ISRAEL: POLITICAL AND ECONOMIC CONDITIONS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP06T00412R000505530001-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 8
• Document Creation Date: December 22, 2016
• Document Release Date: May 17, 2012
• Sequence Number: 1
• Publication Date: May 6, 1986
• Content Type: MEMO

Declassified in Part - Sanitized Copy Approved for Release 2012/05/17: CIA-RDP06T00412R000505530001-2
Original - ExDir
1 - D/NESA
1 - DD/NESA
1 - C/NESA/AI
1 - NESA/AI/I
DDI/NESA/AI/I/
(6 May 86) 25X1
Declassified in Part - Sanitized Copy Approved for Release 2012/05/17: CIA-RDP06T00412R000505530001-2
 Declassified in Part - Sanitized Copy Approved for Release 2012/05/17: CIA-RDP06T00412R000505530001-2
DIRECTORATE OF INTELLIGENCE
6 May 1986
ISRAEL: Political and Economic Conditions
Summary
With only five months remaining in Prime Minister
Peres's tenure in office, he seems likely to honor his
agreement to hand power over to Foreign Minister Shamir
in mid-October despite strains that will plague the
coalition. Peres nonetheless will keep a close eye on
the leadership crisis in Shamir's Likud bloc, which
could flare up at any time before the premiership
changes hands and could precipitate the breakup of the
coalition. Peres will be reluctant to exploit Likud's
leadership problems, however, unless they fully
discredit Shamir and swing public opinion in support of
breaking up the unity government.
Despite the political frictions within the unity
coalition, it has made significant progress on Israel's
massive economic problems since introducing a new
austerity program in July 1985. Inflation has cooled
considerably, the exchange rate has remained relatively
stable, and foreign exchange reserves have been rebuilt
to a healthy level. In return for these gains, real
wages inevitably have declined, and unemployment is
growing.
The public has accepted austerity with equanimity
in exchange for unaccustomed relief from inflation and
generally approves of the government's handling of the
economy to date. Problems could reappear, however, if
the government permits the budget deficit to grow
through extraordinary spending designed to relieve some
This memorandum was prepared by
the Israel-Jordan-PLO Branch, Arab-Israeli Division, Office of
Nea
r Eastern
and
South Asian Analysis. Information as of 6 May 25X1
198
6 was used
in
its preparation. Qu
estions and comments should
be
forwarded
to
Chief, Arab-Israeli D
ivision,
25X1
-1-
SECRET
Declassified in Part - Sanitized Copy Approved for Release 2012/05/17: CIA-RDP06T00412R000505530001-2
 Declassified in Part - Sanitized Copy Approved for Release 2012/05/17: CIA-RDP06T00412R000505530001-2
of the pressures or if the political situation tempts
the political parties to back off on austerity to woo
votes in an early election.
Peres continues to be the most popular political figure in
Israel. Recent public opinion polls indicate Peres's popularity
has reached higher levels than any previous prime
minister--nearly 68 percent of the Israeli public approves of his
performance as prime minister. The polls also indicate that
nearly two-thirds of the public currently favors preserving the
Labor-Likud partnership.
Peres's political standing in the Labor Party also has risen
substantially since assuming the premiership. After years of
bitter feuding with Defense Minister Rabin, Peres has emerged as
the unchallenged leader of his party. The applause that was
reserved for him at Labor's national convention last month
demonstrated his strong support and even led to a few complaints
of an "excessive personality cult." Rabin clearly is the second
leading figure in the party. 25X1
Some Labor Party activists are discontented, however, over
Peres's unwillingness to break the rotation agreement with
Shamir. Peres disappointed them when he failed to exploit the
coalition crisis last month over the dismissal of Yitzhak Moday
from the finance portfolio to break up the government. Peres
agreed to allow Moday to remain in the Cabinet as Justice
Minister in return for Shamir's verbal pledge that Moday's
replacement, former Justice Minister Nissim, would be finance
minister for the duration of the unity government.
Shamir's Tenuous Hold on Likud
In contrast to Peres's popularity as party and national
leader, Shamir's public standing is low, and he maintains only a
shaky hold on the leadership of Likud and its dominant component,
the Herut Party. Shamir has relied on the support of Herut
veterans and former Defense Minister Arens to outmaneuver his
rivals--Deputy Premier Levy and Commerce Minister Sharon. Arens,
who lacks strong factional support in the party, is nonetheless
respected because of his reputation for honesty and integrity.
He probably hopes that his alliance with Shamir will strengthen
his candidacy if he decides to contest Levy and Sharon for the
party leadership after Shamir retires.
-2-
SECRET
Declassified in Part - Sanitized Copy Approved for Release 2012/05/17: CIA-RDP06T00412R000505530001-2
 Declassified in Part - Sanitized Copy Approved for Release 2012/05/17: CIA-RDP06T00412R000505530001-2
Shamir's ~leadership was manifested at Herut's national 25X6
convention in early March, which ended prematurely in disarray
amid fisticuffs among delegates and disagreement among the
leadership rivals about how to proceed. Shamir's credibility as
party leader was damaged further during the crisis over Moday's
departure from Finance when he was forced to back down from his
threat to resign from the government so as not to jeopardize his
chances of becoming Prime Minister.
Outlook for the Unity Government
Having chosen not to use the Moday crisis as a pretext to
break up the unity coalition, Peres now seems likely to honor the
rotation agreement unless Likud makes a serious blunder. We
expect further strains, however, to plague the coalition as the
October rotation nears. Labor Party activists, disappointed with
Peres's unwillingness to break the rotation agreement, will 25X1
probably try to undermine the Labor-Likud partnership. Their
efforts ironically are likely to be aided by Levy, whose interest
in replacing Shamir as Likud leader would best be served by the
dissolution of the current government and an early election.
Peres will closely watch the internecine warfare in Likud, 25X1
but he probably would not try to exploit Likud's leadership
crisis unless it discredits Shamir and swings public opinion in
support of breaking up the unity coalition. Shamir will strive
to ignore Labor provocations and Levy's maneuvering to protect
his interest in becoming prime minister.
Effects of July 1985 Austerity Measures
The key elements of the austerity program introduced last
July were wage and price controls, a 19 percent devaluation
followed by a stable exchange rate policy, and a number of
deficit reducing measures. The program has worked unexpectedly
well with inflation falling from a monthly average of around 14
percent (180 percent per annum) a year ago to 1.5 percent (20
percent per annum) for March. Since July the exchange rate has
remained stable at around 1.48 shekels per dollar, while
depreciating with the dollar against other currencies. Foreign
exchange reserves are now around $3.0 billion, up about $500
million from a year ago.
Austerity has had its costs, however. Unemployment is
currently around 7 percent, historically high for Israel, and is
expected to grow another 1 percent in the coming months. Real
-3-
SECRET
Declassified in Part - Sanitized Copy Approved for Release 2012/05/17: CIA-RDP06T00412R000505530001-2
 Declassified in Part - Sanitized Copy Approved for Release 2012/05/17: CIA-RDP06T00412R000505530001-2
wages plunged 18 percent during the last half of 1985 compared to
the first half. Personal consumption also fell, but its fall was
cushioned as the population benefited from some income tax
adjustments and cost-of-living wage and savings increases.
Overall, real GNP grew at about 2 percent last year compared to a
0.3 percent fall in 1984. 25X1
Economic Problems and Outlook
Israel continues to suffer considerable imbalance in its
external accounts and is highly dependent upon the United States
for balance-of-payment and budget aid. Israel had a civilian
goods and services deficit of about $2.5 billion in 1985 compared
to $3.4 billion for 1984. When military items are included,
however, the deficit climbed to $4.3 billion last year. Israel
received total US aid of slightly over $3.9 billion in 1985 and
paid back about $1.2 billion on past debts. 25X1
Israel has come a long way in the last year in its fight to
straighten out its economy, but it still has a long way to go.
The government budget deficit needs to be reduced further in
order to consolidate the gains of the austerity program.
Upcoming wage negotiations also pose a problem if labor tries to
make up a large percentage of the real wages lost last year.
Additional issues, such as tax reform and deindexation of the
economy, also need to be faced, but are unlikely to be addressed
in a meaningful manner before the October Labor-Likud rotation.
25X1
-4-
SECRET
Declassified in Part - Sanitized Copy Approved for Release 2012/05/17: CIA-RDP06T00412R000505530001-2
 Declassified in Part - Sanitized Copy Approved for Release 2012/05/17: CIA-RDP06T00412R000505530001-2
Israel's Constitutional and Judicial Systems
Israel's system of government is based on an unwieldy
combination of basic laws and ad hoc legislation. The first
legislative act of Israel's Knesset or parliament in February
1949 was to enact a Transition Law, often referred to as the
Small Constitution, which became the foundation of constitutional
life in the state. Administrative and executive procedures were
based on a combination of past experience in self-government,
elements adapted from the former British mandatory structure, and
new legislation. According to the Small Constitution, Israel was
established as a republic with a weak president and a strong
cabinet and parliament. It was anticipated that this document
one. braced in due course by a more extensive and permanent 25X1
Israel's first Knesset was deeply divided between proponents
of a written constitution and those who believed that the time
was not appropriate for imposing rigid constitutional
limitations. The Knesset decided in June 1950 to postpone the
issue indefinitely. It agreed in principle that a written
constitution would ultimately be adopted, but that for the time
being there would be no formal and comprehensive document.
Instead, a number of fundamental, or basic, laws would be passed
dealing with specific subjects, which might in time form chapters
in a consolidated constitution. 25X1
By the end of 1984 Israel had adopted eight Basic Laws
dealing with various issues: The Knesset (1958), The Lands of
Israel (1960), The President (1964), The Government (1968), The
State Economy (1975), The Army (1976), Jerusalem, The Capital of
Israel (1980), and the Judiciary (1984). The Basic Laws provide
a definitive perspective of the formal requirements of the system
in specific areas of activity. 25X1
Judicial authority is vested in religious as well as civil
courts. The latter include municipal and magistrates' courts for
civil and criminal actions, district courts for appeals from the
lower tribunals and for matters not triable by a magistrate, and
a supreme court. The supreme court, known as the High Court of
Justice, cannot review legislation passed by the Knesset, but it
has the power to invalidate administrative actions and to
interpret statutes it regards as contrary to the rule of law.
Each major community in Israel has its own religious courts
that deal with matters of personal status. Rabbinical courts
SECRET
Declassified in Part - Sanitized Copy Approved for Release 2012/05/17: CIA-RDP06T00412R000505530001-2
 Declassified in Part - Sanitized Copy Approved for Release 2012/05/17: CIA-RDP06T00412R000505530001-2
have exclusive jurisdiction over Jews in marriage and divorce,
and they may act on alimony, probate, succession, and other
similar questions with the parties' consent. Christian
ecclesiastical courts have exclusive authority over Christians in
marriage, divorce, alimony, and confirmation of wills, and they
may judge other matters if the parties agree. Muslim courts have
exclusive jurisdiction for Muslims in all matters of personal
status. The judicial appointment procedure seeks to discourage
political influence, and judges enjoy tenure subject only to good
-6-
SECRET
Declassified in Part - Sanitized Copy Approved for Release 2012/05/17: CIA-RDP06T00412R000505530001-2
 25X1
Declassified in Part - Sanitized Copy Approved for Release 2012/05/17: CIA-RDP06T00412R000505530001-2
Next 2 Page(s) In Document Denied
Iq
Declassified in Part - Sanitized Copy Approved for Release 2012/05/17: CIA-RDP06T00412R000505530001-2