Ticket Into the Club of Developed Nations

Nathan Lipson
Nathan Lipson
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Send in e-mailSend in e-mail
Nathan Lipson
Nathan Lipson

A few days before the flotilla fiasco, daily turnover on the Tel Aviv Stock Exchange spiked to an unprecedented height of NIS 16.4 billion. That extraordinary volume of trade was the direct result of an announcement made that day, May 26 - Israel had been admitted into the OECD, the Organization for Economic Cooperation and Development. Israel had officially joined the club of developed nations.

Credit: Dan Ben-David

How Israel achieved this coup is depicted in the accompanying graph, which appears in "The State of the Nation," a report by Dan Ben-David, professor of economics and executive director of the Taub Center for Social Policy Studies in Israel.

The decision to admit Israel into the ranks of the OECD led to its immediate inclusion in one of the most important indices tracking stocks in the developed world. Large institutions around the world immediately bought Israeli shares, hence the gigantic turnover on the day of Israel's OECD admission.

Joining the OECD had been a longtime goal for Israel - not only for reasons of prestige, but also because it stood to change the way Israel is treated, which in turn would benefit the country's economic status in international circles.

It was the realization of decades of effort, forged along a number of paths. The true turning point, however, took place about 25 years ago, when inflation-stricken Israel embarked on a new course that culminated in reducing the ratio of its national debt to gross domestic product.

The higher the debt-to-GDP ratio, the worse it augurs for the future; in fact, it encumbers the future in favor of the present. An especially high ratio represents a kind of mortgaging of the future.

Between the Six-Day War in 1967 and the Yom Kippur War in 1973, the government's spending rose drastically, much faster than its income. The widening gap between expenditure and income naturally needed to be funded, which meant borrowing. The result: Israel's national debt mushroomed relative to its GDP.

And so, in 1984, while the debt-to-GDP ratio among the OECD nations averaged 53%, Israel's stood at 284% - more than five times the average - as displayed in the graph. Under such conditions, Israel could not even consider applying for OECD membership.

In that same year, 1984, inflation raged out of control, reaching 445%. But then the government formed a plan that may have been the most dramatic, and effective, economic move ever made by an Israeli government. At the time, the country was ruled by a unity government, a rainbow coalition, which threw its united support behind the Stabilization Plan.

Inflation dropped, though perhaps remained higher than in the developed nations for years. But finally, it converged to roughly the same level as that of Israel's main trading partners.

The success of the Stabilization Plan provided a great incentive to adopt highly responsible budget policies. Deficits were gradually but firmly reduced and the need to borrow dropped commensurately. So did the ratio between debt and GDP. Thus, a little more than 25 years after the Stabilization Plan that spurred a paradigm shift, Israel's debt-to-GDP ratio converged toward that of the OECD nations, which helped open the door to usher Israel in.