Economies under stress: The case of Israel

Supermarket  credit: Shutterstock
Supermarket credit: Shutterstock

Israel has fared better than many in the face of recent global shocks such as inflation, but it has its own vulnerabilities.

The state of the Israeli economy is good relative to other countries, among other things thanks to the economy’s size in relation to its excellent human capital. But that isn’t always enough in an extreme scenario. Israel is unlikely to see scenes such as in Sri Lanka, with protesters invading the leader’s residence. Nevertheless, a scenario of economic boycotts of Israel is problematic.

The prosperity of the Israeli economy is founded on inward investment and global exports. A boycott of Israeli products or of a cessation of investment would send the economy into a downward spiral. Is such a scenario unreal? The history of boycotts of the Israeli economy began even before the state was founded and continues to this day. In 1945, the Arab League decided to impose a boycott on the Jewish population in the Land of Israel, and in recent years, the European Union has published policies concerning trade and other economic ties with settlements in Judea and Samaria, East Jerusalem, and the Golan Heights. The recent Ben & Jerry’s ice-cream episode is still fresh in our minds.

Extreme scenarios with a high probability of occurring are war with Iran and Hezbollah, singly or together, and an intifada (Palestinian uprising). Another possibility is an earthquake or other natural disaster that damages the economy.

Reserves of $200 billion

How does an economy cope with a boycott or all-out war? Since 2010, the Bank of Israel has raised its foreign currency reserves to $200 billion. That, however, would not help in the event of an intifada, which would be liable to harm private consumption, so it is not a cure for every crisis that might come along. The reserves are mainly intended to deal with the sharp depreciation of the shekel that would be liable to happen in extreme circumstances.

There is no need, however, to rush to extremes, when the reality of the past two years has provided the global economy with a challenge in the form of high inflation. In this respect, the Israeli economy has so far coped well. All the same, the cure for inflation has been rapid interest rate hikes, which put the economy in danger of "stagflation", that is inflation combined with economic slowdown and even recession. In that event, in which the economy’s engines slow down sharply in the face of the global situation, or tax collection declines, the importance of political stability will rise.

Raising interest rates as a treatment for inflation has side effects in the form of economic slowdown and higher unemployment. The government’s economic policy therefore has to be supportive of growth. That includes promoting economic and industrial reforms, carrying out structural changes to deal with rising prices, and investment in infrastructure. But when, as at present, there is no government, but only a transitional administration as we go into an election, the danger of getting into an economic tailspin becomes less remote.

Published by Globes, Israel business news - - on July 24, 2022.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.

Supermarket  credit: Shutterstock
Supermarket credit: Shutterstock
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