ABSTRACT
The most important policy relevant to liberalization is exchange rate determination. The availability of unilateral and long-term capital transfers, as well as substantial foreign exchange reserves, have prevented balance of payments considerations from leading to reversals in trade liberalization. In Israel, devaluation has been an essential part of the early stages of liberalization, when the price mechanism was substituted for quantitative restrictions. When Israel obtained its independence in 1948, it was the culmination of a long period of Zionist endeavor to re-establish a Jewish homeland in the historic area of ancient Israel. During the thirty years of the British Mandate for Palestine, a viable, fairly modern economy was developed in the Jewish sector, alongside but almost entirely unconnected to the less developed Arab sector. In addition to the problem of growth, the economy was plagued by three major problems: inflation, unemployment, and balance of payments deficits.
