Israel Battling an Enemy At Home

By Richard Lacayo

Prime Minister Shimon Peres took office ten months ago determined to reform Israel's out-of-control finances. But when he tried to put the brakes on inflation last week, the country came briefly to a halt. With the U.S. pressuring him for action, Peres became the first Israeli leader ever to bypass the Knesset (parliament) with economic restrictions imposed by emergency decree.

In response, Israel's powerful labor federation, the Histadrut, called a one-day strike that forced Peres to delay implementation of key parts of the package.

The Prime Minister insisted that drastic reform was necessary "to prevent an actual collapse" of the Israeli economy. After seven months of voluntary wage and price restraints, the country's inflation rate is still soaring at 300% annually. Burdened with enormous military expenditures and extensive social-welfare programs, the government last year ran a $1.8 billion deficit on a $23 billion budget. The foreign debt, the world's highest per capita, has reached $23 billion, and foreign-currency reserves have dropped to $2 billion.

At a marathon 20-hour Cabinet meeting early last week, Peres forced through a package of austerity measures designed to shock the economy back to health. The program included an 18.8% devaluation of the shekel (which beforehand was worth 1,262 to the U.S. dollar) and a three-month general wage and price freeze, along with price increases of 17% to 82% on such subsidized products as gasoline, bread and milk. At the same time, the Cabinet cut away the methods that Israelis use to protect themselves from inflation, by suspending the wage-indexing system that ties earnings to the cost of living and severely restricting further deposits in bank accounts linked to the value of the U.S. dollar. The Cabinet also agreed to trim $750 million from Israel's budget and to dismiss 9,000 government employees within 90 days.

As the Histadrut labor federation saw it, the burden of the reforms fell on the nation's workers rather than employers. Meeting with Peres before the strike, Histadrut Chief Yisrael Kessar acidly asked the Labor Party leader, "How did your hand keep from shaking when you signed a 30% erosion of wages?" Histadrut, whose 1.5 million members account for 90% of the nation's work force, then called a 24-hour general strike. Violent demonstrations broke out in Jerusalem, where protesters burned tires and shouted antigovernment slogans.

Under the threat of a further, indefinite strike, Peres delayed carrying out the most controversial parts of his program, including the wage freeze, suspension of the indexing system and government layoffs, pending negotiations with Histadrut. The Prime Minister faces opposition as well from the Likud Party, Labor's partner in the National Unity government. Seven Likud members , voted against the economic package in the Cabinet, although Likud grudgingly supported the government afterward in a vote of confidence by the Knesset.

Peres' austerity measures were considerably more popular in Washington, where the Reagan Administration has been pressuring Israel for economic reforms in return for $1.5 billion in supplementary aid for fiscal year 1985-86. Secretary of State George Shultz praised Peres for his "courage and foresight," and called the reform package "an important step forward in Israel's continuing efforts to stabilize its economy."

With reporting by Robert Slater/Jerusalem