Economic Stabilization Plan (Israel 1985)
Encyclopedia
The Economic Stabilization Plan was implemented in Israel
in 1985 in response to the dire domestic economic situation of the early 1980s.
The background to the crisis is that the years after the 1973 Yom Kippur War
were a lost decade economically, as growth stalled, inflation
soared and government expenditures rose significantly. Then, in 1983, Israel suffered what is known as "the Bank stock crisis"
. By 1984 inflation was reaching an annual rate close to 450% and projected to reach over 1000% by the end of the following year. See Economy of Israel: History.
In response, in 1985 the Knesset
implemented an economic stabilization plan aimed at generating "sharp disinflation
". The plan was devised by Yitzhak Moda'i
and Michael Bruno
. This was done after a series of smaller-scale "package deals" proved ineffective in stemming the rise of inflation. It was not until the implementation of this larger stabilization plan, which brought together all the main players in the Israeli economy at the time (the government
, labor unions, and central bank
) that inflation was successfully brought to under 20% in less than two years. Some of its main points included:
These steps, coupled with the subsequent introduction of market-oriented
structural reforms successfully reinvigorated the economy, paving the way for its rapid growth in the 1990s. The plan has since become a model for other countries facing similar economic crises.
Israel
The State of Israel is a parliamentary republic located in the Middle East, along the eastern shore of the Mediterranean Sea...
in 1985 in response to the dire domestic economic situation of the early 1980s.
The background to the crisis is that the years after the 1973 Yom Kippur War
Yom Kippur War
The Yom Kippur War, Ramadan War or October War , also known as the 1973 Arab-Israeli War and the Fourth Arab-Israeli War, was fought from October 6 to 25, 1973, between Israel and a coalition of Arab states led by Egypt and Syria...
were a lost decade economically, as growth stalled, inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
soared and government expenditures rose significantly. Then, in 1983, Israel suffered what is known as "the Bank stock crisis"
Bank stock crisis (Israel 1983)
The Bank stock crisis was a financial crisis that occurred in Israel in 1983, during which the stocks of the four largest banks in Israel collapsed, and were nationalized by the state.-Background:...
. By 1984 inflation was reaching an annual rate close to 450% and projected to reach over 1000% by the end of the following year. See Economy of Israel: History.
In response, in 1985 the Knesset
Knesset
The Knesset is the unicameral legislature of Israel, located in Givat Ram, Jerusalem.-Role in Israeli Government :The legislative branch of the Israeli government, the Knesset passes all laws, elects the President and Prime Minister , approves the cabinet, and supervises the work of the government...
implemented an economic stabilization plan aimed at generating "sharp disinflation
Disinflation
Disinflation is a decrease in the rate of inflation – a slowdown in the rate of increase of the general price level of goods and services in a nation's gross domestic product over time. It is the opposite of reflation. Disinflation occurs when the increase in the “consumer price level” slows down...
". The plan was devised by Yitzhak Moda'i
Yitzhak Moda'i
Yitzhak Moda'i was an Israeli politician, who served five terms in the Knesset for Likud and then the New Liberal Party over the course of a 20-year career.-Biography:...
and Michael Bruno
Michael Bruno
Michael Peter Bruno was an Israeli economist. He was a governor of Israel's central bank and a former World Bank Chief Economist.-Biography:...
. This was done after a series of smaller-scale "package deals" proved ineffective in stemming the rise of inflation. It was not until the implementation of this larger stabilization plan, which brought together all the main players in the Israeli economy at the time (the government
Politics of Israel
The Israeli system of government is based on parliamentary democracy. The Prime Minister of Israel is the head of government and leader of a multi-party system. Executive power is exercised by the government. Legislative power is vested in the Knesset. The Judiciary is independent of the executive...
, labor unions, and central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
) that inflation was successfully brought to under 20% in less than two years. Some of its main points included:
- A significant cut in government expenditures and deficit.
- Reaching an agreement with the then-powerful HistadrutHistadrutHaHistadrut HaKlalit shel HaOvdim B'Eretz Yisrael , known as the Histadrut, is Israel's organization of trade unions. Established in December 1920 during the British Mandate for Palestine, it became one of the most powerful institutions of the State of Israel.-History:The Histadrut was founded in...
labor union to enact wage controls, thus decoupling rampant wage from price inflation. - Emergency measures imposing temporary price controlsPrice controlsPrice controls are governmental impositions on the prices charged for goods and services in a market, usually intended to maintain the affordability of staple foods and goods, and to prevent price gouging during shortages, or, alternatively, to insure an income for providers of certain goods...
over a broad range of basic products and services. - A sharp devaluationDevaluationDevaluation is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged....
of the Shekel, followed by a policy of a long-term fixed foreign exchange rateFixed exchange rateA fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime wherein a currency's value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold.A fixed exchange rate is usually used to...
. - Curbing the Bank of IsraelBank of IsraelThe Bank of Israel is the central bank of Israel. It is located in Kiryat HaMemshala in Israel's capital city of Jerusalem, with a branch office in Tel Aviv. The current governor is Stanley Fischer.-History:...
's ability to print moneyFiat moneyFiat money is money that has value only because of government regulation or law. The term derives from the Latin fiat, meaning "let it be done", as such money is established by government decree. Where fiat money is used as currency, the term fiat currency is used.Fiat money originated in 11th...
to cover government deficits.
These steps, coupled with the subsequent introduction of market-oriented
Market economy
A market economy is an economy in which the prices of goods and services are determined in a free price system. This is often contrasted with a state-directed or planned economy. Market economies can range from hypothetically pure laissez-faire variants to an assortment of real-world mixed...
structural reforms successfully reinvigorated the economy, paving the way for its rapid growth in the 1990s. The plan has since become a model for other countries facing similar economic crises.