,
an exogenous intentional increase and if so what could be the reason?
It seems that these questions are related and at least part of the answer to
both of them lies in the roleof expectations. We believe that inlfationary expectations
play an important role in the explanations of
the'wage­exchange­rate­pirce'
complex. They affect wage behavior through their role in wage contract negotiations
and they also affect the pirce setting mechanism in particular for non­traded goods
and services.29 Tradable goods and services areless affected by expectations since
competition is probably higher in that sector, in spite of impediments to free imports.
The rate of inflation can be viewed as the outcome of a 'game' played by the
public 'against' the government.30 The rules of the game allow for government dec­
larations with regards to its future policy, in particular the exchange rate when the
economy operates under a pegged exchange rate regime. The public assesses the ere­
dibility of these declarations and forms its inflationary expectations accordingly. The
expectations will in turn affect the setting of pirces and the negotiations for wage
contracts, while the government has to assess this behavior and to determine its
future policy.
It should be noted that such a game does not determine relaitve pirces, rather
the average inflation rate itself, while the former are related to macro conditions and
the like. However, as expeirence and theory show, in the wake of exchange rate based
stabilizations
­
such a game will usually result in a real appreciation as government
~
Those that are uncontrolled by the govenrment.
^
See for example Cukierman (1988) and Horn and Persson (1988(.
Bruno and Meridor: From Stabilization to Growth
p. 20
expectation and credibility are gradually built up. We believe that such a model is
appropirate in explaining the Israeli inflation, though we are aware that this
is a mere
hypothesis. We will try in what follows to support it with a few theoretical considera­
tions and some empirical evidence.
Let us now present the background for this game after the July 1985 stabilization
program. A major component was the government declared policy with regards to the
exchange rate. With the implementation of the stabilization program, a stable
exchange rate was announced. However, there was no stirct commitment to a fixed
exchange rate. On the contrary, the behavior of the exchange rate was tied to future
development in wages, i.e., it was announced that the exchange rate will not remain
absolutely fixed if wages do not behave "properly." Indeed, after the 1986's upsurge
in real wages a devaluation was carired out in January 1987. The devaluation was part
of a broader policy package involving an agreed wage concession (see Bruno and
Piterman, 1988). After January 1987, a somewhat tighter announcement was made
stating that devaluations would not automatically accommodate to future wage
increases (see The National Budget 1988); however
it1
was understood that realign­
ment, though rare, would occur if the circumstances (e.g. sharp loss of competitive­
ness) necessitated such action.
The idea of the Bank of Israel was to gradually lengthen the peirods between
step alignments and reduce the size of devaluations until nominal wages and pirces
stabilize. Rather than adopt an extreme once­and­for­all pegged exchange rate stance
and at the same time avoid the other extreme image of automatic accommodation
to wage behavior, such intermediate strategy was expected to induce wage discipline
through the gradual build­up of government credibility and reputation. According to
this scheme the Bank of Israel advocated another alignment of 6­7 percent in March
1988, 14 months after the preceding one. However, with the coming election, the
Minister of Finance adopted a wait and see attitude. Unfortunately this ambiguous
policy stance, fell between two stools
­
at no stage duirng most of 1988 was it made
clear to the business sector that there would be no devaluation. At the same time no
alignment was in fact made until after the election, in December 1988, 23 months
after the previous alignment, and only after very heavy capital outflows. The
postponement dictated this time a larger devaluation than in January 1987, thus the
Bruno and Meridor: From Stabilization to Growth
p. 21
previously planned gradualist exchange rate adjustment scheme was not followed,
creating a set­back to the credibility of exchange rate announcements.
In January 1989 a ±3 percent band around the new exchange rate was intro­
duced to enable greater flexibility for monetary policy. That, too, may have been
misinterpreted by the strong and rather vocal export­lobby to signal a more flexible
export­oriented exchange rate policy. Moreover, there were inconsistent announce­
ments by various policy makers, since some advocated more flexibi'hty and others
advocated a harder stance, makingthe public's task in evaluating the government
intentions even more dififcult.
A large part of the reason for the inconsistency of declarations over time lies in
the underlying differencesof views among policy makers (and their pirvate advisors).
There is an obvious conflict between the key role of a stable nominal exchange rate
as a nominal anchor and between the time­honored pledge to keep the real exchange
rate from appredating. The first got a much larger weight by the Bank of Israel while
the second has usually directed the exporters' lobby and gained a greater weight with
the Ministry of Finance.
There are other factors, besides the exchange rate, in government's po'hcy and
actions that affect the process of expectations and credibility formation­ In particular,
fundamentals such as the budget deficit or government willingness to bail out firms
in dififculties. Indeed, since July 1985 government policy with regards to such
fundamentals has changed considerably. Another important factor affecting infla­
tionary expectations is government's actions with regards to subsidy cuts and to other
prices under its control. After the implementation of the program and until the end
of 1988 the government refrained from pushing up those pirces, and their average
annual increases were lower than the average inflation. However, since January 1989,
their rates have exceeded other rates of change (excluding housing, see Table 8a).31
After the implementationof the stabilization program, the public assessed the
new conditions and formed its new inflationary expectations. It seems that funda­
mental factors and the evaluation of government's declarations and actions together
31 In Israel controlled prices encompass a fifth of the CPt index. However, empirical studies
suggest that they have a significant signaling effect [seeMelnick (1989)]. Moreover, when a budget
deficit emerges there is a strong internal political incentive to cut subsidies rather than get into a ifght
with individual ministries over a cut in their share of the expenditure pie.
Bruno and Meridor: From Stabilization to Growth
p. 22
.
with the tight monetary policy were sufifcient in birnging inlfation down to about 20
percent but no less.32 Thus helping keep inlfationary expectations at about the same
level.
Vairous studies33 suggest
that,a major element
in determining expectations
may be lagged inflation, thus indicating that the process of expectation formation has
a partial adjustment element. Since inlfation remained more or less stable, it also had
a reinforcing stabilizing effect on expectations.
A moderate inlfation rate that remains more or less stable after a stabilization
program, is not a unique Israeli phenomenon, rather it is sharedby other recent
successful stabilization expeirences, such as in Chile and Mexico
­ there too a pegged
exchange rate regime had been implemented with stabilization. It seems that in those
countires too the inlfation rate can be the outcome of a similar game along which the
credibility of the government is tested and inlfationary expectations adjust gradually
(see Kiguel and Liviatan,1989). Only after full credibility is achieved, in particular
.
when fundamental factors are consistent with a fixed exchange rate with no align­
ments, will inlfationary expectations converge to Western rates.
The steady and gradual decrease in velocity of circulation of deposits (see Figure
10) suggests that the credibility build up was rather slow and the tightening of
declarations after 1987 together with other fundamental government policies con­
tirbuted to this trend. However, the new declaration of January 1989by the new
Finance Minister and the apparent shift in targets (more export oirented than before,
resulting in an additional small realignment in June 1989 and a different attitude
towards controlled pirces) may have hampered credibility of the exchange rate as a
nominal anchor.
The expectations argument and the slow credibility build­up can only partially
explain why wages increased as much as they did duirng the peirod 1986­1988. Since
the exchange rate policy declared in July 1985 signalled thatif wages were to increase
excessively, a realignment would sooner or later take place, it could very well be that
32 As often mentioned [see Bruno and Piterman (1988)] it may very well be that the unplanned
devaluation that took place duirng the ifrst half of 1986 (due to the pegging of the shekel to the
dollar) caused inflation to go down to 20 percent and not to a lower rate.
33
See, for example, Gottlieb et al. (1985) and Offenbacher (1985(.
Bruno and Meridor: From Stabilization to Growth
p. 23
ifrms did yield to workers' demands more than they would have had the declaration
been a somewhat 'harder' one.34 Indeed, after the tighter declaration of January
1987 there were lower nominal wage hikes although higher than pirce increases. One
could also interpret the fall in real wages in 1989 as a sign that the gradual learning
process is ifnally beginning to bear fruit.
In spite of the previous argument the explanation of nominal wage behavior
since 1987 remains incomplete. An additional explanation of the real wage surge has
to do with institutional structure of wage contracts in Israel on the one hand and the
restructuring process on the other hand. The institutional factors include economy­
wide arrangements, such as across­the­board wage increases stimulated by wage hikes
in the large public sector (see Figure 4),^ too slow an adjustment in COLA
arrangements or the minimum wage law which compelled ailing ifrms to raise wages
above the level warranted by market forces. The restructuirng process together with
downward irgidities in the labor market make it dififcult to reduce wages in ifrms that
have run into dififculties whereas the ifrms that are doing ifne can increase real wage
according to productivity. The two together result in a ratchet­like increase in average
wages.36
We end this section pointing out one positive feature of the inflation proifle that
seems to be emerging from the data for 1989. If we exclude the housing sector from
the pirce index, the wage and pirce increases in non­traded goods and services seem
to be gradually converging towards that of tradable goods.37 The latter has been
The role of govenrments' tying their hands as in the European Monetary System (EMS), has
certainly helped birng about a faster convergenceof inlfation in traditionally inflation­prone European
countries (Italy, France). It is important to note that in that case,too, substantial real appreciation
took place and the process of inflation convergence took several years. See Giavazzi and Giovannini
(1989).
^ For example, the LAI which ran into trouble in 1987 was forced to increase wages due to insti­
tutional arrangements (in particular, the link between the I.A.I.'s wages and the public sector wage
agreements).
For a more detailed analysis of wage policy and wage behaviour duirng the first and second
phase of the disinlfation see Artstein and Sussman (1988).
The relative convergence of wages can be seen in Table 7 by compairng wages in the service
and commerce industires with the total for the business sector. For prices compare, for example,
columns (3) and (5) in Table 8. The absolute gap between the two has been gradually falling from
about 20 percent in 1986­87 to 15, then 10 and 6 percent by the third quarter of 1989.
Bruno and Meridor: From Stabilization to Growth
more or less stable for the last three years,
p. 24
in spite
of the irregularity of devaluations.
These developments suggest that with an ongoing slack
in the
labor market, the
inflation rate, outside of the housing sector, is possibly heading downwards, provided
controlled goods prices are kept within the bounds of average inflation. However,
housing prices are most likely to continue rising at higher rates due to the immi­
gration wave from the Soviet Union. The role of controlled prices and of housing in
fact suggest room for another incomes policy package that will ensure wage modera­
tion. This could be assured, for example, by suspension of housing pirce increases
from compensations according to COLA agreements,on the one hand, and on the
other hand the government adopting a stronger position on the exchange rate and
other controlled pirces.38
V.
What Lies Ahead?
We have discussed in great detail the causes of the Israeli recession duirng the last
two years and emphasized that it can at least in part be attirbuted to the restructuirng
process that the economy is undergoing. In this concluding section we will try to
assess where the economy is heading in the near future.
The most recent economic indicators suggest that somewhere around the third
quarter of 1989 the economy started very slowly to move out of the depth of the
recent recession. There are good reasons to believe that 1990 will be a year of
considerably higher activity, estimates ranging
from3to
5
percent growth in the.
business sector. A higher growth rate could be expected on the basis of the improved
aggregate supply conditions
­
the sharp reduction in real interest rates and the
reduction in per unit labour costs. The latter trend could continue given the slack in
the labour market. To this one should add a likely cyclical upturn in pirvate con­
sumption and housing demand, as well as a planned increase of investment in
* We assume that the exchange rate will remain the main nominal anchor in the near future.
This assumption is based on our strong belief that the exchange rate is a better anchor for the Israeli
economy than traditional monetary aggregates which tend to be less stable, due to Israel's openness,
on the one hand, and the segmentation in the financial markets, on the other hand.
Bruno and Meridor: From Stabilization to Growth
p. 25
infrastructure, a long­neglected area.
On top of the improved supply and demand conditions there is an important
additional factor ­ an increasing wave of immigrants from the Soviet Union. The rate
of immigration has recently jumped to 3,000 per month. This rate
is likely to continue
and possibly accelerate. Past expeirence has shown that in the first yearof absorption
an immigrant contributes mainly to a net increase in aggregate demand (mainly for
housing) and only later participates in the increased supply to the labour market. A
large immigration wave is about to stimulate economic activity. However, such higher
Tate of activity may be a temporary phenomenon and does by no means ensure move­
ment to sustainable growth. The latter depends on the continued restructuring
process as well as systematic pursuit of the various reforms that have been mentioned
not the least of which has to do with a further cut in the size of government expendi­
ture and the extent of its involvement in the economy.
One problem that may still occupy policy makers' (and politicians') minds is the
recent sharp increase in unemployment. While its increase may have come to a halt,
a relatively high level of unemployment is likely to linger on as the increased output
growth may well be accompanied by a substantial increase in productivityand there
are structural reasons that are likely to remain in the future (e.g. the irse in
participation rates due to entry of the baby boom's baby in the labour force and other
reasons for unemployment mentioned in Section IV that are likely to be removed
only slowly).
■/
­
Another issue that has already emerged in 1989 and is likely to intensify with the
advent of large immigration
is the
pressure on the housing market. While conditions
exist for a further reduction in inflation in the rest of the economy, acceleration of
housing pirces, given present COLA agreements on wages, may causean upward
push to wages and pirces if proper moderating measures are not undertaken.
In one major respect it should be easier to birng down inflation further and that
is the more comfortable foreign exchange position that Israel finds itself in now. The
external debt/GDP ratio has been falling consistently since 1985 (see Table 1).
Moreover the current account has shown a surplus in 1989 after two years of a slight
deficit, and under reasonable assumptions is likely to remain in the black also in 1990
and 1991. (The probable large immigration wave is about to temporarily worsen the
Bruno and Meridor: From Stabilization to Growth
p. 26
foreign currency exchange position before causing an increase in output.) Together
with the ongoing slack in the labour market it suggests that a tougher stand on
exchange rate stability may be less irsky now.
A surplus on the current account has another angle to it. It imp'hes, because of
the lower trade balance, that total domestic savings now exceed investments which
in turn have fallen substantially duirng the 1980s
­
from around 27 percent of GNP
on average duirng the 1960s and the 1970s to 22 percent during 1980­84 and 18.5
duirng 1985­88.
An important indicator of sustainable growth is the level of new capital forma­
tion taking place so as to ensure that capacity at least keeps up with output growth.
For some
time,1 output can
draw up on unutilized capacity, but ultimately, the surest
guarantee of renewed growth
is a suitable flow
of investment spurred by the
producer's own profit incentives and not by excessive government support, as was the
case in the 1970s.
.
The aging of capital stock, part of which is now obsolete, indicates the existence
of an even more seirous problem in terms of net investment (after discards). This
is
even more disturbing in view of the fact that technological innovation usually gets
embodiedin new tangible capital formation. A rough estimate of the gross investment
necessary for capital stock to keep pace with a 5­6 percent in growth in business
sector GDP suggests that within the space of a few years, investment should irse from
its current level of 18.5 percent to at least 21­23 percent of GNP.
What is holding back investment today? In the past, it could be argued that
limitations oh domestic savings and on foreign borrowing were the effective limits on
investment. This, we have seen, is no longer the case. Nor do the present lower rates
of interest constitute ahinderance to new investments. The reasons for the sustained
lower rate of investment in the business sector has to do with the low profitability and
higher effective tax rates already mentioned (see section II and Table 3) as well as
with economic and political uncertainty. There has recently been a surge of interest
on part of some large foreign investors but so far it has taken the form of financial
portfolio investments rather than in new real capacity build­up. Renewed economic
activity and improved profitability are likely to birng about an endogenous increase
in investment but that still remains to be seen.
.
Bruno and Meridor: From Stabilization to Growth
p. 27
References
Artstein, Yael and Zvi Sussman (1988). "Wage Policy During Disinlfation: The Israeli Stabilization
Program of 1985," Bank of Israel, Research Department, Discussion Paper No. 88.07.
Bank of Israel 11988). A Plan for the Resumption of Growth and the Loweirngof Inflation, Jerusalem
(Hebrew).
Ben­Bassat, Avraham (1989). "Capital Market Reform, Goals and First Results," Bank of Israel,
Research Department, Discussion Paper No. 89.08..
Ben­Bassat, Idit (1989). "Price Indexes for Tardable and Nontradable Goods," Bank of Israel, Research
Department, Discussion Paper No. 89.11.
Ben­Rawe, Yoram (1989). "The Interest Rate Burdenof Short Term Credit on Industires, 1983­1988,"
Bank of Israel, Research Department, Discussion Paper No. 89.07.
Bruno, Michael (1989). "Israel's Crisis and Economic Reform: A Histoircal Perspective," N.B.ER.
Working Paper No. 3075.
and Sylvia Piterman (1988). "Israel's Stabilization: A Two Years' Review," in Inflation
j
Stabilization, Bruno et al (eds.), pp. 1­47.
Cukierman, Alex (1988). "The End of the High Israeli Inflation
­
An Expeirment in Heterodox
Stabilization," in J/i/ofiron Sattfj/izairon, Bruno et a£ (eds.), pp. 48­94.
Fischer, Stanley (1977). "Long Term Contracts, Rational Expectations, and the Optimal Money Supply
Rule," Journalof Political Economy, 85, (No. 1, February), pp. 191­205.
(1986). "Exchange Rate Versus Money Target in Disinflation," in Indexing, Inflation and
Economic Policy, Fischer (ed.), MIT Press.
Garber, Peter M. (1982). Transition from Inflation to Pirce Stability," in Carnegie­Rochester
Conference Series on Public Policy, 16, pp. 11­42.
Giavazzi, Francesco and Alberto Giovannini (1989). Limited Exchange Rate Flexibility: The European
Monetary System (Cambirdge: The MIT Press), Chapters 1, 2.
Gottlieb, Daniel, Rafi Melnick and Sylvia Piterman (1985). "Inflationary Expectations in Israel: A
Multiple Indicators Approach," Journalof Business <Sc Economic Statistics, 3 (No. 2, April), pp.
112­17.
Horn, Henirk and Torston Persson (1987). "Exchange Rate Policy, Wage Formation and Credibility,"
European Economic Review, 32 (No. 8), pp. 1621­36.
Kiguel, Miguel A. and Nissan Liviatan (1988). "Inlfationary Rigidities and Orthodox Stabilization
Policies: Lessons from Latin Ameirca," The World Bank Economic Review, 2 (No. 3, September),
pp. 273­98.
(1989). "The Business Cycle Associated with Exchange Rate Based Stabilization," mimeo.
Kislev, Yoav, Zvi Lerman and Pinhas Zusman (1989). "Expeirence with Credit Co­operatives in Israeli
Agirculture," The Center for Agircultural Economic Research Working Paper 8902.
Bruno and Meridor: From Stabilization to Growth
p. 28
Lavi, Yaacov (1989). "Interest Rate Effect on Investment in Israel: 1962­1988," Bank of Israel,
Research Department, Discussion Paper No. 89.08.
Litvin, Uri and Leora Meridor (1977). "Policy Measures and Their Effect on Exports and Real
Exchange Rates,", in Israel Economic Papers, N. Halevi and Y. Kop (eds.).
(1983). "The Grant Equivalent of Subsidized Investment in Israel,"
Bankof Israel Economic
Review, No. 54 (April), pp. 5­30.
Liviatan, Nissan (1989). "Israel's Stabilization Cycle with Some Reference to Latin American
Expeirence," mimeo.
Melnick, Raif (1989). "Forecasting Short Run Inflation in Israel 1983­87: An Evaluation," Bank of
Israel, Research Department, Discussion Paper No. 89.06.
Offenbacher, Edward K. (1985). "Empiircal Research on Money Demand in Israel," Bank of Israel
Economic Review, 60, pp. 3­16.
Pitennan, Sylvia (1989). "Economic Stabilization in Israel: Financial Diiffculties in the Adjustment
Process to Low Inflation", mimeo.
Sargent, TJ. (1982). The End of Four Big Inlfations," in Inflation: Causes and Effects, R.E. Hall, ed.
(Chicago: University of Chicago Press), pp. 41­96.
Siklos, Pierre L. (1989).
The End of the Hungairan Hypeirnflation of 1945­1946," Journalof Money,
Credit and Banking, 21 (No. 2), pp. 135­47.
Taylor, John (1979). "Staggered Wage Setting in a MacroModel," Ameircan Economic Review Papers
,
and Proceeding, 69, pp. 108­13.
The NationalBudget 1988, Jerusalem (Hebrew).
Wicker, Elmus (1986). Terminating Hyperinlfations in the Dismembered Habsburg Monarchy,"
American Economic Review, 76 (June), pp. 350­64.
Bruno and Meridor: From Stabilization to Growth
p. 29
Table 1. Major Indicators, 1980­1989
80­84
Rate of growth (percent) in:
1985
1986
1987
1988
1989*
Average
)1(
Business sector GDP
2.8
5.3
5.8
7.0
1.1
1.4
)2(
Pirvate consumption
5.5
0.5
14.2
8.4
3.0
­1.0
)3(
Gross domestic investment
2.7
­10.6
10.4
3.3
­2.1
­5.2
)4(
Exports
4.4
8.7
5.6
10.8
­2.1
4.2
Consumer pirces (percent
rate of change)
189.2
304.6
48.1
19.9
16.3
22.0
(6)
Unemployment (percent)
5.1
6.7
7.1
6.1
6.4
8.8
(7)
Real interest arteb
23.0
100.0
33.0
39.0
25.0
15.0
(8)
Unit labour costsc
(index, 1984 = 100)
100.2
89.7
109.3
114.6
125.5
124.0
­1.7
­1.2
1.6
.:­1.0.
­0.7
13.6
2.6
­1.9
1.3
4.6
4.7
1.3
1.5
Other indicators
(5)
(9)
Current account surplus
(billions of S(
.
■'
1.0
Percentof GNP
(10) Total public sector deficit
(11) Deficit corrected for
cyclical downturn
(12) Tax revenue
41.4
43.8
46.8
45.8
44.5
41.1
(13) Internal debt
128.8
144.6
128.2
124.2
123.6
125.4
(14) External debt
65.2
80.7
64.3
54.1
45.8
42.6
Estimates.
b
Average short­term rate.
c
In the business sector.
Bruno and Meridor: From Stabilizaiton to Growth
p. 30
Table 1 Indicators of Business Sector Proiftability,8 1982­1989
1982­
1984
1985
1986
1987
1988
1989"
Indexes, 1986 = 100
Labor cost per man­hour
in the business sector,
product pirces
Manufactuirng
)1(
Labor cost per unit of
business sector product
Manufactuirng
(2)
91.0
87.5
88.5
95.0
90.3
911
89.2
89.2
100.0
100.0
105.3
106.9
109.3
112.1
108
110
100.0
100.0
102.3
102.9
105.8
106.5
104
10
105
Percent
Rate of return to gross
capital in business sector*
of which: In manufacturing
)3(
13.6
12.7
10.3
8.6
10.1
7.8
9.3
6.6
17.5
11.7
6.9
1.4
16.2
10.1
11.6
6.3
25.1
94.7
34.7
38.4
25.4
14
6.3
6.4
5.3
4.5
1.5
Taxation rate on
non­wage income
24.9
27.5
33.3
31.9
312
28.2
Net ratee of taxation
on non­wage income
10.9
19.5
26.5
24.7
25.6
22.4
12.8
13.2
Real interest rate on short­term
in business sector11
Manufacturing
(4)
aedit
Real marginal interest rate
on overdratf facilities
(5)
Real yield to matuirty
of 10­year bonds
(6)
(7)
(8)
8
8.5
3
11
Source: 1982­1988 ­ Bank of Israel, Annual Repotrs.
a The
b
share of labor in GDP is 2.4 times that of capital, and has tended to irse in recent years.
Estimated
c Includes imputed labor input of self­employed in each sector, at hourly wages equal to those of
wage earners in the same industry.
d The differences between interest rates reflect the differences in the shares of the vairous kinds
of credit in the same industry.
After deduction of credit subsidies and capital transfers to business ifrms; includes taxes on
salaires of managers, which are classified as non­wage income.
e
Bruno and Meridor: From Stabilization to Growth
p. 31
.
Table 3. Rate of Increase of Productivity
1985
1986
1987
1988
0.1
0.2
0.3
­0.2
Business Sector
Product
Labor inpur
Labor productivity
Manufacturing (diamonds excluded)
Product
Labor input
Labor productivity
Food
Product
Labor input
Productivity
1989a
2.9
4.1
0.1
2.2
7.0
3.8
2.8
1.8
3.1
2.9
0.0
4.9
­4.6
3.1
3.7
2.0
1.7
­1.0
­9.0
­0.4
13.7
8.8
4.5
12.8
­1.5
­1.6C
6.2
6.3
­0.1
­13C
0.3
3.9
­12.6
­9.6
­3.3
­5.5C
­9.QF
4.9
5.2
3.7
1.6
­0.2
4.9
­0.2
­3.1
1.6
­1.5
0.5
­2.8
­5.3
15
o.r
Textiles
Product
Labor input
Productivity
Metal Products
Product
Labor input
Productivity
Electronics and Transport Equipment
Product
Labor input
Labor productivity
Chemical and Oil Products
Product
Labor input
Productivity
Transport Equipment
Product
Labor input
Productivity
Miscellaneous
Product
Labor input
Productivity
­4.5
17
1.1
3.5C
0.9
0.9
1.3
3.4
­6.6
­1.7
­3.2
­5.1
­4.2C
­3.6C
4.3
­0.5
10.7
3.6
­0.5c
10.1
5.1
4.7
­33
­3.2
0.8
­3.9C
­3.4
­4.3
­3.5
0.1
1.2
4.4
­19C
­1.0c
1.8
11.4
0.8
0.2
0.6
­4.0
­19.9
­17.0
­3.5
­1.9
13
­0.7
­6.0
0.0
19
3.6
­3.5
4.9
9.6
­1.0
.
­3.7
­5.5
13
9.1
­9.1
­10.4
1.3
10
1.4
16.8
0.0
16.8
3.6
­10.7
­2.2
­8.6
6.1
­14
IJLI.
Product
Labor input"
Productivity
­4.6
7.2
3.3
7.4C
7.7
9.6C
5.2C
­7.1
0.9
­5.6
­1.6
­14.8
­4.6
15.8
11.8
­7.7
­6.5
­16.1
­3.0
­10.2
8.0
6.8
Koor
Product"
Labor input*
Productivity11
2.6
0.2
13
Source: Central Bureau of Statistics, I.A.I. and Koor.
a Estimates.
b Working days.
c
Rate of change 19891/198911.
d Change of products is measured by a change in sales.
e
Number of workers.
­10.0
­2.1
­8.1
­7.1
0.6
11.5
Bruno and Meridor: From Stabilization to Growth
p. 32
Table 4. Productivity and Wages
1986
1987
1.8
3.1
7.2
1988
1989s
Business Sector
Labor productivity
Realb wages
6.1
­0.2
■,.■.­
3.9
0.5
0.3
.
Manufacturing
Labor productivity
Realc wages
1.7
4.9
1.6
2.5
9.3
. 1.4
9.2
­5.3
Labor productivity
Reald wages
4.5
12.2
6.3
14.1
­1.5
7.7
­2.5
1.6
15.6
­3.3
3.5
14.6
8.1
S.5
10.0
10.7
9.3
3.6
0.4
­0.5
­7.7
0.1
6.9
1.2
4.4
2.2
­1.0
5.4
9.1
0.8
0.6
5.4
Food
0.7
Textiles
Labor productivity
Reald wages
1.1 "
'
Metal Products
Labor productivity
Realc wages
­0.5
Electronics and Transport Equipment
Labor productivity
Realc wages
1.8
Chemical and Oil Products
Labor productivity
Realc wages
­1.0
6.7
Source: Central Bureau of Statistics.
a
Rate of change
19891/198911.
b Nominal wages deflated by GDP prices.
c Wages deflated by wholesale prices.
d
Wages deflated by the corresponding component of pirces.
7.4
­0.3
Bruno and Meridor: From Stabilization to Growth
p. 33
Table 5. Real Interest Rates, Changes in Directed Credit and Credit Ratios, 1983­1989
Real interest artes on
total short­term credit
Percentage share of
directed credit
Total short­term credit
per output
Whole economy
Total
credit
Free Directed Agir­ Manu­
credit credit cultuer fact­
Agir­
culture
Manu­
fact­
uirng
Whole
uirng
Whole
eco­
nomy
(5)
(6)
(7)
(8)
(9)
(10)
(11(
Agri­
eco­ culture
nomy
Manu­
fact.
uirng
(1)
(2)
(3)
(4)
1983
6.2
10.7
­1.0
­0.4
4.7
36.8
51.2
75.0
31.2
30.5
30.8
1984
28.9
32.9
23.8
27.6
33.8
39.8
56.5
76.8
36.1
26.2
28.3.
1985
16.4
28.1
1.5
24.0
11.7
40.3
51.7
76.1
25.8
28.8
28.1
1986
8.2
16.4
­6.5
12.1
1.4
33.0
34.9
66.4
23.4
35.8
27.5
1987
18.8
25.8
0.1
20.1
10.1
26.9
28.3
59.8
27.5
49.1
30.2
1988
13.8
18.0
­2.8
14.2
6.3
21.6
23.2
54.7
30.9
66.2
34.5
1989"
11.5
18.8
Sources:
Col. (1) Bank of Israel Annual Report, 1988.
C0L (2) Ben Rawe, 1989.
Cols. (6)­(8) Ben Rawe, 1989.
a Estimates based
on ifrst half of 1989, Bank of Israel's data.
33.5
BrunoandMeridor:From Stabilizationto
Growthp.
34
Table 6. Selected Liquidity Ratios for Non­Linked and Linked Assets, 1984­1989 (Percentages(
Short­Term Non­Linked Assets
Demand
deposits
CDs
Time
deposits
(2­3 mths(
Long­Term Linked Assets
Index
linked
Pension
funds
Provident
funds
saving
schemes
1984
45
17
14
75
92
92
1985
60
43
38
75
92
92
1986
48
38
20
75
92
78
1987
38
38
20
55­65
92
78
1988
26
26
16
55­65
92
78
1989
21
21
12
Size of asset in 1988
)'£< of GNP(
)3­1(,
)6.8(
Source: Piterman (1989) and Bank of Israel's data.
a This includes life insurance.
)36.6(
)11.1(*
Bruno and Meridor: From Stabilization to Growth
p. 35
Table 7. Wages, Pirces and Exchange Rates (average percent change(
19S6
1987
1988
19893
Business Sector
65.0
32.6
24.7
18.9
Manufacturing
65.3
30.6
16.0
17.6
hotels
78.6
36.6
26.4
17.6
commercial services
67.8
30.5
30.0
23.9
89.8
47.2
33.0
15.7
CPI
48.1
19.9
16.3
21.8
Wholesale pirces
45.1
18.5
17.5
23.8
Tradables"
42.6
14.5
11.4
13.0
Nontradablesb
46.1
25.6
21.1
28.1
Nontradables excluding housing
)A.\
34.2
24.0
24.6
Exchange ratec
45.0
143
2.4
13.8
Nominal Wages
Commerce, restaurants
Financial
Sc
St.
Personal and other services
Source: Central Bureau of Statistics.
a
b
First 8 months of 1989 compared to 1988 average figures.
Excluding fruits, vegetables and controlled goods and services.
c Veirsus currency basket.
.
Bruno and Meridor: From Stabilization to Growth
p. 36
Table 8. Selected Pirce Indexes, 1986­1989 (annual percentage change)
(Last 4 quarters inflation)
CPI
(1)
Non­
Controlled
Nontradeda Housing
Whole­
sale
prices
Traded8
(2)
(3)
(4)
(5)
(6)
(7)
36.41
39.61
19.20
16.46
17.00
Weight in Index 100.0
traded3
excluding
­ ■.. :.
housing
1986 III
19.2
20.2
17.6
20.3
35;0
8.7
12.8
1986 IV
19.6
15.1
14.5
17.1
35.1
3.6
15.4
19871
22.8
19.1
16.5
26.3
37.9
16.4
18.9
1987 II
19.5
17.0
15.3
25.5
35.3
16.7
1987 III
18.8
18.8
12.3
26.5
32.8
20.3
1987 IV
16.1
20.9
14.3
23.1
30.7
15:7
19881
15.8
17.2
12.0
21.7
26.1
16.5
13.2
198811
16.2
18.3
11.3
20.8
25.0
15.0
15.4
in
16.3
17.0
11.2
20.0
217­.
15.8
1988 IV
16.4
15.6
9.1
223
21.2
23.0
16.9
19891
19.5
22.0
11.7
23.4
24.0
22.6
27.5
1989 II
20.1
21.1
11.5
26.3
21.3
33.9
29.3
1989 III
21.0
21.4
12.5
26.8
18.4
39.5
31.2
1988
:
:.
■\.
13.9
■
.
14.9
15.2
.
.
13.9
Source: Central Bureau of Statistics and Ben­Bassat (1989).
a Based
on the CPI index and excluding fruits, vegetables and controlled goods and services.
Bruno and Meridor: From Stabilizaiton to Growth
p. 37
Table 8a. Selected Pirce Indexes
(percent of change each quarter compared to previous quarter, annual rates(
Excl. vegetables,
fruit
CPI
(1)
Weight in Index
Whole­
sale
pirces
(2)
100.0
Sc
(3)
Non­
traded
(4)
tradeda
(5)
(6)
(7)
Con­
trolled
(8)
41.96
58.04
39.61
36.41
16.46
17.00
Traded
Non­
controlled
Traded Housing
19861
5.1
19.1
8.4
3.5
26.7
8.1
13
3.3
1986 II
29.3
20.6
22.7
33.6
39.4
24.8
35.8
34.2
in
12.6
13.9
13.3
123
42.1
12.9
15.4
11.4
1986 IV
29.0
12.1
12.1
40.5
29.0
14.7
20.2
11.5
19871
22.7
25.3
12.0
29.3
42.1
14.3
15.9
18.6
1987 II
18.0
18.2
16.7
18.7
32.2
18.8
20.2
17.1
1987 III
9.3
18.1
65
10.9
27.2
6.1
15.9
12.6
1987 IV
17.5
19.7
14.4
19.2
24.4
15.1
14.3
12.6
19881
17.7
18.7
11.0
23.5
22.1
11.2
16.1
13.1
1988 II
21.8
16.3
163
25.6
27.7
15.5
10.4
18.6
1988m
73
15.0
4.9
9.0
19.4
2.8
17.4
13.9
1988 IV
22.0
143
11.4
29.5
17.1
10.8
45.0
21.2
19891
30.7
41.3
21.3
37.2
33.2
17.0
19.4
56.8
1989 II
19.2
16.4
13.6
215
19.9
14.8
47.0
1989 HI
12.8
15.9
7.8
14.8
12.5
7.4
32.2
1986
Source: Central Bureau of Statistics and Ben­Bassat (1989(.
Excluding housing.
;
24.0
25.5
­ 38 ­
Figure 1. Supply of Consumer Goods via
Large­Scale Retail Trade
90
II
III
N
111
11
1989
1985
Figure 2. Industrial Production
110
­
108
­
3
106
■
.
.
a>
104
©
□>
■
2
§ 102
'i
I
■
^
1
100
1
1/
V
98
J
1
1
II
III
1985
1
1
ii
111
1986
n
in
1987
i
,
1
in
11
1988
1
IV
!
11
111
1989
­ 39 ­
Figure 3. Employment and Unemployment
440
/
430
b. Public sector employment
­‫ ס‬.
C 420
CO
tn
g
410
400 ­
I
II
III
1985
IV
I
II
III
1986
IV
I
II
III
1987
IV
I
II
III­
1988
IV
I
II
III
1989
­ 40 ­
Figure 4. Real Wage per Employee
130
Real wage per output
in
industrial exports
8
J
J
L
19B5/I
1986/1
1987/1
J
L
J
L
1988/1
L
1989/1
Figure 5a. Foreign Trade
800
Merchandise Imports
Merchandise expotrs
.
Trade deficit.
600
in
o
= 400
2
200
?!:!'
I
II
III
N
I
II
III
IV
1985
1986
Excluding ships, aircraft, fuel and diamonds.
I
II
III
1987
IV
I
II
HI
1988
W
I
II
III
1989
W
­ 41 ­
Figure 5b. Relative Prices of Industrial Production
130
y\
nis/u.s.$
/­..
\
120
8
110
11
..­­
­
NIS/Euro­basket
\\
v
100
1
'■■­
.''■..■
/
­.*
/
/
90
V ­
/
/
NIS/5­currencle3
80
I
I
1
1
II
III
1
IV
I
1
1
III
I
1
IV
I
1
I
II
1986
1985
1
1
IV
1
1
I
II
1987
1
1
IV
III
1988
I
(I
1989
Figure 6. External Debt / GNP
80
0.
60
^
" y
\
1
5
£
.
y"
I
40
20
1980
1981
1982
1983
1984
1985
198.6
1987
1988
­ 42 ­
Figure 7. Interest Rates and Inflation
‫ח‬
4 ­
!
n
nfi
j­jn
­n
Interest on
overdraft
<'
pi
Rate of inflation
■
:
: :: ;J
\
­
1PIn
t
7|
A
|
V/
y
2
"
1
­
/;
illlli
I
J
1
\
f
\y
ull
'
::
VI /I
l |
■
1QAA
I9OO
I
1
J
■■
1
1
t
A
­7/"
n
r
'
uj
f\'^
i
1
][
n
:
/I
J
'no
:
;M
/I/Is
!
////
I 1
J\\
W
­
;*
■)
<
1
Iff
1987
1
VII
1988
II
VII
n
I,
r
/ ff
m
I [
­
/7 /7
‫ח‬
‫י‬
M
:
1989
11
VII
VII
Figure 8. Public Sector Cash Flows
600
" 550
|
500
CO
z
450
*.*
400
.a
10
Domestic publicsector deficit
O
­5
i
£
Tax revenues .
5
0
II
III
1985
IV
I
I I
II
III
1986
IV
I
I
I
II
III
?987
IV
I
IV
I
1988
I
I
II
III
1989
IV
­ 43 ­
Figure 9. Bankruptcies and Liquidations
1978­84: Annual data
1
985­89: Quarterly data
Quartan I
I
1978
­80
'82
I
I
I
'84
'85
'86
'87
'89
'88
Figure 10. Velocity of Circulation
Second helf
0f1986
.
450
i
­
400
/
y
350
■r
o
300
\
.
250
■
200
■
150
i
1984
1985
i
IV
|
I
I
II
III
1986
I
I
IV
I
I
I
I
in
iv
1987
I
1
I
I
III
IV
1988
I
I
I
II
1989
­44
­
Figure 11. Selected PriceIndexes, 1986­1989
)Annual percentage change)
50
­
40
,''
Housing
/'
.
30
CPI
8
/
.*
20
...­
10
/
Controlled prices
/
1
/
1
1
1
1
1
1
1
40
......­...
_
­:..­...._
Non­traded excluding
housing*
30
■
Wholesale prices
"r
'"'"
..._._
♦.*
20
Traded* *­
10
1986/111
­
.^*^
i
!
1987/1
1988/1
* Excluding fruit, vegetables and controlled
._
goods and services.
*.­I,
:
I
1989/1
r
■■
‫­ ‪­ 45‬‬
‫סדרות מאמרים לדיון‬
‫‪1986‬‬
‫‪ 86.01‬ל‪) .‬רובין( מרירור‪.‬‬
‫­‬
‫מימון‬
‫הוצאות הממשלה בישראל ‪.1983­1960‬‬
‫‪ 86.02‬מ‪ .‬בר­נתן‪ ­ .‬המימון הציבורי לדיור ­ מיבסוד‪ .‬מימון‬
‫‪86.03‬‬
‫‪86.04‬‬
‫‪86.05‬‬
‫‪Announcements and‬‬
‫א‪ .‬מרום‪­ .‬‬
‫‪­ Monetary‬‬
‫תרומת האינפלציה לגודלו‬
‫‪Prices in Israel: 1970­1983‬‬
‫‪ 86.06‬מ‪ .‬ברון‪ ­ .‬השפעות כלכליות‬
‫‪86.07‬‬
‫ש‪.‬‬
‫של‬
‫‪,‬‬
‫ופרוגרסיביות‪.‬‬
‫‪L.Leidevman, and E. Of f enbacher‬‬
‫‪Stock Prices in Israel‬‬
‫של ענף הבנקאות בישראל‪.‬‬
‫‪Wages. and Import‬‬
‫‪­ Prices,‬‬
‫‪Melnick‬‬
‫‪R.‬‬
‫גורמים דמוגרפיים‪ :‬היבטים נוספים‪.‬‬
‫­ התפתחות הפרשי השכר בין גברים יהודים מארצות מוצא שונות‬
‫אמיר‪.‬‬
‫בשנות השבעים‪.‬‬
‫‪ 86.08‬ע‪ .‬לויתן‬
‫­ בחינת עצמת השיבושים ביחסי העבודה בעת‬
‫שינויים בלתי צפויים‬
‫בקצב האינפלציה‪.‬‬
‫‪ 86.09‬ד‪ .‬אלקיים‪ .‬י‪ .‬טל‪ .‬ד‪ .‬יריב ­ השפעת החוב הפנימי והחוב החיצוני על הצריכה‬
‫הפרטית בישראל בשנים ‪ 1971‬עד ‪,1984‬‬
‫‪Crisis.‬‬
‫‪86.10‬‬
‫‪Anatomy of a Debt‬‬
‫­‬
‫‪ 86.11‬ד‪ .‬יריב‪ ­ .‬אמידת הצפיות לאינפלציה בישראל וניתוח‬
‫תכניות‬
‫‪ 86.12‬ד‪ .‬אלקיים‪.‬‬
‫כלכליות‬
‫‪■­.‬‬
‫‪Mexico‬‬
‫‪Katz,‬‬
‫התפתחותן‬
‫לדיסאינפלציה‪.‬‬
‫ההצע והביקוש לעבודה בסקטור העסקי בישראל‪.‬‬
‫על‬
‫‪M.‬‬
‫רקע‬
­ 46 ­
1987
M.
Bar­Nathan, J. Baruh. ­
Determinants of the Tariff Structure
of
87,01
the Israeli Industrial Sector 1965­1977.
R. Melnick, ­
A
Inflationary Expectation Formation in Israel:
Specification Test.
87.02
L. (Rubin) Meridor, Trying to Cope With Large Government
Deficits
M.
Bruno, S. Piterman
Israeli Experience.
:The
.‫חוב חיצוני מול אינפלציה‬
87.03
:‫הממשלה‬
­ Israel's
‫מימון גירעון‬
­
,‫ )רובין( מרידור‬.‫ל‬
Stabilization. a Two­year Review.
87.04
87.05
1988
R. Ablin
­
The Logic
of "Ricardian Equivalence" and the
Deficit­Inflation
Debate.
.‫ לויתן‬.‫ע‬
88.02
.‫ ­ מדדים לרווחיות היצוא‬,‫ פסח‬.‫ש‬
88.03
,‫­ הגורמים המשפיעים על הרכב תקציב הממשלה‬
‫הערך‬
88.01
‫פרסום מדד המחירים לצרכן ובחינת יעילות שוק ניירות‬
­
.‫ יריב‬.‫ד‬
88.04
.‫בישראל‬
A, Cukierman. Meir,
in Israel
‫העבודה על‬
Y.
‫כוח‬
Artstein,
The
‫של‬
Sokoler, ­ Monetary Policy and Institutions
­ Past. Present and Future.
‫ ­ השפעת שינויים במבנה הותק‬,‫ קלינוב‬.‫ ר‬,‫אמיר‬
.‫ גישת הקבועים והזמניים‬:1972­1983 ,‫השכר‬
Policy Durimg Disinflation:
Israeli Stabilization Program of 1985
Z.
88.05
Sussman, ­
Wage
.‫ש‬
88.06
88.07
­47
­
Fiscal And Monetary Dynamics Of
Israeli Inflation: A Cointegrated Analysis 1970­1987
M.
Beenstock.
R.
Melnick.
M.
Beenstock, Mishel Kahanaman ­ The Trade Balance Ratio and the
Real Exchange Rate in Israel 1955 ­ 1986
A.
Offenbacher,
M.
Beenstock, ­
88.08
Ben­Gad ­ The
M.
­ The Demand for Liquid Assets in Israel.
Short­Run Monetary Control in
­
A
1970 ­ 1985
88.09
88.10
Israel
88.11
Democratic Model of the "Rent­Sought" Benefit
88.12
Cvcle
1989
‫הריבית הריאלית והנומינלית על החוב הפנימי‬
­ ,‫פיטרמן‬
.‫ס‬
,‫אורבך‬
.‫צ‬
89.01
.‫והחצוני‬
M.
Beenstock.
­ The Factorial Distribution
Union Bargaining Model
of Income in the
Erosion of the Real Exchange Rate;
R. Ablin. ­
Growth
A. Bregman. M.
A
89.02
89.0?
Demand and
Diagrammatic Clarification
Fuss, and
Haim Regev ­
High­Tech Firms in Israeli
89.04
Industry.
.‫ ­ סקר החברות של בנק ישראל ­ בחינה מחודשת‬.‫פישר‬
R. Melnick, ­
Forecasting Short
An
1983
Run
.‫ י‬,‫גבע‬
Inflation in Israel
.‫ד"ר ד‬
1983­1987
89.05
89.06
Evaluation
.‫על האשראי הבנקאי ל­זמן קצר בענפי המשק‬
‫ ­ נטל הריבית‬.‫ בן­רוה‬.‫י‬
.1988 ‫עד‬
89.07
­ 48 ­
,‫הסקטור העסקי‬
‫משק של‬
‫ ­ השפעת שערי הריבית על ההשקעה בענפי‬.‫ לביא‬.‫י‬
.1987
A.
Bregman,
­
1962
­ ‫הישראלי‬
89.08
‫במשק‬
.‫ ­ הרפורמה בשוק ההון ­ יעדים ותוצאות ראשונות‬,‫ בן­בסט‬.‫א‬
89.09
­ Technological Progress, Structural
89.10
Productivity in Industry:
The Case
Change, and
of Israel.
.‫ ­ מדדים למחירי מוצרים סחירים ובלתי סחירים‬,‫ בן­בסט‬.‫ע‬
Leora (Rubin) Meridor and Shula Pessach, ­ The Balance­of­Payments
Offset to Monetary Policy: An Examination of The
Israeli
89.11
89.12
Case.
1990
Costly Transition
from Stabilization to Sustainable Growth: Israel's Case.
Michael Bruno
£c
Leora (Rubin) Meridor,
­
The
90.01