Global Courant
A five-year process that included special measures and laws.
Reviewing in 2023 an experience from the 80s seems anachronistic. Although the anachronism is not in the Israeli experience but in Argentine inflation. Israel faced and solved the problem in the 1980s and, except for Venezuela, the Latin American countries ended inflation in the 1990s. Only Argentina returned to inflation from 2007.
With the support of the Embassy of Israel and some thirty Argentine civil society organizations, Esteban Krol, a prestigious economist from the Hebrew University of Jerusalem, presented the Israeli experience in the framework of the “Learning Economic Development” meetings.
From the early 1970’s to the mid 1980’s Israel had high inflation rates with a peak of 500% per year in the early 1980’s. The inflationary acceleration began in the early 70’s. The context influenced: in 1973 the Yom Kippur War coincided with the first oil crisis, followed by the second oil crisis in 1979 and the war in Lebanon in 1982.
Between 1973 and 1984 military spending was 26% of GDP and the fiscal deficit reached 17.3% of GDP. A good part of the deficit was financed with foreign debt, which reached 220% of GDP. But the Central Bank, which depended on the government, financed an important portion of the fiscal hole with issuance.
In 1977 a new government took abrupt measures, which resulted in blunders: indexation of bank deposits and wages, lifting of restrictions on the movement of capital, and free floating of the exchange rate. In the context of huge issuance-financed deficits, the last two measures caused a massive flight to the dollar, with the currency depreciating from 6 to 15,000 shekels per dollar in ten years. Indexation spiraled prices and hyperinflation reached 500% in 1984, an election year.
At the beginning of 1985, a government of national unity began a stabilization program: an immediate cut of 4% of public spending (in subsidies for basic products, public employment and social spending), the exchange rate was devalued by 19% and a fixed exchange rate was established, wage negotiations were suspended, all types of indexation were eliminated, prices were frozen for a few months to curb inflationary expectations, and the denomination of the currency was changed.
But what was substantial were the institutional changes: a law for the independence of the Central Bank that prohibits it from financing the government, a budget law that requires a fixed date for its approval with a maximum level of deficit, and the supervision of a special division of the Ministry of Finance.
The law provides that if these conditions are not met, the government falls and new elections must be called. Every year, together with the budget law, the government must present an economic reform law. Among the reforms, export duties were eliminated and import duties were reduced, until a free trade agreement was reached with the US.
Since their approval in 1985, these laws have been complied with (with the exception of three years in which there was a world recession and new security problems), and the fiscal deficit came to be in the order of 1% of GDP: substantially less than the country’s growth rate, which became 5% per year.
For five more years, until 1990, inflation continued, but with rates of the order of 20%. Then it went to levels below those of Europe or the US Today public debt is 60% of GDP and international reserves are of the order of 35% of GDP. Israel became a market economy, open and without controls. The local currency strengthened 25% due to the increase in the economy’s productivity and the permanent trade surplus.
The reforms, together with excellent education and the highest investment in science and technology per capita in the world, turned Israel into a developed country. In 2022, it had a per capita GDP of US$44,000, close to the average for OECD countries. At the current rate of growth, Israel will reach the quality of life of the countries of northern Europe in a few years.
You cannot copy the Israeli experience, but that experience serves as an inspiration and a lesson: Argentina can end inflation, grow and end poverty.
Member of the Argentine Political Club and of ContiTuya
