Freeing Israel from Foreign Aid

Almost one-seventh of Israel's GDP comes to Israel as foreign aid and charity. This has proven economically disastrous. It prevents reform, causes inflation, fosters waste, ruins competitiveness and increases the future tax burden of Israelis. Israel will attain true growth and economic independence only when it ceases to receive foreign aid.

Growth is easy when someone else pays the bill!
exerpted from "Winter 1995 IASPS Quarterly"

by Alvin Rabushka

As the year drew to a close, Israel's Bureau of Statistics issued its preliminary estimate of economic growth in 1994. The results were spectacular: The gross domestic product increased 6.8% in real terms, and real per capita income rose 4.3%. Israel outperformed all 24 countries in North America, Western Europe, and Japan which together constitute the Organization of Economic Cooperation and Development (OECD). Israeli press coverage of these statistics reveals a swaggering sense of national pride, a feeling that we're ``No. 1.'' Every Israeli can take heart from these numbers. Per capita income of $13,700 places Israel well within the ranks of middle-income, modern nations.

But wait! If Israel is a world leader in economic growth, why does its government relentlessly seek out foreign aid, global Jewish philanthropy, and U.S. government loan guarantees? How can any country turning in one of the world's highest growth rates demand uninterrupted U.S. aid of $3 billion a year and billions in private charity, along with $2 billion in loan guarantees year after year? Shouldn't aid, charity, and loan guarantees be reserved for the truly needy, such as the impoverished residents of Africa and Latin America? Doesn't the new-found Israeli sense of national pride extend to self-support? This question remains largely rhetorical, of course, as it has been for decades.

But readers of our publications are entitled to ask a much more important question. How does the Institute's harsh criticism of Israeli economic policy square with the evidence of spectacular growth? Are we so blinded by our hostility to socialism that we can't see the reality of Israel's prosperity?

Let's look behind the high-growth numbers for some additional details. In 1994, Israel had the highest trade deficit of all 24 OECD countries, amounting to $7.5 billion. In other words, Israelis bought more goods from abroad, some $7.5 billion more, than foreigners bought from Israel. How much is $7.5 billion? It amounts to $1,450 for every man, woman, and child in the country. Every family of four consumes $5,800 in imported goods that it does not have to pay for from its earnings. These imports, in essence, are free.

This gift is made possible by the generosity of U.S. taxpayers and Diaspora Jews, who pump $7 billion a year into the Israeli economy in free gifts, known in economic jargon as unilateral transfers (foreign aid and charity). This huge sum represents a staggering 10% of Israel's $70 billion gross domestic product. Only impoverished countries with per capita incomes below $1,000 receive anything like this fraction of their national income in free money. No middle-income country other than Israel receives anything approaching even a few percentage points of its national income in aid and charity. By the way, $7 billion is sufficient to bail out every bankrupt socialist institution and business in the country.

But this is not the end of the statistical story. Israel has an additional deficit in what is known as the current account, which includes services. Despite $7 billion in unilateral grants that cover the trade deficit, Israel still has a current account deficit of about $3 billion. Where did that money come from?

$7,300 per Family

Enter the loan guarantees. Israel raised almost $2 billion in 1993 and another $2 billion in 1994. The money became part of Israel's foreign exchange reserves and was used to cover a sharp rise in the current account. How much is $2 billion in loan guarantees? It amounts to about $385 per person, or $1,540 for a family of four. When the aid, charity, and loan guarantee dollars are totaled up, every family of four now has $7,300 a year to spend on imports that it does not first have to earn. You might want to keep your calculator handy and tap in the numbers as you continue to read.

Let's recalculate the growth figures for 1994. The loan guarantees of $2 billion supplied about 3% of each Israeli's income in 1994. Subtract that 3% from reported per capita growth of 4.3% in 1994, and the increase drops to 1.3%. This only slightly exceeds the approximately 1% per capita growth rate Israel has averaged for the past 20 years. It is much easier to report world-leading growth when a large chunk of the national income is pumped into the economy from abroad without having to earn it first.

Growth is good. Indeed, it is the primary objective of economic policy in every country in the world. But it matters how growth is financed. Does it come from internal saving, direct foreign investment, or borrowed money? If it comes from borrowed money, will the return on investments financed by borrowed money be sufficient to repay the loans? In Israel's case, much of the loan guarantees money was allocated to ordinary budget expenditures for consumption, not for investment.

Consumption v. Investment

Now let's take a look at Israel's overall balance sheet at year's end. The additional consumption of imports, financed by $2 billion in loan guarantees, shows up as a $2 billion increase in Israel's foreign debt. The country, rather the country's taxpayers, will have to repay this sum with interest in the future, unless Israelis can find a sugar daddy to pay that bill as well.

It may be helpful to think about Israel's pace-setting growth in everyday terms. Imagine a family with household income of $100,000. The family applies for and receives a VISA, Master Charge, or some other charge card with a credit line of $3,000. It promptly proceeds to charge $3,000 of purchases in one year. Its household consumption, or income, has risen 3%, but its debt is $3,000 higher. The family parties today, but faces a financial hangover tomorrow, unless it can find someone else to pay the bill. This is not a good way to raise living standards, especially not in the long run. A better way is to first earn more income. But Israelis are a remarkable people. Somehow they will find a way to get U.S. taxpayers and Jewish donors to foot their increased prosperity.

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