The Israeli Path to Neoliberalism

The State, Continuity and Change

Arie Krampf

• Publisher: Routledge
• Year: 2018
• ISBN:
  9781351759595
• Edition: 1
• Topic: Economics
• Subtopic: Economic History
• Index: Economics

In recent years, Israel has deeply and quickly transformed itself from a self-perceived social-democratic regime into a privatized and liberalized "Start-Up Nation" and a highly divided society. This transition to neoliberalism has been coupled with the adoption of a hawkish and isolationist foreign policy. How can such a deep change be explained? How can a state presumably founded on the basis of socialist ideas, turn within a few decades into a country characterized by a level of inequality comparable to that of the United States?

By presenting a comprehensive and detailed analysis of the evolution of the Israeli economy from the 1930s to the 1990s, The Israeli Path to Neoliberalism seeks to explain the Israeli path to neoliberalism. It debunks the 'from-socialism-to-liberalization' narrative, arguing that the evolution of Israeli capitalism cannot be described or explained as a simple transplantation of imported economic models from advanced liberal democracies. Rather, it asserts that the Israeli variant of capitalism is the product of the encounter between imported Western institutional models and policy ideas, on the one hand, and domestic economic, social and security policy problems on the other. This mechanism of change enables us to understand the factors that gave rise to Israel's unique combination of liberalization and strong national sentiments.

Providing an in-depth analysis of Israel's transformation to neoliberalism, the book is a valuable resource for those studying the economic history of Israel, or the political economy of late-developing countries.

1 States and markets in late-developing economies

Liberal values such as individualism, property rights, economic freedom and the rule of law, are part and parcel of the institutional infrastructure that makes market economies what they are. These liberal values are embedded in the institutional structures of liberal market economies: the judicial system, the legislative system based on representation and an autonomous monetary authority. In liberal-democratic societies, so the argument goes, these institutions were established to protect market and societal actors from the capricious actions of the sovereign (North and Weingast, 1989). Therefore, these institutions are considered by liberal thinkers as a precondition for a well-functioning market economy.

The liberal model of economic governance provides a sufficient approximation of actual institutional structures in liberal-democratic market economies. In such economies sovereigns restrict their intervention in the economy by laws, regulations and institutions, which protect economic freedom and private property rights. In exchange sovereigns expect higher returns in terms of growth, taxes, exports and the lowering of the costs of financing the national debt. The history of the formation of liberal-democratic states is quite consistent with this simple portrayal: market actors demanded and received more rights, and sovereigns received higher returns.

To what extent is this narrative consistent with the economic history of late-developing countries? The very short answer is that it is not very consistent. If the evolution of Western liberal democracies is described as a bottom-up and inside-out process, in the sense that domestic market actors played an active role as drivers of change, the evolution of late-developing market economies can be described as a top-down and outside-in process in which domestic governing institutions and external actors played a decisive role in shaping the economies. In late-developing countries, formal state institutions were created prior to the maturation of domestic markets and sophisticated societal actors. Market actors were economically weak and politically unorganized. Therefore, the market economy was not built by private forces, but by the sovereign, that is, by the state.

Therefore, the path of late-developing economies to a mature market economy assigns a different role to state institutions than their role in liberal market economies. Whereas in the advanced liberal market economies, institutions were designed to protect market and societal actors from the sovereign, in late-developing economies, these institutions were used to enhance the capacity of the sovereign to realize its preferences, which included, among other things, industrialization, job creation and promoting exports. Attaining these objectives required capacities to confront market and societal actors or mobilize them rather than protecting them. In that sense, the market-building in late-developing economies included the use of illiberal policy instruments, which made it a contradictory process: quasi-liberal institutions were built by illiberal means.

Therefore, the market-building process in late-developing countries was contradictory. On the one hand, this process was shaped and inspired by the liberal values, ideas and institutions of the advanced economies. On the other hand, to build markets, governments had to employ illiberal measures, which included discrimination, breaching private property rights and restricting economic freedom. Moreover, the goal of building a market economy was perceived as one of the state interests, and in that sense it was driven not only by the prioritization of individual rights and free entrepreneurship, but mainly by state preferences. This duality is fundamental and it must be accommodated by any political economic theory of late-developing countries.

Historicity and geography of economic rationality

Tracing the political economy of a late-development country must acknowledge what is termed here the historicity and geography of economic ideas. Any social scientist or historian who is interested in explaining the evolution of socioeconomic regimes—namely, the types of structures, policies and ideas used— sooner or later faces the theoretical—perhaps philosophical—dilemma: should the behavior and policy decisions of the historical protagonists be interpreted on the basis of knowledge and information available to them then, or on the basis of knowledge and information available to us today?

For economists who believe in the immutability of economic laws, the answer is clear and simple: there is only one set of economic laws, which are not affected by prevailing institutions, and therefore the behavior of policy-makers—as well as of all other economic actors—should be evaluated on the basis of the most up-to-date mainstream economic theories. However, what this approach gains in theoretical rigor, it loses in realism: it would not capture how policy-makers really reach decisions, but rather how abstract policy-makers should have reached their decisions. In order to trace how policy-makers actually made policy choices, it is necessary to acknowledge that economic rationality has a history of its own and that this history—the history of economic ideas—must be an essential part of any economic history.

Economic history provides us with ample examples that demonstrate the historicity of economic rationality. A century ago, the idea that governments should increase taxes and spending during a recession was ludicrous; yet by the 1960s this view was the standard of most governments. Another example to consider is that in the 1950s the trade-off between employment and inflation was taken as a fact that justified anti-cyclical policies; today this causal link is questionable. These examples demonstrate that “what actors believe is rational in a given context and … what constitutes ‘rationality’ shifts over time” (Epstein, 2008, pp. 10–11).

Economic rationality not only has a history, but also a geography whereby policy-makers make choices in a particular geopolitical and geographical context, which is taken into account in the policy-making process. Take, for example, the Keynesian paradigm, which was born in the context of the Great Depression in the United States, and was embraced later by Britain as well as by many other advanced economies. However, Germany did not adopt a Keynesian approach (Hall, 1989), which does not imply that German policy-makers failed to learn good lessons from the United States or Britain. It means that economic rationality depends largely on the specific economic and institutional environment. Albert Hirschman was very aware of the geography of economic rationality and he pointed out that economic practices in peripheral countries may seem “odd, irrational, or reprehensible social behavior” to a Western observer (1984, p. 91). Developing countries are characterized, argues Hirschman, by “hidden rationalities” that cannot be identified by Western liberal observers.

To capture both the historicity and the geography of economic rationality it is useful to take Peter Hall’s concept of policy paradigm as a starting point. Peter Hall defines the concept of policy paradigm as an assemblage of conceptual, normative and symbolic elements that frames economic reality, defines urgent policy problems while simultaneously offering types of legitimate policy solutions. A policy paradigm is a “framework of ideas and standards that specifies not only the goals of policy and the kind of instruments that can be used to attain them but also the very nature of the problems they are meant to be addressing” (Hall, 1993, p. 279).

By tracing ideational and discursive changes, scholars can identify institutional changes before they are manifested in material or institutional variables, because the actors’ costs of talking about a needed change are much lower than taking the risks of making the actual change. In other words, actors are likely to talk and write about the need for a change before they take action. Therefore, tracing the emergence of a new paradigm can provide us with a glimpse into the expectations and the plans of policy-makers and other actors.

Another advantage of tracing paradigm changes in economic history is that it provides researchers with more information in order to capture actors’ preferences. Whereas some scholars assume that state preferences can be deduced from theory and behavior, tracing discourse and ideas provides another empirical source to reconstruct a broader picture of the environment in which actors take decisions.¹

Ideas also change their meaning across the geographical space. Policy ideas have a practical meaning only within a well-defined institutional, political and economic context: Keynesianism means a very different thing in a closed economy such as the United States as opposed to an open peripheral economy, such as Israel, for example. Margaret Weir and Theda Skocpol (1985) show that Keynesian ideas were received differently in different countries on the basis of the local actors’ interests. Similar processes have been identified by International Relations scholars, who have studied the diffusion of ideas, norms and policies (Acharya, 2004; Checkel, 2007; Risse-Kappen, 1994), and by comparative political economists, who focus on the national origin of economic ideas (Campbell and Pedersen, 2014). The local dimension of policy paradigms is especially essential in the context of the division between the Global North and the Global South. A certain set of ideas may prove to be welfare-maximizing in the Global North, while causing damage if implemented as-is in late-developing economy in the Global South. Developmental economists are particularly aware of this problem. The implication of this analysis is that economic historians must distinguish between the nominal meaning of economic policy ideas and their practical meaning. Whereas in many cases the ideas remain constant nominally, their practical meaning changes significantly in different institutional and political contexts. This fact obviously poses a challenge for comparative political economists: if notions such as liberal economics, Keynesianism and social democracy gain different practical meanings in different institutional contexts, a comparison of economic regime becomes a much more challenging task.

This book, therefore, rather than trying to characterize the Israeli economic regime by using “universal” tokens, which originated in the advanced economies, instead identifies local policy paradigms. These paradigms were inspired and affected by economic policy ideas imported from European and American policy discourses, but they are in no way a replication of these ideas. Through the period from the 1930s to the 1990s four local policy paradigm are identified: (1) the agrarian paradigm; (2) the paradigm of rapid development; (3) the paradigm of economic independence; and (4) the neoliberal paradigm. Each paradigm is characterized by a particular economic rationality, a national ethos, a prioritization of goals and a particular pattern of state-society and state-market linkages.

State preferences

The claim that ideas play a role in shaping policy strategies and economic structures tacitly assumes the existence of a discursive space in which actors make rational choices in the face of policy problems. This space may be minimal, constrained, restricted, bound and even transient. But such discursive space must exist if ideas have an impact on outcomes. The existence of such a discursive space presupposes “that elements within the state, acting, presumably, in pursuit of the national interest, decide what to do without serious opposition from external actors, thereby confirming a central tenet of state theory” (Sacks, quoted in Hall, 1993, p. 276). If such a space does not exist, then policy paradigms are reduced to nothing more than ideologies that legitimize the power of the powerful. The existence of such a space can be guaranteed by the autonomy of the state. Therefore, in our analysis, the concept of state autonomy plays a key role.

The notion of state autonomy must be elaborated on before continuing further. The term “state autonomy” is used in the literature in two different ways. In some cases the state is a concept that refers to the set of institutions, rules and constitutions that restrict the sovereign and that protect the civil society from the sovereign. Rational choice institutionalists highlight this aspect of the state. Margaret Levi argues that the “rulers rule,” but they do that “within the constraints of the political constitution” (1989, p. 2). Why would the rulers restrict their coercion practices? Revenue, suggests Levi. Given the bargaining power of the rulers, the transaction costs and the discount rate, the rulers have an incentive to bind their hands in exchange for revenue. A similar argument is made by Douglas North and Barry Weingast, who show how the establishment of the judicial system, the parliament and the central bank in seventeenth-century England institutionalized the differentiation between the market and the sovereign, in the sense that markets were protected from the sovereign’s whims by state institutions (North and Weingast, 1989).

Hence, rational choice institutionalists distinguish not only between states and markets, but also between the state-as-a-sovereign (the “rulers” or the government) and the state-as-institutions (the rules and procedures that restrict the state-as-a-sovereign) that protects markets and societal actors from the sovereign. In the sense, the rational choice modeling of the state acknowledges that modern states fulfill two contradictory functions. This duality is echoed in Weingast’s views regarding the “fundamental political dilemma of an economic system”:

A government strong enough to protect property rights and enforce contracts is also strong enough to confiscate the wealth of its citizens. Thriving markets require not only the appropriate system of property rights and a law of contracts, but a secure political foundation that limits the ability of the state to confiscate wealth.

(Weingast, 1995, p. 1)

Realists and state-centric scholars use the term “state” in a different way: for them, the state is the sovereign. In the past, the sovereign was the monarch, and in modern societies the sovereign is manifested in a more complex group of “policy-makers.” Eric Nordlinger, writing within this tradition, argues that state preferences are nothing more or less than a “resource-weighted parallelogram” of public officials’ preferences (1981, p. 15). However, even realist and state-centric scholars acknowledge that rational policy-makers may delegate powers to gain revenue.

The contradictory nature of the state is particularly essential to analysing the political economy of market building in late-developing countries. Whereas in advanced liberal democracies, the state-as-institution is much more developed, in late-developing economies the dual function of the state is more pronounced and observable. These states confront (certain) market actors and thereby they discriminate against certain other actors, they breach private property rights and they restrict the economic freedom of certain actors, and at the same time they protect (certain) market actors, they guarantee the private property rights of (certain) actors and their economic freedom.

The dualistic and contradictory statehood in late-developing countries raises a problem of legitimacy: how do policy-makers justify their choice of discriminating actors, while at the same time building liberal market-oriented institutions? This question brings us to the interaction between the ideologies of liberalism and nationalism.

Economics and nationalism

The literature on the economic history of the Wes...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright page
• Table of Contents
• List of illustrations
• Preface
• Acknowledgments
• Introduction: market nationalism and Israeli capitalism
• 1 States and markets in late-developing economies
• PART I The formative period: economic ideas and state preferences
• PART II From full employment to economic independence: production and finance
• PART III The path to neoliberalism
• Index