Introduction

•State of Israel was formed on 14th May,1948•Economy of Israel can be divided into three main phases: 1948-1973, 1973-1985, post 1985.• Focus of presentation : “Lost decade”

Lost Decade: Background• Increased Defense Expenditure• Oil crisis and Yom-Kippur War • Bank Stock Crisis• Declining immigration rate

Lost Decade : Economic Trends

• GNP growth declined to about 2% per annum, as compared to 10.4% increase in GNP annually before this era.

• 1982-1984 : The deficit reached up to 12% of GNP.

• Defense spending during this decade increased to 25% of GNP as compared to 10-16% during 1960s.

Lost Decade : Economic Trends

• Inflation during 1972-84 increased to double digits and as high as 445% in 1984.

• Due to Bank stock crisis , government had to purchase bank stocks at a loss of 17%.

Stabilization Plan 1985

• Cut in Budget deficit.– Freezing of exchange rate(helped in curbing hyperinflation)– Reduction in subsidies and public expenditure.– Increase in Taxes.

• Real exchange rate appreciation– NIS vs US Dollar appreciated at a rate of 16% IN 1986, 7% in

1987 • US aid received amounting to $1.5 billion in 1985 and

1986.• No major role of Seigniorage in inflation or disinflation.

Consequences

• Fiscal Adjustment– Major fall in the fiscal deficit from 16% of GDP to

1.3% of GDP.• Consumption Boom– Decline in the consumption of durable and non-

durable goods to half in the first quarter of 1988.– In 1989 , the consumption of the durable goods

declined by 13%.

Rapid Disinflation

Recommendations

• The government could have restricted selling of stocks by banks by putting a cap on issued stocks.

• The Israeli government could have stopped paying the salaries to its employees.