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1 THE ROAR THAT B ECAME A WHISPER Soon after the state of Israel was established in 1948, its economy took off, with vibrant economic growth continuing for twenty-three years (Table 1.1). After 1973, however, this vigorous growth was replaced by sluggishness and a very disappointing rate of economic expansion, barely sufficient to sustain the rate of per-capita production attained in 1973. The story of how growth was replaced by stagnation is the story of the past two decades of Israel's economy. We will see that the roar became a whisper largely because of the semisocialist arrangements on which the economy was founded, many of which survive to this day. The term socialism is used here in its strict sense: the collective ownership and allocation of an economy's means of production.~ According to this definition, Sweden, often referred to as socialist, is not: it has the highest incidence of private ownership of any Western economy.3 Socialism is used interchangeably to describe the ideology and to identify the organizational setup within which the norms laid down by the ideology are being pursued. This semantic problem does not exist with capitalism, which is the institutional setup spawned by liberalism. TABLE 1.1 Growth of Real GDP.* Annual Averages Period Percent Period Percent 1950- 55 12.6 1971-75 7. 1 1956-60 8.8 1976-80 2.6 1961-65 9.8 1981-85 2.8 1966-70 7.7 1986-89 3.1 1950-73 9.7 1974-89 2.8 *Gross Domestic Product. Source: Central Bureau of Statistics.' Ncuional Accoums. various years. 8 The Poltical Economy ofIsrael These distinctions are important, since the institutional setup is crucial in determining the functional efficiency of an economic system. This can be most sharply demonstrated by noting that in the Soviet version of socialism, the institutional system tried to replace the market institution. This has probably been the most important factor in the spectacular collapse of the communist economic system, and it is also what made Western economists so confidant that the communist system could not ultimately deliver on its promises. In contrast, the Israeli system recognizes the forces of supply and demand. Hence, to a casual observer it looks as though the Israeli economy works like a capitalist one, except that the government is more heavily involved. The task of attributing Israel's economic failure to socialism is thus made more difficult. Israeli socialism is, as one might put it, more subtle. The use of the adjective socialist in the description of the Israeli economy hinges on three central attributes of the institutional system. First, there has been virtually no free access to the capital market. For many years, there was almost no way to raise capital in Israel except through the government. Hence, even though a substantial share of capital is not collectively owned, almost all of it has been collectively allocated. Second, a substantial proportion of the means of production has been owned either by the government or by the Trade Unions Federation-both forms of social ownership of the means of production. This is true of much of the capital, but most particularly of the land, which is 94 percent socially owned. Third, the wage structure reflects the attempt to implement the basic socialist welfare criterion. This is, then, the sense in which the term socialism is being used throughout. As we shall see, some of the more important consequences of this structure resemble the obstacles that the ex-communist world confronts. The Bumpy Road of Political Economy The task of identifying certain traits in an economy as the causes for longstanding problems is a very treacherous one. The difficulty emanates from the fact that it is impossible to prove assertions in this field in the usual, scientific sense of the word. Propositions in economics, other than in the context of pure economic theory, are not prone to proofs in general, for the simple reason that virtually no experimentation at all, and certainly no controlled experimentation, is possible. In this respect, economics is in much the same position as meteorology. A meteorologist cannot create in the laboratory mini-weather systems that exactly duplicate natural ones. And because weather patterns are quite varied, no clear rules can be established other than in extreme situations. For example, it can be stated with certainty that wherever a hurricane will pass, it will rain. But the spectrum of weather patterns that involve cloudiness is so wide that...


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