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 1016% 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 nondurable 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.