Israel's economic history is varied: a series of major achievements accompanied by serious problems. The 1950s, 1960s and early 1970s were highly successful in terms of economic growth, with the exception of the 1966-67 recession. By the early 1960s the e conomy had successfully absorbed the mass immigration of earlier years and labor shortages had become the norm. However, balance of payments problems soon became more severe and inflationary pressures grew, although Israel's labor shortages were ameliora ted after the 1967 Six Day War. The opening of the pre-war borders brought a growing influx of Arab labor from the areas which came under Israeli control.

The Yom Kippur War of 1973 and the oil shock of 1973-74 greatly aggravated inflationary pressures and balance of payments problems. The second oil shock (1979-80) raised Israel's oil import bill to over $2 billion per annum, a value that exceeded the gra nts which Israel received from the United States. The oil shock and the huge revenues acquired by the rich Arab states helped to stimulate the Middle East arms race, further straining the Israeli economy. Hyperinflation, amounting to hundreds of per cent per annum, became the norm, with all of its attendant evils. Economic growth slowed to a crawl, dropping from 9-10% per annum between 1953 and 1973 to 3.2% per annum in the decade from 1975-85, and barely exceeded the population growth rate.

In 1985, a national unity government came to power and adopted important economic measures designed to reduce inflation drastically and to put greater stress on economic efficiency. Increased US aid during a two-year transition period facilitated the imp lementation of the new program. The results were excellent. Inflation, over 300% per annum in 1984 and 1985, fell to 48% in 1986, and continued at a steady decline to less than 20% per annum from 1987-91 and 10-12% from 1992-95. Initially economic grow th rates lagged—as is usually the case when drastic anti-inflationary measures are taken—but these policies laid the groundwork for the favorable economic performance of the Israeli economy during the first half of the 1990s.

Based on an international comparison, since 1990 Israel has enjoyed a high rate of economic growth, around 6% per annum. This is three years before the signing of the Declaration of Principles. In fact, the growth rate of GDP, 5.7% per annum from 1993-9 5 was somewhat lower than in the previous three years, 6.4% per annum in 1990-92. The business sector GDP (i.e., excluding government and non-profit institutions), shows a more significant drop in the growth rate in the latter period, from an annual aver age 7.8% in 1990-92, to 6.6% in 1993-95.

The high rate of economic growth since 1990 was stimulated, in part, by the large-scale immigration from the former Soviet Union. During the period of mass immigration (200 thousand per annum in 1990 and in 1991) the rate of unemployment rose. But in su bsequent years, when immigration was back to a more "normal" 75 thousand per annum, the rate of unemployment steadily declined. The improving state of employment was accompanied by moderating inflation, which by 1995 was down to 10%.

But the good news was accompanied by bad news. In particular, since 1993 Israel experienced a sharp deterioration in the balance on current account of the balance of payments, which worsened in 1994, and even more so in 1995. The balance on current acco unt is defined as exports of goods and services, plus unilateral transfers from abroad (US grants, contributions from world Jewry, German restitution, immigrant and other private transfers) minus imports of goods and services. In 1990-92, as a whole, the balance on current account was positive at $154 million. In the following three years, 1993-95, there was a sharp deterioration with a total deficit of $7.8 billion, of which $4.1 billion was incurred in 1995 alone. [All data regarding the Israeli econo my are from the Bank of Israel Annual Report (Israel: Government of Israel, March 1996).] This deficit was not the result of arms imports, which actually declined. Estimates for the first quarter of 1996 show a continued deterioration with the deficit i n the balance on current account 25% higher than in the same period a year earlier. [Data for the early months of 1996 are from Economic Developments in Israel and the World (Israel: Bank Leumi, July 1996).] These deficits were covered, for the most part , by loans and a growing external debt.

If the budget submitted to parliament by the new government in mid-1996, which focuses on cutbacks in government expenditures, is implemented, it should reverse the adverse trends in the balance of payments and reverse the recent up-trend in inflation.

The data do not suggest that the Oslo agreements had any perceptible effect on the Israeli economy. Nor can one "blame" the Oslo accords for the problems which arose since 1993/1994. Israel's recent economic woes are attributable mainly to unwise govern ment economic policies. One example is the unusually large wage increases granted by the government to public sector employees in 1993-96 (soon emulated by other sectors) that stimulated very large increases in private consumption, imports and inflation. A second example is the provision by the government of unusually large subventions to politically-favored groups, aggravating the budgetary deficit and indirectly the deficit in the balance of payments.

What all this tells us is that Israel's economic problems can be addressed only by the adoption and implementation of appropriate economic policies. Israel adopted some important new economic policies in the mid-1980s which fostered efficiency, productiv ity, and profitability, and the favorable results became very visible in the early 1990s. Wise economic policies underlay Israel's prosperity, and poor economic policies explain the problems that arose in more recent years.

As the rest of this discussion will demonstrate, the same is true of the Arab states where the problems are far more deep-rooted. Wise domestic policies hold out the promise of prosperity. Only basic, fundamental economic changes can significantly impro ve the performance of the Middle Eastern economies, and provide jobs and decent incomes for the vast army of unemployed and under-employed, the poor and downtrodden—not interstate politics.