Spotlighted at the centre of Israel's economic-political stage this week were the two Yaakovs, both professors, one of economics and the other of law. Governor of the Bank of Israel Prof. Yaakov Frenkel convened an urgent 08:30 a.m. press conference in order to slap the foreign currency market down before it started to go wild, and raised the interest on free shekel credit by two percent, from 9.5% to 11.5%.
Minister of Finance Yaakov Ne'eman presented the Knesset with the 1999 draft budget, only partly reflecting a grim, harsh forecast of rising unemployment and declining growth, export and GNP, all for the third year in succession. The two Yaakovs have failed. The two Yaakovs, Frenkel and Ne'eman, are actually making a professional and public admission that their policies, jointly and severally, have proved a resounding failure.
By and large, one can now say that the economic policy of the Netanyahu government has led us into professional bankruptcy, and a profound, unnecessary and very costly recession. Social gaps, under their tutelage, have widened, and gloom and despair pervade both the political-security and the economic horizons.
This is the third successive year of higher unemployment, a shrinking general product and negative per capita growth, absolute uncertainty and instability as regards prices, and a reasonable chance that inflation will again shoot up to a level of 7-8 percent, along with a worrying and painful drop in exports, due to which the one real achievement of this scorched earth policy, namely the lower trade balance deficit, will also be wiped out.
In addition, both local and foreign investors are taking to their heels, tourism is down, and there is strong reason to fear that the benefits due to flow from Christian pilgrim traffic in Year 2000 will be lost because adequate preparation has not been made. Social conflicts are taking on a sharper edge and savings and the middle classes are being badly injured. Solemn promises of tax reform and a diminishing burden on the middle classes are not being kept, and unemployment is off and running toward more than 10% or 240,000 unemployed next year.
Prof. Yaakov Frenkel's decision to raise the interest rate by 2% is an admission of the failure of his policy of using the shekel interest rate as his sole price control instrument. For three years, Frenkel navigated, managed and manoeuvred the exchange rate by means of the interest rate. He fanatically and consistently pursued shekel revaluation so as to reduce the cost of import and exert downward pressure on prices on the home front. In addition, there was his restrictive fiscal (budgetary) policy, designed to reduce inflation from 10% per annum to 3%-4% at all costs. Just a few stormy October days, in which daily devaluation sometimes reached 4%-5%, capsized Frenkel's rubber dinghy, leaving him wet and trembling with cold and fear.
Beady eyed, he gazed upon the September Consumer Price Index, which has risen 1.4%, and on inflation expectations, that had doubled from 4% per annum to 8% per annum. Seized by a primitive and irrational fear of intervening directly in foreign currency market trading, Frenkel again resorted to the hackneyed, worn out tool of the interest rate hike. He knew what this meant in terms of continuing monetary and fiscal restraint. It meant very high interest rates and further cuts to the 1999 budget. It meant plunging the market into an even deeper and grimmer recession.
Under today's conditions, the domestic ones by courtesy of the two Yaakovs and the external ones arranged by some "hidden hand", the writing on the wall is clear: 1999 will be the worst year in the past decade. A still more bitter pill to swallow is the fact that it holds out not the slightest glimmer of light, of hope or of any prospects for a change in trend.
The Israeli economy is a good, stable economy, properly constructed from an economic and business point of view. What the Israeli economy needs today is a smiling, optimistic, confident economic leadership, with a positive outlook. A leadership that will give free rein to the market's real creative forces, that will give industry, agriculture and the hotel sector the strength and direction for running with the ball.
The two Yaakovs are unsuited to the task. After three years (including the lost year of 1999), of recession, downslides and no growth, these gentlemen should be shown the door. They have failed. Their policy has failed and the time has come to replace them. Someone has to pay the price. That is how it is with businesses, and that is how it should also be with public bodies.
Published by Israel's Business Arena October 28, 1998