Can Jake Frenkel Work Miracles In Jerusalem?

Those who can, do; those who can't, teach. That may be true for some, but not for Jacob A. Frenkel. A renowned University of Chicago-trained free-market economist and former research chief for the International Monetary Fund, Frenkel, 49, has authored 15 books and more than 200 articles in his 23-year academic career. But since becoming Governor of the Bank of Israel last year, Frenkel has been making policy, not just analyzing it. "It's very different," he says. "You can see the immediate impact of your decisions."

No kidding. In the warming of relations following Israel's recent change of government, George Bush and Israel's new Prime Minister, Yitzhak Rabin, are meeting in Kennebunkport, Me., Aug. 10-11 to close a deal for about $10 billion in U.S. loan guarantees for the Jewish state. For Frenkel, the proposed guarantee, allowing Israel to sell as much as $20 billion in bonds at favorable rates, is the keystone of his plan to radically restructure the Israeli economy. "It's a once-in-a-lifetime opportunity," says Frenkel, an Israeli native and one of the most visible backers of the loan scheme.

SAYING NO. Behind-the-scenes bargaining by Frenkel--a consummate diplomat whom his friends call Jake--helped set the stage for the planned Bush-Rabin deal. But the plan is hardly the only thing on Frenkel's agenda (table). Burdened by money-losing state industries and double-digit inflation, Israel is failing to generate enough economic growth to cope with the hundreds of thousands of new immigrants from the former Soviet Union. "Frenkel faces the hardest challenge anyone in Israel can face," asserts Rudiger Dornbusch, the Massachusetts Institute of Technology economist and a former Chicago classmate of Frenkel's. "He has to say 'no.' "

The soft-spoken central banker has had to do that again and again in the year since former Prime Minister Yitzhak Shamir persuaded Frenkel to return home. Within months of his arrival, Frenkel was faced with a speculators' attack on the shekel. He quickly instituted an innovative plan that gradually devalues the currency along predetermined lines and holds the government to tough anti-inflation guidelines. The plan is credited with cooling inflation to around 10%, from 16% last year. "He's tough," says Dornbusch. "It was a textbook case." Frenkel now is warning Rabin's Labor-led government against a quick-fix devaluation to spur exports. "The game plan," he says, "should be a multiyear program. There should be no compromises, either in the budget or in carrying out a massive exit of government from the marketplace."

Frenkel, who supported Rabin's plan to freeze construction of West Bank settlements even before his election, appears to be making some headway in that area. The Labor Prime Minister has already moved to speed the privatization of government-controlled banks and state enterprises, including El Al Israel Airlines and ZIM Israel Navigation Co., the shipping line. Such free-market recipes are straight from the neo-Gothic halls of Chicago's economics department and from the IMF, where Frenkel headed research from 1987 until last year. That "was basically the dream job for any economist," he says. In fact, friends wondered why Frenkel gave up prestige and a tax-free salary of more than $150,000 a year for the $30,000-a-year job of guiding Israel's economy. Replies Frenkel: "I saw an extraordinary national challenge in the context of the new immigrants."

FAMILY TIES. Frenkel returned to Israel with an array of credentials and highly placed friends. With undergraduate degrees in economics and political science from the Hebrew University of Jerusalem, he journeyed in 1967 to Chicago to study under luminaries such as Milton Friedman and Harry G. Johnson. In 1973, Frenkel began teaching economics at Chicago, specializing in exchange rates and inflation. His wife, Niza, also received a Chicago PhD, in biology, before pausing to give birth to daughters Orli and Tahli. But in 1987, former IMF Managing Director Jacques de la Rosiere--now head of the Bank of France--lured Frenkel away. "He took a research department that had languished and put it very firmly back on the map," says Stanley Fischer, a Chicago colleague and former World Bank chief economist.

Frenkel appeared comfortable enough in Washington to relinquish his endowed Chicago professorship. In fact, few colleagues thought he would say yes when Shamir beckoned. "I pushed him very hard to take it," says Fischer, now an MIT professor, "but most of his friends--myself included--didn't expect him to." While Frenkel had kept his ties to Israel, visiting every year, his family had grown up in the U.S. And while doing research at her National Institutes of Health laboratory, Niza Frenkel had just discovered a new herpes virus.

Frenkel's biggest regret now is that his job provides almost no time for scholarly work. Six days a week, a chauffeur-driven Volvo 740 picks him up at his modest apartment in northern Tel Aviv well before 7 a.m. for the one-hour drive to Jerusalem. He rarely returns home before 10 p.m. But to Frenkel, the long hours are worth it. Even if things don't come off exactly as he hopes, Frenkel will certainly have a riveting tale to tell whenever he decides to step to the front of the classroom again.

       -- Reduce inflation from last year's 16% to the 3.5% level of Israel's trading 
       -- Open protected financial markets to foreign competition and allow citizens 
      to open bank accounts abroad
       -- Get state to slash spending on housing and wages and boost outlays for 
      transportation, telecommunications, education
      DATA: BW
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