NEWS ANALYSIS : Israeli Economic Woes Cast Doubt on Wisdom of Underwriting Loans : Settlements: If funds were put to poor use, the program could cost U.S. taxpayers hundreds of millions, experts say.

JERUSALEM —  For the past month, the debate over Israel’s request for new foreign help to absorb tens of thousands of Soviet immigrants focused chiefly on the heated political issues: whether Israel will get the money and still continue to colonize the West Bank and Gaza Strip, or whether President Bush, leaning on vast financial leverage, can stop the settlement campaign.

Hovering in the background, however, are basic questions of economics. A blight of helter-skelter projects meant to house and employ Soviet immigrants during the past two years is giving rise to doubts about the wisdom of granting new aid: Will the money be used to back sound policies of long-term growth or merely to bail out an undisciplined administration and keep an ailing economy afloat?

Israel wants Washington to underwrite $10 billion in loans, in effect picking up fees and setting aside funds that will make it cheap for Israel to borrow the vast amount of money on the international market.

Put to poor use, the program could cost U.S. taxpayers hundreds of millions of dollars down the road, experts say. Past Israeli economic problems have induced Washington to make grants out of aid that began as loans, with Americans picking up the bill.

Currently, Israel’s landscape is dotted with new projects to integrate tens of thousands of Soviet Jews who have come here. Tens of thousands more immigrants are expected in the next three years. Signs of inflation and growing unemployment are also cause for worry about the state of Israel’s economy.

In the immigration absorption program, as it is called here, folly is sometimes the most visible result. Thousands of mobile homes in Beersheba, the main city in Israel’s arid south, stand empty because immigrants don’t want to move into the distant quarters for fear they will be stuck there.

Nearby, in the remote and underdeveloped outpost of Arad, new prefabricated houses are awaiting unwilling immigrants. Local officials fear that immigrants who come may not stay. “There are just no jobs for them,” said Town Hall spokesman Ranaan Peltz.

On television recently, government ministers helped celebrate the inauguration of a new hotel in the West Bank settlement of Ariel, and the mayor announced construction of 1,500 housing units. On hills all around, right-wing settlements are dotted with empty trailers, and square, quick-built cottages are waiting for Israelis to be squeezed out of established cities by crowding and high prices.

By way of contrast, the mayor of Haifa, a favored destination of Soviet immigrants, complained that no housing is being built, and he has refused to provide water and electricity hookups for an emergency shipment of mobile homes, arguing that they would create an instant slum.

About half of the new immigrants have settled in Tel Aviv and its suburbs, but only a fifth of Israel’s new housing is under construction there.

Behind the imbalances, economic and political observers say, is the strict ideological bent of the government of Prime Minister Yitzhak Shamir and of his housing minister, Ariel Sharon. When the government began its drive to house the immigrants, plans were laid down to ensure Jewish demographic dominance of the “whole land of Israel,” as the right-wing lexicon puts it. Never mind that the immigrants preferred Tel Aviv and Haifa to remote regions.

“Sharon’s construction drive . . . has become a plaything of his megalomania and his vision of eternal war against the Arabs,” wrote economics columnist Ariel Caspi in the Jerusalem Report magazine.

“He decided for the immigrants where they should live,” Caspi went on. “Sharon decided to send people from Leningrad and Moscow to the far ends of the country. Most of them want to live in the center of the country; the billions invested in building elsewhere will go down the tube.”

Aryeh Gurel, the mayor of Haifa, complained flatly that “Mr. Sharon has not yet started to build any single house in Haifa. He didn’t start a single one.”

The unwillingness of immigrants to follow Sharon’s blueprint has resulted in soaring rents and house prices, which in turn feed the highest rate of inflation since the chaotic early 1980s. For the last two months, prices rose at an annual rate of 4%, double the rate for the previous 12 months.

At the same time, the lack of an employment plan for the new arrivals has left jobless rates at above 10%. The economy, growing at 6% a year, is not keeping pace with the increase in population; economists had been forecasting a 10% boost.

Beyond the particular goals of Shamir and Sharon lies the problem of economic reform, economists in and out of government say. While governments ranging from Mongolia to Poland are moving toward free-market economies, Israel is taking only reluctant steps to liberalize.

High tariffs continue to block many imports, investment efforts get wrapped in a tangle of red tape, a monoply trade union movement mandates wages across the labor market and the government continues to own many industries and subsidize others, keeping even the most inefficient ones afloat.

Some economists blame two decades of American aid, always at the ready, for having postponed a day of reckoning. Moshe Syrquin, a professor of economics at Bar-Ilan University, said increased U.S. aid has begun to “do more harm than good” for Israel’s economy.

“Massive aid may well be needed for immigration,” he concluded in an interview. “But it could also permit continued inefficiencies and delayed reforms. Then more aid will be needed.”

In Washington, a report by the Export-Import Bank said that more borrowing by Israel means a “higher probability” of default down the road, even if new credits and gifts are figured in.

“The expected buildup of external debts gives rise to concerns about Israel’s ability to meet its future debt-service obligations on a timely basis,” said the report.

“Israel has shown a pattern of large fiscal and external deficits to finance high defense expenditures, an extensive social welfare system and a relatively high standard of living,” the analysis continued.

“The experience of the past two decades indicates the government has put off free-market reforms and has been willing to adopt emergency economic measures only when confronted with a crisis.”

Government officials argue that such a pattern will not repeat itself, as long as reform goes into effect right away. “There is no better time for reform,” said Jacob Frenkel, the new governor of the Bank of Israel, the central bank.

Frenkel described his goal as ensuring progress on three economic fronts: control of inflation, liberalizing trade and accelerated privatization.

The government should avoid make-work projects to increase employment, said Frenkel, who before taking the bank job was chief economist for the International Monetary Fund. He warned that political pressures--elections are scheduled for next year--could tempt politicians to take shortcuts that in the long run will prove costly.

Inflation is higher than he would like, Frenkel admitted, but it is not out of control. “I view inflation seriously and intend to stop it before there are problems.”

Growth is lagging, Frenkel advised, and the answer is in “dramatic steps to privatize.” The government provides jobs for 39% of the labor force and has “dragged its feet” in selling them off, he added. Frenkel predicted that the Shamir government will take major steps to sell off state-owned enterprises in the coming months.

The aggressive spending by Housing Minister Sharon has caught Frenkel’s attention, but he believes that it has been remedied by a sharp slice from the housing budget. He cautioned however, that closer oversight is needed to ensure that neither Sharon nor any other minister overspends and presents the government with a fait accompli.

Frenkel emphasized the importance of the loan guarantees not only for getting $10 billion at low rates but also in giving international bankers and other governments confidence to grant Israel another $15 billion it may need to borrow in order to finally settle the Soviet Jews.

Frenkel shied away from the political question of whether a settlement freeze should be imposed in order to get the loan guarantees.

He also dismisses defiant comments by Israeli politicians to the effect that Israel itself can finance projects for absorption without outside help.

“This is nonsense,” he said.