Have Globalization and Liberalization 'Normalized' Israel's Political Economy?
Have Globalization and Liberalization 'Normalized' Israel's
Political Economy?[1]
Michael Shalev, The Hebrew University of Jerusalem
December 1997
Forthcoming in Israel Affairs, December 1998
In his 1960 study The Israel Economy: The First Decade, the distinguished
economist Don Patinkin complained bitterly that Israel's political leaders
acted as if they could defy the laws of economics.[2]
The government consistently spent far more than it raised in taxes, just
as the economy as a whole consumed more, especially in imports, than it
could ever pay for. Patinkin believed that policymakers would be forced
to adopt more market-conforming policies, but he was mistaken. So long
as the leaders of the country could exploit Jewishness and geopolitics
to mobilize loans and gifts from abroad, they did not need to heed the
dictates of the market. Rationalized by its goals of building and defending
the precarious new state and attracting and retaining Jewish immigrants,
the government's "profligacy" had a remarkably long life.
During roughly the first four decades of Israel's existence there was
a durable and almost wall-to-wall policy consensus among policymakers in
Israel regarding the indispensability of open, organized and subsidized
Jewish immigration; the need for the state to underwrite the economic security
of all Jewish citizens and to "close gaps" between different Jewish ethnic
groups; the necessity to meet Israel's defence "imperatives" irrespective
of economic considerations; and the desirability of the state playing an
active developmental role in the economy. Over the past 10-15 years these
four consensual pillars, especially the last, have for the first time been
confronted by a comprehensive and vigorously articulated alternative: the
(neo) liberal view which glorifies individual acquisitiveness and views
the state as an impediment to the workings of the market economy, a conviction
hitherto voiced only by economists or by disaffected businessmen lacking
the right connections. Both of Israel's two major political parties are
now committed to reducing the economic role of government, making the economy
more attractive to foreign investors and other shibboleths of contemporary
economic liberalism. Has the long-standing "exceptionalism" of Israel's
political economy come to an end?
This paper reviews and weighs empirical evidence on the contemporary
evolution of Israel's political economy which is drawn mainly from published
data and documentary sources. For two reasons, this is not an easy task.
First, liberalization is an ongoing drama, one in which the actors often
have good reasons to engage in misinformation and camouflage. Second, we
are dealing here with politically charged issues that many writers find
it hard to be dispassionate about. Under these circumstances, theory
and comparison (both historical and cross-national) are crucial
aids to interpretation of the evidence.
The theoretical underpinnings of this paper are drawn from my book
Labour and the Political Economy in Israel, in which the political
economy was conceived as "a dynamic and potentially contradictory gestalt
that encompasses a broad range of institutional spheres".[3]
This perspective assumes that "state" and "economy" are always interdependent,
but that the terms of this interdependence are contingent on struggles
and alliances among economic classes and sectors on the one hand and the
political and bureaucratic managers of the state on the other. When a lasting
pattern of policy priorities becomes buttressed by institutions, coalitions
and discourses it is helpful to speak of a "policy regime". Extending the
notion of policy regimes to incorporate the structure of the economy and
its principal engines of growth conveys the broader notion of a political-economic
regime.[4]
In order to understand why Israel has taken the path of liberalization,
and what this might mean, the next section of the paper will attend to
both the stable and the dynamic elements of its political-economic history:
the inner logic characterizing the country's past and present regimes,
and the tensions and conditionality built into them.
The paper also draws inspiration from a growing literature in the comparative
study of political economy on the consequences of globalization for domestic
policy. Scholars disagree sharply on this issue. Some have issued doomsday
proclamations of the end of national sovereignty, but it is also reasonable
to reverse the apparent relationship of global to domestic processes, recognizing
that globalization is filtered and in part even constructed by the intentional
policies of national governments.[5]
Recent comparative research vigorously asserts the relative autonomy of
nation-state, finding little or no evidence for the claim that economic
and social policies are bound to converge in the wake of rising openness
to international trade and capital mobility. National policy distinctiveness
persists, and in some critical areas retrenchment of the state's role is
problematic and may even be followed by further expansion. The progress
of liberalization and structural change has not been wholesale, mechanical
or uniform. The pressures posed by globalization vary both in their objective
dimensions and in the manner that they are politically constructed. Politics
still appear to matter: conflicts of interest and ideology between political
parties have persisting (although weakened) effects on policy, and the
political costs of liberalization policies are sometimes prohibitive.[6]
Case research has an indispensable analytical role to play in clarifying
the universality of the thrust to liberalize. Careful study of individual
countries typically reveals that the structural features of political economies--especially
those defining characteristics which are likely to enhance or impede liberalization
processes--are quite distinctive, even within clusters of countries that
appear to share the same political-economic regime.[7]
Accordingly, it is reasonable to assume that the particular barriers to
liberalization in Israel must be sought in those features of the Israeli
political economy that most distinguish it from other economically advanced
capitalist democracies.
The Political Economy of Israeli Exceptionalism
Any observer of Israeli society over the last decade cannot fail to be
struck by the rise of the market and market culture in contemporary Israel.
Adapting John G. Ruggie's well-known phrase, I find it helpful to think
of Israel's previous political-economic regimes as having shared an "embedded
illiberalism" with roots in the prestate experience of colonization by
Jewish settlers and their conflict with the Palestinians and the Arab world.[8]
Briefly, the conditions of Jewish settlement required that the political
institutions of the Zionist movement and the Jewish community in Palestine
dominate the mobilization of capital and the purchase of land. Because
of their common interest in neutralizing an unfavourable labour market,
the labour and Zionist movements cooperated intensely. Organized Zionism
supported the workers' movement, which shielded Jewish workers from Arab
competition by providing subsidized employment and social services. A wide
consensus developed around the view that economic collectivism was indispensable
to the success of Jewish colonization but that it could and should coexist
with a capitalist market economy.[9]
The labour movement so dominated Zionist politics over so long a period,
that it was tempting to identify this collectivism with socialist ideology.
In fact, the world-view of labour Zionism was only secondarily socialist;
its central theme was Jewish nationalism.[10]
The arrival of sovereignty reinforced the collectivist consensus. The ruling
Labour Party adopted a highly interventionist economic stance but embraced
neither of the innovations associated with Western parliamentary socialism
after the war--nationalization and the welfare state. The government was
committed to assisting the private sector along with state and Histadrut-owned
enterprises; in any case, the local bourgeoisie was neither able nor willing
to bear principal responsibility for economic development, and private
industrialists were the first to demand a controlled (protected and subsidized)
economy. In the domain of social policy, attempts to introduce a modern
system of social insurance along the lines of postwar British reforms were
stillborn.[11]
In the event, state intervention was rationalized by specifically Israeli
constructions: the challenges of arming and defending the country, settling
huge waves of new immigrants, bringing territory where Arabs lived or which
bordered Arab countries under the control of the state, and developing
an economic infrastructure that would permit immigrant absorption and eventually
eliminate Israel's dependence on charity and loans. This constituted what
may be thought of as the "demand side" of the interventionist state in
Israel. The "supply side" was no less compelling. It rested on Israel's
singular capacity to attract gift capital from foreign donors stemming
partly from its active alignment with the West in the East-West struggle,
but even more importantly from the Jewish character of the state which
enabled it to make claims on Jewish communities abroad and obtain substantial
financial compensation from Germany on behalf of world Jewry.[12]
These "unilateral transfers", as well as a relatively favourable borrowing
capacity for a struggling new entity, provided the Israeli state with the
means to steer economic development and play a very active role in distributional
processes. Economic growth was powered by the state's ability to mobilize
money and people from abroad. Tellingly, both before and since sovereignty
business cycles have been driven by waves of immigration and periodic eruptions
of violence and war.[13]
Under these conditions, it is not surprising that liberal arguments in
favour of "free" markets and self-interested private investment enjoyed
limited appeal among policymakers.
Continuity and Change
Perhaps the clearest indication of the structural underpinnings of the
role of the state in the Israeli economy was the continuity that became
evident after the 1977 elections, when Labour's long period of uninterrupted
rule was abruptly brought to a close. Despite the new Likud government's
claims to be embarking on a radical programme of liberalization (complete
with a cameo appearance by Milton Friedman), widespread expectations of
a fundamental shift in economic policy priorities proved to be premature.[14]
The enduring parameters of economic policy proved to include the following:[15]
1. High levels of government expenditure and employment (biased by
commitments to defence and immigrant absorption), relative to the economy's
level of development.
2. Extensive state control of savings, investment and foreign currency.
3. Modest public ownership alongside a high degree of public subsidy
of private and Histadrut-owned business.
4. Corporatist delegation of state functions to the Histadrut, with
the state trading subsidies for policy cooperation and legitimation.
This is not to suggest that Israel's political economy has been immutable
to change. Rather, changes have not necessarily been coupled with policy
proclamations and they must be understood more broadly than exclusive concentration
on policy allows. This is why it is more useful to think in terms of political-economic
regimes, an analytical construct which abstracts the underlying
"model" of political economy in a given epoch from the broad ensemble of
economic, political and institutional variables which supports it.
For an understanding of the background to contemporary economic liberalization
in Israel, two such regimes are noteworthy. The first, characterizing the
period of rapid growth from the mid-fifties to the mid-sixties, rested
on the synergy created by the meeting of two imported influences: German
reparations and other foreign gifts, and the arrival of masses of propertyless
immigrants who (among other things) expanded the markets for housing and
consumer essentials and simultaneously provided a cheap labour force for
their production.[16]
The state was positioned strategically, as the factor that directed immigration
and settlement, the disposal of foreign gifts, and housing and industrial
policy. It created a highly politicized and closely regulated economy with
partially competing blocs of public, private and Histadrut capital, and
a high degree of labour market segmentation parallel to ethnic and national
divisions in the working class. These arrangements, that I have described
elsewhere as "the system of 1948", awarded both the state and the party
that dominated it considerable autonomy--that is, the capacity to steer
business interests and civil society rather than be steered by them.[17]
After a decade of rapid growth, this regime was exhausted. The shift
to full employment upset power relations by reducing the dependence of
ordinary workers on the state and the ruling parties. The winding down
of immigration and German aid persuaded the state to cut back both the
scope of its presence in the economy, and the extent of its subsidizing
role. It was thought necessary to discipline both labour and capital. The
instrument for exercising this discipline was a recessionary economic policy--the
Mitun or slowdown of 1966-67.[18]
This cooling-off period proved to be shortlived. In the aftermath of
the Six Day War a new "system of 1967" came into being that fundamentally
altered key elements of Israel's political-economic regime. Although senior
politicians and bureaucrats developed a sudden fondness for laissez-faire
rhetoric, and some elements of economic regulation did become less direct,
there was no undermining of the state's role as the central pivot of the
economy. Instead, this pivot found a new axis in the "military-industrial
complex".[19]
The basis for this development was a potent combination of government-subsidized
local military procurement, the burgeoning world market for arms, and (from
1970) US government financing of Israel's foreign arms purchases. The occupation
of the West Bank and Gaza also played an important part in reviving growth
along new lines, both by extending the scope of Israel's "domestic" product
market, and by providing a source of cheap labour to replace increasingly
scarce Israeli manual workers, especially in construction.
During the 1970s the structure of the Israeli economy, and its labour
market, became increasingly dualistic. "Big business" developed in the
bureaucratic sector, nominally controlled by the state or the Histadrut,
frequently linked to military requirements, and employing exclusively Jewish
labour under the favourable conditions of a sheltered or "primary" labour
market. The more competitive economic periphery, smaller-scale and privately
owned, operated a "secondary" labour market employing a mixed (Jewish and
Arab) workforce.[20]
As in the prewar period, the coherence of the post-1967 growth model
rested on state subsidy of both capital and labour. The most compelling
claims to subsidy were made by the bureaucratic sector. The key actors
in this respect were the big banks and the big conglomerates under their
control; the "strong" Workers' Committees in the bureaucratic sector; and
the Histadrut (simultaneously representing big business and "big labour").
The state found itself increasingly indebted to these powerful interests,
and unable to assert its will and extract benefits in return for the rising
tide of subsidies. Under the conditions prevailing in the world economy
of the post-1973 period, and given the earmarked nature of US aid, economic
policy became strikingly "undisciplined". Symptomatic of this was the public
sector's excessive deficit spending, frequent recourse to corrective devaluations,
and government lending policies that favoured borrowers at the state's
expense. The result of these policies was to exacerbate Israel's immanent
condition of stagflation after 1973, while paradoxically enriching its
big banks and conglomerates.[21]
This is the background to the Emergency Stabilization Plan of June
1985.[22]
In hindsight, the astonishing success of the plan in bringing the Israeli
economy back from the brink of hyperinflation is of lesser importance than
the structural change that it inaugurated--the contemporary liberalizing
shift in Israel's political-economic regime. The most compelling interpretation
of the stabilization plan is that, just like the Mitun, it was a
radical attempt by the state--led by senior economic policy mandarins and
sages--to regain autonomy by strengthening market discipline.[23]
The plan and the structural reforms temporarily hidden in its shadow constituted
a frontal attack on mechanisms that had previously protected societal interests,
directly or indirectly at the expense of the state: devaluations, protectionism,
wage indexation, unlinked public lending, and diffuse investment incentives.
Why had it taken the state so long to develop a coherent policy response
to the problems of economic stagnation and hyperinflation? While most observers
have emphasized the role of public opinion and the leadership finally shown
by the government, the state's drive to reinstate its autonomy accounts
more effectively for the timing of its stabilization initiative. By 1985
the economic crisis posed tangible threats to the state itself--its fundamental
legitimacy and, no less importantly, its economic viability. While critics
cast doubt on the plan's macro-economic effectiveness,[24]
its consequences for the viability and autonomy of the state were very
substantial indeed. Talk of the need for a "strong leader" (an ominous
threat to the political regime) disappeared; state extraction of economic
resources through taxation was restored to effectiveness; it was possible
to set in motion a long-overdue flattening of military expenditure; and
a worrying hole in Israel's foreign reserves was filled, in large part
by virtue of enlarged United States aid.
This is not to argue that the acute crisis which economic instability
posed to core state interests was the only relevant factor. As is often
the case when history turns at a major crossroads, multiple causal forces
converged in mid-1985. First, many of Israel's largest corporations and
investors began to believe that there were limits to the profitability
of military-based demand and inflationary subsidies, and that the time
was ripe for a new and more outward-looking economic strategy.[25]
Second, the political conjuncture in mid-1985 was especially favourable
to radical policy initiatives.[26]
There was little scope for profiting from party rivalry under the National
Unity government which was then in its early stages. And the leadership
of the Histadrut, the most vocal potential opposition to the stabilization
plan given that it was expected to slash real wages, was politically indebted
to the government for its aid in a recent election. All of these circumstances
together offered exceptional leeway to the professional economists in state
agencies and university economics departments who prepared and lobbied
for the stabilization plan. The architects of the plan cannily grasped
the opportunity to go beyond crisis management and engineer a strategic
reorientation of economic policy.[27]
Have they succeeded in liberalizing the Israeli economy?
Indicators of Liberalization
The term liberalization is typically applied to reforms of countries' trade
policies (removing barriers to imports and ending preferential treatment
of exports) and their foreign currency regimes (eliminating restrictions
on inward and outward flows of foreign currency and letting exchange rates
float more freely). From a broader perspective, the principal goal of liberalizing
economic reforms in Israel and elsewhere has been state contraction,
a fundamental alteration of the division of labour between markets and
the state by means that include privatization, expenditure and tax cuts,
sectoral "deregulation", etc. To the extent that this aim is achieved,
the state's ownership, regulatory and distributional roles are diminished
in favour of the market and the private sector. The conventional wisdom
assumes that combining state contraction with increased exposure to international
competition causes markets to become both more important and more competitive.
1. Internationalization
In 1996 Israel's "internationalization" was ranked 18 out of 46 countries--including
all of the OECD and the rapidly growing NICs--by the World Competitiveness
Yearbook.[28]
Liberalization in the sense of opening up to the global economy should
be evidenced at the macro level by buying more from the outside world and
selling more to it, and at the micro level by the elimination of import
restrictions and export incentives. The scope and regulation of trade can
only tell part of the story, however, especially in Israel where politicization
has been the most salient feature of external economic relations. In the
Israeli context liberalization would also imply a change in the character
of capital inflow, from state to market-sponsored and from gifts to loans
or investments.
Has the economy become more involved in trade?
Since its establishment as a state and in fact well before that, Israel
has been chronically dependent on imported goods and services yet unable
to pay for them from export revenues alone. The total value of trade (imports+exports)
relative to national product has always been exceptionally high compared
to other countries, three-quarters or more of GNP. While this ratio has
fluctuated (a substantial rise during the years of high inflation and stalled
growth), during the 1980s it experienced a secular decline. Although
in the last few years the trade ratio has returned to its 1990 level, the
seeming absence of a trend towards increasing openness is again unusual
from a comparative perspective.[29]
Part of the puzzle is resolved by recognizing that Israel's relatively
strong growth rates in the 1990s hide a major increase in the absolute
volume of trade. Since stabilization the dollar value of both imports and
exports has surged upwards, even taking account of rapid population growth.
In addition, two elements of Israel's trade that arguably warrant separate
consideration--the diamond industry and arms imports--have been contracting.
The Bank of Israel estimates that setting these elements aside, during
the 1990s the scope of trade increased from roughly 50% to 70% of national
product.[30]
No less significant than the quantitative trend, foreign sales have altered
qualitatively--more high-tech yet less military-centred; less dependent
on the European market and more on "emerging" markets in Eastern Europe
and, especially, Asia.[31]
Nevertheless, during the present decade exports have failed to keep pace
with rapidly rising imports as trade barriers came down and cheap imports
became a de facto mainstay of Israel's anti-inflationary policy. Consequently,
as in the majority of the last 25 years, the civilian "import surplus"
(excess of imports over exports) is again within one or two points of 10
percent of GNP--well above OECD standards.[32]
Theoretically, opening up to trade should have important microeconomic
effects, obliging domestic producers to feel the whip of foreign competition
and encouraging exports to be driven by comparative advantage in world
markets. The first of these variables, exposure to competition from import
substitutes, has increased significantly since stabilization. Between 1985
and 1990 there was a 30% increase in the penetration of domestic markets
for manufactured goods.[33]
Still, the impact of greater openness to imports on competition has been
weakened by monopolistic tendencies among importers. Moreover, while after
much foot-dragging Israel honoured its free trade agreements with the EU
(1975) and the United States (1985), defenses against competing imports
from other countries (mostly NICs) were actually fortified for a time.
However, during the 1990s these barriers have gradually come down.[34]
On the other side of the trade ledger, export subsidies--at least those
for which statistics are available--have been phased out (Chart 2). At
their peak in the period 1970-84 these subsidies averaged 3 percent of
GNP, but by 1990 they had been virtually eliminated.[35]
Chart 1
Has the nature of capital inflow changed?
"Unilateral transfers" from foreign sympathizers and governments has always
been crucial both for meeting Israel's external obligations and for financing
the role of the state in the economy. One variety of gift capital, that
which emanates from Diaspora Jewry, has gradually declined in importance.[36]
Since the beginning of the 1970s the United States government has become
the pre-eminent source. By the late 1970s the import of American arms had
plateaued at around 8% of GNP, and American aid was effectively paying
for them in full (Chart 1). In 1984 and 1985 Israel's foreign economic
relations took a dramatic new turn. A wide gap emerged in Israel's favour
between what it receives from the US government and its purchases of US
arms. In the first half of the 1990s net US aid averaged over 3 billion
dollars a year, up by a billion dollars from a decade before. At the same
time Israel's purchases of imported arms were declining, especially in
relation to the rapidly growing national product. As the combined result
of these two trends, for more than a decade the ratio of aid to arms has
been at least 2:1.
Chart 2
Not only has the pure gift element in US aid increased substantially
since the mid-1980s, but following the transition to a Labour government
after the 1992 elections Israel was able to obtain official US guarantees
for $10 billion worth of future commercial loans. Like the peace process
which was also inaugurated following the 1992 elections, the loan guarantees
have helped raise Israel's commercial credit-worthiness abroad.[37]
So far, in most years of the 1990s this has helped give the state the resources
and flexibility to maintain or increase non-defence spending while actually
reducing the budget deficit and the public debt and accumulating very high
levels of foreign reserves.
The political-economic implication of these changes is multi-dimensional.
The increase in the gift component of US aid and the addition of the loan
guarantees has enhanced the scope and autonomy of the state in the economic
arena. At the same time, by helping relieve the budget deficit and the
shortage of hard currency that reached crisis proportions prior to stabilization,
American aid created necessary (although not of course sufficient) conditions
for liberalization of the capital market and the foreign exchange regime,
which in turn opened up new possibilities for capital inflows and outflows
through the market.
Foreign direct investment (FDI) has been the most novel and noticed
element of Israel's contemporary integration into the world economy.[38]
Net FDI was insignificant until the early 1990s and only at mid-decade
did it reach substantial levels (1.5-2.0 billion dollars a year).[39]
In the past the Israeli economy was too small and resource-poor to interest
most foreign investors, and many big financial and corporate interests
also stayed away because of the chronic state of war or their fear of losing
Arab markets. The little FDI that did enter Israel typically involved Jewish
businessmen with connections to Zionist philanthropy and the Israeli political
establishment, who were induced to invest by a combination of generous
subsidies and patriotic appeals.[40]
Investments in Israel by Volkswagen, Nestlé, Macdonalds and numerous
other well-known transnational enterprises indicate a substantial departure
from this tradition, although not its elimination. The recent acquisitions,
led by Charles Bronfman and Ted Arison respectively, of controlling interests
in Koor and Bank Hapoalim--arguably the two most important corporate entities
in Israel--are eloquent testimony to the continuing role of well-connected
Jewish magnates.[41]
There are additional reasons why the features of the new foreign investment
warrant careful scrutiny. The effective scope of the capital inflow accompanying
FDI is far more modest than the imagery conveyed by government and business
discourse suggests. The largest deals (including those just mentioned)
have been financed almost entirely by Israeli banks.[42]
The mushrooming of franchise operations in consumer markets also takes
place, by definition, with a minimal financial commitment on the part of
the foreign investor. Another significant limitation of FDI is that the
state continues to generously subsidize showcase foreign investments. Intel's
decision to open a major production facility in Israel was conditional
on a government subsidy so large ($600 million) that the Investment Incentive
Law had to be amended to make it legally possible.[43]
FDI is not of course the only means by which overseas investors channel
capital to Israel. Indeed, it has been complemented by an equal or larger
stream of foreign purchases of shares issued by Israeli firms. Both, in
turn, are overshadowed by the liquid capital (much of it "hot money" originating
in Israeli companies) which has been attracted simply by high interest
rates and convenient opportunities for "laundering".[44]
It is still too early to assess the scope or durability of Israel's
new status as a target for foreign investment, but there is no gainsaying
the growing international orientation of Israeli business (mainly big business,
but also smaller hi-tech firms), which in the last few years have become
much more committed to raising capital via foreign banks and stock markets,
undertaking joint ventures with foreign firms, and in some cases even setting
up branch plants abroad. Reports of such activities fill the business-oriented
media in Israel, although it is hard to gauge their scope with any precision.
Aggregate data confirm however that like incoming FDI, outward direct investment
has risen far above previous levels. For instance, in the period 1994-6
alone, industrial firms in Israel purchased one billion dollars worth of
equity in foreign concerns.[45]
2. State Expenditure
The decline since the mid-1980s in the share of national resources distributed
by the state is quite remarkable. Total public expenditure had been equivalent
to at least three-quarters of the national product since the "Yom Kippur
War" in 1973. But two years after stabilization the figure fell to 62%
and by 1994 it had troughed at only 54%. Almost all of the decline in government
spending since the early eighties can be traced to defence (a drop of over
10 points of GNP), capital subsidies (down 8 points) and debt service (down
nearly 5 points).[46]
The Welfare State for Business[47]
The decline in capital subsidies is especially significant, given that
much of the increase in transfer payments during the seventies--which was
the major factor behind the fiscal crisis of the early eighties--consisted
of payments and benefits to business.[48]
One element in the cutback, already noted, has been the termination of
subsidies specifically targeted to exporters. Subsidies on production for
the domestic market have also been sharply reduced. As shown in Chart 2,
during Israel's initial inflationary spurt in the mid-1970s the burden
of these subsidies jumped fourfold to 8% of GNP, remaining at this level
through the early 1980s. Phased reductions over the next decade brought
their share back down to 2%.[49]
Because of their indirect effects on the business sector, the implications
of the other principal budget cuts--in debt service and defence--have been
no less portentous. Servicing the government's debt became a major source
of profitability for Israel's biggest banks, especially during the 1983-88
period when it preempted an average of nearly a fifth of GDP.[50]
Reductions since stabilization in the domestic defence budget, which had
showered lucrative cost-plus contracts on large-scale local suppliers, [51]
may also be assumed to have indirectly eroded the profitability of big
business. From 1985 the domestic military procurement budget failed to
increase in real terms, so that its share of Israel's growing GNP fell
substantially (Chart 1).[52]
All of the data reviewed thus far appear to signify massive retrenchment
of the "welfare state for business". But a fuller assessment
of this issue also requires us to consider whether the apparent harshness
of post-1985 policy towards business has not been mitigated by two developments
that would not necessarily show up in these data: compensatory "tax expenditures",
or the replacement of old subsidies by new ones.
Regarding taxation, as Swank has recently noted in a comparative study
of OECD economies, despite the pressures exerted by mobile global capital
on state managers, they continue to "defend the treasury". Accordingly,
while governments have found it necessary to cut taxes on business the
primacy of markets has also been invoked to justify the withdrawal of investment
incentives.[53]
The same is true in Israel, where the other side of the equation is also
evident: in aggregate, as can be seen in Chart 2, massive cuts in subsidies
have been offset by tax cuts of similar magnitude. One of the immediate
effects of stabilization was to revive the state's capacity to extract
revenues from the business sector--a capacity which had been badly undermined
by rapid inflation. Revenues from corporate income and payroll taxes rose
sharply relative to national product immediately following stabilization,
but since then taxes and subsidies have been declining more or less in
tandem. A major reform in the mid-1980s and gradual additional cuts since
then have brought the tax rate on undistributed profits down from an internationally
high level of 61% in 1984 to the rich-country norm (only 36%) in 1996.[54]
In addition, employer contributions to the social security system and other
payroll taxes have been either reduced or taken over by the Treasury in
order to help employers lower their labour costs.[55]
Finally, while automatic and indirect capital subsidies have been dramatically
cut, targeted incentives are more generous than ever. This has already
been noted with respect to foreign investment, in the specific case of
Intel's enlarged presence in Israel. It is also true of direct investment
grants issued by the Ministry of Industry and Commerce, especially assistance
to startup companies in high technology fields which was three times higher
in real terms in 1992-94 than in 1985-87.[56]
The Welfare State for Households
There is no evidence that aggregate social spending in Israel has fallen
during the contemporary era of liberalization--an irony that holds for
other countries as well.[57]
Following a period of budget cutting in the eighties, in the first half
of the nineties spending on the major categories of social services--health
and education--rose, returning to approximately the same share of GNP as
a decade earlier.[58]
Expenditure on housing and immigrant absorption (important components of
Israel's generosity towards Jewish newcomers) increased by well over 3
points of GNP, in response to the wave of immigration from the former Soviet
Union. Transfer payments to households also grew, by about one and a half
points of GNP.
The record of annual fluctuations in real social expenditure over the
last fifteen years shows that in addition to immigrant absorption, increased
commitments have come about for a variety of reasons. The cost of the key
income maintenance branches has grown mainly because of automatic benefit
adjustments and demographic shifts (a larger and older population). In
other instances, specific programmes have experienced innovations that
caused sudden steps in expenditure. The most notable example is the national
health insurance law adopted in 1994 (see section 5 below). There have
also been a few cases where spending rose when liberal demands for equality
coincided with increased political clout, leading to a broadening of the
universal basis of social security.[59]
Finally, one of the social services--a very expensive one, education--actually
expanded during the nineties. The Labour government elected in 1992 restored
per capita spending to the level that prevailed before cuts were instituted
in the eighties.[60]
This momentum has however stalled in several recent years.
None of this necessarily means that there has been no rollback of the
welfare state, broadly-conceived. At least one significant form of social
protection has been all but eliminated since the stabilization plan--consumer
subsidies on food and public transportation, which at their peak in 1984
amounted to $1.4 billion.[61]
The Treasury has also sought and sometimes succeeded to erode entitlements
(child allowances have been a favourite) or stymie the implementation of
costly political promises (such as extension of the school day). As in
most other countries, eligibility rules for unemployment insurance have
become more restrictive, although this has not prevented rising take-up.[62]
In addition, it has been widely observed in Israel that private expenditure
on social services has increased in the last decade to compensate for inadequate
public provision.[63]
The public school system both requires and encourages parents to pay a
range of fees and subsidies in public education. In the health field supplementary
insurance schemes have recently proliferated, and the Treasury is expected
to try to cut the cost of national health insurance by creating additional
membership fees and service charges.
Critics see these signs of privatization of welfare as part of a broader
project of undermining the generosity and universality of the welfare state.[64]
No less important but less noticed so far are the implications of the ascendancy
of market-oriented criteria in relation to public sector employment and
government policy towards outlying Jewish areas. So long as the "bureaucratic
sector" sheltered key parts of the defence industries and other key industrial
sectors that exclusively employed Jewish citizens, it was a haven for government-subsidized
occupational welfare.[65]
The retrenchment of both the scope and conditions of blue-collar employment
that tends to follow privatization seriously threatens this system of welfare.
Regional development incentives constituted a second element of the state's
traditional role in supporting the living standards of Jewish citizens.
The claim that these incentives are inefficient and no longer justified
by security considerations has generated ongoing policy changes that threaten
to substantially erode direct and indirect subsidies to housing, employment
and public services in peripheral "development towns".
3. Competition and the Structure of Capital
The industrialization of Israel was both directed and financed by the state,
working through the managers of the private, public and Histadrut sectors.[66]
This dirigisme was practised in a fashion which strongly encouraged
the monopolistic tendencies that characterize capitalism in general, and
small-country capitalism in particular.[67]
Since the late 1960s a very substantial and quite integrated sector of
big business has emerged in Israel. At the apex are only a handful of "business
groups" constituted by very large conglomerates and banks. These two wings--the
financial and non-financial--are moreover closely connected by virtue of
bank ownership or simply as a result of the banks' multiple roles as investors,
creditors and stockbrokers. The two biggest banks account for a majority
of the country's highly diversified banking business, while conglomerates
and other large firms have typically dominated the branches in which they
operate.[68]
The period between the Yom Kippur War and the stabilization plan furnished
hothouse conditions for growth in the profitability and power of the big
business groups.[69]
Direct incentives and capital subsidies, cost-plus procurement contracts,
and windfall profits from the government's practise of lending unlinked
money and borrowing linked money all contributed to an impressive increase
in capital accumulation at the apex of the business sector, despite the
dampening effect of economic stagnation on profitability as a whole. The
changing profile of state expenditure since stabilization which has already
been discussed undoubtedly hurt the profitability of the large banks and
conglomerates.[70]
No less important, the government's nominal ownership of the largest
banks--the result of the bailout which followed the stock market collapse
of 1983--offered the reformers an opportunity to force the big banks to
divest their controlling interests in industrial and service enterprises.
This demand is part of a wider recent tendency for Treasury officials to
place the issues of monopoly power and ownership concentration on the public
policy agenda and to advocate tighter regulatory inhibitions on big business.[71]
Together with the inflow of competing imports discussed in an earlier section,
the result has been a decline in the monopolistic character of the market
for manufactured goods.[72]
The recent "trust-busting" activities of the state, so alien to its
traditional role of fostering concentration, should not however be over-dramatized.
The Treasury's attempts to limit bank ownership of non-financial firms
are only the latest round in a long-running battle, and some seasoned observers
remain unconvinced that this battle will ever be won.[73]
There are a number of indications that the status quo is highly resistant
to reform. First, by offering the banks postponements, special exceptions,
tax incentives, and compensatory approved rises in bank fees and rate spreads,
the state has gone to considerable lengths to sweeten the bitter pill of
divestiture.[74]
Second, even though new local and foreign private investors have acquired
controlling interests in segments of big business, the existing groups
were also strengthened in the 1990s by opportunities for expansion furnished
by some major privatizations and by boom conditions in construction and
infrastructure.[75]
Third, so far at least executive responsibility remains in the hands of
the same managers as before, except that their personal wealth and their
potential roles as capitalists in their own right have grown substantially.
This continuity of the managerial elite has so far held fast even when,
as with the privatization of the Histadrut-owned Koor conglomerate, control
has passed to foreign investors.[76]
The Koor experience suggests that rather than weakening the domestic economic
oligarchy, internationalization may be seized upon by local capitalists
and executives as a resource in their struggle for wealth and power.[77]
Koor, which came close to bankruptcy in the eighties, also illustrates
the renewed vitality of big business in the nineties. Like other big manufacturing
interests, Koor has evidently benefited from recent economic trends--diversification
away from arms production, penetration of new overseas markets, and increased
financial ties with overseas capital.[78]
4. Privatization and Deregulation[79]
The changes that liberalizers seek to effect in the structure of the economy
are, of course, directed not only at stimulating competition but also at
reducing the scope of state ownership of firms and organizations producing
marketable goods and services. Summing up developments in Israel prior
to the mid-1980s, one survey concluded that in this period "no serious
effort was made to privatize public corporations".[80]
The first major initiative occurred in 1988, when the cabinet embraced
an ambitious privatization programme drawn up by an international consulting
firm. Yet as in other countries, privatization has been hampered by the
problem of finding a method of sale that would be at once feasible, politically
acceptable and make a worthwhile addition to the state treasury, as well
as the need to overcome opposition from employees, executives and responsible
cabinet ministers in corporations targeted for privatization.
Beginning in 1990 the government budget has included sizable projected
revenues from privatization, but until recently only 15-20% of the targeted
revenues were actually raised.[81]
The first few major sales, based on hastily-concluded deals with local
and foreign investors, netted disappointingly low revenues. Several subsequent
public offerings on the Tel Aviv Stock Exchange were more successful but
this outlet was closed off when the market collapsed in 1994. The Likud-led
government that assumed office following the May 1996 elections has carried
the process much further, most notably by the sale in September 1997 of
the government's controlling stake in the country's largest bank (Hapoalim)
to a consortium of foreign and local investors. A number of other major
privatizations in banking, arms production and transportation appear imminent,
but could yet run into obstacles of various kinds.
Deregulation, a second catchword of neoliberal reform programmes, has
been carried out at least partially in several areas, notably by the dismantling
of producer boards in agriculture.[82]
As part of their recent "trust-busting" frenzy, the authorities have launched
specific measures designed to eliminate monopoly "rents" created by licensing
and rationing mechanisms that were operated by or with the consent of the
state. Current examples include the markets for insurance, pay TV, overseas
and cellular telephony, and taxis. However, insofar as barriers to entry
other than licenses are high (as in most of these examples), the result
is typically an expanded market capable of supporting a few more large-scale
players, rather the substitution of many small players for one big one.
By far the most important locus of deregulation in Israel has been
the attempt to roll back the state's domination of what in the past could
only euphemistically be called the "capital market". It will be recalled
that prior to 1985 the state was the dominant source of investment capital;
both reinvestment of undistributed profits and unregulated bank credit
played very limited roles. The disposal of long-term savings (in bonds,
pension funds and bank savings plans) was heavily regulated in ways that
funneled the lion's share of these assets to the state, with the result
that the stock market played virtually no role in the mobilization of investment
capital for the business sector.
Two different factors account for the state's historic domination of
capital flows. Its ability to acquire extensive foreign gifts, part of
which took the form of donated capital goods or raw materials, naturally
encouraged the state and its political masters to prefer institutional
and political modes of allocation. Both the state bureaucracy and the governing
party benefited greatly from their resultant ability to directly steer
the course of economic and indeed societal development right down to the
micro level. However, once erected this interventionist bias proved highly
durable even when the state's ability to cover the costs by foreign gifts
and the political profits to be reaped from intervention both diminished.
The 1967 and 1973 wars were turning points after which the state's commitments
grew far beyond its extractive capacities, with the result that budget
deficits and the cost of servicing accumulated public debt greatly increased.
This fiscal crisis reinforced the state's longstanding preference for
meeting its commitments by pre-empting private savings through regulations
requiring banks, pension funds and other institutional investors to automatically
convert the bulk of their accumulations into government securities.[83]
Under these circumstances the state's relationship with the big banks became
characterized by competition to attract private savings, as well as by
collaboration (the banks were charged with the profitable tasks of mobilizing
funds for the state and distributing credit on its behalf). The authorities'
seeming inattention to the banks' extensive manipulation of their own share
prices in the early eighties was one of the ways by which the state's economic
managers attempted to handle this mix of competition and collaboration.[84]
In addition, to protect the state's autonomy in fixing domestic credit
and interest rates, international currency flows and the holding of foreign
currency inside Israel were limited or banned outright. While most foreign
currency controls were removed by the first Likud government in 1977, it
was still necessary to finance a growing deficit and as a result controls
were gradually reinstated.[85]
As this example demonstrates, lowering fiscal indebtedness was a necessary
condition for capital market deregulation. With the abrupt ending of hyper-inflation
by the stabilization plan in 1985, public sector costs were reduced and
state revenues enhanced. Along with other elements of the plan (such as
large cuts in price subsidies and the partial de-indexation of wages),
these developments virtually wiped out the domestic budget deficit. Since
then, Treasury and Bank of Israel officials and the responsible cabinet
ministers have been committed to ending the various forms of government
regulation of savings and credit and to easing the local capital market
into the international market. The measures already implemented or decided
upon include eliminating "directed credit" and encouraging businesses to
turn instead to banks and the stock market; and cutting the state's claims
on (and obligations to) pension funds, provident funds and insurance companies.
In addition, foreign currency flows and holdings have been partially deregulated,
so that while the Israeli shekel is still not fully convertible, foreign
interest rates now exert a stronger influence over local ones.
That the state today makes a diminished claim on domestic savings,
and that it has devolved the setting of important financial parameters
onto the market, cannot be in doubt. Yet it remains uncertain whether the
still ongoing process of capital market reform will be fully completed. [86]
As I have emphasized, the competitiveness of the enlarged capital market
is significantly bounded, especially given the obstacles facing attempts
to limit the role and power of the big banks. On the other hand, both sides
have reason to be satisfied by the partially liberalized status quo. The
Treasury and the Bank of Israel have been at least partly freed of the
necessity of propping up financial institutions and bidding up the cost
of attracting private savings, and are themselves among the potential beneficiaries
of the accessibility of foreign capital markets.
At the same time, the new avenues for raising capital (especially the
stock market) which have been opened up by the state's withdrawal and deregulation
measures have widened the scope for at least the very largest concerns
to lessen their traditional dependency on both the government and the banks.
Yet this enhanced flexibility need not promote a radical break with past
patterns of ownership and control of business. Companies that "went public"
during the stock market boom of 1992-3 by and large continued to be dominated
by the same individual owners or holders of controlling blocks of shares.
Similarly, the increased role of stock markets--domestic and overseas--in
the 1990s has not eliminated either government subsidies or bank credit
as mainstays of investment finance. Reliance on the New York exchanges
is realistic only for big or "hot" enterprises, while the local market
is operated largely by, and to an important extent for the benefit of,
the large banks. It is a testimony to this continued domination that independent
brokers, nonbank financial institutions and foreign commercial banks have
all made very limited inroads into the market for financial services, despite
facilitating changes in the rules of the game.[87]
5. The Labour Market
Liberalization of the labour market merits separate treatment because,
as I emphasized in the historical introduction, the labour market was the
stimulus and original site of many of the most distinctive features of
Israel's political economy. The problem of creating jobs for propertyless
Jewish settlers and insulating them from Arab competition led to the creation
in 1920 of the Histadrut as a unitary, multifunctional, politicized national
labour organization that for more than half a century played a dominant
role in politics, the economy and social protection. The problem of generating
work for settlers also stimulated the public and Histadrut economies, where
Israel's "bureaucratic sector" took root. The drive to provide immigrants
with jobs and prevent emigration encouraged a political consensus on the
desirability of full employment, as well as the readiness of successive
governments to subsidize an inefficient business sector provided that jobs
were created.
Given this background, the labour market sphere has generated what
must be judged as perhaps the three most remarkable signs of contemporary
change in Israel's political economy. First, revolutionary transformations
of the structure and rationale of the Histadrut have led some observers
to cast doubt on its continued viability. In the last few years the labour
organization has experienced an internal political upheaval, massive membership
losses, and the paring down of its mandate to trade union representation.
Second, the government has violated an enduring nationalist taboo by admitting
large numbers of foreign gastarbeiter who have replenished and enlarged
Israel's stock of cheap non-citizen labour. Third, privatization of public
and Histadrut-owned business enterprises accompanied by reduction or "casualization"
of employment, together with diminished activity by the public sector (including
the military) in creating new jobs, have retrenched the "bureaucratic sector".
It is hard to exaggerate the importance of the Histadrut, prior to
the 1990s, in diverse spheres of Israel's political economy: power-brokering
in the Labour Party; shaping the formation of economic and social policy;
monopolizing the national-level representation of labour and centralized
collective bargaining; nominally directing the country's main health fund
and several of its largest financial and industrial enterprises; and leading
an irresistible "distributional coalition" by coordinating the demands
of private and Histadrut business and siding with privileged public sector
workers.[88]
The decomposition of the Histadrut's complex role-set had multiple sources,
but the most salient (and mutually reinforcing) developments may be summarized
as follows.
1. In 1979, after failing to gain the vital cooperation of the Histadrut
for restrictive wage and economic policies, the Likud government's Minister
of Finance revoked a long-standing arrangement whereby the Treasury authorized
and subsidized the Histadrut's use of its pension fund accumulations to
finance investment by its corporate affiliates. This act eliminated the
principal source of Bank Hapoalim's leverage over its largest client, the
Histadrut economy. Then in 1983 following the bank share collapse Hapoalim
suffered major losses and was effectively nationalized pending privatization.
Along with contraction of military-related demand in Israel and worldwide,
and the effects of deflation, the loss of favourable pension fund financing
also precipitated an acute crisis in Koor, the Histadrut's flagship conglomerate.
2. In the labour relations sphere, determined employers--including
Koor--embarked on the same road to decentralization and flexibilization
of labour relations followed by their counterparts in other countries.
Preoccupied with rearguard struggles to defend its affiliated pension funds,
health service and business enterprises, as well as its position inside
the Labour Party, and sensitive primarily to pressures from powerful groups
of workers who could threaten its representational monopoly, the Histadrut
leadership did little to counter layoffs and clawbacks in crisis-stricken
firms, or the growth of individual employment contracts, subcontracting
and temporary employment. Then, partly for conjunctural political reasons
and partly with an eye to obtaining aid for Koor's ailing enterprises,
the Histadrut cooperated with a key element of the 1985 stabilization plan--the
dismantling (albeit incomplete) of wage indexation. This removed the most
significant aspect of its role in countrywide wage negotiations. In addition,
the "framework agreements" hitherto negotiated for the whole of the business
sector between the Histadrut and the Manufacturers Association were scrapped.[89]
The combined result of the twin crises in the Histadrut's economic and
labour-representation roles was that it lost not only economic assets and
trade union legitimacy, but also the ability to pivot an alliance of big
labour and big business against the state.
3. Finally, a long-brewing political crisis inside the labour complex
came to a head in the runup to the 1994 Histadrut elections. Because of
its unpopularity and the pressure on Labour cabinet ministers to prioritize
aid to Histadrut enterprises and services over other policy goals, the
labour organization had become a political liability. A group of younger
liberals who had risen within the Labour Party independently of (and in
conflict with) the old Histadrut-based "machine", openly articulated this
tension. They succeeded in ousting the party-appointed Histadrut oligarchy,
and given the labour organization's desperate fiscal crisis and the government's
unwillingness to bail it out the result was not only a severing of the
traditional political ties between the Histadrut and the party, but also
the selling off of the Histadrut's business assets, the cessation of its
responsibilities for health care, and consequently its loss of hundreds
of thousands of captive members.[90]
Current attempts to reformulate a role for the Histadrut as a trade
union and to add roots from below to its corporate and centralized traditions
are best understood as a belated adaptation, almost half a century after
the event itself, to the challenge which statehood presented to the Histadrut's
prestate mode of operation. In contrast, the presence of some 200,000 foreign
"guest workers"--perhaps one eighth of business sector employment--poses
a stark contradiction to a core feature of Israel's state tradition, its
hostility to the entry of non-Jews other than for tourist purposes. Following
the occupation of the West Bank and Gaza, in an effort to prevent unrest
in the territories and meet unmet demand for construction and agricultural
labour, the government sanctioned the entry of Palestinian day labourers
on a commuter basis. In the late 1980s and early 1990s, when this flow
was disrupted by Palestinian strikes, Israeli retaliations and security
closures during the Intifada, the number of Palestinians employed
in Israel remained high (around 100,000, down by only 20%). But in 1993
security-related prohibitions were tightened considerably. Over the next
two years the escalating scarcity of Palestinian labour was compensated
almost precisely by increased quotas for "temporary" imported labourers,
the largest contingents originating in Thailand and Rumania.[91]
The scope of the guest worker phenomenon has rapidly outgrown the problem
of substituting for Palestinians, however, and observers agree that today
there are something like twice as many illegal as legal immigrant labourers
in Israel. Not only is this an indication of internationalization affecting
yet another of Israel's markets, but in consenting to labour importation
and delegating responsibility for its operation to private manpower companies,
the state has yielded capacities that include but go well beyond its role
in regulating the economy. Yet in contrast to other reforms, Israel's opening
to the global market in cheap labour does not reflect a strategic embrace
of liberalization by state elites. The decision to open the floodgates
to foreign labour is the consequence of the state's contradictory interests.
The political economy of Palestinian pacification--whether under conditions
of reconciliation and self-rule, or continuing Israeli occupation--requires
that the Palestinian proletariat be able to earn a living inside Israel,
but the real and perceived threat of terrorism leads policy in the direction
of shutting the Palestinians out.
The third dimension of liberalization of Israel's labour market is
the diminished (although by no means exhausted) role of the state in furnishing
employment. Privatization and deregulation, although incomplete, have putatively
lowered both the scope and the sheltered quality of employment in public
corporations, military industries, infrastructural monopolies, and the
former Histadrut enterprises. Employment in the public services (health,
education, government administration etc.) has declined somewhat during
the 1990s, and there has been a pronounced growth of new jobs in the business
sector.[92]
In particular, industry has responded to the low cost of employing experienced
skilled labour and highly specialized scientists and engineers from the
former Soviet Union.[93]
The third component of the public sector is the military, which like public
corporations and services has played a significant role in the past in
absorbing excess (Jewish) labour. In 1983 the regular army (including conscripts)
and reserve duty together accounted for over 12% of the total (civilian+military)
labour force. By 1995 this proportion had fallen to 8%.[94]
Conclusions
Israel's political-economic regime is without question in the advanced
throes of policy reforms, institutional shifts and structural changes that
are at odds with its long record of embedded illiberalism. Although much
of the traditional exceptionalism of the political economy in Israel is
disappearing before our eyes, three important reservations must be noted.
First, like any rapid major transformation liberalization has not occurred
evenly, consistently or completely. Second, despite dramatic reductions
in the role of the state, "normalization" of the Histadrut and the cultural
ascendancy of the market, the legacy of Zionist collectivism persists in
many of the practises--and even more, the discourses--that surround the
political economy. Third, the process of liberalization is indeterminate
because of its inherently political nature: it is an occasion for struggle
between winners and losers. The winners seek to exploit the rhetoric and
the institutional tools of liberalization in order to protect and strengthen
their favourable position in the status quo ante, thus changing both everything
and nothing. Backlash from the losers may retard, limit or even reverse
changes.
These are the reasons why many of our findings have seemed contradictory.
State expenditure is down, but some branches of public spending persist
and even grow. The state has reduced or eliminated its control of the capital
and foreign exchange markets, yet its role in wooing big multinational
corporations, marketing Israeli-made weapons technology and subsidizing
hi-tech startups has if anything increased. Big business is still the core
of the political economy, but it has been forced to accept huge cuts in
state subsidies and budget-derived profit opportunities. However, the state
has also greatly lowered corporate taxation and has opened up new opportunities
for private mobilization of capital and entry into foreign markets. While
Israel's business elite has become much more internationally oriented,
at least part of this process seems to reflect its interest in preserving
the hyper-concentrated structure bequeathed by the long era of state patronage.
The literature of political economy teaches us that transitions between
policy regimes are propelled by a combination of endogenous and exogenous
pressures for change: unintended and undesired consequences of existing
policies and institutions accumulate, while changing external conditions
add new opportunities and constraints. A longterm perspective on contemporary
trends reveals that in both the mid-sixties and the mid-eighties the Israeli
state found itself unable to revive a failing growth model that imposed
heavy burdens on the state itself. In both cases it was no longer possible
to resolve the contradictions by taking advantage of windfalls of imported
financial and human capital. Given a political conjuncture that made it
possible to ignore or even attack entrenched interests, the state responded
with radical breaks from past habits. Its new policies were aimed at shedding
economic obligations to powerful interests and defending its capacities
to manage both the public economy and the wider national economy.
Theoretically, this dialectic fits well with a view of public policy
as grounded in the state's interest in autonomy. When the pendulum swings
and the state becomes burdened by commitments that no longer empower it
vis-à-vis social groups and economic sectors, it may cast off these
fetters by devolving responsibilities to the market arena. The apparent
paradox of willful liberalization-that states willingly shed power in
order to regain it-makes sense analytically if we recognize the difference
between power as resources and power as autonomy. Forfeiting
resources may be the price which has to be paid for regaining lost autonomy.[95]
This perspective sheds light on the origins of radically liberalizing
policy initiatives like Israel's Mitun and its current liberalization drive.
It is less helpful in dealing with the question of how durable such
policy realignments are likely to be. After little more than a year, even
before the June 1967 war and its consequences propelled Israel towards
a new political economic regime, the liberalizers of the time encountered
serious difficulties in sustaining recessionary discipline and reaping
the expected harvest of export-led growth.[96]
However, in the dozen years that have elapsed since 1985 the structural
reforms which were the subtext of the stabilization plan have been partially
and sometimes haltingly implemented, but incontrovertibly so. Israel's
political economy has changed, in ways that did not seem possible in the
past.
To understand how a new regime becomes viable, we need to focus on
the formation of mutually profitable coalitions that link (sectors of)
the state with (sectors of) society.[97]
Established patterns are unlikely to be broken for long unless the state's
interest in initiating change connects with compatible interests (or at
the very least, encounters a low probability of resistance) in important
power centres outside of the state. This survey has identified trends during
the 1980s and early 1990s that furnished precisely this condition.
1. The multifaceted political exchange between the Histadrut and the
state-key to the persistence of the collectivist/interventionist bias in
economic policy-was undermined by the Histadrut's decomposition, which
also wore away the common political destiny which had bound the labour
organization and the Labour Party.
2. Several key centres of the "big economy"--the major banks and the
Koor conglomerate--were weakened by serious crises.
3. Globalization offered new opportunities to market, produce and finance
business activity--opportunities that were greatly enhanced by free trade
agreements on the one hand and the "peace process" on the other.[98]
The first two of these developments weakened the capacity of the most
powerful beneficiaries of "excessive state intervention" to resist retrenchment;
the third trend is indicative of a new global strategy for big business
no less profitable than the previous regime. Indeed, the new turn in state/economy
relations opened the way to transforming what had been vicious circles
into virtuous circles. From the state's viewpoint, its new profile in the
economy not only greatly eased fiscal strains,[99]
but also contributed to the new 1990s formula for rapid economic growth
led by the export-oriented hi-tech sector. For big business a slimmer state
meant fewer capital subsidies but also turned out to offer significant
advantages. Privatization offered opportunities for private takeover of
public enterprises and weakened the pressure from the bureaucratic sector
on private sector wages. A smaller state budget led to lower taxes and
a far more open capital market. But the budget has remained big enough
to sustain vigorous state intervention helpful to business, including absorption
of masses of cheap and productive immigrants, and educational and industrial
policies that enhance Israel's edge in technology and expertise.
The role of the state thus remains crucial even though it is less obvious.
In particular, it remains true that the state's management of the national
conflict continues to impact on the political economy. The state plays
a decisive trail-blazing role for Israel's arms industry, which remains
the world's fifth largest exporter.[100]
Perhaps most important of all, if the state were to turn its back on the
peace process then internationally-oriented business strategies would be
hampered and the military burden on the budget would rise again. Not only
the conflict but another traditional extra-economic state function--its
"demographic interest"--continues to be invested with major economic implications.
I am referring of course to the immigration wave of the early 1990s, on
which liberalization impacted not by ruling out state intervention but
by transforming its instruments. Most of the privileges earmarked for immigrants
have been dispensed as entitlements to financial aid rather than (as in
the past) by bureaucratic allocation of state-provided goods, services
and exemptions. Similarly, the shift in industrial policy from blanket
subsidies to "picking winners" in hi-tech fields is testimony to the renewed
(albeit "market-conforming") steering capacities of the state.
The virtuous circles metaphor for the current thrust of relations between
the state and business should not be pushed too far. There is still ample
room for tension between the two sides. In this connection it is important
to recognize that the Treasury performs a dual role, both orchestrating
diminution of the state and attempting to appropriate some of the benefits
of liberalization for the state. In the specific cases of taxing capital
gains on stock-market profits and diminishing the holdings of the big banks
in industrial and service corporations, this "clawback" dynamic has resulted
in sometimes acrimonious and still unsettled conflicts with big business.[101]
It is not difficult to imagine other potential threats to the institutionalization
of liberalization. The decline of hitherto protected industries, shrinkage
of the bureaucratic labour market, and the mass importation of non-Jewish
guest workers could all give rise to politically potent reactions.[102]
The 1996 elections have already demonstrated that the losers from liberalization
can crystallize into a substantial political force, although so far this
force has been focused on issues relating to peace/borders and identity
politics. The evident contradiction between the present government's activist
impulses in relation to settlement and defence and its proclivity for shrinking
the economic presence of the state could end up forcing it to backtrack
on liberalization.
In any event, it is by no means obvious that the new growth model is
sustainable, or even that it is entirely new. The developing economic downturn
during 1997 raises the possibility that in the future Israel's strong economic
performance in the 1990s may come to be seen as only a conjunctural success,
a latterday version of the old-fashioned growth machine powered by inflows
of human and financial capital. Even if the market-driven and globally
anchored growth model envisioned by the champions of economic liberalization
really has taken root, it remains vulnerable should the collapse of the
"peace process" and tension between the US and Israel cause foreign investors
and financial institutions to revise their favourable view of Israel's
economic potential. In sum, liberalization is real, entails far-reaching
changes, and is supported by a genuine mutuality that bridges the state
and business. But it is still too early to predict how complete and how
durable the transformation of the Israeli political economy will turn out
to be.
From the comparative standpoint espoused by this volume, the Israeli
story is similar in essence to trends discernable elsewhere. The state
has inaugurated a series of reforms very much in line with the "Washington
consensus". Major barriers to national integration into international capital
markets have been removed, stimulating cross-border capital flows and foreign
trade. Some large government-owned banks and businesses have been sold
to private owners. Public expenditure, taxes and the state's indebtedness
have all been markedly reduced. Deregulation has eliminated important forms
of economic guidance and control by the state, and has eroded the preeminence
of some significant public and private monopolies.
As in other countries, there are also contradictions. To a greater
or lesser extent specific processes of liberalization have been incomplete
or only skin-deep, a testament to the continuing ability of states to retain
nationally distinctive institutions and policy paradigms (albeit within
limits set by global pressures). Israel is also no exception to the rule
that at the ideological level, liberalization has become the sole economic
programme favoured by all major political parties, yet the employees and
beneficiaries of the welfare state oppose its retrenchment and the mass
public remains much more positive towards state expenditure than the politicians
and their economic advisors. In short, the politics of liberalization,
like the politics of economic policy generally, is rooted in the conflicting
interests of winners and losers; furthermore, these interests are just
as likely to be camouflaged as revealed by the contenders' ideological
positions.
A comparative perspective on liberalization is handicapped by the absence
of reliable cross-national data against which the relative progress of
state contraction in Israel could be assessed.[103]
An educated guess is that, relative to trends in other countries, Israel
has gone particularly far in cutting (non-social) public expenditure and
in deregulating the state's role in capital markets; is around the average
with respect to trade and foreign-currency reforms and privatization; and
ranks below the average in terms of welfare state retrenchment.
A comparative perspective on the dependent variable (how much liberalization?)
is important for defining the puzzle: like other countries, over the last
decade or so Israel has fundamentally altered longstanding patterns of
state/economy relations; but as elsewhere, some elements of state contraction
have been much more marked than others. Immigrant absorption, settlement
over the pre-1967 borders and aid to outlying areas within those borders
continue to make significant claims on national resources, as do military
commitments that continue to preempt close to one quarter of government
budgets.[104]
A comparative perspective on the independent variables (what are the forces
that advance or retard liberalization?) requires that we pay attention
to the continuing distinctiveness of Israel as a settler society with contested
borders and legitimacy. The collectivist economy that was the historical
legacy of Jewish settlement and Arab-Jewish conflict in the prestate period
is difficult to dismantle precisely because conflict and settlement continue
to shape state commitments.
These issues are of course hotly contested in Israel's political discourse
and practices. Ironically, while both the left and right wings of the political
spectrum favour liberalization, they hold opposed positions on how to resolve
longstanding boundary disputes. The "expansionist" position requires considerable
state activism and funneling of economic resources to consolidate and defend
territory, a requirement patently at odds with state contraction.[105]
The right in Israel is also political home to Jewish social groups whose
precarious economic standing would be deeply threatened by a rollback of
Israel's settler-society welfare state and the triumph of meritocratic
individualism.
The left, which in Israel means the "peace camp", holds out the prospect
of further reducing military spending and altogether eliminating the costs
of occupying and settling Palestine, as well as profitable exploitation
of the regional and international economies formerly blocked by the Arab-Israeli
conflict. Yet except for Arab-backed parties, the left remains committed
to continued military strength and Jewish territorial, demographic and
cultural predominance. It is thus both unable and unwilling to contemplate
an alternative to the active settler-society state. The logical option
for the left--a "post-Zionist" vision of Israel as a politically liberal
state in the service of (all of) its citizens--is fundamentally at odds
with almost the entire spectrum of Jewish opinion, both at the elite and
the mass levels. It is especially at odds with the religious-nationalist
ethos of the right, on which the socio-political standing of the economic
losers from liberalization is so dependent.
But both right and left share a commitment to the Zionist consensus.
The triumph of economic liberalization may eventually overpower this hegemony,
unintentionally and perhaps even unconsciously.[106]
Whatever the outcome, it is precisely the high and unique stakes involved--for
Israel's identity as well as its political economy--which a comparative
view of liberalization so effectively clarifies.
Notes on the Charts
Chart 1: Military spending as a percent of GNP, using the SNA system
from 1980 (old series linked to new at 1980). "Domestic" is net domestic
defence consumption; "imports" is direct defence imports, including advance
payments. The "aid to arms" ratio is intergovernmental transfers divided
by defence imports. To dampen their volatility, imports and aid are three-year
moving averages. (BOI-96, Appendix Table Hay-1a,1b)
Chart 2: Subsidies on exports and domestic production combine
direct supports and credit subsidies. (BOI-96, Appendix Table Hay-7).
Revenues from corporate taxes combine two series. First, corporate income
tax data published by the State Revenues Administration (annual report
for 1996, Table Chet-1 and parallel data from earlier reports).
Second, CBS data on social security contributions and payroll taxes (Abstract-97,
Table 6.13 and earlier years).
Endnotes
[1]
An earlier version of this paper, which readers may wish to consult for
additional tables and charts, is forthcoming in Humboldt Journal of
Social Relations. That paper was written while I was a guest at the
Swedish Institute for Social Research, benefiting from the stimulation
and generosity of Walter Korpi and Joakim Palme. Dani Maman and Meir Shabat
were extremely helpful in providing me with data and other assistance from
afar. I am also indebted to Gershon Shafir, Meir Shabat and Dani Filc for
their exceptionally thoughtful comments.
[2]
D. Patinkin, The Israel Economy: The First Decade, Jerusalem, 1960.
[3]
M. Shalev, Labour and the Political Economy in Israel, Oxford, 1992.
[4]
On the notion of policy regimes, see G. Esping-Andersen, The Three Worlds
of Welfare Capitalism, Cambridge, 1990. The concept of "political-economic
regimes" is an alternative to the more grandiose "social structures of
accumulation" used in my book. For discussion of these and related conceptualizations,
see B. Jessop, 'Regulation Theories in Retrospect and Prospect', Economy
and Society, Vol.19, No.2 (1990), May, pp.153-216; L. Mjøset,
'Nordic Economic Policies in the 1970s and 1980s', International Organization,
Vol.41, No.3 (1987), Summer, pp.403-.
[5]
For a concise survey, see B. Cohen, 'Phoenix Arisen: The Resurrection of
Global Finance (Review Article)', World Politics, Vol.48, No.2 (1996),
Jan., pp.268-96. Economist Paul Krugman has argued vigorously that politicians
and other interested parties exploit "pop internationalism" to their own
end; P. Krugman, Pop Internationalism, Cambridge MA, 1996. The political
construction of "global imperatives" has been insightfully discussed in
the Latin American context by B. Geddes, 'How Politicians Decide Who Bears
the Costs of Liberalization', in Ivan T. Berend (ed.), Transition to
a Market Economy at the End of the 20th Century, Munich, 1995, pp.203-28;
K. Weyland, 'Neo-Populism and Neo-Liberalism in Latin America: Unexpected
Affinities', Studies in Comparative International Development, Vol.32,
No.3 (1997), Fall, pp.3-31.
[6]
For evidence of cross-national divergence, see S. Berger and R. Dore (eds.),
National Diversity and Global Capitalism, Ithaca NY, 1996; R.O.
Keohane and H.V. Milner (eds.), Internationalization and Domestic Politics,
Cambridge, 1996. On the limits and paradoxes of retrenchment, see P. Pierson,
'The New Politics of the Welfare State', World Politics, Vol.48,
No.2 (1996), pp.143-; S.K. Vogel, Freer Markets, More Rules: Regulatory
Reform in Advanced Industrial Countries, Ithaca NY, 1996. On the role
of partisan differences and party dynamics, see T.R. Cusack, 'Partisan
Politics and Public Finance: Changes in Public Spending in the Industrialized
Democracies, 1955-1989', Public Choice, Vol.91, No.3-4 (1997), pp.375-95.
[7]
L. Mjøset, 'The Nordic Model Never Existed, But Does It Have a Future',
Scandinavian Studies, Vol.64, No.4 (1992), pp.652-71; F.G. Castles,
Families of Nations: Patterns of Public Policy in Western Democracies,
Brookfield VT, 1993.
[8]
The term "embedded liberalism" was coined by J.G. Ruggie, 'International
Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic
Order', International Organization, Vol.36, No.2 (1982), Spring,
pp.379-415.
[9]
B. Kimmerling, Zionism and Territory: The Socio-Territorial Dimensions
of Zionist Politics, Berkeley, 1983; G. Shafir, Land, Labor and
the Origins of the Israeli-Palestinian Conflict 1882-1914, Cambridge,
1989; M. Shalev, Labour and the Political Economy.
[10]
Z. Sternhell, Nation-Building or Social Reform? Nationalism and Socialism
in the Israeli Labor Movement 1904-1940 (in Hebrew), Tel Aviv, 1995;
M. Shalev, 'Time for Theory: Critical Notes on Lissak and Sternhell', Israel
Studies, Vol.1, No.2 (1996), pp.170-88.
[11]
On economic policy see H. Barkai, 'The Public, Histadrut, and Private Sectors
in the Israeli Economy', in The Falk Project for Economic Research in
Israel: Sixth Report, 1961-1963, Jerusalem, 1964, pp.15-77; Y. Plessner,
The Political Economy Of Israel: From Ideology to Stagnation, Albany
NY, 1994. The failure of early welfare state initiatives is discussed by
A. Doron and R. Kramer, The Welfare State in Israel -- the Evolution
of Social Security Policy and Practice, Boulder, 1991.
[12]
U. Bialer, Between East and West : Israel's Foreign Policy Orientation,
1948-1956, Cambridge, 1989; G. Yago, 'Whatever Happened to the Promised
Land? Capital Flows and the Israeli State', Berkeley Journal of Sociology,
Vol.21 (1977), pp.117-46.
[13]
N. Halevi, 'Economic Growth and Economic Cycles in the Jewish Economy of
Mandatory Palestine (in Hebrew)', in Iyunim Bekalkala 1981, 1983,
pp.313-21; M. Beenstock, J. Metzer, and S. Ziv, Immigration and the
Jewish Economy in Mandatory Palestine: An Econometric Explanation,
(1993), Falk Institute Discussion Paper No. 93.02, January .
[14]
I. Sharkansky and A. Radian, 'Changing Domestic Policy 1977-1981', in Robert
O. Freedman (ed.), Israel in the Begin Era, New York, 1982, pp.56-75;
Y. Ben-Porath, 'The Conservative Turnabout that Never Was', Jerusalem
Quarterly, No. 29 (1983), Fall, pp.3-10.
[15]
N. Halevi and R. Klinov-Malul, The Economic Development of Israel,
New York, 1968; Y. Ben-Porath, 'Introduction', in Yoram Ben-Porath (ed.),
The Economy of Israel: Maturing through Crisis, Cambridge MA, 1986,
pp.1-23; Y. Aharoni, The Israeli Economy: Dreams and Reality, New
York, 1991.
[16]
D. Bernstein and S. Swirski, 'The Rapid Economic Development of Israel
and the Emergence of the Ethnic Division of Labour', British Journal
of Sociology, Vol.33, No.1 (1982), March, pp.64-85.
[17]
M. Shalev, Labour and the Political Economy; P. Evans, D. Rueschemeyer,
and T. Skocpol (eds.), Bringing the State Back In, Cambridge, 1985.
[18]
M. Shalev, 'Labor, State and Crisis: An Israeli Case Study', Industrial
Relations, Vol.23, No.3 (1984), pp.362-86.
[19]
A. Mintz, 'The Military-Industrial Complex: The Israeli Case', Journal
of Strategic Studies, Vol.6, No.3 (1983), September, pp.103-28; H.
Barkai, The Defense Industries at a Crossroads (in Hebrew), (1987),
Research Paper No. 197, Falk Institute for Economic Research in Israel,
Jerusalem. .
[20]
E. Farjoun, 'Class Divisions in Israeli Society', Khamsin (London),
No. 10 (1983), pp.29-39; Y. Aharoni, Structure and Performance in the
Israeli Economy (in Hebrew), Tel Aviv, 1976; M. Semyonov and N. Lewin-Epstein,
Hewers of Wood and Drawers of Water: Noncitizen Arabs in the Israeli
Labor Market, Ithaca NY, 1987.
[21]
L.L. Grinberg, Split Corporatism in Israel, Albany NY, 1991; M.
Shalev, 'Israel's Domestic Policy Regime: Zionism, Dualism, and the Rise
of Capital', in Francis G. Castles (ed.), The Comparative History of
Public Policy, Cambridge, 1989, pp.100-48; S. Bichler, The Political
Economy of Military Spending in Israel (in Hebrew), Unpublished PhD
dissertation, Department of Political Science, Hebrew University of Jerusalem,
1991.
[22]
M. Bruno, Crisis, Stabilization, and Economic Reform: Therapy by Consensus,
Oxford, 1993.
[23]
M. Shalev and L. Grinberg, Histadrut-Government Relations and the Transition
from a Likud to a National Unity Government: Continuity and Change in Israel's
Economic Crisis, (1989), Discussion Paper 19-89, Pinhas Sapir Center
for Development, Tel Aviv University, October ; H.J. Barkey, 'When politics
matter: Economic stabilization in Argentina and Israel', Studies in
Comparative International Development, Vol.29, No.4 (1994), Winter,
pp.41-67.
[24]
A. Razin and E. Sadka, The Economy of Modern Israel: Malaise and Promise,
Chicago, 1993.
[25]
S. Bichler and J. Nitzan, 'Military Spending and Differential Accumulation:
A New Approach to the Political Economy of Armament--The Case of Israel',
Review of Radical Political Economics, Vol.28, No.1 (1996), March,
pp.51-95. The shift in opinion among key figures in the business elite
has been retrospectively confirmed by a series of interviews carried out
by Yehezkel Lein and myself during the summer of 1997.
[26]
L.L. Grinberg, Split Corporatism in Israel.
[27]
M. Keren, 'Economists and Economic Policy Making in Israel: The Politics
of Expertise in the Stabilization Program', Policy Sciences, Vol.26,
No.4 (1993), pp.331-46.
[28]
The World Competitiveness Yearbook is an expensive annual compendium
published privately in Switzerland and targeted at governments and well-heeled
investors. The cited ranking summarizes a battery of quantitative and qualitative
indicators, including the results of a survey of executives in all the
countries studied.
[29]
For the sake of comparability I cite data from The Penn World Table (Mark
5.6), as made available at http://datacentre.epas.utoronto.ca:5680/pwt/pwt.html.
Bank of Israel data covering the same period (1975-92) exhibit almost identical
trends but have much higher absolute values. The idiosyncratic nature of
the Israeli trend is emphasized by the fact that during the 25 year period
ending in 1990, in the average OECD member-state the ratio of trade to
GNP rose by 10 points. G. Garrett and D. Mitchell, 'Globalization and the
Welfare State: Income Transfers in the Industrialized Democracies, 1966-1990',
Paper presented at Annual Meeting of the American Political Science Association,
San Francisco, 1996. The Penn Tables cover 40 countries in Europe, the
Americas & East Asia. Excluding East Germany and Puerto Rico. Israel's
rank on openness declined from 6 in 1975-84 to 7 in 1985-9 to 10 in 1990-92.
[30]
BOI-96, Diagram Vav-1.
[31]
For detailed data on manufacturing exports, see the annual HaTa'asiya
Beyisrael published by the Ministry of Industry and Commerce's Planning
Administration.
[32]
Data for Israel are from BOI-95 [Bank of Israel Annual Report for
1995], Appendix Table 14. The comparison with 19 OECD members is drawn
from the OECD's Main Economic Indicators, which indicates that Austria
and Switzerland have the highest import surpluses at only around three
percent of GDP.
[33]
H. Regev and S. Bar-Eliezer, Control over the Domestic Market and Economic
Performance in Israeli Industry (in Hebrew), (1994), Falk Institute
Discussion Paper No. 94.05 . Significantly, the overall rise between the
low of 1980/81 and the peak reached in 1990 was quite widely diffused.
Increases were posted in this period for 20 of the 22 disaggregated branches
investigated by Regev and Bar-Eliezer, although in 3 cases the change was
only negligible.
[34]
N. Halevi (ed.) Import Policy and Exposure of Israeli Industry (in Hebrew),
Jerusalem, 1994. On import duties, see the annual reports of the State
Revenues Administration.
[35]
Both the figure cited here and the presentation in Chart 3 are based on
data published in BOI-95, Appendix Table 12 which include both explicit
supports and implicit credit subsidies. However, many other traditional
elements in government aid to exporters, such as the provision of subsidized
land, infrastructure and labour, are not included in the figures.
[36]
A high estimate of philanthropic aid, based on the category "foreign transfers
to the national institutions and non-profits" in Appendix Table 11 of BOI-95,
put it at under 2% of GNP throughout the last decade. In an article in
Yediot Acharonot on August 20th, 1996, former Deputy Foreign Minister
Yossi Beilin wrote that Israel's receipts from the United Jewish Appeal
had declined to less than $300 million a year, and that the Israel Bonds
had become a more expensive way of raising money than free market loans.
[37]
BOI-95, p.238.
[38]
For an optimistic survey of foreign investment, which dates the breakthrough
to the Madrid peace conference of 1991, see H. Sher, 'After the Revolution',
The Jerusalem Report, October 17 1996, pp.37-41. I have also benefited
from conversations on this topic with two Israeli bankers, Yair Saroussi
and Nir Oliver.
[39]
BOI-96, Appendix Table Vav-13.
[40]
D. Levi-Faur, Pinhas Sapir and the Industrial Development of Israel
(in Hebrew), Tel Aviv, 1993.
[41]
Yediot Acharonot (Mamon), October 1 1997.
[42]
Natan Lipson and Sami Peretz, Ha'aretz, October 28 1997.
[43]
The dubious economic benefits to Israel of the gigantic Intel subsidy have
been noted in many media commentaries (e.g. Oded Lipschitz in Davar
Hashavua, March 29 1994). Another noteworthy case is the 38% subsidy
promised to Volkswagen (the government paid for $133 of its nominal $350
million investment) for a joint magnesium production venture with the Dead
Sea Works (Jerusalem Report, June 27 1996).
[44]
In a communiqué dated November 6 1996, the Economics Desk of the
Government Press Office reported that investment in Israeli shares by foreign
citizens had reached $5.5 billion, while other financial assets held by
foreigners amounted to $14 billion.
[45]
M.A.o. Israel, Globalization in Israeli Industry: Report of the Committee
for Strategic Thinking (in Hebrew), Tel Aviv, (1997), Economic Division,
MAI; BOI-96, Appendix Table Vav-13.
[46]
Comparison is between the five years preceding stabilization (1980-84)
and the most recent five-year period for which data are available (1992-96).
BOI-96, Appendix Table Hay-1a.
[47]
This terminology is borrowed from R. Friedland and J. Sanders, 'The Public
Economy and Economic Growth in Western Market Economies', American Sociological
Review, Vol.50 (1985), August, pp.421-37.
[48]
M. Shalev, Labour and the Political Economy.
[49]
In addition to subsidies granted under the Investment Incentive Law, the
main formal means of capital subsidy--since abolished--was "directed credit"
channeled through the commercial banks. Already by 1990 the cost to the
government of directed credit was less than a quarter of its 1984 level
in real terms.
[50]
Data are based on budgetary allocations and are derived from Tables 1 and
2 of the statistical appendix to Y. Kop (ed.) Allocation of Resources
to Social Services 1996 (in Hebrew), Jerusalem, 1997. According to
the same source, in the 1990s the ratio of debt service to GDP fell by
about 6 points. The Bank of Israel's estimates of the ratio of debt service
to GNP (BOI-96, Appendix Table Hay-2b) are much more conservative,
but they also indicate a major drop in the burden of both domestic and
foreign interest payments.
[51]
S. Hadar, Blurring of the Boundaries between Public and Private in Relations
between State and Industry (in Hebrew), Unpublished doctoral dissertation,
Department of Political Science, Hebrew University of Jerusalem, 1990;
S. Bichler and J. Nitzan, 'Military Spending and Differential Accumulation'.
[52]
The data on domestic military expenditure in Chart 3 combine procurement
expenses (including construction costs) with wage costs. The latter have
hardly declined, while between 1985 and 1995 the share of the former in
national product fell from 7.5% to 3.5%. (Calculated from BOI-95, Table
Hay-7.)
[53]
D. Swank, 'Funding the Welfare State, Part I: Global Capital and the Taxation
of Business in the Advanced Market Economies', Paper presented at Annual
Meeting of the American Political Science Association, San Francisco, 1996.
[54]
See the annual report of the State Revenues Administration for 1996, Table
Kaf-12.
[55]
Z. Schuldiner, A Look at the 1996 Budget (in Hebrew), Tel Aviv,
(1996), Adva Center. Schuldiner estimated that relief of employer contributions
to social security and health insurance, along with a wage subsidy paid
to employers for the first two years of new hires, accounted for 12.5%
of the government's "social expenditure" budget for 1996.
[56]
O. Yosha and Y. Yafeh, 'The Capital Market Reform 1985-95 and Modes of
Finance in Israeli Manufacturing (in Hebrew)', Rivon Lekalkala,
No. 43 (1996), Table 3.
[57]
For comparative discussions, see J.D. Stephens, E. Huber, and L. Ray, 'The
Welfare State in Hard Times', Paper presented at Conference on the Politics
and Political Economy of Contemporary Capitalism, Humboldt University and
the WZB, Berlin, 1995; P. Pierson, 'New Politics of the Welfare State'.
This section relies on data presented in the annual report of the Center
for Social Policy Studies in Israel; Y. Kop (ed.) Allocation of Resources.
The estimates from this source, which are based on substantive definitions
of expenditure categories and refer to budget allocations, are more conservative
(especially regarding income maintenance) than the national accounts data
published by the Bank of Israel and referred to earlier.
[58]
See also Z. Schuldiner, A Look at the 1996 Budget.
[59]
Retired women who did not work outside the home are now entitled to pensions,
and an economically significant form of discrimination against Palestinian
citizens has been ended with the decoupling of child allowances from military
service.
[60]
Z. Schuldiner, A Look at the 1996 Budget.
[61]
H.J. Karger and M. Monnickendam, 'The Radical Right and Social Welfare
in Israel', in James Midgley and Howard Glennerster (eds.), The Radical
Right and the Welfare State: An International Assessment, Savage MD,
1991, pp.124-40.
[62]
While rules for the receipt of unemployment benefit were toughened with
a view to making refusal of job offers more difficult, this failed to reduce
the number of unfilled vacancies during the period of high unemployment
in the early 1990s. S. Amir, Unemployment in Israel 1964-1989: An Analysis
based on the Beveridge-Curve Model, (1996), Discussion paper No. 96.04,
Falk Institute for Economic Research, Jerusalem, March .
[63]
For a general discussion, see A. Doron and H.J. Karger, 'The Privatization
of Social Services in Israel and its Effects on Israeli Society', Scandinavian
Journal of Social Welfare, Vol.2 (1993), pp.88-95. It is hard to find
reliable indicators of expenditure on "gray" health and education services.
One analysis of the Household Expenditure Survey has shown little change
in expenditure on private health services between 1986/7 and 1992/3, but
this conclusion is probably already outdated. See A. Berg, B. Rosen, and
G. Ofer, Changes in Household Expenditure on Health, (1996), Research
Report No. RR-246-96, Brookdale Institute of Gerontology, Jerusalem .
[64]
A. Doron, In Defense of Universalism: The Challenges Facing Social Policy
in Israel (in Hebrew), Jerusalem, 1995; A. Doron, 'The Contradicting
Trends in the Israeli Welfare State: Poverty, Retrenchment and Marginalization',
Paper presented at 19th Meeting of the ISA Research Committee on Poverty
and Social Policy, Copenhagen, 1997; Z. Schuldiner, A Look at the 1996
Budget.
[65]
E. Farjoun, 'Class Divisions in Israeli Society'. A. Doron, 'The Histadrut,
Social Policy and Equality', Jerusalem Quarterly, No. 47 (1988),
Summer, pp.131-44.
[66]
E. Kleiman, The Structure of Israel [sic] Manufacturing Industries 1952-
1962, (1964), Unpublished paper for the Falk Project for Economic Research
in Israel, Jerusalem, December ; A. Bregman, 'Government Intervention in
Industry: The Case of Israel', Journal of Development Economics,
Vol.25 (1987), pp.353-67; D. Levi-Faur, Pinhas Sapir; Y. Aharoni,
The Israeli Economy.
[67]
F.L. Pryor, Property and industrial organization in communist and capitalist
nations, Bloomington, 1973.
[68]
On the theory and the Israeli experience of business groups, see respectively
M. Granovetter, 'Business Groups', in N.J. Smelser and R. Swedberg (eds.),
The Handbook of Economic Sociology, Princeton, 1994, pp.453-75 and
Danny Maman's contribution to this volume. Until recently the striking
role of big business in Israel and of banking within it was rarely mentioned
by mainstream economists and never studied by them. Yair Aharoni and Shimshon
Bichler were the first scholars to definitively establish the dualist character
of Israeli capitalism. Y. Aharoni, Structure and Performance; R.
Rowley, S. Bichler, and J. Nitzan, Some Aspects of Aggregate Concentration
in the Israeli Economy 1964-1986, (1988), Working paper No. 7/88, Department
of Economics, McGill University . More recently, hyper-concentration in
banking and the big banks' multiple roles as owners, financiers and investors
have been explored by A.L. Bebchuk, L. Kaplow, and J.M. Fried, Concentration
in the Israeli Economy and Bank Investment in Commercial Companies,
(1995), Unpublished typescript ; and by O. Yosha and Y. Yafeh, 'Capital
Market Reform'. Indirect indications of the market domination of big business
are furnished by H. Regev and S. Bar-Eliezer, Control over the Domestic
Market.
[69]
S. Bichler, The Political Economy of National Security in Israel: Some
Aspects of the Activities of the Dominant Blocs of Capital (in Hebrew),
Unpublished M.A. Thesis, The Hebrew University of Jerusalem, 1986; M. Shalev,
Labour and the Political Economy.
[70]
The most up to date source of data on big business profits is S. Bichler
and J. Nitzan, 'The Great U-Turn: Restructuring in Israel and South Africa',
News from Within, Vol.11, No.9 (1995), September, pp.29-32, but
these figures are not entirely consistent with earlier publications by
Bichler cited in previous notes. According to Bichler and Nitzan, big business
profits declined precipitously after 1984 and experienced only a very modest
recovery through 1993 (the latest date of the series).
[71]
The "Brodet Committee" on bank ownership of non-financial corporations
was a milestone in this respect. D. Brodet, Report of the Committee
to Examine Structural Changes in the Capital Market (in Hebrew), Jerusalem,
1995. The unprecedented activism of the current directors of two units
of the Treasury--the Supervisor of the Capital Market and the Antitrust
Commission--also constitute a sharp break with past practice. See for example
Ha'aretz weekend supplement, November 28 1997.
[72]
Between 1982/3 and 1990 the three-firm concentration ratio fell from 43%
to 34% of total domestic sales. H. Regev and S. Bar-Eliezer, Control
over the Domestic Market:Appendix Table 1.
[73]
On the skepticism of well-placed observers, see the articles in Globes
by Haim Barkai on December 20 1995 and by Orna Raviv on December 4 1995.
As long ago as 1981 the Banking Law tried unsuccessfully to prohibit banks
from holding more than 25% of the equity of any non-financial corporation.
See O. Yosha, 'Privatising Multi-Product Banks', Economic Journal,
Vol.105, No.433 (1995), pp.1435-53. The recommendations of the Brodet Committee,
endorsed by the government at the end of 1995, postponed the deadline for
implementation of the Banking Law to the end of 1996, although the ownership
ratio is supposed to be further reduced (to 20%) by the end of the century.
[74]
See two articles by Sami Peretz in Ha'aretz, March 29 1996.
[75]
See the article by Danny Maman in this volume.
[76]
The June 1995 sale of the Histadrut's 22.5% stake in the Koor group to
Shamrock Partnerships, an American investment company, was immediately
followed by the distribution of options to Koor's management with a theoretical
value of close to $30 million. Shamrock has since sold out, for a considerable
profit, to a consortium led by the Bronfman family but Benny Gaon, the
aggressive chief executive of Koor, has kept his position under the new
regime just as he survived the previous transition. See Globes February
5 and February 27 1996 and July 24 1997. For a partially contrasting view
of the current position of the managerial elite, see Ephraim Reiner in
Ha'aretz, November 20 1997.
[77]
As Koor's CEO has candidly pointed out, one of the uses of internationalization
has been the possibility of countering dependence on traditional bank partners
(in Koor's case, Bank Hapoalim) by exploiting new opportunities to raise
capital abroad. B. Gaon, He Who Dares Wins (in Hebrew), Tel Aviv,
1997.
[78]
Ha'aretz, July 26 1996.
[79]
For a description of developments through 1992, see E. Murphy, 'Structural
Inhibitions to Economic Liberalization In Israel', Middle East Journal,
Vol.48, No.1 (1994), pp.65-88.
[80]
S. Eckstein, B.-T. Zilberfarb, and S. Rosowitz, 'The Process of Privatizing
Public Corporations in Israel: Survey and Evaluations for the Future (in
Hebrew)', Rivon Lekalkala (1993), May, pp.31-47. A recent study
suggests that in the 1968-88 period, Labour and Likud governments were
equally inactive in privatization. M. Harris, Y. Katz, and G. Doron, 'Ideology
and Privatization Policy in Israel', Environment and Planning C: Government
and Policy, Vol.15, No.3 (1997), August, pp.363-72. Additional sources
on privatization are Y. Katz, 'Privatization in Israel: 1962-1987 (in Hebrew)',
Medina, Memshal Veyachasim Benleumim, No. 35 (1991), pp.133-45;
M. Hasson, The Privatization Policy of the Government of Israel: Declarations
versus Action in Practice (in Hebrew), M.A., Jerusalem, 1995.
[81]
M. Hasson, Privatization Policy.
[82]
M. Schwartz, Unlimited Guarantees: History, Political Economy, and the
Crisis of Cooperative Agriculture in Israel (in Hebrew), Beersheba,
1995.
[83]
L. Leiderman and G. Bufman, Financial Reform in Israel: A Case of Gradualism,
Tel Aviv, (1994), Pinhas Sapir Center for Development.
[84]
Despite the judicial discourse of individual culpability in which it was
framed, the report of the commission of inquiry into the bank shares collapse
made this abundantly clear. See Commission of Inquiry into the Regulation
of Bank Shares, Final Report (in Hebrew), Jerusalem, 1986.
[85]
L. Leiderman and G. Bufman, Financial Reform in Israel; I. Tov,
'The Economic Upheaval of 1977 - Implementation of Operational Goals (in
Hebrew)', Rivon Lekalkala, No. 135-6 (1988), April, pp.33-47.
[86]
See the conclusions reached by O. Yosha and Y. Yafeh, The Capital Market
Reform and its Influence: An Analysis from the Angle of 'Industrial Structure'
(in Hebrew), Jerusalem, (1995), Bank of Israel Research Department;
and by L. Leiderman and G. Bufman, Financial Reform in Israel.
[87]
These assertions are empirically supported by a recent wave of research
sponsored by the Bank of Israel. See especially O. Yosha and Y. Yafeh,
'Capital Market Reform'; H. Ber, Y. Yafeh, and O. Yosha, Conflicts of
Interest in Universal Banking: Evidence from the Post-Issue Performance
of IPO Firms, Jerusalem, (1997), Bank of Israel Research Department,
Discussion Paper 97.05 .
[88]
L.L. Grinberg, Split Corporatism in Israel; L.L. Grinberg, The
Histadrut Above All Else (in Hebrew), Jerusalem, 1993; M. Shalev, Labour
and the Political Economy.
[89]
Between 1980-84 and 1992-93 the role of cost of living adjustments in business
sector wage increments was reduced by almost half (69% to 37%) and national-level
wage increases (formerly 13.5% of the total increment) were eliminated
altogether. D. Sharon, 'Wage Policy and its Implementation (in Hebrew)',
Kalkala Veavoda, No. 9 (1994), October, pp.97-115; see also Z. Sussman
and D. Zakai, The Decentralization of Collective Bargaining and Changes
in the Compensation Structure in Israel's Public Sector, Jerusalem,
(1996), Bank of Israel Research Department.
[90]
The decline of the Histadrut has hardly been investigated systematically.
See however the symposium in Rivon Lekalkala, April 1995. For earlier
developments (through the late 1980s) see L.L. Grinberg, Split Corporatism
in Israel. On the traditional political functions of the Histadrut
health fund and its ultimate loss, see respectively A. Arian, 'Health Care
in Israel: Political and Administrative Aspects', International Political
Science Review, Vol.2, No.1 (1981), pp.43-56; D. Chinitz, 'Israel's
Health Policy Breakthrough: The Politics of Reform and the Reform of Politics',
Journal of Health Politics, Policy and Law, Vol.20, No.4 (1995),
Winter, pp.909-32.
[91]
On the factors accounting for the entry of Palestinian labour to Israel
and its implications, see L.L. Grinberg, The Histadrut Above All Else:Chap.
6; M. Semyonov and N. Lewin-Epstein, Hewers of Wood. The foreign
worker phenomenon is documented by D.V. Bartram, Foreign Workers in
Israel: History and Theory, Jerusalem, (forthcoming, 1998), International
Migration Review, Vol.32, No.2; Ha'aretz, March 22, 1996; Skira Kalkalit
(Bank Hapoalim Economic Department), August 29 1996. The Kav LaOved
website is a source of current information on the employment of Palestinian
and foreign labour (http://www.aic.org/org/kav-oved).
[92]
BOI-96, Appendix Table Dalet-8.
[93]
Annual surveys of immigrant employment in industry conducted by the Manufacturers'
Association have revealed the scope of immigrant employment in industry.
Indirect evidence from the surveys, as well as media reports, point to
the role of downgrading (such as the employment of qualified engineers
as technicians, and technicians as skilled manual workers), low pay, and
government wage subsidies in rendering immigrants attractive to employers.
[94]
My calculations based on estimates of the number of conscript and career
soldiers published in The Military Balance (International Institute
for Strategic Studies, London) and the extent of absence due to reserve
duty as estimated by official labour force surveys.
[95]
I recognize, but have not investigated, a parallel (and complementary)
dialectic located inside the state apparatus: the economic-policy
bureaucracies favour a slimmer public economy with fewer commitments, because
this enhances their autonomy by trimming the sails of other departments
of state.
[96]
These difficulties derived from the resistance of the business sector to
operating without state subsidies, and challenges posed to the legitimacy
of the recession by popular unrest and individual out-migration. M. Shalev,
'The Mid-Sixties Recession: A Political-Economic Analysis of Unemployment
in Israel (in Hebrew)', Machbarot Lemechkar Ulebikoret, No.9 (1984),
February, pp.3-54.
[97]
P. Gourevitch, Politics in Hard Times: Comparative Responses to International
Economic Crises, Ithaca, 1986; P. Swenson, 'Bringing Capital Back in,
or Social Democracy Reconsidered - Employer Power, Cross-Class Alliances,
and Centralization of Industrial Relations in Denmark and Sweden', World
Politics, Vol.43, No.4 (1991), pp.513-44.
[98]
The links between economic liberalization and globalization and the peace
process have been emphasized by Y. Peled and G. Shafir, 'The Roots of Peacemaking
- the Dynamics of Citizenship in Israel, 1948-93', International Journal
of Middle East Studies, Vol.28, No.3 (1996), pp.391-413. For other
discussions of the "peace dividend", see J. Lederman, 'Economics of the
Arab-Israeli Peace Process', Orbis-a Journal of World Affairs, Vol.39,
No.4 (1995), pp.549-66; A. Retzky, 'Peace In the Middle East - What Does
It Really Mean For Israeli Business', Columbia Journal Of World Business,
Vol.30, No.3 (1995), pp.26-32; B.-Z. Zilberfarb, 'The Effects of the Peace
Process on the Israeli Economy', Israel Affairs, Vol.1, No.1 (1994),
pp.84-95;E.C. Murphy, 'The Arab-Israeli Peace Process: Responding to the
Economics of Globalization', Critique, Fall (1996), pp.67-91.
[99]
Comparison of experience in the 1990s with a decade earlier shows that
the state not only reduced its claims on the national product but also
changed the profile of public finance: capacities of tax extraction were
enhanced and reliance on debt and gifts reduced. (BOI-96, Appendix Table
Hay-1b)
[100]
Israel's rank in arms exports as reported by Israel Radio on October 14
1997, based on International Institute of Strategic Studies data. A good
example of the state's role in facilitating military exports is an agreement
reached between the Israeli and Polish governments for refurbishing helicopters
in Israel (Yediot Acharonot, October 15 1997), a $600m. deal that
pressure from another trail-blazing state--the U.S.--might ultimately force
Israel to yield.
[101]
The Finance Minister of the 1992-96 Labour government was forced by business
pressure to reverse the government's decision to tax stock market gains.
The saga is documented and analyzed by Yehezkel Lein in a forthcoming MA
thesis in the Department of Political Science at the Hebrew University.
[102]
As this paper was being completed (December 1997) a major confrontation
developed between the Histadrut and the Ministry of Finance. While a dispute
over pension reform was the central issue nominally at stake, the deeper
source of tension was the attempt by the country's strongest groups of
organized labour in the public sector to preempt state attacks on their
privileged position by allying themselves firmly with the Histadrut.
[103]
One area in which data are readily available--openness to international
trade--are the exception which proves the rule. I pointed out earlier in
the paper that evaluations of trends in Israel's trade ratio is complicated
by the role of arms and fuel imports and the diamond-processing industry.
Truly comparable data which takes account of these elements would be difficult
to assemble.
[104]
According to the 1997 annual report of the Centre for Social Policy Studies
in Israel, defence accounted for 23.9% of 1997 budgets.
[105]
While "expansionism" requires an interventionist state, some of the means
of this intervention can and have been effectively "liberalized", i.e.
delegated to the market. In the heyday of Jewish settlement in the occupied
territories, the state used massive subsidies to attract private contractors
and home buyers on the basis of financial self-interest.
[106]
Compare the similar argument made by Lustick in relation to the implications
of competition between the main Zionist parties for their de facto orientation
towards Israel's Palestinian-Arab minority. I. Lustick, `The Political
Road to Binationalism: Arabs in Jewish Politics', in Ilan Peleg and Ofira
Seliktar (eds.), The Emergence of a Binational Israel--The Second Republic
in the Making, Boulder, 1989, pp.97-123.