Rabushka, Director, Division for Economic Policy
the late 1970s and early 1980s, Israel experienced
accelerating inflation. Inflation first reached
triple digits (111.4%) in 1979, hit 190.7% in 1983,
444.9% in 1984, and was running at an annual rate of
about 800% during the latter part of 1984.
Reflecting the run-up in prices, a 1,000 shekel note was
put into circulation on November 17, 1983, followed by a
5,000 shekel note on August 9, 1984, and a 10,000 shekel
note on November 27, 1984. A 50,000 shekel note
was prepared for circulation.
Secretary of State George P. Shultz was concerned that
runaway inflation was threatening a financial meltdown
of the Israeli economy. He offered Minister of
Finance Shimon Peres a special aid package of $1.5
billion as part of a plan to curtail Israeli inflation.
The additional aid would be used to finance Israel’s
imports while Israel called a halt to the monetary
U.S. aid to Israel had begun in earnest in 1973 at just
under $1 billion. It reached an annual level of
about $1.5 billion in 1983. The additional aid
offered by Secretary Shultz increased the level to
almost $4 billion in 1984. Aid has since
fluctuated around $4 billion. Altogether, Israel
has received over $100 billion in U.S. aid since 1973.
On September 4, 1985, the inflated shekel was replaced
by the new Israel shekel (NIS). Three zeros were
dropped from the old shekel denominations. Notes
in the denominations of 1, 5, 10, 20, and 50 new shekels
were issued between 1985 and 1988. A 200 new
shekel note was issued in 1991 and a 500 new shekel note
is scheduled for release this year.
The new shekel was set at an initial rate of $1=NIS 1.5.
The current exchange rate is $1=NIS 4.14. The
inflation rate, which was 185.2% in 1985, fell sharply
to 19.7% in 1986, and further to 16.1% in 1987. It
took until 2000 to reduce inflation to Western European
levels. Between 1986 and 2001, the new shekel
depreciated from 67 cents to the dollar to 24 cents to
the dollar, a decline of 64%.
Inflation has been a chronic problem in Turkey,
currently running at an annual rate of 60%. It
recently devalued its currency, the lira, from about
750,000 to the dollar to more than 1 million to the
dollar. The country has received $17 billion in
international aid from the International Monetary Fund
and World Bank, of which $8 billion was approved in
April by the Bush administration.
Turkey is a large country with a population numbering
around 70 million. Like Israel, its economy is
heavily state-controlled and state-directed. The
bulk of the government’s budget goes to pay salaries
of bureaucrats and most large companies are state
monopolies. Turkey would benefit from a heavy dose
of free-market reforms.
Back to inflation. Israel receives about $4
billion in U.S. aid every year. It receives
several billion dollars in other grants and transfers.
These large sums permit Israelis to live well beyond
their means. By financing the deficit in
Israel’s international accounts, the large inflows
permit the Bank of Israel to maintain a reasonable
degree of control over the country’s money supply and
a relatively stable exchange rate for the shekel.
Now it becomes clear what advice the three Israeli wise
men can offer Turkey: Get more aid.
In addition to aid from the IMF and World Bank, Turkey
should ask the U.S. Congress for billions of dollars in
aid every year. If the Turks can get enough U.S.
aid, then it’s possible they can reduce inflation to
manageable levels and keep it under control.
Perhaps this is why Turkey’s new economy chief, Kermal
Davis, accepted Shimon Peres’s offer of Israeli
advice. If he can get sufficient aid—he can
attach letters of recommendation from distinguished
Israeli economists in his request to the U.S.
government—then he can stabilize Turkey’s currency
without having to wage the political battles that would
be necessary to reform its heavily state-controlled