Menachem Begin has left his successor more than an army mired in southern Lebanon and a virtually unbreakable grip on the occupied West Bank. He has left him a domestic mess, the result of a national economic joy ride that began in the pre-election-day politics of 1981 and continued even through the costly war in Lebanon.
Getting Israel out of its economic straits will almost certainly involve requests for further infusions of American aid.
Economics was never the strong suit of the outgoing prime minister. He left these matters largely to others, but like any political leader he was sensitive to the economy's heavy impact at election time. The economic problems under the previous Labor government contributed to Begin's election in 1977; during the campaign he and his party had promised to set things straight. For what turned out to be his last hurrah -- the parliamentary election of 1981 -- his advisers' policies of keeping the economy pumped up also served him well.
But in the same month that Begin announced his resignation, the bills began coming due. Despite denials that were dismissed by the street-smart public, the country's currency, the shekel, was devalued by 7.5 percent and the government plunged into a painful round of Cabinet negotiations aimed at cutting the budget and raising revenues by about $1 billion.
The prime minister's resignation was not tied directly to the economic troubles, but the predictable internal bickering that accompanied the budget negotiations undoubtedly contributed to his feeling that, as he told the Cabinet, "I cannot continue."
The resignation has frozen attempts to get control of the domestic economy. The maneuvering to succeed Begin is also likely to exacerbate the situation since the various factions in the government coalition can be expected to extract a price for their continued loyalty.
About all that is certain is that when the maneuvering is over, one of the first acts of heir-apparent Yitzhak Shamir -- or whoever succeeds Begin -- will be to make a trip to Washington where the level and terms of U.S. aid to Israel will be discussed.
That process got underway even before Begin's resignation with the visit to Washington earlier this summer of Foreign Minister Shamir and Defense Minister Moshe Arens, who asked President Reagan to convert some of the military loans the United States provides to Israel into outright grants.
As a result, the administration and Congress are likely to be confronted more directly than in the past with some difficult questions concerning the U.S.-Israel relationship. How much aid to Israel is enough? What are the risks involved in continuing the upward spiral in the aid level? And particularly with a new government taking over in Israel, what should the United States expect in return for its assistance?
The immediate cause for the devaluation was Israel's ballooning balance-of-payments deficit -- projected at close to $5 billion this year -- and an alarming rise in the country's total indebtedness, which at almost $21 billion is the highest per capita in the world. The Israeli public, knowing it could not go on like this forever, had begun flocking to the banks to buy dollars in anticipation of the inevitable devaluation.
The government, said one economist, was forced to act "by the people in the street."
Analysts both within the government and without agree that the Israeli economy is not on the verge of collapse, and that despite its heavy debt burden, the country is not heading into the desperate straits of a Brazil or Mexico. Israel can still pay its debts and would be helped substantially by worldwide economic recovery, particularly in Europe, its principal export market.
"It is a bad spot, but it is not irreparable," said Yoram Ben Porath, professor of economics at Hebrew University and director of the Falk Institute for Economic Research in Israel. According to a recent report of the General Accounting Office, the United States has provided Israel with more than $25 billion in aid since its creation as an independent state in 1948. Today, Israel receives more U.S. foreign aid ($2.5 billion in economic and military grants and loans) under more generous terms than any other country in the world. Israel's total indebtedness to the U.S. government is around $8 billion, more than one-third of its total external debt.
Yet the very generosity of the U.S. aid program has come to haunt the Israelis even as it has allowed them to embark on costly new weapons programs that many pose major problems for them and their creditors by the end of the century.
Following the heavy losses in equipment Israel suffered in the 1973 war, the United States poured military aid into the country. Between 1974 and 1982, according to the GAO report, Israel received almost $13.5 billion in U.S. military assistance.
Of this amount, about $8 billion was in loans which, since the mid-1970s, have contained a special provision allowing Israel a 10- year "grace period" in which it is required to pay back only the interest on the debt. The bulk of the $8 billion loaned to Israel since the 1973 war was in the form of 30-year loans with this grace period provision.
The grace period on the post-1973 war loans will soon begin to expire, adding to Israel's growing debt-service problem. This year the country will pay back more than $1 billion to the United States alone, more than it will receive in U.S. economic grants. There is every indication that the trend will only get worse, leading the GAO to predict requests for more U.S. aid just to ease the debt service burden.
This has not, however, deterred the Israeli government from plunging ahead with two enormously expensive weapons programs. One is to build a new-generation Israeli fighter, the Lavi, which the GAO estimates will cost $15.5 million per aircraft, more than the cost of the front-line, American-built F-16 fighter-bomber. And in the midst of this summer's economic tribulations, the government also approved the largest single weapons deal in Israel's history: $2.7 billion for the purchase of 75 more F-16s, doubling its air force's F-16 strength.
U.S. military grants and loans -- the latter having the usual 10-year grace period for the leaders of the 1990s to worry about -- will finance most of the F-16 purchases. In the case of the Lavi, designed as a home-grown product, the Israelis are seeking an exemption from the normal U.S. military assistance rules that would allow them to use American aid money to develop an aircraft they later hope to sell in the world market.
The Israelis argue that they have no choice, and that the country's growing debt burden and its importance to the United States are compelling reasons for an increase in military grants and a reduction in the loans Israel must repay. They would also, obviously, not resist an increase in the overall level of aid.
"I'm not talking about the long run, but just for a few years," said Israel Igra, an adviser to Bank of Israel governor Moshe Mandelbaum. Igra said U.S. aid to Israel should be compared to the cost of maintaining American troops in Europe, suggesting it is a bargain.
But history suggests that when it comes to American aid to Israel, what goes up stays up and keeps going up. Moreover, besides the heavy defense burden, there is another aspect to Israel's economic troubles, one not usually highlighted before congressional appropriations committees.
Its roots go back to 1981 when the Begin government was at a low point in public opinion polls. The finance minister, Yigal Hurwitz, had pursued an austere economic program, seeking to tackle the chronic balance- of-payments problem and lead Israel toward economic independence.
Under pressure in the Cabinet, Hurwitz resigned and was replaced by Yoram Aridor, or another fiscal conservative who implemented decidedly unconservative but politically popular changes. Aridor increased the subsidies on basic commodities, slashed taxes on consumer items and poured money into the economy before the 1981 election. Economist Ben Porath, who has made a study of such election year economic cycles in Israel, called it "the most glorious I have ever seen."
Aridor's economic policies worked their political magic with the narrow reelection of the Begin government. But the consumer spending spree he set off continued unabated. Last year Aridor attempted to revert to a more austere approach, but it was too little and didn't take.
In addition, last September, Aridor declared that inflation -- currently about 150 percent a year but cushioned by an automatic wage-indexing system -- was the country's major economic problem and must be conquered. Under a new policy, the steady devaluation of the shekel was slowed and other steps taken, all aimed at curbing the public's inflationary expectations and reducing the annual inflation rate to a reasonable, by Israeli standards, 80 percent.
The policy didn't dent inflation, but by artifically proping up the value of the shekel it made Israeli exports more expensive and imports cheaper, exacerbating the balance-of- payments problem. The consumer spending binge continued, as evidenced by the flood of imported automobiles coming into the country, and the rise in the number of Israelis leaving it to travel abroad -- an estimated 750,000 this year.
According to one story that has made the rounds here, a Japanese manufacturer of expensive video equipment sent an investigator to Israel to check on his enormously successful local distributor. The manufacturer was said not to believe so much video equipment could be sold in such a small country and suspected the Israeli dealer of reexporting the items to other countries.
The result of these policies was the balance-of-payments hemorrhage, which was all the more remarkable in that it coincided with a decline in Israel's always-burdensome level of defense imports. According to Bank of Israel figures, during 1982, while Israel's overall external debt was growing by more than $2.5 billion, defense imports declined by almost 30 percent, from $2.2 billion to $1.5 billion. The cost of importing fuel, another heavy burden to Israel, also declined, by 6 percent.
But total private consumption rose by 7.5 percent and there was an almost 20 percent increase in the purchase of durable consumer goods, many of them imports. Israel's gross national product and level of productivity remained largely stagnant, but Israelis' standard of living rose sharply for the second year in a row.
This did not mean that Israelis began living in the style of the American upper-middle class. The country's standard of living, Igra noted, is about at the level of Greece and Spain, two of the poorest countries of Western Europe. There is poverty in Israel, and even much of the middle class lives in small, cramped apartments far short of the U.S. housing norm.
Israelis are also among the most heavily taxed people in the world, although the roughly 50 percent tax rate is deceptive because much of this is returned to the public in the form of welfare benefits and government subsidies. This is, after all, a modern welfare state, created by its Zionist and socialist founders in the image of the European models they knew so well.
But Aridor's policies clearly fed a sense of constantly rising expectations. The raging inflation and the government's well-known abhorrence of tough economic measures also contributed to a certain public cynicism regarding the economy, as symbolized by the zany speculation at the Tel Aviv stock exchange and the national institution of the bank overdraft, an expensive but universally accepted form of consumer credit.
The same trends -- lower defense imports but a rising balance-of-payments deficit -- continued this year until they forced the abrupt devaluation on Aug. 10. And in the meantime, Ben Porath noted, the Begin government imposed two additional burdens on the economy: the invasion of Lebanon -- which was supposed to be a "cheap war" but with the army still mired there has turned out otherwise -- and the accelerated program to expand Jewish settlements in the occupied West Bank.
"Can a country adopt these burdens without cutting something else?" Ben Porath asked. "That is where we stand now -- late in the game and facing the reality that the economy cannot do all these things at the same time."
Even if Begin's successor is not, as anticipated, Foreign Minister Shamir, that successor is likely to come from among his political allies, another member of a government that during its six years in power doubled Israel's external debt. It is not a record that inspires confidence that a new Israeli government will long forgo the political benefits that come from a constantly rising standard of living financed by borrowing. Another election in Israel is at most two years away and may be moved forward as a result of the Begin resignation.
Nor is there any evidence to suggest that economic troubles will cause the government to defer its ideological commitment to absorb the West Bank as rapidly as possible. Among all the tax and fee increases and budget cuts tentatively approved by the Cabinet, there is nothing that will significantly reduce public expenditures on the settlement program, the real cost of which is unknown (and deliberately unknowable) but substantial.
The same is true in the defense sphere, where Arens and others waged a fierce battle against major budget cuts. Israel's military planners are convinced that both the Lavi and the 75 new F-16s are vital to the nation's security, but neither they nor the civilians who run the economy proposed additional domestic steps to help finance their cost.
The Reagan administration has publicly called for a halt to the settlement program and for a year has been working to arrange an Israeli withdrawal from Lebanon. Yet there is no reason to believe that whatever policy differences exist on these and other issues there will be the slightest impact on the level and terms of U.S. aid to Israel.
Under the circumstances, it is not surprising that a certain cynicism has developed in the Israeli view of the economy. They have fought a costly war and pursued policies opposed by their principal financial benefactor, all the while enjoying a rising standard of living. There may be some rough days ahead, but their own government has never demonstrated a tolerance for sustained austerity and the United States, the best guarantor of credit and source of revenue in the world, still stands squarely behind them.