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3. The Transition to a Market Economy: The Road Half Taken Ofira Seliktar This essay provides a critical examination ofIsrael's stillunfinished , and still debated, transition from a socialistZionist to a market economy, focusing on privatization, government regulation, subsidization, and private investment . The author also analyzes the future ofthe Histadrut in a market economy and examines the underlying themes of state and statism in Israel. The essay stresses the need for a successful combination ofpolitical will, electoral support , and unified government strategy iffurtherprogress is to be made along the road to an efficient market economy. Barkai, Haim, The Lessons ofIsrael's Great Inflation, Westport CT: Praeger, 1995. Ben-Porat, Amir, The State and Capitalism in Israel, Westport, CT: Greenwood ,1993. Elizur, Yuval, The Shekel and the Olive Leaf" The Israeli Economy between War and Peace, Haifa: Gestalit, 1992. (Hebrew) Grinberg, Lev Louis, The Histadrut Above All, Jerusalem: Nevo, 1993. (Hebrew) The Israeli Economy at the Threshold ofthe Year 2000. Organization and Efficiency in the Economy and Civil Service, Jerusalem: Jerusalem Center for Public Affairs, 1992. (Hebrew and English) Kanari, Baruch, Zionist and Socialist-Zionist Planned Economy, Ramat Efal: Yad Tabenkin, 1993. (Hebrew) Plessner, Yakir, The Political Economy ofIsrael: From Ideology to Stagnation , Albany: State University ofNew York Press, 1994. Shalev, Michael, Labor and the Political Economy ofIsrael, Oxford: Oxford University Press, 1992. 47 48 Ofira Seliktar Since the late 1980s, Israel has been making a slow and halting transition to a market economy. The hallmark of this process is privatization, defined here as a set of policies designed to curtail the size of the state's ownership in the economy by means of selling off publicly owned enterprises. Some, known as SOEs (state-owned enterprises ), are owned directly by the government, whereas others are publicly or collectively owned bodies. The Histadrut (Israel's major trade union organization) owns a large number of such enterprises. The transition to a market economy has generated a fierce public debate and a correspondingly large volume of scholarship. The books considered in this essay offer a wide range of views of the problems that led Israel to embrace market reforms and to analyze the obstacles to their implementation. At the same time, the books both reflect and contribute to the debate that has pitted the advocates of market economy and privatization against the defenders of the mixed-economy model offered by socialist··Zionism. I Israel is part of a large group of developing countries in which SOEs have been a dominant factor in the economy. The justification for opting for a strong public sector is based on a concept ofdevelopment in which economic rationality has been generally subordinated to political needs. The heroic task of creating a Jewish state in Palestine prior to 1948 was seen as superseding economic considerations and, in turn, led to an exalted view of the state as the supreme instrument of political and economic will. The model ofthe mixed economy that Israel adopted was based on the assumption that neither free enterprise nor pure socialism could produce a healthy state of economic being. The resulting compromises mandated that the state should, to a large extent, substitute for market mechanisms. Public-sector enterprises were put in control ofthe "commanding heights" and ofother strategic sectors ofthe economy, in many cases by creating monopolies. An extensive regulatory system helped to correct the effects ofmarket mechanism, enhancing the autonomy ofthe public sector. The state improved its capacity to intervene by creating public financing institutions, nourished by the public capital generated The Transition to a Market Economy 49 through the generous financial support of world Jewry and the United States. Restrictive codes on private foreign investment and various limitations on foreign trade further extended the statist grasp on the economy. Since its inception in the yishuv (prestate) period, the mixed economy model encountered periodical difficulties, but it was only after the economic slump following the 1973 war that it ran out of steam. Between 1973 and 1991 the economy did not grow and hyperinflation reached three digits in the mid-1980s. The ensuing stabilization program generated a national debate during which the system of public enterprises came under particular indictment. Two major criticisms were leveled against the public sector: that it was inefficient, and that it was not profitable. The case ofthe Histadrut-owned company Koor, which ran up tremendous deficits in the 1980s, and the near financial collapse of the kibbutzim and moshavim in the same decade were viewed as highly symptomatic in this...

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