The Hard Road to Israeli Self-Dependence:
Facing Up to the Grim Economic Realities
If the prime essential of a sound democracy is free, candid, and untrammeled public discussion and criticism of official policies—political, economic, or social—the Israelis surely qualify. We print here a remarkably frank article by a young Israeli economist, SCHLOMO RIEMER, whose zeal for the independence of his new state prompts a most searching analysis of why and how Israel must plan if it is to achieve economic independence in the future.
One of the most important aims of Zionism was to reduce the dependence of Jewish communities on a surrounding Gentile world. And it is one of the supreme ironies of history that the culmination of Zionist success, the creation of a sovereign Jewish state, has served up to now, not to reduce this dependence, but to shift it from the political to the economic arena. While the great Jewish communities of the Diaspora were characterized by economic strength and political weakness, we citizens of the state of Israel enjoy political sovereignty coupled with an almost complete economic dependence on others.
As we know, the considerable economic prowess of the Jews in the Dispersion availed them little in countries where they were politically helpless; it might be concluded similarly that Israel’s political independence will mean little in the face of continued economic dependence.
There is an understandable tendency to write off Israel’s economic weakness as just another example of how in our chaotic modern world all small nations and some not so small ones must depend on the support of a Big Brother or the generosity of an Opulent Uncle. But, even so, the sheer magnitude of Israel’s economic dependence on the outside world makes it a very special, if not unique case.
A glance at Israel’s balance of payments will make the point:
During the three and a half years from 1949 to June 1952 Israel imported goods and services worth $1,184,000,000, while its total exports, visible and invisible, amounted to $183,000,000—only 15.5 per cent of the total. The deficit reached the fantastic sum of over one billion, or $286,000,000 annually, which is not very much short, in terms of real economic values, of one-half the net national income at cost price during that period. And it must be remembered that in the absence of these huge annual unrequited imports the total national income would have been much lower.
The invariable response of official spokesmen when confronted with these figures is to point to the Ingathering of the Exiles and the massive volume of investments required for their productive integration into the economy of the country. What are the facts? From the foundation of the state in May 1948 until the end of September 1952, net immigration, i.e., the excess of all arrivals over all departures, was 676,097. This compares with a Jewish population at the termination of the British Mandate of about 650,000. On the other hand, however, it must not be forgotten that at the beginning of that same period approximately 800,000 Arabs left the territory now administered by the State of Israel. They left behind all their immovable property, including 1,300,000 dunams of arable land, 140,000 dunams of built-up area with 50,000 more or less intact dwellings, 8,300 businesses, and 1,000 workshops.
Moreover, despite this windfall and the subsequent huge expenditures, the new immigrant population is still far from having been absorbed into the economy of the country, however we may choose to define this term. About 180,000 newcomers are still living in flimsy, temporary camps, so-called ma’aharot, which, according to the impartial testimony of UN officials on the spot, invite comparison with the admittedly dreadful living conditions in the Arab refugee camps beyond Israel’s borders. Another quarter of a million people are housed in Arab-abandoned towns, villages, and homesteads, and only the final odd third have been provided with new homes or have been absorbed into residences of the older immigrants. The government and public institutions still expend vast sums of money for large-scale public-work schemes of dubious productive value in order to enable thousands of needy newcomers to eke out a meager existence. By no stretch of the imagination can we call this “economic integration.”
The most disturbing feature in the situation is that, as the rate of immigration has gone down, Israel has become more, not less, dependent on the outside world. In 1949, when 234,000 immigrants entered, our economy paid for 16.2 per cent of imports from its current earnings. In 1950, when immigration went down to 160,000, we paid for only 14.7 per cent of our imports. In 1951, when 167,000 persons immigrated, we paid for only 13.7 per cent of our imports.
During the first nine months of 1952, just under 10,000 persons immigrated into the country. Yet in comparison with the corresponding period of 1951, visible exports shrank by 7.6 per cent (from $36,700,000 in January-September 1951, to $33,900,000 in January-September 1952) while visible imports rose by 20.2 per cent (from $232,300,000 to $279,200,000). The visible trade deficit increased by 25.4 per cent at a time when the world price level had decreased on an average by 10 to 15 per cent!
More than a year after mass immigration had virtually ceased (only 30,000 odd persons for the period July 1951-June 1952), the government budgeted for an import program of $332,000,000 (of which $305,000,000 is government-financed) for the year July 1952June 1953, of which Israel’s visible and invisible exports were expected to contribute but $62,000,000 or only 18.7 per cent of the total. So much, in plain figures, for the much publicized plan!
True, Israel’s economic crisis since 1949 is no more desperate than was the preceding military crisis which threatened her very existence. But there is this unhappy difference. While the country rose brilliantly to meet the challenge of 1948, it is now, as we have seen, sinking ever deeper into the morass of economic dependence for its very daily existence. In 1948 the Jews of Israel knew that there was no way out; they either had to throw the Arabs back or else be thrown by them into the Mediterranean in an orgy of slaughter and pillage. It was a bitter but clear-cut alternative, and out of it arose the grim determination to stand one’s ground wherever one happened to be. The Arabs, not faced with any such inescapable imperative, yielded to superior courage and resourcefulness born of sheer desperation.
On the economic front the position is the exact opposite. There is no grim alternative threatening us with starvation in the absence of production. We are shielded against the icy wind of economic reality by the magic phrase, the “Ingathering of the Exiles.” By virtue of this appeal, we have succeeded now for the fifth year running in drawing forth hundreds of millions of philanthropic dollars out of the pockets of the most amazing number of countries, peoples, and institutions, moneys which flow into Israel as unrequited imports, primarily to prop up living standards at a level out of all proportion to our productive performance.
The annual excess of imports over exports per capita of the Jewish population over the last three years has averaged the respectable sum of $255. Without any productive effort of their own, every Jewish man, woman, and child in Israel commands a volume of goods and services which roughly exceeds three times the total means of subsistence per head of such countries as Egypt, Iraq, and Syria, and is well above the $100 figure at which more than half of the world’s population are subsisting.
Under the circumstances, what drive is there for the heroic exertion of mind and bodies required to fend for ourselves? It would not make sense economically! Economics has been defined, correctly, as the “dismal science,” advising how man ought best to battle against Nature for his daily subsistence. The price for the flow of utilities on which life depends is the perennial incurrence of the “disutilities” of work and effort. No man in his senses would willingly want to add to these disutilities if he can reap fruits at a lower pitch of strain. The Israeli economy as a whole is shielded from the need to face grim economic realities by the unmatched ability of its leaders to find external means to finance 85 per cent of its total import bill. And the individual earner in Israel is protected from the disutilities involved in realistic economic productive effort by such ingenious institutional devices as “cost plus” to the businessman, and an automatic cost of living allowance to the wage earner—of which we will have more to say later. Together these form a kind of national insurance policy guaranteeing to workers and manufacturers a generously defined “decent standard of living” divorced from corresponding “decent” productive achievement. The government, in these circumstances, is required to function as a presiding committee which shares out the bounty-from-afar to the different sections of the community in nice proportion to the intensity of pressure brought to bear upon it.
If the Jewish community of Israel in 1948 had been convinced that, come what may, the Arabs simply would not be allowed to win, that even were the Egyptian army and the Arab Legion to join forces in the center of Tel Aviv a powerful American task force would land on the beaches of Tel Aviv and throw back the enemy, would they have put up the fight they did? Might they not have been inclined toward waging a war of make-believe? Counting so greatly as we do today upon economic relief forces from abroad, isn’t there always the very human temptation to put up with an economy of make-believe, doing only just enough to support the belief abroad that we are really straining to the limits of human exertion and that our gigantic strides justify further aid of the same kind?
Isn’t there some truth in the sardonic observation that many Israelis’ chief economic talent seems by and large to consist in the mastery of the subtle arts of oral persuasion, and the utilizing of those arts to “produce” economic values? I have seen how this works in my own personal experience. Israeli businessmen sometimes take the occasion to discuss with me their foreign exchange difficulties. Actually, I am in no position to help them even should I want to. They know this full well: it is part of their peculiar talent to nose out in any situation at once those strategic vulnerable points at which it is worthwhile to apply the lever of their persuasive powers. If they still deign to talk to me, it is no more than a kind of verbal sparring exercise on their part, to keep fit and in good fighting trim, rather like a champion boxer going through a preliminary workout in preparation for the big fight. Yet, after listening to them for ten minutes, protect myself as I try with my trained critical faculties, I find myself being convinced that our national economy (such as it is) is balanced precariously on a dangerous precipice and will crash to pieces like an empty card-house, burying us all under its debris, unless that particular enterprise can obtain an immediate allocation of, say, $25,000 for the acquisition of, say, urgently needed spare parts. In another minute I would be prepared literally to sell the last shirt off my back to alleviate their distress. And these people are blundering amateurs compared to our representatives on the annual world circuit, who, in turn, are outclassed by the really Big Shots. And there is always the Old Man himself, our one-man atomic artillery piece, looming awe-inspiringly in the background, ready to rumble into action at instant notice.
For fifty and more years, the Zionist movement had to fight an arduous uphill struggle against unbelievable odds to promote its national ideals. One remembers the almost legendary biluyim, our first pioneers, and their accounts of the malarial swamps and murderous roving Beduin bands with which they had to contend. There comes to mind the passage in Weizmann’s autobiography in which he describes how he was moved to tears thirty years ago at the sight of young Jewish boys from the ghettos of Eastern Europe breaking stones for roads while the hot burning sun of a Palestinian summer beat mercilessly down on their frail bodies. Zionist progress has always demanded deliberate assaults along a line of greatest resistance. And now in the very hour of our triumph and fulfillment, after the Old-New State has been set up again and its external enemies defeated in war, it seems as if the reservoirs of spiritual energy that fed us hitherto have been drained.
To many people in America, reading of the careful government control of imports, and the extensive government-guided investment program, these statements may appear excessive. It is typical of economic lay opinion to think that the economy of Israel can be put on its feet by control of import or even of investment policy. Unhappily, this is a fallacy—if this were so we would be well on our way to independence! Consumption goods in proportion to total imports dropped from 32.4 per cent in 1949 to 26.2 per cent in 1950 and 25.7 per cent in 1951; from 1949 to 1950 investment goods imports rose from 28.6 per cent to 34.4 per cent and sank to 28.1 per cent in 1951 since investment goods imports had to be cut in favor of production goods, i.e., raw materials, etc., because of the critical foreign exchange position. Yet, as we have seen, these massive imports of investment goods have had no positive impact whatsoever on Israel’s international balance of payments. The truth is that, while the potential productive capacity in Israel has indeed immensely increased over the last four years, only a limited part of it is being utilized at all, and of that again only a fraction is employed in the most efficient manner possible.
This much progress has been made: as far as our capital equipment is concerned, Israel is all primed for a remarkable upsurge in production and productivity. What is now needed is the political courage on the part of the government to create the conditions in which the rational exploitation of existing resources becomes possible and feasible. But this would require a determined attack on the two economic mecha —“cost plus” and the automatic cost-of-living bonus—which would force Israeli businessmen and workers to produce, for their very livelihood, at costs lower than prevail today in Israel. Since these mechanisms are the very quintessence of the Israeli economic system, they need explanation.
“Cost plus” is a method of price calculation based on costs of production plus a flat percentage rate of profit superimposed upon it. This not only offers a subsidy to inefficient producers but actually places a premium on economic waste since your absolute profits increase with costs of production. Under this system, you can never reduce real incomes through rising prices, because profit margins as fixed percentages of production costs rise proportionately. It is by way of the “cost plus” mechanism that government makes its purchases—and, of course, in the present situation government purchases form a huge percentage of all production.
In 1952 the government tentatively experimented with the method of issuing tenders—that is, permitting open bidding, contract to go to the lowest bidder—for the production of certain standardized types of goods. This actually reduced prices in some lines, but was met with the most determined opposition and even attempts at organized sabotage on the part of the producers. The Israeli manufacturers are forever passing high-sounding resolutions reiterating their unflinchable belief in the private enterprise, free competitive system, and in the very same breath reaffirming their abhorrence of government tenders!
The automatic cost-of-living bonus is even more serious. For every one-point rise in the officially computed cost-of-living (C of L) index all wage and salary earners in Israel automatically enjoy a bonus of 800 prutim (eight-tenths of a pound). More than 50 per cent of these allowances, which amount today to one-half to two-thirds of wages and salaries, are freed from income tax.
The fundamental anomaly in the Israeli economy is the relation subsisting between the price of a unit of labor-power (wage) at home, and the official price of the Israeli pound (rate of exchange) abroad. And the C of L allowance is a device which ensures that this anomaly is automatically perpetuated. During the three years 1949-1951 we kept the Israeli pound at par with the pound sterling (I £ = $2.80) and tried to reduce wage rates by artificially reducing the price level. Between April 1949 and July 1950, the official C of L index was forced down by administrative action from 371 to 317 points (1938-39 = 100) or by 14 per cent. Money wages over the same time period rose by between 6 per cent and 13 per cent. Hence real wages rose by no less than 24 per cent to 33 per cent. In September 1951, the base period for the new C of L index, the average wage stood at about I£ 90 monthly. (In the then flourishing black market for labor, skilled workers could easily make I£.200 and more). The British worker earned about £,30 monthly. The currencies of the two countries were at par. It follows that the Israeli worker could buy with his wages three times as much goods and services embodying the world’s labor than could the less fortunate worker in Britain; and assuming, optimistically, that average productivity in Israel was 50 per cent of productivity in England (it is probably less), it means that goods and services embodying Israeli labor were six times as dear on the world’s market as those embodying British labor. One does not have to be an economist to see the absurdity of this.
In 1952 we devalued the I£. But devaluation forced up the internal price level and provoked corresponding wage rises. By the end of 1952, the average monthly wage had reached I£ 150 (of which I£ 60 was C of L allowance). At the new rate of exchange, the Israeli worker now earned almost twice as much as the British worker, and we were almost back where we had started from. If we had managed to devalue the I £ while freezing wage rates at their former level, the economic situation today would be transformed. But the automatic C of L bonus maintained by Histadrut in the face of all reason prevents such a straightforward solution to our national economic problems. It is much easier to depend on another campaign in America in order to make up the economic losses which we ourselves insist upon inflicting on ourselves!
We might look at our problem another way. Foreign exchange is, in terms of the Israeli economy’s ability to earn it, far and away our scarcest resource. Yet until February 1952 we fixed a ridiculously low price for it and turned it thereby into our cheapest resource. At the same time labor-power, our most abundant productive factor —and it still is—was boosted as artificially, by monopolistic control of its supply, into the most expensive factor of production.
The results are written large over the national economy: wasteful consumption of imported goods and services made available at almost token prices to the populace—fuel and bread grains are good examples of this; a lopsided economy, in which a small, super-mechanized industry and agriculture exist side by side with a huge pool of new immigrant labor1; an ever mounting pressure on dwindling foreign exchange funds which could only be met fully, perhaps, by the resources of the American treasury; increasing forced idleness of up-to-date productive resources through lack of imported materials, which at existing costs they cannot earn by their own exports.
Obviously, the inevitable result of a policy which makes money available domestically without any corresponding ability to earn is inflation. Originally the government tried to deal with this problem by price fixing and rationing. Nothing serious was done at the same time to lap up the excessive purchasing power called into being thereby. There ensued a battle of wits between the government and private speculators. Since the government in the economic field was quite outmatched by its opponents, the speculators won hands down. There were two fatal consequences: the national economy was undermined by the weakening of economic incentives to work and effort, and the moral foundations of society were undermined by the growth of black markets and the flouting of the law. The black market, which expanded into a gray market, became Israel’s number-one industry, complete with its own production and smuggling base, with an intricate network of middlemen and its own special “lines of communication” leading from the countryside, harbors, and airports into the big towns, with autonomous channels of distribution, and even its own private protective personnel reminiscent of American bootlegging.
The New Economic Policy inaugurated by the government in mid-February 1952 has improved the situation. Inflation has momentarily been frozen and the new multiple exchange rates have introduced at least a pretense of reality. But the rigidities which the different interests have built into the economy, to make sure that they will protect themselves to the last penny whatever happens to the economy as a whole, have remained intact; we have not seen the measures which might force industry, labor, and agriculture to be more efficient. If it is true that the economic atmosphere has changed for the better, it is equally true that economies don’t live on atmosphere alone but on the production of goods and services and their exchange with the products of other economies—and of that there is as yet preciously little. The final measuring rod of the fortunes of the Israeli economy remains its international balance of payments and this, as we have seen, has grown worse in 1952, exports covering only about 12 per cent of the visible trade balance in the first nine months of the year—an all-time record low even for the State of Israel. Israel probably stands unique in modern economic experience as a country which devalued its currency by practically two-thirds and as a result harvested a drop in the value of its exports. This is simply because its products are too scarce and too expensive.
In short, we do not yet have the economic conditions in which legitimate economic initiative, private, cooperative, and public, do not clash with but promote the common good, in which the economic virtues of thrift and effort are rewarded and the economic vices of waste, indolence, and incompetence penalized.
Some look for salvation to a government dominated by the right-wing parties. To my mind, this is no real solution. The Israeli government, in the realm of economic policy, is like a plaything in the hands of powerful forces. The strongest pressure group of all is the Histadrut. There is no trade union movement anywhere in the world whose power position vis-ô-vis the state is as strong as that of the Histadrut. And there can hardly be a modern trade union movement anywhere whose members’ grasp of economic realities is as rudimentary as that of the Histadrut, particularly in its higher ranks.
There exists only one force which, when organized and made articulate, can cancel out the pressures, from labor and business, which prevent the government from adopting a sane economic policy. And that is the people and institutions who provide the government with 85 per cent of its annual imports. If American Jewry could summon the moral courage to assume the role not merely of paying the piper, but of calling the tune—or, at least, helping to set the key— they could exert the necessary influence upon the Israeli government to create such conditions in the economy as to make sure that the external financial aid is applied really to the basic constructive end of making Israel financially independent.
There will be vociferous protests against this proposal as amounting to treason and a deliberate attempt at the abrogation of Israeli sovereignty. And there will be embarrassment and hesitation on the part of American Jewry at “interference” in the “internal policies” of Israel. But as we have already pointed out, in its present state of complete economic dependence on the outside world, Israeli sovereignty, in any case, exists only in the most formal sense of the word. Moreover, the very possibility of open, direct, “foreign” intervention in the internal affairs of the state, and the criticism of their personal, political prestige which it implies, may well of itself suffice to prod Israel’s rulers in the right direction.
But what, in very concrete terms, should American Jews ask Israelis to do, and what have they the right to ask them to do for the sake of Israel herself?
In the first place, before they can hope to request anything, they will have to make clear that they recognize the need to continue to make available financial aid on a large scale—understanding this to be a necessary, though not sufficient, condition for the attainment of a viable Israel in the future. But this dollar aid, they should now make it clear, should be used not to prop up the present unviable system, but in such a way that the Israeli economy becomes eventually independent of further aid.
To this end I visualize the establishment in Israel of a Grants Office to administer the funds contributed by American Jewry analogous to the already functioning Grants Office which administers the financial aid made available by the American government. It will enter into negotiations with the Israeli government concerning the release of moneys for mutually agreed purposes, the rate of exchange to be fixed for the goods and services brought to Israel thereunder, the administration and disposal of local counterpart funds, etc. As the Grants Office is responsible to the American State Department, so this Grants Office will be responsible to a council of Jewish communal leaders in America in whom will be vested the final right of approval of all proposed projects. I am too far removed from the American scene to discuss here with profit in detail how such a body should be set up. It obviously will have to be composed of leaders representative of and responsible to all important shades of American Jewish opinion. The Grants Office in Israel, in addition to its ordinary tasks, will act as economic advisor to the council in America. It should be manned in the main by competent professional economists, with a sprinkling of engineers and administrators, and its expenses in local currency will be a first charge on the counterpart funds realized from the sale of imported goods and services financed under its auspices.
It may not be altogether unreasonable to assume that, once the first shock has worn off, the Israeli government may actually find that the proposed arrangement will contribute to strengthening its own hand against the enormous sectional pressures to which it is exposed. On the other hand, American Jews will have to change their attitude towards Israel from one of aloof philanthropy to one of vital concern and constructive partnership.
American Jewry, by virtue of its immense material wealth, can no more escape the predicament of leadership of world Jewry, including Israel, than the American people as a whole, again because of its enormous material resources, can escape the burden of leadership in the Free World.
What if the Israeli government of the day won’t play ball? Certainly no one will want to infringe on the formal sovereignty of the state. But if its elected representatives choose not to accept the conditions, then it would be better if they had to forgo enjoyment of those funds. But no one will want to make such a threat; nor will it, in my view, prove either advisable or necessary.
I believe—and I think competent economists will agree—that two measures on the governmental level will have to be sought from the Israeli government as the necessary and sufficient conditions for Israel’s economic recuperation. They are truly balanced government budgets, capital as well as current, inclusive of exchange equalization funds, etc., and an exchange rate which will equate the real purchasing power of the Israeli pound with that of foreign currencies. The joint incidence of the two measures, in the form of a stable money supply (i.e., balanced budgets), plus a rising internal price level due to higher import prices (i.e., a realistic exchange rate), would sooner or later force Histadrut to jettison the highly cherished provision by which cost-of-living allowances for all wage earners are automatically linked to a representative official cost-of-living index, and will bring down our fantastically high labor costs. If the Histadrut chose to maintain the cost-of-living allowances, it would invite mass unemployment, which could gravely weaken or break its bargaining position altogether.
Today there are about 20,000 unemployed officially registered at the labor exchanges and it is estimated that total unemployment is much higher. The great majority of the people affected are new immigrants who have no savings or other resources to fall back on; since there is no unemployment benefit scheme in force in Israel, the plight of these unemployed is a serious and very real one. While Histadrut is shedding crocodile tears commiserating with them, it loudly disclaims any responsibility for the situation. And yet any economics student in his first year at college could explain that if you keep the supply of money virtually constant, as we have done for the past year, while boosting wages by 60 to 70 per cent or more, then sooner or later you must force people out of work, because whatever the velocity of circulation, there just is not enough money to pay all the workers at the inflated wages. By abolishing the C of L bonus, or using the moneys accruing under it in excess of, say, I £50 to 1£60 per worker for the financing of productive investments, the government could change the situation.
In the same way producers, faced with dwindling effective demand at home, will be up against the choice of export or bust, and for their part will be forced to abandon the “cost plus” mechanism. Moreover, by radically changing the methods of allocation, as a natural corollary to the introduction of a realistic exchange rate, producers will have to export to prevent starving their plants of their imported raw materials. Only in this way can we achieve the economic preconditions for competitive exports of goods and services embodying Israeli labor on the world’s markets. Finally, severe disinflation at home, plus the growing pull of the world market, will rectify the fantastically distorted distribution of economic resources caused by a protracted period of inflation when we were getting mass immigration.
And so, with arduous toil, by the sweat of our brows, at perilously low living standards, and by real ingenuity in economic policy-making and social engineering, Israel will start on the path to economic viability.
1 Of course, compared with America, no one could claim that Israel is over-mechanized. But mechanization is a relative concept. When employers had to pay about one-third of a pound for an American dollar and three pounds for a day’s work, it was inevitable that they should be driven to install the most modern mechanized labor-saving equipment everywhere in order to cut down on labor costs. But all capital equipment comes from abroad and has to be paid for in hard currency. We have the coexistence here of the most modern production facilities, for those who managed to get the foreign exchange, with a great supply of the most primitive hand labor, the latter of course employed by the state in its public-works schemes. The same outlay on capital equipment distributed more sanely, and more evenly throughout the economy, would have yielded much greater benefits.