The Political Economy of Israel

Ira Sharkansky

• Publisher: Routledge
• Year: 2017
• Print ISBN: 9780887381171
• eBook ISBN: 9781351477307
• Edition: 1
• Topic: Economics
• Subtopic: Development Economics
• Index: Economics

The resurgence of political economy as an important topic reflects the deep interpenetration of politics and economics. There are few economic issues of consequence that are not shaped by government decisions, and there are few governments whose agendas are not dominated by economic issues. No country reflects the interpenetration of politics and economics as much as Israel.In this analysis, Ira Sharkansky examines the extensive involvement of the Israeli government in the country's economy, reflected in governmental expenditures that exceed the gross national product, intimate links between governmental activity and Israeli's standard of living, high inflation and other economic problems, and policymaking behaviors that include entrepreneurialism and indirection. He explores the strategic points of Israel's political economy, pursuing a qualitative analysis of Israeli problems and strategies for dealing with them. Those interested in policy analysis, political economy, comparative politics, comparative public administration, and Israeli politics will find this book invaluable.Contents: The Political Economy of Israel; What is the Israeli State? How Large is the Government Budget?; Israel's Standard of Living; Israeli Municipalities: Local Initiative amidst Central Controls; Who Gets What amidst High Inflation? Winners and Losers in the Israeli Budget 1978-1984; Conundrums of Israel's Political Economy: Problems without Solutions; Public Sector Entrepreneurialism; Policymaking by Indirection; Perspective on Israel's Political Economy.

1

The Political Economy of Israel

The resurgence of political economy as an important topic reflects the deep interpenetration of politics and economics. There are few economic issues of consequence that are not shaped by governmental decisions, and there are few governments whose agendas are not dominated by economic issues.¹

No country may reflect the mixture of politics and economics as much as Israel. From 1976 to 1981 official reports of spending by governmental and quasi-governmental bodies ranged from 97 to 105 percent of gross national product! How a government can spend so much of its nation’s resources is only one of the fascinating questions in Israel’s political economy.

Israel also stands out for the critical nature of its economic issues, and the challenges faced by politicians and civil servants who would guide or control the economy. Perhaps any government that spends over 100 percent of GNP is as much a problem as a source of solution. There is also inflation, a negative balance of payments, growing foreign debt, and a stagnation in economic growth. Israeli prices moved upward at an annual rate in excess of 100 percent during 1980-85, and increased at about 1,000 percent on an annual basis during various months in 1984 and 1985. The balance of payments is chronically negative; it averaged 22 percent of GNP in each year during the 1973-84 period. The nation’s foreign debt increased from 23 percent of GNP in 1959 to 125 percent of GNP in 1984. Although GNP per capita grew by an average 9 percent per year in the 1959-73 period, it grew by only 15 percent during the entire 1973-84 period (i.e. 1.3 percent per year).

The Theme

Israel’s political economy reflects the confluence of several phenomena:

•During the first two and one-half decades of Israel’s independence — from 1948 to 1973—there was an impressive record of economic growth despite multiple adversities.

•Times have changed. There is no longer—and no immediate prospect of—the large-scale immigration that contributed to rapid economic growth in the past.

•The central role of the government in economic activities facilitated growth in the past. Now the government may be as much of a problem as a benefit. Although Israel’s politicians have shown impressive measures of will and success in making war and peace, they have recently lacked both will and success in economic policy. The country’s recent history as reviewed by its economists offers a depressing picture of misallocated resources, and a failure to make or persist with decisions that have unpleasant implications.² Perhaps heroic or messianic decisions are out of place in modern political economies that are finely tuned amidst conflicting interests.³ Issues of inflation, employment, foreign exchange, living standards, and the government budget are linked together in tangles of causes and effect. A drastic change in one of these variables can have unpredicted and unpleasant implications for others.

•There remains vitality among Israeli politicians, and among the career professionals who do much of the work involved in proposing and implementing public policies. Despite the heavy weight of formal procedures that are centralized in government ministries, it is befitting the inhabitants of the Jewish state that they behave as entrepreneurs within their public sector, sometimes ignoring or evading the laws that they have enacted against themselves. Also, they are willing to pursue policy goals indirectly when circumstances deter a direct pursuit of their goals. Officials break the formal rules frequently. Sometimes they break the informal rules as well. It can be difficult sorting out the violations that are permitted in the interest of flexibility, and the violations that are condemned as corruption. The disorder in Israeli politics that has contributed to some of its problems may also reflect the vitality that will be its salvation.

Environments That Shape and Constrain

To understand the how and why of economic policy in Israel, it is necessary to comprehend key features of the country’s history, its economy, and policy goals that are widely accepted. The following points describe the environment within which Israelis make their economic decisions.

•Israel is a country of immigrants and the children of immigrants. The Jewish population⁴ swelled from 600,000 to 1,810,000 in the first 10 years of national independence (1948-58), mostly on the strength of survivors of the European Holocast, and mass movements from North Africa, Yemen, Iraq, and Iran. Despite the hardships associated with the first years in a new country, the population growth and economic integration of the immigrants—together with the economic and human capital that they brought with them—created the wherewithal for substantial economic growth that persisted with short periods of setback until 1973. (The events of that year included a devastating war, and the beginning of an international inflation that affected Israel no less than other countries.) Moreover, the filling of a new country permitted economic policy-making to go forward without concern for entrenched and conservative agrarian or aristocratic elements that retarded modernization in other developing countries.⁵

•Israel’s defense posture dominates the scene. There have been five or six major wars in less than four decades of independence, and numerous additional confrontations with terrorists both inside and outside Israel.⁶ The country’s continuous military footing costs its economy upward of 20 percent of GNP annually.⁷ The prominence of defense contributes to the dominant role of the state in economic affairs. The widespread service in the defense forces, and the consensus that assigns high priority to defense supports a nationalism that is also rooted in older periods of Jewish history. This facilitates large roles for the state and other public bodies, and leads Israelis to accept personal sacrifices for the public good.⁸

•The hostility of Israel’s Arab neighbors has implications that go beyond military preparedness and defense outlays. Israel is denied free access to regional markets. Elsewhere its ability to compete is affected by higher shipping costs, and hostilities related to Arab boycott efforts. Also because of boycott efforts, Israel is not viewed as a convenient place for investment by international firms.

•Like other developing countries, Israel has depended on foreign sources of capital to finance growth, and a strong government to manage capital recruitment and investment. Earlier waves of capital were brought by immigrants, contributed by overseas Jews, or paid by the West German government as compensation to victims of the Holocaust. More recently, there have been major loans and grants from the United States government, and loans from banks arranged by the Israeli government or by Israeli commercial banks and business firms.⁹ In recent years, Israel’s balance of payments has been affected by the need to pay escalating sums to its creditors. Moreover, Israeli economists write that much of the country’s investments have been misallocated; that Israel’s capital plant and equipment is underutilized; and that government programs and procedures that were suitable for an earlier day may be barriers in the way of the progress that is demanded now.¹⁰

•The government is not the only public body with a dominant role in the economy. During the period of the British Mandate (1919-48) the Jewish Agency and the Labour Federation (Histadrut) provided social services, employee representation, and employment opportunities. Both organizations retain important roles. The Labour Federation, in particular, must be counted among the giants of the Israeli economy. Its bank, pension funds, insurance companies, and construction and manufacturing conglomerates account for some 25 percent of the country’s employment and a substantial part of its investment capital. Given the fact that the Labour Federation is both employer and employees’ representative, it lends a peculiar cast to the form of neocorporatist economic policy-making that occurs in Israel.¹¹

•No major economic policy can go forward without the cooperation of the Labour Federation. The highly politicized policy-making structure of the Labour Federation (with national elections, a parliament, and executive and judicial bodies parallel to those of the state) means that major policies generate public controversy and substantial politicking in the Labour Federation as well as in the state sector.¹² Although Israel qualifies as a genuine democracy by virtue of free elections, a lively media, and extensive public debate, the weight of large institutions that claim to speak for sectors of the public means that—as in other neocorporatist settings—¹³ individuals can be frustrated in expressing their own preferences.¹⁴

•Israel pursues several policy goals that enjoy wide consensus among its political leaders. These reflect key features of the present environment and national history, and serve both to guide and to constrain policymakers. The tenuous nature of Israel’s existence, and the dominant Zionist ideology put a premium on attracting and retaining a sizable Jewish population. Emigration is to be avoided, as are economic problems—like unemployment or the erosion of private savings—that are likely to produce emigration. Economic policymakers have been constrained from draconian steps against inflation that would produce a step-level increase in unemployment. The government has been pressured into the continued funding of inefficient industries that employ unskilled people in peripheral “development towns.” Also, the government has committed substantial resources to guarantee the stock issues of commercial banks that—before their collapse—had become vehicles for mass savings.

•High inflation during 1977-85 was partly a manifestation of these policy constraints. The linkage of wages, savings, rents, and other payments to the cost-of-living index meant that inflation was perpetuated by the mechanisms that are designed to protect the population from its worst effects. The lack of intense public pressure to do something about high inflation is traceable to these linkages. Incomes and savings moved upward along with inflation. Although the public was protected from the los...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of Figures and Tables
• Dedication
• Preface
• Chapter 1. The Political Economy of Israel
• Chapter 2. Israel Is Like Other Countries, But Different
• Chapter 3. Israel’s Bizarre Public Finance: Governmental and Quasi-Governmental Bodies That Spend More Than 100 Percent of Gross National Product!
• Chapter 4. Israel’s Standard of Living
• Chapter 5. Israeli Municipalities: Local Initiative Amidst Central Controls
• Chapter 6. Who Gets What Amidst High Inflation? Winners and Losers in the Israeli Budget 1978-84
• Chapter 7. Israeli Inflation: The Politics of an Economic Concept
• Chapter 8. Conundrums: Problems without Solutions
• Chapter 9. Public- Sector Entrepreneurialism
• Chapter 10. Policy-Making by Indirection
• Chapter 11. Government Corruption or Acceptable Feasibility? Sorting Out the Differences
• Chapter 12. Perspective on Israel’s Political Economy
• Epilog: For Those Who Think That Political Scientists Should Advise Politicians
• Index