Israel's new prime minister, Ehud Barak, has moved quickly to deal with major issues facing his country: renewed negotiations with the Palestinians; the possibility of opening negotiations with Syria; the reinvigoration of working relationships with the United States and European countries. And he has maintained vigilance against acts of violence that threaten Israeli people in their daily lives.
With such momentous issues on Barak's plate, economic policy would seem to secondary. And yet, for Israeli citizens, and for the international financial community, his government's economic policies are important.Israel can only survive if its economy is strong.
For many reasons, it has produced an abundance of outstanding economists. Some were born there, others emigrated from other countries, and many have alternated between working in Israel and elsewhere.
Economists, of course, disagree about everything. Economic debates in Israel may be conducted at high intellectual levels, but they are over the same bread-and-butter issues as anywhere else.
The Israeli economy is highly socialized, but it also has a vibrant private sector. In some ways it is an emerging economy, as with the Asian tigers, drawing upon previously under-utilized human resources. Under that model, Israel could grow at 6 percent to 8 percent per year, but only at the risk of double-digit inflation.
In other ways, it is like an industrial economy, as in Europe, with strong labor unions and high unemployment (8.8 percent). On that model, 3 percent to 4 percent growth is the maximum without generating inflation.
Either way, the Israeli economy is under-performing.
Gross domestic product rose by only 2 percent last year and may fall short of that this year. The consumer price index rose
5.9 percent over the past year, and the Bank of Israel is projecting 4 percent over the year ahead, an improvement but still high.
The new finance minister, Avraham Shochat, held the position before, from 1992 to 1996. He wants more growth and is willing to ease fiscal policy to achieve it.
In preparing the budget, the Finance Ministry contemplated raising the target for the deficit next year from 1.75 percent of GDP to as much as 2.75 percent. But with slow growth, even that target will be hard to achieve.
The details of the budget will be hotly debated over the days and weeks to come. In the process, Shochat's spending plans have come under criticism from the Bank of Israel, led by Gov. Jacob Frenkel.
He was first appointed in 1991, having built a reputation as an international economist at the University of Chicago and the International Monetary Fund. Governors of the Bank of Israel have often been brilliant economists, but few have survived long in the cut and thrust of Israeli economic policy battles.
Frenkel has out-survived his predecessors, partly by his ability to translate economic theory into practical policy but mainly by the force of his personality. He is one of the few economists anywhere with a sense of humor, and he draws from his trove of stories and anecdotes to win friends as well as to win arguments.
At the same time, he is passionate about the need for setting Israel on the path to self-sustained growth without inflation, and for the Bank of Israel to have independence in setting monetary policy. For these reasons he has immense support in the financial markets.
Inflation-fighting central bankers are usually easy targets for dismissal when a new government takes power, especially during a growth slowdown.
In late July, rumors circulated that Finance Minister Shochat wanted to force Frenkel out. Markets responded negatively. For his part, Frenkel warned about the need to cut spending, but he also cut interest rates, from 12 percent to 11.5 percent, a move that was welcomed by everyone.
Prime Minister Barak cleared the air when he said that Frenkel was ''strong in his position'' that the central bank's independence must be preserved.
The Finance Ministry and the Bank of Israel are now working on ways to coordinate fiscal and monetary policy. This discussion will take place in the press and the markets as much as behind closed doors, and will surely be lively.
But the result may well be a tighter fiscal policy than is now envisaged by the Finance Ministry, coupled with a further cut in interest rates by the Bank of Israel. This would stimulate the economy without unleashing a resurgence of inflation.
I'm not much of a millennium buff, but every city and hamlet in Israel is steeped in biblical history. Some 2,500 years ago the prophet Isaiah wrote of the wealth of nations coming to Israel.
If Barak is successful in moving the peace process forward, and if the economic policymakers achieve, say, 3 percent growth and 3 percent inflation (difficult, but do-able), then 2000 will be a very good year indeed. Modern Israel may not yet fulfill that prophecy, but it might be off to a good start.
In more immediate terms, with greater peace and prosperity, equity investors would bid up share prices, starting with the handful of Israeli companies that are already traded internationally. Also, fixed-income investors might develop an appetite for marketable Israeli bonds.
Israel is still more of a bet than a buy, but it is worth considering.