Israel losing economic war

Israel's efforts to gradually reduce the nation's raging 1,000 percent annual inflation rate have fallen far short of the kind of shock treatment needed to restore this badly faltering economy.

That is the opinion shared by economic analysts and politicians here. They seem almost unanimous in their predictions that the government's three-month wage-and-price freeze is not good enough.

Speculation is rampant about what will happen when the freeze is lifted in February. The most commonly painted scenario is one in which the inflation rate explodes again unless far more Draconian measures are taken.

Anxiously watching the developments from the sidelines is the United States government, which last month transferred $1.2 billion to Israel - all of the economic aid for fiscal year 1985.

''It might have been the single largest payment the American government has ever made,'' said an official who declined to be named. The money was added to Israel's dwindling foreign-currency reserves, but, wrote one Israeli newspaper, ''There is no guarantee it will remain there.''

Israel already is preparing a new economic aid package to present to the US. The Jerusalem Post reported over the weekend that the aid request for 1985-1986 will be close to $5 billion. Israel already receives more US aid than any other nation. For this fiscal year, total economic and military aid to Israel is $2.6 billion. For the first time, it is all in grants.

A Post reporter quoted unnamed Israeli officials in Washington as saying that the government wants between $700 million and $800 million in emergency aid added to funds already granted Israel for 1985. The report was denied by a spokesman for Israel's Finance Ministry Tuesday.

''It's not moral to give any report about this aid request until Israeli and American officials will meet,'' the spokesman said.

Israeli Prime Minister Shimon Peres has said repeatedly that Israel cannot continue to rely on the United States to bail it out of its economic crisis.

But at the same time, it was the prime minister who visited the US just before the American election to ask for more aid, and it is Peres who has been exhorting the American Jewish community to increase its donations to Israel in light of its economic crisis.

US officials have said they want to see real economic reform in Israel before agreeing to another aid increase.

The US Embassy declined to comment on whether it feels Israel so far has made adequate progress. But members of the Israeli government are not so reticent.

Science and Development Minister Gideon Patt, a Liberal Cabinet member, told an Israeli interviewer that ''there is no chance of success'' for the government's plan. The government's efforts, Mr. Patt said, ''were just a weak attempt at solving our economic problems.''

The government has followed up the price freeze, which began Nov. 5, with a promise to make deeper budget cuts and decrees cracking down on money-changing in the black market.

But there is a growing sense that the long-awaited package deal reached by the government, the giant Histadrut labor union, and manufacturers does not address the economy's fundamental problems.

Chief among those problems is an overabundance of money. The government simply prints more shekels as needed, and Israelis spend them as soon as they get them for fear they will be worth less the next day. The shekel is so badly devalued (600 shekels for $1 on the black market) that Finance Minister Yitzhak Modai said this week he plans to introduce a ''new shekel'' that will take the burden off financial computers that can no longer handle the number of zeros involved in most transactions.

But simply trimming zeros off the shekel does not change the fact that the currency's value against the dollar continues to fall. The government has shied away from linking the battered shekel to the dollar. Informally, such a linkage has already occurred in much of daily life here. Although it is illegal to quote prices in dollars or accept payment in dollars, both practices continue.

''People wait too long to pay their bills, so I must link their bills to dollars or I will lose,'' says the owner of a Jerusalem bookstore who bills his clients monthly.

Many merchants hiked their prices so much in anticipation of the price freeze that the freeze is virtually meaningless. Products are selling at rates designed to tide the sellers over for three months.

The government may ultimately have to abandon its plan to gradually reduce real wages and therefore the purchasing power of workers and take the far more painful step of allowing unemployment to rise.

In addition to budget cuts, Mr. Modai has promised to eliminate entire departments and lay off thousands of civil servants. But so far such layoffs have not occurred. About one-third of all employed Israelis work for the government; they can be expected to resist mass layoffs.

In many cities, municipal workers, including teachers, have already struck to protest late paychecks. The Histadrut has threatened labor action if the government does not eventually compensate workers for the decline in real wages they will suffer because of the package deal.

For now, the government is struggling to come up with further measures that will somehow make the freeze work to bring inflation to a bearable level, increase productivity, and replenish foreign currency reserves.

If a solution is not found, one analyst writes, ''Failure will leave the government so bereft of credibility that the only policy options left will be so Draconian as to endanger our very democratic system and risk tearing the social fabric to pieces.''