The Bank of Israel - Vol. 1

By Haim Barkai; Nissan Liviatan | Go to book overview

9
General Features of the Overall
Inflationary Process

The following chronological review of Israel’s inflation process underscores the relevance of several general characteristics of inflationary onslaughts and the importance of elucidating them at this juncture of the discussion.


THE REAL ECONOMY AND THE COSTS OF INFLATION

Israel’s “lost decade,” 1974–84, was associated with very poor economic performance in terms of growth and productivity. The comparison with the boom years of 1967-September 1973 is highly instructive. The rate of real annual GDP growth plummeted from 11% in the earlier period to a mere 3.3% in 1974–84 (table 9.1). Total factor productivity in the business sector plunged from 6% per annum in 1967–73 to 0.7% in 1974–84 (Annual Report 1999, p. 266).

Despite the stagnation of output per capita, real wages continued to rise. It is especially noteworthy that the of real-wage in the business sector increased in the lost decade by more than 3% per annum (table I.1). The continued rise in real wages points to the existence of a basic “disequilibrium,” or unsustainability, in view of the stagnation of gross domestic investment and total factor productivity in 1973–84 (Annual Report, 1984, p. 12). Further evidence of the unsustainability of the pattern was the 4.9% rate of increase in private consumption during the lost decade, as against 3.3% GDP growth (table 9.1), reflected in the doubling of the foreign debt/GDP ratio from 40% to over 80%. These developments did have a positive side: the oil crises, which caused worldwide stagnation, raised unemployment in Israel less than in industrial

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