Travel Reference
In-Depth Information
investment in the 1950s, and Israel was an unlikely candidate to capture what little there was. It
had just emerged from the War of Independence, and its long-term survival was still in doubt.
Thus, Palestine Potash was taken over by the Israeli government after its private-sector share-
holders failed to secure fi nancing to rehabilitate its facilities.
In any case, most of the unilateral transfers of the 1950s were intergovernmental, which left
little alternative but for the state to become the conduit to invest in the economy. But there
was also an ideological imperative. The socialist ethos of the Labor Zionists held that economic
development should be steered by the government rather than by market forces, which they
regarded as fi ckle and unreliable.
The system worked well enough in the 1950s and early 1960s, but as the economy grew more
sophisticated, its ineffi ciencies became more apparent. Moreover, in the aftermath of the Yom
Kippur War of 1973, the government was having an increasingly diffi cult time controlling its
current expenditures — the money spent on budget items such as defense, education, and so-
cial welfare. By 1985, 96 percent of all the capital raised in Israel (state loans, bonds, and equity
issues) went to the government, and increasingly not to develop fi nances but to cover current
expenditures on defense and education, among other things.
The bank shares' collapse of 1983 illustrated the problem created by the state's excessive
involvement in fi nance. The banks had so much of their capital tied up in directed credit that
they turned to the stock market as an alternative, unhindered source of capital. To convince
investors to buy their stock, the banks ensured attractive returns by buying it themselves. By
the early 1980s, the strategy was no longer sustainable: the price of the shares had risen far
beyond their underlying value.
When the banks could no longer afford to prop up their stock, investors sold their holdings
and prices collapsed. To prevent the losses from reverberating through the economy, the gov-
ernment was forced to step in. It bought the banks' shares from investors at close to their pre-
crash value and assumed ownership of the banks, a cost that was covered by printing money,
thereby exacerbating the country's infl ation problem.
In the wake of the Economic Stabilization Plan, the government gradually reduced its
involvement in fi nance. Quotas imposed on institutional investors to hold non-tradable
government bonds were lowered, enabling the investors to choose what kinds of assets to in-
vest in. The government itself began issuing increasing amounts of tradable bonds, and com-
panies no longer had to get offi cial approval to issue bonds. Directed credit, which in 1985
accounted for two-thirds of all bank lending, was gradually eliminated.
The shekel was gradually made fully convertible, so that by 2003 Israelis could buy and
sell foreign currencies for business, travel, or investment without any restrictions. As budget
defi cits fell over the years, the government no longer needed to monopolize capital for itself.
Government debt as a percentage of GDP fell from a high of 284 percent in 1984 to about
80 percent in 2008 and 70 percent in 2010. Though high by the standard of 60 percent set by
the European Union, it nevertheless represents a signifi cant achievement. Israeli government
debt accounted for about 19 percent of all fi nancial assets held by the public in 2009, but the
corporate debt market has been able to grow as well, and it accounted for about 11.5 percent.
Although the government continues to have a negative savings rate, the fi gure has dropped
to the low single digits, while the private savings rate has been about 10 -12 percent since 1990.
