The Bank of Israel - Vol. 1

By Haim Barkai; Nissan Liviatan | Go to book overview

6
War and Oil Shock,
October 1973-May 1977

The outbreak of the Yom Kippur War and the energy crisis in October 1973 left no doubt that the 1967–73 economic boom had ended and that Israel would be facing long-term economic and political difficulties. Indeed, this turning of the tide marked the beginning of a lengthy period of economic stagnation and accelerating inflation that would not end until 1985. In the estimation of Z. Sussman (1995), the total burden that these exogenous shocks imposed on the economy by 1979 (when the second oil shock struck) amounted to 15% of annual GNP. This emphasizes quantitatively the rate of deterioration in economic performance after the 1973 crisis.

We first discuss the effects of the crisis within the framework of short-term management of the initial shock (1974–75); then we focus on the succeeding period and the formulation of medium-term policy in 1975–77.


THE IMPACT OF THE 1973 SHOCK

The initial shock dealt the real economy a tremendous blow. Balassa (1984) estimates its effect in 1974–76 at 10.5% of GNP—not counting the domestic defense burden, which had risen for a number of years (table 6.1).1 Between 1972 and 1974, the current-account deficit tripled in nominal dollar terms (from US$1.1 billion to US$3.4 billion and the basic account (the current-account deficit less long-term inflows) turned from a positive inflow of US$0.8 billion to a negative flow of US$1 billion. From then on, the balance of payments (BOP), problematic to begin with, became the number-one issue on the government’s economic agenda. The economy somehow had to cope with this huge burden.

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