The Second Front

It should be clear that the problem Israel is facing at this time has much more than just an economic dimension. Israel is at war. But successful management of the economy  is essential so that resources needed for defense can be made available without causing serious damage to the economy.


By Moshe Arens

(A version of this column appeared in Haaretz on May 14, 2002.)

When the local currency rapidly decreases in value, it is a sign of serious economic trouble. In the past four months, the shekel has lost 20 percent of its value against the dollar. The Argentine peso lost 47 percent when it was cut loose from its dollar peg in February. So we still have a way to go before our economic crisis reaches Argentine proportions, but there is little doubt that unless drastic measures are taken, we are on the way. Warning lights are flashing.

Confidence in the local currency is an essential element of a sound economy. Argentine President Eduardo Duhalde tried to instill such confidence among Argentina’s citizens after the devaluation of the peso when he said, “Those who bet on the dollar will lose.” Unlike him, MK Joseph Paritzky did his best to undermine confidence in the Israeli shekel when he told Israelis to consider transferring their wealth abroad. The rapid drop in the value of the shekel is a sign that confidence in it is waning. Had Paritzky’s misguided advice been taken by most of Israel’s citizens, we would be digging ourselves out of the ruins at this time.

There are many differences between the Israeli and Argentine economies. Most of the Argentine government’s debt is in dollars, while most of the Israeli government’s debt is, fortunately, in shekels. The structure of the Israeli economy is basically sound, but on the other hand, Israel is at war, with a significant proportion of its resources devoted to defense. Sound management of the economy is an essential element in the conduct of the war against Palestinian violence and terrorism. With good economic management, Israel should have little trouble overcoming the present crisis. But where is that management?

Judging by the steps taken by the Finance Ministry, one can only speak of mismanagement. It started with the economic forecasts published by the ministry last year. While it was already clear that the economy was well on its way to a recession, the ministry’s bureaucrats forecast continued growth for the economy. Based on false premises regarding anticipated government revenues and underestimates of the need for defense expenditures, a totally unrealistic budget was prepared. It was only when the government’s income from taxes started to fall far short of the forecast that the bureaucrats woke up. Finally, the ministry realized the budget it had prepared would have to be drastically revised and curtailed. But all the talk of big cuts in the budgets of most of the ministries came to naught. In an attempt to keep the coalition afloat, money was again parceled out right and left, and the government’s budget deficit increased beyond reasonable bounds. The bloated budget was passed through the Knesset to the sounds of ministerial congratulations advertising “a great political triumph.”

But the budget was a disaster. No sooner had it been approved by the Knesset, than talk began of the need for a major revision. Then the finance minister dramatically announced an emergency economic plan based on large-scale tax increases in an already over-taxed economy. At the same time, there was no let-up in his continuing battle with the governor of the Bank of Israel, who is supposed to be his partner in managing Israel’s economy. Plans for a law that would restrict the authority of the governor were ill-received in the international financial community and seem to have been dropped for the time being. The emergency economic plan is in the process of being torn to bits by the many political interest groups whose constituencies will be affected by the plan. Is it any wonder that the shekel’s value is decreasing daily?

It should be clear that the problem Israel is facing at this time has much more than just an economic dimension. Israel is at war. All eyes are directed at Palestinian acts of terror and the IDF’s moves to destroy the network of terror in Judea and Samaria. But successful management of the economy – the second front – is essential so that the resources needed for defense needs can be made available without causing serious damage to the economy.


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