[Congressional Record Volume 141, Number 26 (Thursday, February 9, 1995)]
[Extensions of Remarks]
[Pages E309-E310]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


                ECONOMIC CONDITIONS IN ISRAEL AND EGYPT

                                 ______


                          HON. LEE H. HAMILTON

                               of indiana

                    in the house of representatives

                       Thursday, February 9, 1995
  Mr. HAMILTON. Mr. Speaker, the United States has a strong interest in 
the economic conditions and government policies aimed at promoting 
economic reform in Egypt and Israel. Every year since the signing of 
the Israeli-Egyptian Peace Treaty in 1979, the Congress has voted to 
provide these two countries with substantial economic and military 
assistance. Last year, Congress supported the administration's fiscal 
year 1995 request of assistance totaling over $5.2 billion. The 
administration had made the same assistance request to Congress for 
fiscal year 1996.
  Given the importance of the economic conditions in Egypt and Israel 
to the United States, I would like to place in the Congressional Record 
the summary of USAID's Report on ``Economic Conditions in Egypt, 1993-
94'' and the economic overview of the State Department's fiscal year 
1994 Report to Congress on the ``Loan Guarantees to Israel Program and 
Economic Conditions in Israel.''
        Report on Economic Conditions in Egypt, 1993-94 Summary

       During the past three years, Egypt has made progress 
     implementing macroeconomic stabilization measures, such as 
     reducing fiscal and current account deficits and liberalizing 
     interest rates and foreign exchange regulations. It has made 
     much less progress on the broader structural reforms 
     necessary to promote increased economic efficiency and 
     growth. The resultant slow economic growth has a number of 
     explanations. Some reasons are temporary and although 
     critical, should become less constraining over time. These 
     factors include the sharp decline in Egypt's government 
     spending over the last four years, high real interest rates, 
     an overvalued exchange rate, and sluggish foreign demand for 
     Egyptian products due to the uncompetitiveness of the 
     Egyptian private sector.
       Unfortunately, other constraints to growth are structural 
     and cannot be changed quickly. Egypt adopted a socialistic 
     and inward-looking approach to economic development in the 
     1950s. as a result, the country is burdened with public 
     sector enterprises which are inefficient, unprofitable, and 
     contribute very little to output. Millions of Egyptians have 
     jobs with the Government or parastatals which they believe 
     are theirs for life, regardless of the productiveness of the 
     job. Legal, regulatory, and bureaucratic systems restrict 
     business expansion and impose unnecessary costs on business. 
     The judicial process is time-consuming and expensive. High 
     levels of protection hinder international trade and 
     competitiveness. The tax administration is cumbersome. Long 
     term financing at reasonable rates is scarce. Government 
     owned firms dominate the business sector, and they have 
     proven incapable of generating jobs for the Egyptians 
     entering the labor force each year. At this point in time, 
     the private sector is too small to provide jobs for the new 
     entrants to the labor markets.
       [[Page E310]] Private investment and export orientation are 
     the only realistic path to economic development. 
     Unfortunately, Egypt's environment for the private sector is 
     not sufficiently alluring to attract an adequate amount of 
     investment funds from the international financial markets. 
     The task for the Government of Egypt (GOE) is to prepare the 
     private sector business environment so that Egypt can harness 
     the energy of the private sector, direct it down the path of 
     sustainable development, create jobs, and make it easier for 
     Egypt to enhance its role as a model of stability, democracy 
     and prosperity in the region.
       Vice President Gore and Egyptian President Mubarak 
     developed an Economic Growth Partnership that focuses 
     precisely on this issue. The Gore-Mubarak Partnership is 
     intended to spur equitable economic growth and job creation 
     in Egypt, especially in the private sector. It is intended to 
     strengthen links between the U.S. and Egyptian private 
     sector, and increase trade and investment. The Partnership 
     reflects a personal effort by the U.S. leadership to help 
     Egypt improve the welfare of the Egyptian people. It reflects 
     the special relationship which exists between the U.S. and 
     Egypt.
                                                                    ____

  State Department's Fiscal Year 1994 Report to Congress on the Loan 
     Guarantees to Israel Program and Economic Conditions in Israel


                                overview

       The Loan Guarantees to Israel Program was established to 
     assist Israel in its humanitarian effort to resettle and 
     absorb immigrants into Israel from the republics of the 
     former Soviet Union, Ethiopia, and elsewhere. The guarantees 
     were authorized in recognition that the effective absorption 
     of these immigrants within the private sector requires large 
     investment and economic restructuring to promote market 
     efficiency and thereby contribute to productive employment 
     and sustainable growth. The legislation anticipates that the 
     effect of U.S. loan guarantees will be bolstered by an 
     Israeli economic strategy involving prudent macroeconomic 
     policies, structural reforms designed to reduce direct 
     government involvement in the Israeli economy and measures to 
     promote private investment. Israel presently enjoys the basic 
     preconditions for sustainable medium-term economic growth. 
     These include a skilled and rapidly growing labor force, an 
     environment of macroeconomic stability, and an improved 
     geopolitical situation. A series of economic reforms begun in 
     the late 1980s and early 1990s has continued under the Rabin 
     Government, including measures discussed below to liberalize 
     capital markets, relax restrictions on foreign currency 
     transactions, lower trade barriers and reduce the budget 
     deficit.
       Nevertheless, much remains to be done: trade barriers--
     especially in the agricultural sector--continue to limit 
     international competitiveness; progress has been very slow in 
     privatizing 165 state-owned firms; and fiscal police must 
     fall into step with tighter monetary policy in order to tame 
     inflation. Inflation, an overvalued shekel, and a growing 
     balance of payments gap present serious challenges for the 
     government as it heads into the new year.


         United States-Israel Joint Economic Development Group

       Since the mid-1980s, the United States and Israel have 
     engaged in periodic economic consultations under the auspices 
     of the Joint Economic Development Group [JEDG]. This group 
     has a mandate to examine and discuss Israeli economic policy. 
     It played a key role in shaping the successful 1984 economic 
     stabilization program for Israel. The Group is led on the 
     U.S. side by the Under Secretary of State for Economic 
     Affairs and on the Israeli side by the Director General of 
     the Ministry of Finance.
       In keeping with the intent of the Loan Guarantees to Israel 
     legislation, the U.S. and Israel revived the JEDG in 
     September 1993 to focus specifically on areas identified in 
     the legislation: economic and financial measures, including 
     structural and other reforms, that Israel should undertake 
     during the duration of the loan guarantee program to enable 
     its economy to absorb and resettle immigrants and to 
     accommodate the increased debt burden that results from the 
     program. The JEDG convened in 1994 on May 26 in Washington 
     and again on October 3 in Madrid. Participants included 
     senior officials of USAID, Commerce, the Council of Economic 
     Advisors, Treasury, and in May, Stanley Fischer from the 
     Massachusetts Institute of Technology. The group discussed in 
     both sessions progress and plans in the areas of fiscal and 
     monetary policy, privatization, trade liberalization, 
     financial and capital markets, and labor markets.


                       macroeconomic developments

       Israel, with a population of 5.3 million and a GDP of $72.2 
     billion in 1993, has a per capita GNP of $13,471. The 
     Government of Israel (GOI) has been relatively successful in 
     stabilizing the economy in the face of a massive inflow of 
     immigrants which has increased the population by over 12 
     percent since the end of 1989. The general economic picture 
     is relatively good, despite the appreciation of the shekel, 
     rising inflation and a growing trade deficit.


                     prospects for economic growth

       The country is in the midst of a four-year economic 
     expansion, with GDP growth expected at 6.5 percent by year-
     end 1994, and a growth rate of 4.9 percent predicted for 
     1995. Growth rates of 4-6 percent are projected for the 
     remainder of the decade, relying as in previous years on the 
     productivity of new immigrants (with 70,000 expected to 
     arrive in 1994), structural reforms in the economy, and an 
     opening of new export markets, mostly in Eastern Europe and 
     Asia. In 1994-95, the government faces economic challenges 
     associated with immigrant absorption, the peace process, and 
     unique sectoral requirements. In dealing with the inflow of 
     immigrants, the GOI has appropriately adopted a strategy of 
     abstaining from direct intervention in the labor market and 
     has instead focused on providing the immigrants with housing, 
     subsistence grants and training while encouraging a more 
     favorable environment for private sector investment and 
     expansion.


                               employment

       Over the past four years, Israel's labor force grew rapidly 
     with the addition of these immigrants and a baby boom 
     generation. Although the rapid economic expansion and a 
     moderation in wages resulted in an average 4 percent overall 
     employment growth rate between 1990 and 1992, the 
     unemployment rate nonetheless increased from 8.9 percent in 
     1989 to a peak of 11.2 percent in 1992. During 1993, however, 
     despite the relative slowing in the economy, employment 
     growth picked up to 6 percent and unemployment declined to 10 
     percent. Unemployment has further declined to 7.8 percent in 
     1994. Immigrant unemployment has fallen even more 
     dramatically, from 38 percent in 1991, 29 percent in 1992, 
     and 19 percent in 1993, to 12 percent in 1994.
                          budgetary pressures

       In meeting the economic demands of the peace process and 
     sectoral shortcomings, the government has met with less 
     success. Indeed, a 5.6 billion New Israeli Shekel (NIS) 
     supplemental budget ($1.87 billion) for 1994 was passed in 
     November to cover public sector wage hikes and unanticipated 
     expenses for implementation of the Declaration of Principles 
     (DOP). The 1995 budget proposal is in keeping with recent 
     fiscal policy, emphasizing investment in infrastructure and 
     education. The GOI proposes $460 million to help cover 
     defense industry losses, the labor federation Histadrut's 
     health insurance fund, and kibbutzim debt rescheduling. The 
     1995 budget proposal projects a deficit of 2.75 percent of 
     projected GDP, down from 1994's target of 3 percent.


                               inflation

       Israel's track record on inflation is mixed. On the one 
     hand, it succeeded in bringing inflation down from 420 
     percent in 1984 to 9.4 percent in 1992. On the other hand, 
     the rapid increase in the money supply which took place at 
     the end of 1993 marked the onset of an inflationary surge 
     that reached 15.5 percent for 1994, and the Government has 
     not coordinated its fiscal and monetary policies to control 
     this problem. An annual increase of 25 percent in housing 
     costs, and over 35 percent in fruit and vegetable prices, 
     combined with higher than anticipated levels of private 
     consumption and public sector wage raises, have thwarted the 
     government's 8 percent target inflation rate. Furthermore, 
     there is some fear that a new capital gains tax may cause a 
     shift from stocks to real estate, with new demand again 
     pushing housing costs higher.
       Some question the need for expansionary policies when 
     annual GDP growth rates averages 4-6 percent. Longstanding 
     structural rigidities in the economy also contribute to 
     inflationary pressures, which could be eased by steps to open 
     the agricultural sector to international competition, 
     deregulate the housing sector and increase the labor market's 
     responsiveness and market forces.
     

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