The Role of Economic Advisers in Israel’s Economic Policy: Crises, Reform and Stabilization

180 Pages·2017·2.16 MB·English

by  Daniel Schiffman

Daniel Schiff man · Warren Young
Yaron Zelekha
The Role of
Economic
Advisers in Israel’s
Economic Policy
Crises, Reform and Stabilization
’
The Role of Economic Advisers in Israel s
Economic Policy
Daniel Schiffman (cid:129) Warren Young (cid:129)
Yaron Zelekha
The Role of Economic
’
Advisers in Israel s
Economic Policy
Crises, Reform and Stabilization
DanielSchiffman WarrenYoung
DepartmentofEconomicsand DepartmentofEconomics
BusinessAdministration BarIlanUniversity
ArielUniversity RamatGan,Israel
Ariel,Israel
YaronZelekha
FacultyofBusinessAdministration
OnoAcademicCollege
KiryatOno,Israel
ISBN978-3-319-60680-4 ISBN978-3-319-60682-8 (eBook)
DOI10.1007/978-3-319-60682-8
LibraryofCongressControlNumber:2017943317
©SpringerInternationalPublishingAG2017
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To my wife Bruria and our sons Ariel and
Itiel
Daniel Schiffman
To my wife Sara, our daughters Shani and
Naty and their families
Warren Young
TomywifeOrlyandourchildrenNoa,Omer,
and Yoav
Yaron Zelekha
Acknowledgments
Wethankourcolleagues,students,departmentchairs,deans,andadministratorsfor
creatingandmaintainingasupportiveenvironmentforourresearchendeavors.
DanielSchiffmanandYaronZelekhathanktheAharonMeirCenterforBanking
atBarIlanUniversityforfinancialsupport.
Wealsowishtothankthefollowingindividualsfortheirassistanceinobtaining
archivalmaterials:Prof.RussellBoyeroftheUniversityofWesternOntarioandthe
HooverInstitution,StanfordUniversity;PatriciaMcGuireandTracyWilkinsonof
theKing’sCollegeArchiveCentre,CambridgeUniversity;WillHansenandMegan
O’Connell of the David M. Rubenstein Rare Book and Manuscript Library, Duke
University; Rami Shtivi and Malki Pomeranc of the Begin Heritage Center
Archives; Carmit Cohen and Alice Baron of Israel State Archives; and Marina
MichaelioftheIsraelBroadcastingAuthorityFilmArchive.
Chapter 4 was originally published as “Richard Kahn and Israeli Economic
Policy, 1957and1962,”HistoryofEconomicThoughtandPolicy1-2014,31–73.
WethanktheeditorsofHistoryofEconomicThoughtandPolicyforpermissionto
reproducethisarticle,whichhasbeenrevisedforinclusioninthisvolume.
DanielSchiffmanthankstheRoyalEconomicSocietyforagrantthatfacilitated
hisresearchintheKahnpapers attheKing’sCollege ArchiveCentre, Cambridge
University.
Daniel Schiffman thanks Prof. David Papineau for granting him permission to
quotefromtheKahnPapersandansweringhisinquiriesregardingRichardKahn’s
family,andRabbiYehudaFishmanforprovidingthetextoftheeulogydeliveredat
Kahn’sfuneral.
WarrenYoungthanksthelateAllanMeltzerandMarvinGoodfriendofCarne-
gieMellonUniversityfortheirongoingsupportofthisproject.
Finally,we thankJohannesGlaeser andSivachandranRavanan ofSpringer for
their professionalism and dedication. It was truly a pleasuretoworkwith them to
bringthisprojecttofruition.
vii
Contents
1 Introduction:TheImpactofEconomicAdvisersinIsrael. . . . . . . . 1
1.1 Theory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 2
1.2 PossibleScenariosandHypotheses. . . . . . . . . . . . . . . . . . . . . . . 4
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2 EconomicCrisisandPolicyPrescriptions:TheKalecki
andMikesellReports,1950–1952. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.1 Kalecki’s“Report”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.2 Kalecki’s“Report”andthe“NewEconomicPolicy”. . . . . . . . . . 9
2.3 Austerity,Crises,Policies,andtheMikesell“Report”. . . . . . . . . 11
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3 AdviserandActivist:LernerontheIsraeliEconomy,1953
andAfterward. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.2 TheCentralBankandItsIndependence,theBalanceofTrade
andExports,andEconomicIndependence. . . . . . . . . . . . . . . . . . 21
3.2.1 CentralBankIndependence. . . . . . . . . . . . . . . . . . . . . . . 21
3.2.2 InterestRate,Credit,andLoanPolicy,1948–1957. . . . . . 24
3.2.3 BalanceofTradeandExports. . . . . . . . . . . . . . . . . . . . . 26
3.2.4 EconomicIndependence. . . . . . . . . . . . . . . . . . . . . . . . . 27
3.3 Prices,Wages,Inflation,andtheCLAinIsrael. . . . . . . . . . . . . . 28
3.3.1 Prices,Wages,Inflation,andCLA. . . . . . . . . . . . . . . . . . 28
3.3.2 LernerontheWageControversyandCLA,1955–1956
andAfterward. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
3.4 Lerner’sViewsinRetrospect:Prescience,InstitutionalFunctions
andFailures,andtheContextforHisCritiques. . . . . . . . . . . . . . 39
Appendix. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Lerner’sFirstOpenLetter:8January1956. . . . . . . . . . . . . . . . . 41
Lerner’sSecondOpenLetter:August1956. . . . . . . . . . . . . . . . . 43
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
ix
x Contents
4 Ex-officioAdviser:KahninIsrael,1957and1962. . . . . . . . . . . . . . 51
4.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
4.2 ASynopsisofKahn’sPolicyViews,1945–1962. . . . . . . . . . . . . 52
4.3 Kahn’sVisitstoIsrael:MotivationandDocumentation. . . . . . . . 56
4.4 Israel’sEconomyin1957:APrimer. . . . . . . . . . . . . . . . . . . . . . 58
4.5 Kahn’sViewsontheIsraeliEconomy,1957. . . . . . . . . . . . . . . . 62
4.6 Kahn’sViewsontheIsraeliEconomy,1962. . . . . . . . . . . . . . . . 68
4.7 Conclusion. . .. . . . . . . . . . . .. . . . . . . . . . . .. . . . . . . . . . . .. . 75
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
5 PoliticizationofPolicyPrescriptions:FriedmanandIsraeli
EconomicReform,1977. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
5.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
5.2 TheIsraeliEconomyinMid-1977:APrimer. . . . . . . . . . . . . . . . 83
5.3 IsraelTurnstoFriedman(May1977). . . . . . . . . . . . . . . . . . . . . 88
5.4 TheUnemploymentControversy(May–June1977). . . . . . . . . . . 90
5.5 Friedman’sVisittoIsrael(July1977). . . . . . . . . . . . . . . . . . . . . 94
5.6 “TheEconomicRevolution”of28October1977. . . . . . . . . . . . . 100
5.7 TheIMF’sRoleinthe“EconomicRevolution”. . . . . . . . . . . . . . 104
5.8 Conclusion:TheFailureofthe1977EconomicRevolution. . . . . . 108
5.9 Afterword-Friedman’sRetrospectives. . . . . . . . . . . . . . . . . . . . . 114
Appendix:ChronologyofMajorEvents,1977–1979. . . . . . . . . . . . . . 116
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
6 EconomicAnalysis,Advice,andStabilization,1972–1992:The
Stein-FischerNexus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
6.1 EconomicAnalysis,Advice,andPolicy:SteinandFischer. . . . . . 125
6.2 Politico-HistoricSetting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
6.3 From“DoubleDigit”to“Hyperinflation”:EconomicCrises
andManagement,1970–1984. . . . . . . . . . . . . . . . . . . . . . . . . . . 127
6.4 Stein,Fischer,andtheGrowingEconomicCrisisinIsrael,
1982–1985. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
6.5 RetrospectivesontheStabilizationProgram,ItsOutcome,andUS
LoanGuaranteesforIsrael,1986–1993. . . . . . . . . . . . . . . . . . . . 137
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
7 StabilizationviaGovernmentAccountingReform:The2003Program
andPoliticizationofRecovery. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
7.1 TheCrisisof2000–2003. . . . . .. . . . . . . . . . . .. . . . . . . . . . . .. 146
7.2 Pre-assessmentofthe2003EconomicRecoveryProgramby
ForeignExpertsandthe2003LoanGuarantees. . . . . . . . . . . . . . 147
7.2.1 TheoreticalBackgroundtothe2003RecoveryProgram. . . 148
7.3 CritiquesofEconomicPolicy,Circa2002. . . . . . . . . . . . . . . . . . 151
Contents xi
7.3.1 The2003EconomicRecoveryProgramandtheRole
ofAccountingReform. . . . . . . . . . . . . . . . . . . . . . . . . . . 153
7.3.2 TheRecoveryandSeedsfortheNextCrisis. . . . . . . . . . . 159
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161
8 EconomicAdvisersandIsrael’sEconomicPolicy:SomeInterim
Conclusions. . . . . . . . . .. . . . . . . . . . . . . . .. . . . . . . . . . . . . . . .. . . 163
Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167
Chapter 1
Introduction: The Impact of Economic
Advisers in Israel
Irealizehowunusualitisforoutsideadviserstobegivenasactivearoleintheformulation
ofpolicyasweeventuallyhad.(Fischer1995,3)
Economicresearchontheroleofeconomicadvisers,whilenowwidespread,has
notbeenfullyabletoresolvewhyandwhenadviserscanaffecteconomicpolicies
in the countries they advise. While some may succeed completely or partially in
their policy advice, others may fail, again partially or completely. Our focus here
encompassesthesepossiblescenariosinaspecificnationalcontext,thatis,foreign
economicadvisersinIsrael.
Thepresentvolumeutilizestheuniquehistoricalfactthatwell-knownacadem-
ically based international advisers took part—albeit with varying degrees of effi-
cacy—inthedevelopmentofIsrael’seconomicpoliciesovertheperiod1948–2007.
The involvement of international (and local) advisers can be, inter alia, explained
by the fact that all of Israel’s prime ministers and ministers of finance during this
period lacked formal training in economics and thus also turned to independent
advice, aside from the advice of their own civil servants. Moreover, Israel faced
tremendouseconomicchallengesthatattractedhigh-levelinternationaladvisers.
Theaimofthisbookistosurveytherecommendationsofinternational(andin
specificcaseslocal)advisersthattookpartinthedevelopmentofIsrael’seconomic
policyfrom1948to2007andanalyzetheirrecommendationsvis-(cid:1)a-vis:
1. Policymakers’own(includingtheirpoliticalparties’)interests
2. Actualpoliciesthatwereimplemented
It should be stressed that we will not be dealing here with the role of interna-
tional organizations (such as The World Bank and IMF), except insofar as their
policyadvocacyinteractedwiththatofforeignadvisers.Allofthesecharacteristics,
(1) the intensity and reputation of the advisers, (2) the absence of any formal
training or experience in economics of prime ministers and ministers of finance,
(3)theimpactofinternationalentities,and(4)thetremendouseconomicchallenges
©SpringerInternationalPublishingAG2017 1
D.Schiffmanetal.,TheRoleofEconomicAdvisersinIsrael’sEconomicPolicy,
DOI10.1007/978-3-319-60682-8_1