Israel's Central Bureau of Statistics reported a 132.9 percent rise in the consumer price index during 1980. How can families survive in the face of such inflation?
The answer is that the true rate of inflation in Israel is nowhere near 132.9 percent. That is because of what Israel calls "linkage" and the economists call "indexing." It means simply that wagesM savings deposits, government bonds, etc. are pegged to the cost of living. When prices go up, wages, interest, and all the rest follow automatically.
The increase in wages amounts to 80 percent of the rise in the cost of living; interest rates are 100 percent linked, as are tax brackets themselves. To keep current, these adjustments are made every 90 days. The net result is strong protection for the wage earner.
Linkage of course continues the cycle of inflation, rather than stopping it. But it makes it possible for Israelis to hold on as their economy grows strong, and here real progress is being made.
Israel is a tiny nation with few natural resources, yet it boosted its exports by 23 percent and reduced its trade deficit by 13 percent in 1980. Last year Israel also gave up its oil fields in accordance with its peace treaty with Egypt, thereby increasing its annual oil bill from $1.3 billion to $2.1 billion -- and still managed to hold down the net rise in imports during the year to 9 percent.
What makes Israel's economic prospects especially encouraging is its leadership in high-technology, science-based industry. A world leader in hospital CAT scanners is an Israeli firm, Elscint. Another example of Israeli expertise in high-technology products is Laser Industries. Still another is Sci-Tex of Herzlia, a pioneer in computer graphics.
Fully one-third of all of Israeli's industrial exports last year consisted of products that were researched and developed at home. In recognition of this leadership in high technology, American companies are stepping up their investments in Israel. Early in February a group of top-level US business executives flew to Israel for talks on how they could take advantage of Israel's killed manpower, political stability, and investment incentives. Thus far, more than 150 US firms have invested in Israel, including such giants as Motorola, General Telephone, and IBM.
The US Department of Commerce has called Israel's electronics, chemicals, and pharmaceutical industries "highly promising areas for investment for American firms." To encourage such investment, Israel offers trained scientists, advanced research facilities, a healthy labor environment, duty-free access to the European Common Market, a wide variety of tax credits, loans and other incentives, plus the right to repatriate investment dollars, thus freeing US companies from any currency-fluctuation losses. (For foreign investors, the rise in the cost of labor and raw materials was almost completely offset by the increased value of the dollar relative to the shekel. Thus the net increase in costs to American companies in Israel came to only 9 percent last year.)
This year Israeli exports to the US alone are expected to pass the $1 billion mark, an achievement that will have taken 34 years to come about. It seems clear that the next billion will take considerably less time and that Israel's economy -- despite the huge cost of defense, oil imports, and foreign debt service -- will continu e to flourish and grow as inflation recedes.