The Role of Economic Advisers in Israel’s Economic Policy: Crises, Reform and Stabilization PDF
Preview The Role of Economic Advisers in Israel’s Economic Policy: Crises, Reform and Stabilization
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 Thisworkissubjecttocopyright.AllrightsarereservedbythePublisher,whetherthewholeorpartof the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilarmethodologynowknownorhereafterdeveloped. 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Printedonacid-freepaper ThisSpringerimprintispublishedbySpringerNature TheregisteredcompanyisSpringerInternationalPublishingAG Theregisteredcompanyaddressis:Gewerbestrasse11,6330Cham,Switzerland 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
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