Economic Conditions -- the Economy of Modern Israel: Malaise and Promise by Assaf Razin and Efraim Sadka

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The Economy of Modern Israel: Malaise and Promise, by Assaf Razin and Efraim Sadka. Chicago and London: University of Chicago Press, 1993. x + 225 pages. Tables to p. 246. Refs. to p. 250. Index to p. 256. $34.95.

In what is essentially a book for economists, Assaf Razin and Efraim Sadka review the recent economic history of Israel in considerable detail.

Chapters 1 and 2 of this work are devoted to providing an analysis of the background to and policies of the 1985 stabilization program. Although the program undoubtedly proved a success in curbing Israel's runaway inflation, the authors are intensely critical of some of the basic policy tools of the program's architects, which they believe contributed to the 1988-89 recession. The stabilization program, which consisted principally of the realignment of key prices and fiscal and monetary restraint, created a short-lived boom that rapidly deteriorated into recession. Apparently, the recession was totally unforeseen by Israel's policymakers and was largely attributed by them to the combined effects of excessive wage increases and the intifada (uprising).

Razin and Sadka, by contrast, point to the persistent and (in their view) mistaken determination of then-Finance Minister Moshe Nissim to maintain a freeze on the exchange rate and to use it to manipulate wage and price stability. On top of this, the restrictions on capital imports intended to limit the money supply pushed interest rates uncomfortably high. In short, the authors claim, "the monetary policy pursued [subsequently] should be viewed as the fundamental force driving the economy into recession, a recession further deepened by the intifada and the rise in the effective tax burden" (p. 65). Michael Bruno, the governor of the Bank of Israel at the time, is singled out for particularly heavy criticism.

The authors move in the succeeding parts of the book to discuss some of the primary economic issues facing Israel in recent years, notably, the impact of the intifada and Israel's own stranglehold on the economies of the occupied territories, the implications of emigration from the former Soviet Union, taxation policy, international trade, and economic liberalization. Unfortunately, the pages on the economies of the West Bank and Gaza Strip can only be termed as entirely misleading. It is inappropriate to describe the economic relationship between Israel and the occupied territories as "a classic example of the integration of a 'large' and a 'small' economy," or to assert that it has resembled anything close to a common market (pp. 74-7). Israel has imposed an extensive set of military orders that circumvent its obligations under international law and that (contrary to the inference of the authors on page 76) effectively replace and certainly override existing Egyptian and Jordanian law. These military orders, which cover everything from the planting of a tomato plant to the picking of wild thyme, have undermined any independence of the Palestinian economy and have been used to ensure that the economic benefits of the relationship are nearly all in Israel's favor.

Most critically, Israeli governments have sought to deny the Palestinian population any independent engine for growth by severely restricting capital accumulation and credit for development--for example, by closing the existing sources of formal agricultural loans to farmers in the late 1960s and early 1970s. Israeli practices have been so well documented, not least by international agencies such as the UN Conference on Trade and Development (UNCTAD),(1) as well as by renowned Israeli academics such as Meron Benvenisti, that it does the authors little credit to display what amounts to willful blindness. Benvenisti's own description of the relationship between Israel and the occupied territories--that it resembles "integration and exclusion," integration into the dominant economy when it benefits that economy and exclusion when it does not--is far closer to the truth. …

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