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10 INFLATION! THE O BSTACLES G ANG U P Inflation, it is said, brought down the Roman Empire. But the hyperinflations that shook Gem1any, Poland, Austria, and Hungary, to name a few examples, prompted modern economic research into the causes and consequences of sustained inflation. Common to all these episodes was the suffering inflicted on the population. Therefore, whether inflation had been of the ordinary sort or hyperinflation, the average citizen had an interest in putting an end to it. In those cases where inflation was allowed to get out of hand, it happened not because the population did not mind, but because the government was too weak to cope, as in pre- I991 Argentina, or was dealing with impossible circumstances, as in the case of post-World War I Germany. Against this background, Israel's near-hyperinflation stands out as a process regarded with indifference, if not welcomed, by the citizenry. This is where the artificial economy created over decades by successive governments produced its most important consequences: although inflation was, as we shall describe, wrecking the economy, the ordinary citizen was sheltered from its ravages. In general tern1s, the Israeli variety of inflation did not entail declining standards of living. Savings were not being wiped out. The frequency of wage payments did not increase. In the German hyperinflation of the early I920s, in contrast, wage earners ultimately got paid every morning, so they could rush to buy before the daily price hike took place. So immune was the ordinary citizen to the inflationary disease that for a long time it was virtually impossible to convince anyone that inflation presented a serious threat to the economy. With no political constituency for halting inflation, politicians were in no hurry to undertake the task of ending it, which is why it was allowed to go on for over a decade. When, at long last, the first attempts at halting the process were made, it turned out that some of the major attributes of the economy which were detrimental to growth also proved to be formidable obstacles to stabilization. In the end, it took an unusual combination of near economic disaster and political alliance to implement the stabilization plan of July 1985. 228 The Poltical Economy ofIsrael Phase 1: The Early Stages Double-digit inflation appeared for the first time after the 1966-67 slowdown in 1970. It has never dropped below double digits until 1992. But in the early stages, inflation rates had not been outrageously out of line with what was happening in quite a few other countries, among them especially some members of the industrialized world. Even in the United States rates were creeping up, and President Nixon tried his hand at wage-price guide posts. The relevant numbers are provided in Table 10.1, which is partitioned into two periods: 1970-74 and 1975-77. The first period is characterized by rising rates of inflation in all five countries. Although Israel seems to diverge from the general pattern in 1973 and 1974, it must be remembered that a good deal of this extra inflation was brought about by the Yom Kippur War. In the second period, Israel's pattern clearly differs, as its inflation rates increase steadily, whereas those of the other countries fluctuate with a downward trend. The year 1975, it should be recalled, brought world recession, which helped to check inflation at rates below those of 1974. The inflationary process in these early stages was predominantly interpreted in Keynesian terms: excess demand causing the economy to heat up.1 But there was an added concern that emanated from the evolution of wages. The government's solution to the excess-demand problem was also typically Keynesian: it imposed a variety of taxes. These included increases in income-taxe rates imposed on both individuals and businesses and an increase in social insurance payments imposed on employers. This particular step constituted a self-defeating measure, because it increased the labor costs incurred by the employers, a development that should have been expected to generate TABLE 10.1 Rate of Inflation of the Average Quanerly CPI Between Successive Fourth Quarters Year Israel France Italy United States United Kingdom 1970 10.2 1.6 5.3 7.1 8.3 1971 12.4 5.6 4.7 3.5 9.2 1972 12.1 6.9 7.2 3.4 7.7 1973 24.3 8.3 11.6 8.4 10.3 1974 48.0 15.0 24.7 12...


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