Can Israel get extra US aid without reform?

Does Israel deserve an extra $1.5 billion in US foreign aid? Consulting economist Thomas R. Stauffer doesn't think so. He maintains that Israel's government has not yet launched a tough enough austerity program.

Up to now, Secretary of State George Shultz had wanted more economic reform from Jerusalem before Congress provided extra aid. Israeli newspapers have reported that the Reagan administration sought a major devaluation of the shekel and decreases in the automatic indexation of wages and social benefits. Mr. Shultz also wanted Israel's central bank to create less money in order to reduce inflation. He specified reforms he wanted in an exchange of letters with Prime Minister Shimon Peres.

There is some suspicion within the administration that Shultz may have decided to go ahead and request the additional aid from Congress whether or not Israel has taken sufficient action to remedy its economic problems. One reason, it is thought, could be political. Approval of the aid package might take some of the sting out of the Bitburg affair in the Jewish community. Another may be that Congress was moving ahead with extra aid anyway.

The House Foreign Affairs Committee approved a $14.5 billion foreign-aid package last month which included the extra $1.5 billion for Israel. Already Israel was to receive $3 billion in arms and cash grants under the bill, which is for the fiscal year beginning next Oct. 1.

The full House may act on the measure this week.

A committee aide said Israel has given some assurances it will make economic reforms: ``There are benchmarks to ensure implementation of a program over time. The Israelis know better than we do what they have to do.''

One forecast is that the bill will sail through the entire Congress by the end of this month.

David Said, executive director of the National Association of Arab Americans, accuses the Israel lobby of doing ``an end run'' on the administration in Congress, ``removing the ability of Secretary Shultz to require that Israel gets its economic house in order.''

But Israel's economy minister, Gad Yaakob, has compared the Shultz demands for economic reform to ``some teacher giving us marks -- good or bad.'' In an interview with the Associated Press, he said the United States ``would make a great mistake if it presented demands and did not content itself with advice, since that way it would not strengthen Israel and would cast doubt on [Israel's] sovereignty.''

A State Department source indicates Israel's government may be more bold about reforms after elections in the Histadrut, the nation's important labor confederation, early this month.

Mr. Stauffer contends that Israel must decrease its ``chronic dependence on foreign aid.'' This, he says, ``reflects the chronic inability of its governments to live within their means -- consumption and expenditure have risen steadily since independence, always outpacing earned income.''

``This consumption,'' he added in recent testimony to a Senate subcommittee, ``has been financed by growing demands for aid or, most recently, by a daring -- if not dangerous -- accumulation of short-term foreign debt via the commercial banking system.''

Mr. Stauffer is not the favorite economist of the Israelis or their backers in the US. They consider him pro-Arab and anti-Israel. His testimony will not make him any more popular.

One of Stauffer's main points is that Israel has a real per capita ``income'' that is among the dozen highest in the world (excluding the oil-exporting ``mini-states'') -- higher, for instance, than that of Ireland or Italy, and close to that of West Germany and Japan. Stauffer bases this claim on a 1982 study by the European Community and the Bank of Israel's measure of income. He puts Israel's per capita income at more than $9,000, equivalent to about 70 percent of the figure for the US.

A study by University of Pennsylvania economists, however, calculates that the per capita purchasing power of Israelis is about 52 percent of Americans. And Uri Oren, press consul of Israel in New York, says the average employee in Israel makes only $5,500 -- or some 45 percent of the US level.

Israeli Prime Minister Shimon Peres and Economy Minister Yaakobi have said Israel must apply austerity measures gradually to avoid a rapid growth in unemployment. They fear that high unemployment could lead to large-scale emigration. That happened in an earlier recession in Israel.

As evidence of Israel's high income, Stauffer notes that about 1 in 5 Israelis travels abroad each year -- ``spending `scarce' foreign exchange, in spite of the ostensible austerity measures and controls.'' He estimates total travel outlays of Israelis as more than $1 billion -- two-thirds of the extra aid they have requested.

Stauffer argues that Israel's per capita output is three to 20 times as high as that of other countries getting US foreign aid. Only Jordan comes anywhere near, with about one-third of the standard of living of Israel. The sacrifices Israel would need to make ``to pay its own way'' would still permit a standard of living much higher than other aid recipients, Stauffer asserts.

He also contends that Israel's effective ``real'' tax rates are not high. Ostensibly, the tax rate is some 50 percent. But if one deducts the enormous amounts of money redistributed back to the public by an elaborate system of welfare payments and subsidies, it really lies between 20 and 25 percent, Stauffer holds. That would be modestly above the ``real'' rate in the US if ``transfer payments'' were similarly deducted.

Mr. Oren claims Israel's taxes are ``among the highest in the world,'' reaching 60 percent of an income of $1,300 per month.

Surging weapons exports are increasingly covering the foreign-exchange costs of arms imports, Stauffer says. These exports have been around $1 billion in recent years, he says, citing a London publication, Defence Attach'e.

Moreover, debt service costs for Israel are ``modest'' in relation to foreign-exchange receipts, Stauffer says, putting the figure at 20 percent. This, he explains, is partly because Israel owns considerable income-producing assets abroad which earn foreign exchange. These amounted to $12 billion at the end of 1983. Some $6.7 billion was held by commercial banks; $4 billion by the central bank. In pleas to Congress for aid, Israel does not take account of those foreign earnings, Stauffer charges.

New aid to Israel comes in the form of grants rather than loans. Since this is paid in a lump sum at the start of the fiscal year, Israel can invest some of this money at market rates and earn further tens of millions of dollars.

Israel also makes about $1 billion a year in foreign exchange from its occupied territories, says Stauffer. Many expatriate Palestinians send money to their relatives on the West Bank and Gaza. Since Israel limits imports to these areas, it acquires the foreign exchange.

That figure, Oren holds, is way too high.

He also says Israel has the highest debt service costs per capita of any nation. Some one-third of the budget goes to service the nation's $23 billion in external debt and $26 billion to $27 billion in internal government debt, he says, and that debt is primarily due to high defense expenditures.

Again, Stauffer and Oren look at things differently. Stauffer considers the ratio of debt to foreign-exchange receipts more relevant than debt per capita. Nor does he consider internal debt relevant to the foreign-aid issue.

In conclusion, Stauffer holds that it is not weapons acquisition costs or net debt service costs that impose inordinately high costs on Israel compared with other debtor states. Rather, persistent international payments deficits are more closely tied to steady increases in consumption.

Mr. Said, hardly neutral in the Arab-Israel dispute, says that because Israel figures it needs a high living standard to keep its people there, economic reform is politically impossible without ``the strongest kind of outside pressure.'' He suspects Israel will pour the new aid into consumption and be back next year for more.

A State Department official agrees on the prospect of Israel's coming back for more -- unless it carries out real reform.