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In FY

until FY 1984, when they were increased to $910 million. 1985 obligations were increased again to $1.2 billion (in addition to a $1.5 billion supplemental disbursed in two separate year tranches of $750 million each). In FY 1986, the program was reduced to $1.148 billion due to Gramm-Rudman-Hollings legislation. In FY 1987 the program was restored to the $1.2 billion level. From FY 1976 through FY 1979, approximately two-thirds of the ESF program was provided on a grant basis; the remainder on highly concessional loan terms. All economic assistance has been provided on a grant basis since FY 1980.

In FY 1979, the Commodity Import Program (CIP) financing element was eliminated to alleviate administrative difficulties which the GOI had encountered in drawing down available funds in a timely fashion. Although Israel's non-military imports from the U.S. were large, the GOI had considerable difficulty in managing the documentation processes required for CIPS. The switch to cash transfers greatly eased the administrative burden placed on the Israeli Government. In addition to ESF, the U.S. provided Public Law 480 Title I food aid for several years and authorized several Housing Guarantee Programs for Israel. Under other legislation, assistance has been provided to help Israel settle new immigrants from the Soviet Union and other countries. In FY 1975, a $20 million grant for a Joint U.S.-Israel Desalination project was authorized. This project was completed in 1983.

FY 1988's allocation of $1.2 billion in Economic Support Funds provides a cash transfer to the Government of Israel to provide financing for needed balance of payment support.

From July 1, 1974 through October 30, 1987, A.I.D. provided a total of $13,703.4 million of Economic Support Punds to the Government of Israel. As of October 30, 1987 all of these funds have been disbursed.

The breakdown of the use of ESP is provided below.

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Policy Dialogue

In recognition of the need for close economic consultations, the governments of the U.S. and Israel agreed during the October 1984 visit to Washington, D.C. of then Prime Minister Peres to establish a Joint Economic Development Group (JEDG) to review economic developments in Israel, the role of U.S. assistance in support of Israeli adjustment efforts, and Israel's longer-term development objectives. The Group is jointly chaired by the U.S. Under Secretary of State for Economic Affairs (W. Allen Wallis) and by the Israeli Minister of Finance (currently Moshe Nissim). Participating U.S. agencies include State, A. Ï. D., Treasury and OMB. On the Israeli Government side, participation includes representatives from the Ministry of Finance, Ministry of Foreign Affairs, Bank of Israel, Ministry of Economy and Planning, Ministry of Industry and Trade, and the Economic Advisor to the Prime Minister. Distinguished private American and Israeli economists also participate in the Group. The Group has met several times, both in Israel and the U.S.

The Group has a consultative role only. All decisions about economic assistance remain with the U.S. Government.

Recent meetings of the JEDG (the most recent was in June 1987) have focused on how Israel can facilitate resumption of economic growth without rekindling inflation or worsening the country's external indebtedness. The U.S. Government position has emphasized that the successful implementation of the stabilization program initiated in 1985 is most important in that stability is a prerequisite for a return to sustainable higher levels of productive, private investment and economic growth. The U.S. has continued to stress the need to reduce the role of government in the Israeli economy, in general, to reduce the size of the budget deficit, and to rely to a greater extent on the forces of the market place for the provision of goods and services and the mobilization and allocation of capital. As has been indicated in this report, reform efforts in many of these areas are currently underway.

Free Trade Agreement (PTA)

In September 1985, Israel and the U.S. signed the Free Trade Agreement (PTA), which goes beyond the U.S.'s extension of the Generalized System of Preferences (GSP) as well as the trade arrangement between the European Economic Community and Israel. The PTA called for the immediate duty free status of many products as well as the progressive reduction and elimination of duties on many more, subject to further negotiation. The two parties are also currently negotiating, under the forum of the FTA, understandings on various services, including tourism, telecommunications and insurance.

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Although the PTA is intended to encourage greater two-way trade between the U.S. and Israel, the U.S. share in exports to Israel has declined slightly while Israeli exports as a share of total Israeli exports have risen somewhat. (See Section IV.) A longer gestation period is necessary before the impact of the PTA can be assessed.

Also, in October 1987, the U.S.-Israel Chamber of Commerce and the Government of Israel jointly sponsored the America-Israel Trade Week in Washington, D.C. This conference brought U.S. and Israeli businesspeople together to share information, make contacts and, in general, seek opportunities to increase trade. Other such conferences are being planned for the future.

The Israeli economy has shown marked improvement over the past two and one half years. Much of the improvement is due to the reform efforts of the Government. The need to maintain momentum is necessary to avert a reversion to the destabilizing conditions of the past. Some structural reforms have been started and are already beginning to make themselves felt in the the economy. However, given the improved economic situation, there is the danger that the earlier sense of urgency may have passed and the reform program may not maintain its earlier momentum.

The National Unity Government has achieved a great deal in its reform efforts, and is sensitive to actions that might tend to undermine its past efforts. Nonetheless, both privatization and taxation, areas needy of reform, appear less urgent, and may face greater opposition.

In 1988 the budget is likely to face greater pressures, not due to domestic lobbying for increased spending but due to stepped up military spending, which had slowed, and the return to "normal" levels of U.S. economic assistance. On the up-side for 1988 and 1989, however, is the termination of the Lavi project, which adds considerable flexibility to the budget process.

If Israel is to remain internationally competitive the disparity between domestic inflation and the fixed exchange rate must be addressed. Unless inflation can be slowed to the level of Israel's trading partners, Israel will have to continue its periodic devaluations to maintain competitiveness or face continued pressures on its trade account fueled by an overvalued exchange rate and high consumer imports. 1987 probably saw an increase in exports of about 16%. Regardless of the exchange rates prevailing, it is unlikely that such export growth can be maintained. Exportation is one route for growth in the Israeli economy, but it is unlikely to ever entirely close the resource gap.

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То

A major reason for this is that Israel's demand for military imports is not likely to diminish in the foreseeable future. maintain growth rates in per capita income of one or two percent per year, while maintaining the current levels of defense spending and importation, continued foreign aid in large magnitudes is a must. However, if economic stability can be maintained and the economy can be successfully restructured, foreign aid will only be necessary to fund that gap created by security needs rather than to maintain the civilian economy as well.

drafter: Mark Gallagher, ANE/DP/P&A, Wang 1533R

86-679-88 - 4

APPENDIX 4

SUPPLEMENTAL QUESTIONS BY THE SUBCOMMITTEE ON EUROPE AND THE MIDDLE EAST TO THE DEPARTMENT OF STATE AND RESPONSES THERETO:

Q:

A:

Several weeks ago a team of American doctors from Harvard University and City University of New York traveled to the West Bank and Gaza and presented at the conclusion of their trip a dramatic survey of what they termed was physical and psychological damage they said was being deliberately inflicted on Palestinian demonstrators.

Are you aware of this team?

Are the conclusions reached by the team in your view essentially accurate or not?

Has the United States taken up with the Israelis
issues raised by these doctors?

We are aware of the team's visit but have not seen a full
report of its findings.

We have frequently discussed with the GOI our opposition

to harsh practices such as those cited by the physicians,

Classified portion of Supplemental Questions are retained in subcommittee files.