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Israeli Economic Policies, 1948–1951: Problems of Evaluation

Published online by Cambridge University Press:  03 March 2009

Nachum T. Gross
Nachum T. Gross
Affiliation:
The author is Professor of Economics, The Hebrew University of Jerusalem, 91905 Jerusalem, Israel.
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Abstract

The State of Israel was established in the midst of a war for its survival, and its population doubled within three years by mass immigration. The Israeli governments opted for a system of far-reaching and direct intervention in the economy as a means of winning the war, meeting basic consumption needs, and sustaining a high investment ratio. The circumstances and ideological premises of this policy are discussed, and the major problems of evaluation spelled out.

Type
Articles
Information
The Journal of Economic History , Volume 50 , Issue 1 , March 1990 , pp. 67 - 83
Copyright
Copyright © The Economic History Association 1990

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References

1 Keynes, J. M., How To Pay for the War (London, 1940), p. 53.Google Scholar

2 Keynes, J. M., How To Pay for the War (London, 1940), p. 52.Google Scholar

3 Hinden, Rita, “Palestine and Colonial Economic Development,” The Quarterly Review, 13 (01–03. 1942), p. 91.Google Scholar

4 Nathan, Robert R., Gass, Oscar, and Creamer, Daniel, Palestine: Problem and Promise (Washington, D.C., 1946), p. v.Google ScholarYears later, in 1953, Creamer with Simon Kuznets founded the Falk Project (later Institute) for Economic Research in Israel and was its director during 1954/55.At about the same time Gass was director of an Economic Advisory Staff for the government of Israel.Google Scholar

5 See Metzer, Jacob, “Economic Structure and National Goals: The Jewish National Home in Interwar Palestine,” this JOURNAL, 38 (03. 1978), pp. 101–19.Google Scholar

6 The following section relies heavily on Barkai, Haim, The Beginnings of the Israeli Economy (Jerusalem 1983) (in Hebrew), and on the quantitative data there. He is, however, not responsible for any errors contained here or my interpretations and opinions, which are in part quite different from his.Google Scholar

7 The numbers are from Ben-Gurion's War Diaries as quoted by Greenberg, Yitzhak, “Financing the War of Independence,” Studies in Zionism (Tel Aviv), 9 (1988), pp. 63–80Google Scholar; Barkai, The Beginnings, p. 37, cites an even larger number for “the second half of 1948.”Google Scholar

8 National Product estimates for these first years (especially 1948, omitted in most sources) entail—besides problems of data availability—methodological problems, not the least of which stem from distorted import prices. See discussions of these in the literature, particularly by Gaathon, A. L., in Gass, Oscar and Gaathon, A. L., “Memorandum: Israel's Economic Performance, 1949–1953” (mimeograph, Jerusalem, 1954).Google Scholar The lower figures in the text are close to Gaathon's estimates, while the higher ones are close to data cited by Barkai, The Beginnings.Google Scholar

9 Greenberg, “Financing the War,” p. 69.Google Scholar

10 As a matter of fact, “development” expenditures in the published budgets (the defense budget was kept secret) were also covered by borrowing.Google Scholar

11 The bulk of foreign monies mobilized for the war effort from world Jewry was spent on purchasing equipment abroad. As a result, these sums were not included in fiscal reports or in the national product estimates. On domestic monetary demand and supply they had, of course, no effect.Google Scholar

12 For immigration data, see Sicron, Moshe, Immigration to Israel: 1948–1953. Statistical Supplement (Jerusalem, 1957)Google Scholar; for budget data and GNP shares, see Barkai, The Beginnings.Google Scholar

13 Patinkin, Don, The Israel Economy: The First Decade (Jerusalem, 1960), p. 108.Google Scholar

14 Levy, Emanuel, Israel Economic Survey, 1953–54 (Jerusalem, 1955), p. 14.Google Scholar

15 This was part of the program presented by the first government, after the general elections of January 1949, and approved by the first Knesset. The title Austerity was taken from the British model, as were slogans and other details.Google Scholar

16 The economic parts of the program are discussed by Gross, Nachum T., “Inflation and Economic Policy in Israel: The First Stage, 1949–1950” (in Hebrew) (M. A. thesis, The Hebrew University of Jerusalem, 1953), pp. 9–12; the expression used for absorption and growth was “intensive development of the country, based on a planned economy”; social welfare services were promised in several sections and aimed at “gradually and persistently raising the standard of living…of the entire population.”Google Scholar See also in Government Yearbook 1949/50 (Tel Aviv, 1949).Google Scholar

17 Monthly index data cited by Gross, “Inflation and Economic Policy”; the wholesale price index rose 43 percent from 11 1947 to 11 1948.Google Scholar

18 Due to the structure of the cost-of-living allowances, most real wages actually rose during the lowering of prices. Nevertheless, unions demanded a rise in “basic” wage rates at every renewal of the yearly collective contracts, just as they had done when prices were rising and the nominal wage was lagging.Google Scholar See Horowitz, David, In the Heart of Events (in Hebrew) (Ramat Gan, 1975), for scathing criticism of this line of action.Google Scholar

19 Patinkin, The First Decade, pp. 108–11.Google Scholar

20 As a matter of fact, subsidies were raised from time to time, so that net indirect taxation decreased. Direct taxation was rising slowly, thanks to administrative improvements and public adjustment to the income tax.Google Scholar

21 Halevi, Nadav and Klinov-Malul, Ruth, The Economic Development of Israel (New York, 1968), pp. 6–7.Google Scholar

22 Levy, Survey, 1953–54, p. 14.Google Scholar

23 See Gross, “The First Stage,” and Horowitz, Heart of Events, passim.Google Scholar

24 This was conceded by Michael Kalecki, “Report on Main Current Economic Problems of Israel. Confidential” (mimeograph, Tel Aviv, 09 1950), para. 65.Google Scholar

25 Several of these followed Kalecki's September 1950 recommendations.Google Scholar

26 According to Barkai, Beginnings, p. 65, the dollar rate in 09 1949 should have been IL0.70 instead of the official IL0.33 before the correction; Gaathon, in Gass and Gaathon, “Memorandum,” estimated the yearly average 1949 purchasing power parity at IL 0.593.Google Scholar

27 The dollar/lira rate had already been only $3.00; in any case, the distortion of inconsistent dollar and sterling prices, with the opportunity for illegal arbitrage profits, was abolished.Google Scholar

28 Horowitz, Heart of Events, pp. 42–43.Google Scholar

29 Barkai, Beginnings, pp. 57–58 and fn. 21.Google Scholar

30 Such inflationary effects would have been particularly strong in 1949/50, when the economy was operating practically at maximum potential and imports were about one-third of GNP.Google Scholar

31 Gross, “The First Stage,” p. 19, based on notes taken at those lectures. It is, of course, quite possible that Horowitz argued differently in closed deliberations.Google Scholar

32 Quoting Halevi and Klinov, Development, p. 7.Google Scholar

33 Elections for local authorities were held in November 1950, and for parliament (the second Knesset) in July 1951.Google Scholar

34 Kalecki, “Report” (09 1950).Google Scholar