Israel: where supply-side economics works
For the past year or so Israeli Finance Minister Yoram Aridor has been experimenting with a version of supply-side economics that shares a number of similarities with the Reagan administration's efforts to curb inflation and stimulate the economy. In this relatively short time the Israelis have achieved a remarkable measure of success: the rate of inflation is coming down, exports are rising, and unemployment has remained low. In Israel, at least, Reaganomics seems to be working.
There are of course vast differences between the United States and Israeli economies. The US gross national product is $2.4 trillion; Israel's is $19 billion. Beyond that, Israel has introduced a system of indexing under which wages, savings, and other forms of income are linked to increases in the cost of living. As the consumer price index rises, so do salaries. This makes it more difficult to control the spiral of inflation but makes life easier for Israelis. Indeed, a public opinion poll by the Jerusalem Post in December showed that Israelis by and large considered themselves no worse off than the year before.
When Minister Aridor came into office last February, the Israeli economy was in deep trouble. Inflation was the world's highest at 133 percent and the public was convinced that there was no way to stop it without forcing a recession on the country. The first economist ever to hold the job of finance minister, Aridor undertook a series of steps that could rightly be described as classic supply-side actions. He reduced the purchase tax on a wide variety of ''luxury'' and other goods, such as automobiles, TV sets, and refrigerators. Lowering the cost of these items had the effect of touching off a buying spree, soaking up excess disposable income and increasing government revenues.
At the same time Aridor restricted credit and reduced government spending. To increase productivity and promote greater efficiency in the use of capital equipment, tax concessions were introduced for employees working on late shifts. To soak up funds in private hands, new and attractive savings plans (similar in intent to ''All Savers'' certificates in the US) were introduced. To protect exporters, an exchange-rate insurance plan was introduced.
The results of these policies have been dramatic. Per capita consumption rose 7 percent in the first 10 months of 1981, compared to a drop of 5.5 percent in 1980. The inflation rate declined from 133 percent in 1980 to just over 100 percent in 1981. Perhaps most important, the plan had a positive effect on the psychology of the average Israeli. Inflationary expectations were changed as Israelis came to understand that some goods could actually decline in price.
Another important factor in this economic turnaround is the quality of Israel's technology. In such areas as solar energy, electronics, computer software, and medical engineering, Israel is a world leader. Exports of such products as the Neurogar electronic medical devices, CAT scanners by Elscint, and computer-aided design equipment manufactured by Scitex helped Israel reduce its balance-of-trade deficit last year despite the world crisis in diamonds, a major export item. In 1981 Israel's exports to the US topped the $1 billion mark in a single year for the first time. At the same time, Israel's system of grants and loans to foreign investors, coupled with significant tax incentives, have encouraged more US companies to open plants in Israel or enter into joint ventures with Israeli companies.
Can Israel make supply-side economics work over a longer period than one year? Finance Minister Aridor is optimistic that he can break the back of Israeli inflation. He told me he believes he can get inflation down to 75 percent this year and 60 percent in 1983.
His optimism seems soundly based. As a new year begins Israel's products are winning wider acceptance on the world market, although marketing strategy geared to US sales could stand some improvement; productivity is rising and the country's economic base seems secure. Aridor is no miracle-maker; for example, the decline in the world price of oil, which Israel must import, has been one factor in helping reduce inflation. But he does seem to be doing something right , and he has won the confidence of the people. That is no mean achievement for a young newcomer to the Israeli political scene with the cabinet's most vulnerable portfolio.