Inflation Crisis

Facing up to a disaster

Ever since his new National Unity government took office two months ago, Israel's Prime Minister Shimon Peres has been searching for ways to solve his country's economic crisis. The percentage change in the consumer price index, or inflation rate, which just last July was 307%, by last month was estimated to have reached an incredible 1,300% at a compounded annual rate. As soon as he took office, Peres and his Cabinet announced a cut of $1 billion from the current $23 billion budget. But two economists advised the government that a cut of another $1 billion was necessary. Peres was reluctant to take that step, fearing that the second cut would cause heavy unemployment. Last week, however, as inflation continued to soar, he was reported ready to make further cuts.

Early this week his government announced the strongest medicine it has yet imposed to correct Israel's economic ills: a three-month freeze on all prices, wages, profits and taxes. The plan, which is designed to cut the inflation rate in half by January, was approved both by the Histadrut, the giant labor federation that represents about 1.5 million workers, and by the Manufacturers Association. Neither liked the plan very much, but both realized that some sort of drastic belt tightening was essential. As Avi Pelossof, a spokesman for the manufacturers association, put it, "In the last two or three months, we lost control of our business, and it was no joke. Nobody knew if he was losing money or how much money he was losing." A government worker, complaining that her real income has declined by 50% over the past year, put the wage earner's case succinctly: "I'm doing work that I feel is quite responsible and important, and I take home the measly sum of $200 a month. How am I supposed to live on that?"

Under the emergency plan, labor agrees to take a one-third cut in its cost of living allowance, the sliding-scale device by which it has been protected from the country's runaway inflation. Manufacturers will be obliged to make cost of living adjustments on the remaining two-thirds of the allowance but will be unable to raise prices during this period. Thus both labor and management will feel the squeeze. One problem arose when the Histadrut demanded to know whether such government-subsidized goods as milk, bread and public transportation would be included in the price freeze. The government thought it over and said they would.

Will the plan work? "It's a good thing," said one Jerusalem housewife. "Finally the government has tried to do something." A more cynical view of many Israelis was that the government would find it difficult to enforce the freeze on retail prices. As a Tel Aviv shopper put it, "When the supervisory teams come around to a store, the store will sell items at the legal price. When the team leaves, the prices will be raised. I don't think it will work."

Another danger is that the plan, by forcing businesses to continue paying living allowances while selling their goods at controlled prices, could cause marginal enterprises to fail. In recent days an air-charter company shut down, and a large textile concern was on the verge of collapse, with a possible loss of 3,000 jobs until the government placed it under receivership. All in all, the plan was clearly a "difficult package," as Peres put it.

A second important objective of the Peres government received a minor setback this week. Israel and Lebanon were supposed to have held direct military talks, at United Nations headquarters in the southern Lebanese town of Naqoura, to work out security arrangements in preparation for an Israeli withdrawal from Lebanon. At first the talks were to have begun Monday. But at the last moment the Lebanese government asked for a postponement until later in the week. The reason: President Amin Gemayel and Prime Minister Rashid Karami wanted to make sure they had the support of the full Lebanese Cabinet. Nabih Berri, the Shi'ite leader, was in Algiers. Walid Jumblatt, the Druze leader, had been boycotting Cabinet meetings for some time. "We still don't trust this damned Lebanese Army," he said recently. But Jumblatt's resistance has been undermined by Syria's public support of the talks.

Once again, in Lebanon, there were ominous threats by Islamic Jihad, the shadowy terrorist organization, of further acts of vengeance against Americans in the Middle East. U.S. authorities were fearful that the Muslim fanatics might try an act of terrorism to coincide with the American presidential elections. As a precaution, the U.S. asked the Lebanese armed forces to prevent aircraft from flying over the Beirut residence of U.S. Ambassador Reginald Bartholomew. It is the only building in which American diplomats are still functioning in Lebanon.