- 1 For a list of recurrent abbreviations, see Appendix A.
1A small but growing literature studies the advisory missions of Western economists in developing countries in the 1950s and 1960s, using recently discovered archival materials: Douglas North in Brazil (Boianovsky, 2018), Wolfgang Stolper in Nigeria (Morgan, 2008), Arthur Lewis in Ghana (Mosley and Ingham, 2013, chap. 6), and Albert Hirschman and Lauchlin Currie in Colombia (Bianchi, 2011; Alacevich, 2011; Sandilands, 2015; Alvarez et al., 2017). This paper documents the activities and influence of the Economic Advisory Staff (EAS), a group of American economists that advised the Government of Israel (GOI)1 between May 1953 and July 1955. The GOI established the EAS with the US Government’s approval, and asked the EAS to formulate policies that would move Israel towards economic independence—that is, the elimination of Israel’s dependence on foreign debt. GOI officials hoped that the EAS’ establishment would demonstrate the GOI’s commitment to achieving economic independence, and thus signal its creditworthiness to the US Government, US banks and American Jews.
2To evaluate the EAS’ influence, we use a simple conceptual framework taken from the public choice literature—learning and signaling. To the best of our knowledge, we are the first historians of economics to apply this conceptual framework to foreign advisory missions. As Letterie and Swank (1997) explain, policymakers have in mind two objectives when they choose advisors: Learning about the likelihood of success of a proposed policy, and signaling other agents that the policy has a high likelihood of success. The policymaker faces a tradeoff between learning and signaling: To maximize learning, the policymaker should choose an advisor with preferences that are close to her own. However, to maximize signaling, the policymaker should choose an advisor whose preferences are close to those of the agents whom she wishes to signal. In our case, the GOI faced a tradeoff between maximizing learning by choosing advisors who sympathized with the GOI’s ideology, and maximizing signaling by choosing advisors who were ideologically close to the Eisenhower Administration (EA).
3Although several researchers have evaluated the EAS’ contribution (Halevi, 1969; Tishler, 1975; Kleiman, 1981; Krampf, 2010), their conclusions are based on (at best) a partial examination of the archival record. This paper is the first to utilize the complete archival record of the EAS’ activities, which is located primarily at Israel State Archives.
- 2 Bianchi (2011, 220) defines money doctoring as “[Advice on] how government authorities should act t (...)
4During its 26 months, the EAS produced 120 memoranda in various fields, of which 114 have survived (for the full list, see Appendix C). A detailed analysis of the hundreds of recommendations contained in these memoranda, and the extent to which they were implemented, would require a book-length treatment. Therefore, we focus on the EAS’ recommendations in the following fields: money doctoring—fiscal policy, central banking and monetary policy, international trade, exchange rates and the balance of payments (BoP), wages and foreign debt management;2 industry; agriculture and irrigation; and antitrust.
5The rest of this paper is organized as follows: Sections 1-2 describe the EAS’ formation and its complex relationship with the GOI, in light of the learning and signaling framework. Section 3 presents the EAS’ recommendations and the GOI’s policy decisions, in the fields of money doctoring, industry, agriculture and irrigation, and antitrust.
6The GOI decided to establish the EAS in December 1952. Israel was a developmental state with a heavy defense burden; large-scale immigration; a massive fiscal deficit financed by money printing; monetary chaos in the absence of a central bank; a massive trade deficit; an acute short-term debt problem; and government control over organized labor, capital investment, credit and foreign currency. In 1952, GDP per capita was at 26.0% and 63.8% of the US and Western European levels, respectively (Maddison Project Database, 2018). Agriculture and industry accounted for 11.4% and 21.7% of National Domestic Product, and 17.4% and 20.1% of employment, respectively (Michaely, 1975, 193). Israel’s leading exports were citrus fruits (37.9% of total exports), diamonds (26.4%), other industrial products (12.9%) and textile products (11%) (Appendix D, Table 11).
7The State of Israel was established in May 1948, and was immediately compelled to fight for its survival. Despite its dramatic victory in the War of Independence, Israel continued to face existential threats. Over 1948-1951, mass immigration increased the population by 82% (ibid., Table 1).
8From mid-1948, the GOI, led by Prime Minister David Ben-Gurion and his Mapai party, imposed austerity and rationing, which resulted in large-scale excess demand and suppressed inflation (Gross, 1990). By mid-1951, the need for reform was painfully obvious: The public had tired of austerity and rationing, and foreign currency reserves were dangerously low (Appendix D, Table 8). In February 1952, Ben-Gurion and Finance Minister Levi Eshkol introduced the New Economic Policy (NEP): devaluation via two new exchange rates (100% and 180% above the original rate); fiscal and monetary contraction; increased capital inflows; near-elimination of rationing and price controls; and price increases on (price-controlled) essential goods (Barkai and Liviatan, 2007, 48-52).
9Israel and West Germany signed the Holocaust reparations agreement in September 1952. Germany promised to pay DM 3 billion to the GOI (“reparations”) and DM 450 million to survivors (“restitution”) over the next 12 years.
10The Israeli economy stagnated in 1952, primarily due to the NEP, which significantly reduced money growth (Appendix D, Table 4) and the fiscal deficit (ibid., Table 5). Growth in real per capita GNP and consumption fell to -0.1% and zero, respectively, from 11% and 3.9% in 1951 (ibid., Table 2). Real investment fell 14.1% (ibid., Table 3). Inflation rose to 58.2%, vs. 14% in 1951 (ibid., Table 4). The trade deficit and capital imports were almost 20% of GNP (ibid., Table 6). However, exports grew, both absolutely and as a percentage of GNP (ibid., Table 6), and unemployment fell to 8.1%, vs. 13.9% in 1949 (ibid., Table 1).
- 3 Mikesell was appointed after Milton Friedman declined the State Department’s invitation to go to Is (...)
- 4 On the subsequent evolution of the foreign currency budget, see Michaely (1975, 29).
11From April 1952-June 1953, Israel asked the US eight times for emergency aid to repay/refinance external short-term debt (see Table 9 for details). In June 1952, with Israel’s external short-term debt at $124 million (equivalent to 8.1% of GNP) and the ratio of gross reserves to external short-term debt at just 0.26 (ibid.), Secretary of State Dean Acheson sent Raymond Mikesell to Israel as to play the role of money doctor—a Western economist who brokers money for reforms (see Flandreau, 2003, 4).3 In July 1952, Mikesell recommended approving Israel’s request to use $25 million of its 1953 Mutual Security Agency grant to cover short-term debt, conditional on avoidance of new short-term debt and implementation of a foreign currency budget.4 Israel accepted these conditions and the US authorized the $25 million (Mikesell, 2000, 121).
- 5 The State Department had the following goals: a. promote Israeli economic independence through stru (...)
12Israel’s short-term debt problem came to the attention of Presidents Truman and Eisenhower; both approved the State Department’s policy of imposing tougher conditionality on Israel (Truman-Byroade meeting, FRUS, August 8, 1952; NSC meeting, FRUS, July 9, 1953).5 By March 1954, the situation had improved: External short-term debt fell to $73 million, and the ratio of gross reserves to short-term external debt rose to 0.68. This allowed the US to “substantially reduce” grants to Israel in fiscal year 1955 (Nolting to Dulles, FRUS, March 18, 1954); the economic grant and total aid were cut by 60% and 29%, respectively (Appendix D, Table 7).
- 6 The State Department saw Middle East Technical Cooperation Administration/Point IV programs as a me (...)
13Following the Mikesell mission, Israel and the US reached a mutual understanding that Israel should establish a foreign advisory group. In October 1952, Teddy Kollek, Director-General of the Prime Minister’s Office, met with Mikesell in Washington. Kollek and Mikesell formulated the following proposal: The GOI would recruit 6-10 foreign experts, who would be acceptable to both Jerusalem and Washington. These experts would be employed by the GOI within various ministries, but would be paid by the US Technical Cooperation Administration (Kollek to Shalit, October 23, 1952, 5364/11-Gimmel).6 (The Technical Cooperation Administration ultimately decided not to fund the EAS; Gass to Kollek, April 24, 1953, 5509/3-Gimmel). Ben-Gurion stated his strong preference for “foreign Jewish economists” (Avriel to Gaathon, May 1, 1952, 5509/3-Gimmel, 375) with a “Zionist spark” (Knesset Minutes, June 9, 1953); apparently, he understood intuitively that ideological compatibility maximizes learning.
- 7 The word “balanced” suggests the possible influence of Rosenstein-Rodan’s Big Push theory.
14On December 1, 1952, Ben-Gurion decided to establish a “Central Bureau for Economic Coordination and Planning,” whose “ultimate aim” would be “the balanced planning of the national economy for several years in advance and the consolidation of the independence of the State.”7 Ben Gurion said nothing about signaling (Ben-Gurion to Kollek, December 1, 1952; “Proposal,” November 19, 1952, 5509/3-Gimmel). Kollek, however, thought that the Bureau was essential for both learning and signaling (December 26, 1952, 5509/3-Gimmel; translated from Hebrew):
Questions are [asked of] us with increasing bluntness: How long will we continue to require financial aid? How will the isolated development plans that are in different stages of implementation be coordinated? What form will [our] economy take once it reaches the stage of a balanced economy? ... Isn’t Israel a bottomless barrel?
- 8 This was not to be; only in 1958 did Israel borrow again from the EIB (Sharp, 2016).
These questions arise whether we intend to apply to the US Export-Import Bank for another development loan8 or for consolidating our short-term debt. The same question is [asked] also by the American authorities, to whom we have applied for a third grant of over $1 million to finance our foreign currency budget ... Similar questions come up even when we turn to [Diaspora Jews to] sell ... bonds ...
We need to know how to answer these questions not only in order to answer ... [foreign financial] institutions whose financial resources we require, but also and in the main to ourselves.
- 9 Israel had no sovereign credit rating until 1988.
15Kollek elaborated: In the past, the GOI had not been required to demonstrate that it was utilizing foreign funds efficiently, so the GOI had gotten by without accurate economic data. But in May 1952, foreign creditors started asking more questions; GOI ministries, especially the Ministry of Finance (MOF), were repeatedly embarrassed “because they could not answer the most direct and simple questions regarding our financial condition.”9 Furthermore, the incoming Eisenhower Administration would almost certainly demand greater accountability. Time was of the essence: The Truman-Eisenhower transition opened a brief window of opportunity to recruit experienced US government economists, whose services were essential due to the shortage of qualified GOI economists.
16By early 1953, Kollek was even more convinced of the importance of signaling. Writing from Washington, he told Ben-Gurion that Israel needed an economic plan (to be prepared by the foreign experts) to signal the US government and its financial agencies, or else lose access to US government credit and possibly grants (Kollek to Avriel, undated, ca. February 1953, 5509/3-Gimmel). Ben-Gurion did not dispute Kollek’s assessment. Nevertheless, Ben-Gurion continued to focus exclusively on learning, as evidenced by his letter of invitation to Gass (undated, ca. March 1953; 5509/3-Gimmel), which discussed learning extensively without mentioning signaling at all.
17The EAS was established in April 1953 after three months of contentious negotiations between EAS Director Oscar Gass and GOI representatives Kollek and Ehud Avriel (5509/3-Gimmel). The major issues were as follows:
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The EAS was almost aborted because Eshkol wanted the EAS to engage in long-term planning (henceforth LTP) and avoid short-term issues; Gass was vehemently opposed (more on this below).
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GOI ministers had serious reservations regarding Gass, due to his reputation for abrasive behavior. Kollek persuaded them to appoint Gass nevertheless, because Gass would recruit an excellent staff.
18Despite Kollek’s emphasis on signaling, in recruiting the EAS staff (February-May 1953), Kollek and Gass demonstrated either prioritization of learning over signaling, or a total lack of awareness regarding effective signaling strategies vis-a-vis the EA:
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- 10 Ginsberg would visit Israel in Summer 1953 to advise on human resources. It is unlikely that Gass o (...)
Kollek and Gass sought Truman Administration veterans. Therefore, they did not contact any Republican-connected economists, even if only to solicit recommendations. Gass did not exploit his connections with Arthur Burns, Chairman of Eisenhower’s Council of Economic Advisers (during 1951-1953, Gass and Burns were both active in the Columbia University Center for Israel Studies; Salo Baron Papers, Stanford University, 55:1, 55:5), and Burns’ student, the labor economist Eli Ginzberg, who had “continuing contact with Eisenhower [throughout his Presidency] both in person and by letter” (Ginzberg, 1989, 78).10
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- 11 Kollek and Gass were unaware of these accusations. Note that Mikesell was Adler’s close friend, and (...)
To minimize costs, Kollek (unsuccessfully) sought one or two British economists. For unknown reasons, Kollek limited his search to Labour circles: Kollek’s British contact was the industrial economist Herbert A. Silverman (an associate of G.D.H. Cole), who, in turn, spoke with Hugh Gaitskell and Richard Kahn. At the height of the Cold War, Gass (on Kollek’s recommendation) tried to recruit Solomon Adler, who had left the US Treasury in 1950 after being accused of communist sympathies (5509/3-Gimmel)!11
19Kollek and Gass ultimately formed a New Deal/Democratic EAS, which was a poor choice for signaling the EA; this may explain why the GOI never even mentioned the EAS to Washington-based Eisenhower Administration officials. However, the EAS was an excellent choice for signaling American Jews, who overwhelmingly voted Democratic (only 36% voted Eisenhower in 1952; Aridan, 2017, 81). The EAS’ formation (which was widely reported in American Jewish newspapers) most likely contributed to the surge in transfers from World Jewry to the GOI, from $75 million in 1953 to $123 million in 1954 (Michaely, 1975, 200), and to the United Jewish Appeal’s consolidation loan, which transformed $65 million in short-term debt into five-year debt by November 1954 (Kollek personally persuaded US Jewish communities to participate; Haaretz, March 1, 1954).
20As Kollek predicted, Gass recruited a stellar staff. The six senior members were:
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Oscar Gass (Director) was an economist in the office of the US Treasury Secretary (1938-1943) and the War Production Board (1943-1944), and Israel’s economic advisor in Washington (1946-1953). He represented Israel in its successful applications for Export-Import Bank (EIB) loans (1949, 1950) and its dealings with Mikesell (1952), and designed Israel’s first foreign currency budget (1952). Gass coauthored a seminal study on the economy of Palestine (Nathan, Gass and Creamer, 1946).
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Bernard Bell (Deputy Director, specializing in international finance) was formerly chief economist of the EIB. In that capacity, he spent three weeks in Israel in January 1953.
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Bertram Gross (Senior Officer—construction/housing, education and health) was formerly Executive Secretary of the US Council of Economic Advisers (1946-1952) and a leading Democratic Party operative. He was one of the drafters of the 1946 Employment Act.
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Abba Lerner (Chief Monetary and Fiscal Officer) was a world-renowned theorist.
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Marion Clawson (Senior Officer—agriculture) was formerly director of the US Bureau of Land Management (1948-1953). Clawson was the only non-Jew, and the only Ph.D. besides Lerner.
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Arye Gaathon (Senior Officer—investment and development plans) was Israel’s leading government economist, and the former Director of Economic Research in the Prime Minister’s Office.
21Gass and Gaathon’s extensive experiences with Israel greatly reduced the possibility of “visiting economist syndrome”—“the habit of issuing peremptory advice and prescription by calling on universally valid economic principles and remedies ... after a strictly minimal acquaintance with the ‘patient’” (Hirschman, 1984, 93; see also Bianchi, 2011). The EAS had a Democratic/New Deal orientation: Gass’ personal attorney was the general counsel to the Democratic National Committee; Bell had left the EIB over a policy disagreement with Eisenhower; Gross and Clawson were staunch Democrats; and Lerner was nonpartisan.
- 12 Kollek would later regret this (Kollek to Eshkol, February 23, 1955; Kollek to Gass, February 7, 19 (...)
22Israel’s leading economic policymaker was Finance Minister Eshkol, who enjoyed almost complete autonomy under Prime Ministers Ben-Gurion and Sharett. Nevertheless, the GOI placed the EAS within the Prime Minister’s Office.12
23The EAS-GOI working relationship was problematic from the start. The GOI/MOF did not cooperate with the EAS as promised: The EAS was not consulted regarding GOI investment plans (Gass to Eshkol, May 7, 1954, 5509/14-Gimmel), did not receive timely information from the ministries, and was excluded from key interministerial committees and from regular participation in the Council of Economic Ministers (chaired by Eshkol; Sharett, 1978, March 1, 1954).
24The following factors complicated the GOI-EAS relationship, thus reducing the EAS’ contribution to learning:
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Eshkol and other policymakers had a “know-it-all” attitude—they did not welcome advice in their own areas of expertise.
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The GOI had other advisors who often disagreed with the EAS: David Horowitz, Eshkol’s informal macroeconomic advisor and (from December 1954) Governor of the Bank of Israel (BOI); the American water engineers John S. Cotton, Abel Wollman, Harry Bashore and John Savage; the labor expert Eli Ginzberg; and the United Nations’s Food and Agriculture Organization of the United Nations (FAO).
25Gass had acrimonious relationships with Eshkol, Sharett, Horowitz and others. By March 1954, he was effectively replaced by Bell. Gass left Israel on May 30, 1954 and did not return; in total, Gass was abroad for 16 of the EAS’ 26 months.
26The EAS took an independent, non-partisan approach, and did not hesitate to question some of Mapai’s core beliefs. As Clawson wrote, “one of our chief functions should be to subject to critical scrutiny those ideas which are widely and uncritically accepted ... we would be seriously failing in our responsibilities if we hesitate to speak up on unpopular issues” (#84). The EAS’ independence enhanced the quality of its advice but made partisan policymakers less receptive to it.
- 13 The typical project proposal was a request for GOI loans to build a privately owned factory.
27Despite all the tensions, the EAS-GOI relationship had significant positive aspects. By the end of its term, the EAS established good working relationships with four ministries (Trade and Industry, Agriculture, Labor, Development). Furthermore, the EAS more than paid for itself through project evaluation;13 the GOI saved large sums by rejecting poorly conceived projects based on EAS advice (Kollek to Eshkol, February 23, 1955, 5509/15-Gimmel).
28We now detail the Eshkol-EAS disputes regarding LTP and breaches of confidentiality—disputes which significantly affected both learning and signaling.
- 14 In 1952, the GOI had serious discussions about establishing a LTP office; it told Gass explicitly t (...)
- 15 Gass’ reasons for opposing LTP during the EAS contract negotiations shifted over time: LTP implies (...)
29The EAS was almost aborted due to a dispute between Eshkol and Gass regarding its mandate (Gass to Kollek/Avriel, March 31, 1953, 5509/3-Gimmel). Eskhol, a true believer in LTP,14 expected the EAS (which he called “Office of Economic Planning and Advice”) to engage in LTP and avoid short-term issues entirely. Gass, on the other hand, disparaged LTP15 and insisted that the EAS must address short-term issues of “larger significance” (Gass to Kollek/Avriel, April 1, 1953, 5509/3-Gimmel). Accordingly, Gass insisted on omitting the word “planning” from the name and the contract of the new advisory body.
30Kollek (who advocated LTP for signaling purposes) saved the EAS by convincing both parties to accept the following compromise language (Letter of Terms [attached to EAS contract], March 15, 1953, 5509/3-Gimmel):
The EAS may ... render recommendations on the most immediate economic problems, on questions involving a limited time span, or on issues connected with ... long-run development ... It is however the understanding of the GOI that ... it would be particularly to issues of long-run development that the EAS would wish to devote its most continuing efforts.
- 16 Why didn’t Eshkol hold firm, and insist on a contractual commitment to LTP? Eshkol believed that an (...)
31Gass won—the word “planning” was omitted. But as we shall see, Eshkol’s concession was illusory; he never stopped believing that LTP was the EAS’ raison d'être.16
- 17 After World War II, the US Government promoted LTP abroad even though it was out of style in the US (...)
32In June 1953, Eshkol met with Mikesell (who had arrived on a second mission) and Bruce McDaniel, Technical Cooperation Administration (US) director in Israel; no EAS representative was present. McDaniel urged Eshkol to draw up seven-year plans for agriculture, industry and natural resources (5364/11-Gimmel).17 On October 26, Eshkol presented seven-year plans for agriculture and industry to Diaspora Jewish leaders (702/7-Peh Tzadi). The agricultural plan (known as “Plan C”) was a serious but flawed plan prepared by the Jewish Agency Planning Center and the Ministry of Agriculture, without EAS input. The industrial plan, whose authorship is unknown, was not a serious effort (Sharett, 1978, November 4, 1953). There is no evidence that Mikesell and McDaniel noticed these shortcomings.
33Gass continued to oppose LTP, due to his conviction that the GOI harbored serious misconceptions regarding LTP and was unprepared to implement it properly (Gass to Eshkol, May 7, 1954, 5509/14-Gimmel). Gass made four criticisms in this context [our interpretation appears in brackets]:
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Eshkol wrongly denies the need for planning in fields where Israel possesses significant technical knowledge. Mere technical knowledge does not constitute planning. [The GOI refuses to learn.]
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“Each [minister] thinks ‘planning’ is needed in the sphere of others but not in his own ... because each does not so much as entertain the thought that the very fundamentals of [his] policy ... may need reconsideration ... No one should pretend to plan unless he thinks genuinely that he may be going wrong without planning” [emphasis in original]. [The GOI refuses to learn.]
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The GOI does not desire genuine planning, defined as “the comprehensive consideration of all those factors of costs and returns, in appropriate time perspective, which taken together should govern the determination of an economic policy.” This was (largely) why he insisted on omitting the word “planning” from the EAS’ name and contract. Genuine planning would improve governance by counteracting the common perception that “[the] authorities have no clear and consistent idea of what they are doing.” [Because the GOI refuses to learn, it cannot signal the Israeli public.]
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The GOI confuses planning with “advertising, negotiation or public relations,” which the EAS is contractually prohibited from undertaking. [The GOI thinks LTP is just a signaling device—no learning is necessary.]
34Gass’ first two criticisms were valid (as we shall see). The third is difficult to evaluate. Gass’ fourth criticism amounted to a denigration of Eshkol’s need for LTP to satisfy US policymakers. Obviously, an advisor who denigrates the policymaker’s signaling needs cannot be effective; to maximize his effectiveness, Gass should have accepted LTP as a necessary evil.
35On August 3, 1954, Eshkol (ignoring Gass) presented a planning document to the Council of Economic Ministers, which began:
Out of recognition of the need for a comprehensive plan ... the government established the EAS ... After the EAS spent about a year in Israel, and had the opportunity to ... learn [Israel’s] economic problems, [its members] are now approaching the implementation of their main task: the preparation of the comprehensive plan.
36With the Council of Economic Ministers about to authorize a LTP initiative, Bell, recognizing LTP’s inevitability, tried to influence Eshkol’s thinking (Yochanan Beham to Gass, August 12, 1954, 5509/15-Gimmel):
- 18 “We have a skill for the Land of Israel, which is greater than … [some] expert who comes … for 1-2 (...)
[Bell] tried very hard ... to convince Eshkol that a lot will depend on how the case is presented. Eshkol promised to make it clear to all [Economic Ministers] ... that planning is more than trying to show the other fellow what he ought to do, and that in many cases it might hurt the affected parties considerably ... [Bell] said, “Let’s take an example that is close to home, Mekoroth [the national water carrier, founded 1937 by Eshkol]. We expect the Irrigation Committee to go into all aspects of Mekoroth ... Eshkol reacted, as expected, by saying, “Well, how, as far as irrigation and Mekoroth are concerned, we know pretty well what we want to do.18 Planning in industry is much more important and you should ... stress ... those areas where nothing has been done in the past.” ... Eshkol seemed ... to have come round to [Bell’s] point of view ... We will see ... whether [Eshkol will] make it clear that some people’s pet plans might get lost in the shuffle.
- 19 This was an attempt “to salvage something out of the idea of an economic advisory unit” (Bell to Ko (...)
37In September 1954, the Council of Economic Ministers authorized a committee of DG’s of all economic ministries, five sectoral committees (agriculture/irrigation, industry/mining/electricity, transportation, commerce and construction/housing) and a Planning Secretariat appointed by Eshkol. The Secretariat—MOF Director-General Pinhas Sapir, Kollek, Bell and Shimon Horn (MOF)—first met on September 15. As Kollek recalled: “the [Council of Economic Ministers] decided on a system which would encourage greater cooperation between the EAS and their Ministries. The chances for ... success ... were not overestimated by anybody. In fact, Eshkol, Bell, as well as Sapir ... were a bit doubtful of its ultimate success; nevertheless, everybody believed it was worth trying” (Kollek to Gass, February 7, 1955, 5509/15-Gimmel). 19
38On November 17, 1954, Eshkol wrote Gass in Washington (5509/15-Gimmel). Eshkol complained that the EAS “[has] not made a determined attempt with regard to the one thing we so badly need—a plan,” and asserted that “it would ... be a great pity to disband the EAS without making a determined [LTP] effort.” He updated Gass regarding the LTP initiative, and after acknowledging “some differences of opinion between us on this subject,” he requested the EAS’ “whole-hearted cooperation.”
39At a February 16, 1955 meeting, Eshkol stated that he “wanted the EAS in the remaining period [until its term expired on July 31, 1955] to devote itself exclusively to preparing an overall economic plan or framework ... this would represent the culmination of the two years’ work.” All “agreed ... that every effort ought to be made by the EAS to prepare at least an outline for an overall [LTP] ... Bell said that he believed [this could be done] within ... five or six months ... Kollek said that of course the contract could be extended for a month or two if necessary [this never happened—authors] ... Eshkol said that if Gass were willing to participate actively ... , such participation would be more than welcome [Gass never participated—authors]” (5509/15-Gimmel).
40In an address published that month, Eshkol (1955) announced:
The Office for Economic Advice and Planning [Eshkol’s name for the EAS] is now diligently preparing [a comprehensive development plan]. I hope that within a certain [period] the Office for Economic Advice and Planning will be able to prepare a “blueprint” for [the comprehensive plan]. Certainly, under our conditions it is difficult to prepare a plan in the manner of “this you shall follow to the letter.” Most probably there will be changes to it. But I believe that this time an effort will be made to prepare a comprehensive plan, based on the coordination of the needs and possibilities of the various sectors of the economy
41The EAS ultimately failed to produce this “blueprint,” but Bell was unconcerned (Bell to Eshkol, August 2, 1955, 5509/15-Gimmel):
The [GOI] has a great deal of planning to do, not as extensive as that of the Soviet Government but more extensive than that of the US Government ... [This] must ... be ... planning of policies and actions which will induce ... non-government entities to invest, to produce, to export, etc. This involves both fiscal and monetary actions and the creation of certain facilitating, controlling, and regulating institutions. The [GOI] is doing planning in many fields, will continue to do it and has personnel capable of it.
42Bell’s conception of planning, in which private sector decisions are influenced but not controlled by the government (see also #14), resembled French indicative planning. However, no one in the EAS, GOI or US government ever discussed European planning models and their possible applicability in Israel.
43When the EAS’ term ended, Eshkol expressed his disappointment with Bell (Beham to Eshkol, September 5, 1955, 5509/15-Gimmel), but this was unfair: As Kollek told Eshkol (February 23, 1955, 5509/15-Gimmel), the GOI/MOF had “neither the time nor the inclination” for LTP, because it was too preoccupied with short-term issues; the GOI’s administrative and political problems hampered LTP (Gilboa to Ben-Artzi, September 9, 1956, 901/8-Peh); EAS personnel sought new positions as the EAS’ term wound down (Bell to Kollek, April 21, 1955, 5509/15-Gimmel).
44Why didn’t Eshkol extend the EAS contract, and thus extend the LTP effort? Direct evidence is lacking. Presumably, Eshkol was motivated by the following:
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By 1955, Israel’s financial condition had improved significantly, especially short-term debt and external reserves (Appendix D, Table 9), unilateral receipts from abroad and the fiscal deficit (ibid., Table 5). The Eisenhower Administration responded by cutting aid to Israel, thus creating a perverse incentive for Israel to avoid signaling its progress towards economic independence.
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- 20 Gass/EAS is only mentioned once in FRUS; Gass’ interlocutor was a US Embassy official.
The Eisenhower Administration showed complete indifference towards the EAS.20 Presumably, because the EAS was uninvolved in brokering money for reforms (that was Mikesell’s role), it had no value as a signal to the EA.
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The Eisenhower Administration lost interest in Israeli economic independence. Mikesell’s second mission of June 1953 was his last, and the State Department did not replace him. From August 1954 (when the GOI launched its LTP initiative), the Eisenhower Administration had no substantive discussions regarding Israeli economic independence; its interactions with Eshkol focused exclusively on the Arab-Israeli water dispute (authors’ reading of FRUS).
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Eshkol wished to sever ties with Gass.
45Both sides routinely violated the EAS’ confidentiality clause, which prohibited the GOI from “[making] any public attribution of any view to the EAS,” and the EAS from “any public discussion of any issue on which the EAS is making any recommendation” (Letter of Terms, March 15, 1953, 5509/3-Gimmel). GOI personnel leaked the latest EAS memoranda to the newspapers, which gladly published the memoranda, accompanied by sensationalized, politicized reporting that made rational discussion impossible (Applebaum, 1955). This reduced the EAS’ ability to signal the Israeli public.
46Eshkol clashed with the EAS over Gass’ unauthorized press conferences, especially that of May 26, 1954 (just before Gass’ departure for the US). Gass told the public the unpleasant truth about Israel’s BOP situation: Over the past 12 months, Israel had spent $250 million in foreign currency, only 20% of which was obtained from exports; the other 80% was obtained from German reparations, US aid, bond sales and contributions from Diaspora Jewry. “Israel’s economy continues to be based on the bread of charity.” To change this reality, he suggested three policy options:
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Cut wages by almost half to reduce export prices;
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Real devaluation—implement a 50% nominal devaluation, and avoid inflation resulting from compensation of workers for that devaluation.
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Massive export subsidies, financed by increasing taxes by 12.5% (on average) on (unchanged) wages.
47Gass argued that Israeli exports (except citrus) are negligible and stagnant due to excessive wages. For example, to make Israeli clothing exports competitive with the UK, a 35%-40% wage cut is required. Higher labor productivity growth will take many years to achieve, because it requires improved management/organization. Israel should aspire to Western living standards, but it cannot pretend that it has already achieved them (Jerusalem Post, May 27, 1954; Davar, May 28, 1954).
48Eshkol objected vehemently (Eshkol to Gass, May 28, 1954, 5509/14-Gimmel):
[Your] statement [to the press] constitutes a clear breach of a specific stipulation in your contract ...
I am gravely concerned about the repercussions on the public morale which inevitably will result from this statement, as it is bound to create confusion and serve as a destabilizing factor in our economy.
I came to realize now, more than ever, how necessary and pertinent was the above-mentioned stipulation, and I sincerely hope that you will act accordingly in the future.
49Bell, replying to Eshkol in Gass’ absence, was unapologetic (June 4, 1954, 5509/14-Gimmel):
- 21 Presumably, Eshkol and Bell were referring to the Jewish public only. The non-Jewish public (11% of (...)
I am troubled because ... you do not contest the accuracy of Mr. Gass’ diagnosis ... but rather are concerned that the public21 should know that the economic situation is grave and that drastic and immediately painful steps need to be taken to remedy it. My own regret is, and I think I speak for Mr. Gass as well in this, that no such courageous statement of the truth has been made by a high officer of the GOI. Certainly it should be the obligation of an advisor to do so.
I am sure that you recognize that Mr. Gass made this statement out of his deep and sincere concern ... for the future of Israel and because he felt that it was the obligation of someone whose words would command attention to focus the eyes of the Israeli public on the true facts of its situation.
... one of the greatest dangers to Israel today and one of the greatest blocks to effective action is the mood of public complacency and self-congratulation which has been permitted to develop in place of honest and courageous facing of the facts.
50Presumably, Eshkol was offended for two reasons:
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By sounding the alarm regarding the BOP, Gass had sent the public a negative signal regarding Eshkol’s competence (as Swank, 2000 demonstrates, the policymaker prefers to hear advice in secret, because public knowledge of advisor-policymaker disagreements harms the policymaker’s reputation).
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- 22 Currie and the IBRD held the same view (Alvarez, Guiot and Hurtado, 2017).
The EAS believed that learning must include the public.22 It sought to educate the public regarding the BOP situation, so that the public would support Eshkol in implementing difficult (but unavoidable) measures.
51Eshkol rejected the EAS’ attempt to promote American-style participatory democracy, which was the antithesis of Mapai’s hierarchical, highly centralized system (see Bareli, 2007 and Lammfromm, 2014, 86-87).
52Mosley and Ingham (2013, 165-169) emphasize that a foreign advisor’s success depends critically on the presence of a “problem-solving intermediary.” The intermediary must be credible and must be willing and able to “translate what the adviser needs into a language that the [policymaker] understands,” so that the advisor’s recommendations receive serious consideration (ibid.). In our terminology, the intermediary’s role is to facilitate learning.
53Did Teddy Kollek play this role? No. Kollek brokered the compromise that led to the birth of the EAS, mediated (with little success) the interpersonal conflicts between Eshkol and Gass, and played a major role in facilitating the GOI-EAS LTP effort (a learning and signaling enterprise). However, there is no evidence that he ever tried to persuade the GOI to pay attention to an EAS recommendation; the task of persuasion was left to Gass and Bell.
54The EAS called on the GOI to plan for the cessation of capital imports over 5-8 years, by abolishing or reforming “institutional devices for maintaining real consumption,” and using tax and investment policies to stimulate investment and reduce consumption (#12). If the GOI took any significant measures in this direction, they were a colossal failure: From 1955-1961, 90% of GNP growth was accounted for by growth in private and public consumption (Schiffman et al., 2017, 71).
55The EAS recommended issuing CPI-linked government bonds (#18); the GOI began doing so in 1955. On the other hand, Lerner’s call to index all loans exceeding 12 months (#21) was ignored. Instead, the GOI introduced partial indexation of 2-8 year loans, effective April 1, 1954.
- 23 Oddly, this statement appears in a memorandum on cement.
56The EAS adopted Lerner’s Functional Finance theory: “Narrowly fiscal considerations should not trump the needs of price stability and growth” (#35).23 In the Israeli context, the EAS opposed fiscal deficits for fear of inflation. In a letter to Eshkol, Bell “urgently” recommended contraction on both expenditure and tax sides (Expenditure: cut IL 15-20 million, except for education, health, investment; cut 7-10% in each ministry. Tax: subsidy rebate, direct tax increases, do not broaden income tax exemptions, improve tax collection) (#25). Bell warned that “if [expenditures] are not cut, you will be forced to finance them by directly inflationary means”—printing money or cutting subsidies via devaluation (the GOI subsidized certain commodities by importing them at artificially low exchange rates). Eshkol did not cut expenditures or increase direct taxes. He proposed a subsidy rebate, but did not implement it due to the opposition of the General Zionist ministers (Maariv, July 15, 1954). Tax exemptions and tax collection remained problematic: Even in 1959, tax officials were still negotiating special income tax rates with specific groups of workers (Rubner, 1960, 76).
- 24 This material is taken from Schiffman et al. (2017, 21-24).
57Eshkol asked his friend David Horowitz to draft what became the Bank of Israel Law (1954) and serve as the founding governor of the BOI. Horowitz prepared the draft legislation without EAS input. In late April 1954, Lerner (with Gass) recommended that the GOI not pass Horowitz’s draft legislation, for two reasons (#8):
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The Governor sets monetary policy alone but lacks true independence. An independent monetary board should set monetary policy.
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The Governor’s banking supervision powers are excessive and “arbitrary.” The BOI will exploit these powers to limit competition in return for banks’ cooperation with the GOI’s directed credit program, all in the name of protecting depositors. Instead, the GOI should permit free competition, replace directed credit with direct subsidies, and introduce US Federal Deposit Insurance Corporation-style deposit insurance.
- 25 Two points (based on Helleiner, 2003): a. Eshkol’s expectation that the central bank would develop (...)
58Lerner urged reconsideration, with the help of a Fed or IMF expert who would be brought to Israel, but Horowitz refused, citing endorsements from Edward Bernstein (IMF), Robert Triffin (Yale University), Arthur Bloomfield (New York Fed) and Louis Rasminsky (Bank of Canada). Eshkol supported Horowitz; he wanted a dependent BOI that would develop the country via directed credit and regulate the banks.25 Eshkol overcame the opposition of the right-liberal parties (which was partially based on Lerner’s memorandum): The final BOI law (August 1954) was essentially identical to Horowitz’s draft.
- 26 Israel was free to give export subsidies because it did not join the GATT until 1962.
59Lerner and Bell advocated export subsidies as means of promoting economic independence (#10, #19).26 The GOI utilized export subsidies; in 1956, the GOI changed the basis for export subsidies from gross value to value added (Pomfret, 1975), consistent with what Bell had recommended. However, the GOI failed to keep the trade deficit constant, as recommended by Lerner—over 1954-56, the trade deficit/GNP ratio ballooned from 19% to 25% (Appendix D, Table 6). Furthermore, Gass’ call to abolish the system of discretionary exchange rate-linked export premiums (#15) was not heeded.
60Bell advocated unifying the exchange rate at IL 1.8/$ (accompanied by compensation of low-income households for the resulting food and fuel price increases (#20). This was never implemented: Although the exchange rate was officially unified in 1955, in practice, the highly complex multiple exchange rate system was maintained.
61Four months later, Bell opposed on anti-inflationary grounds a GOI proposal to cut subsidies on certain imported goods by raising the relevant exchange rates. Instead, he suggested what he saw as a noninflationary alternative—a subsidy rebate, in which higher income workers rebate to the GOI the food and other subsidies which they currently receive (#23; also #20, #25). The GOI did exactly the opposite: It rejected the subsidy rebate, and in July 1954, Eshkol raised exchange rates for some imports, including wheat for baking bread.
62The EAS supported import substitution via export subsidies (#19). However, it opposed import substitution where consumers were forced to pay more for import substitutes than they would pay for freely imported goods. The EAS also opposed import substitution in intermediate goods because it harmed export competitiveness (#33, #48, #113). The GOI rejected this advice; it favored import substitution so strongly that it blocked imports even when domestic goods cost over 50% more (Rubner, 1960, 171).
63Lerner (#24) warned that the Cost of Living Adjustment (CLA) was highly inflationary and hurt international competitiveness: When the CPI increased, wages increased more than proportionately. He strongly implied that major CLA reform was necessary (in 1956, he would advocate abolishing the CLA). Although Eshkol publicly supported Lerner’s view (Schiffman et al., 2017, 31), no CLA reform was implemented.
- 27 Both the EAS and the GOI ignored Keynesian arguments against nominal wage cuts.
64Gass (and Lerner) advocated wage cuts (in both traded and nontraded sectors) to improve international competitiveness and promote economic independence. Gass excoriated the “false and meretricious prophets” who denied the need for wage cuts, based on overoptimistic projections of future productivity growth (cover letter to #29, May 24, 1954). Gass’ public advocacy of wage cuts (including his May 26, 1954 press conference) generated a firestorm of controversy. The GOI strongly rejected the EAS’ recommendation. In a 1957 speech (5535/9-Gimmel), Eshkol prioritized equality over efficiency in wage setting, and enthusiastically adopted the optimistic productivity growth projections that Gass had excoriated.27
65The GOI considered asking the EIB to rearrange the maturities of Israel’s debts. Gass warned that this action was irreversible and would harm Israel’s credit abroad. Apparently, the GOI decided not to request rearrangement. Thus, Gass made a modest contribution to the GOI’s signaling effort.
66The EAS recommended the following: freeze bread prices, cut excessive bakery wages, abolish the compulsory linkage between bakeries and flour mills, cut distribution costs by prohibiting deliveries in urban areas until after 11 AM, mechanize bakeries with GOI assistance, and allow free entry into the bakery sector (#29). On July 18, 1954, Eshkol increased bread and flour prices simultaneously, so that the bakers gained nothing. The EAS’ finding that bakery wages were excessive was harshly criticized in GOI and Histadrut (General Federation of Labor) circles; the other EAS recommendations were ignored.
67Bell and Deputy Trade and Industry Minister Zalman Susayeff (of the right-liberal General Zionist party) declared that bread prices should be based on the costs of large, mechanized bakeries, not small, primitive bakeries (#31). The GOI adopted this principle by 1958.
68Bell sat on the GOI’s Sugar Committee, which was optimistic that sugar beet could be grown and processed profitably, and advocated subsidies for these purposes (#45). To minimize transport costs, Gass recommended six small, geographically dispersed sugar refineries, using West German-made equipment (#43). However, the GOI established just two refineries by 1956—an excessively large refinery in Afula (#45) using US-made equipment (the investment was made before the Committee could oppose it) and a small one in Ramat Gan.
69Gass affirmed two principles (#35): a. In setting official prices, cost-plus pricing should be rejected, while guaranteeing producers “an adequate profit return for prudent investment and efficient operation.” b. Consumers should not pay higher prices to support excess capacity. The GOI rejected these principles.
70The EAS (#33) recommended maintaining the price freeze that it had advocated three months earlier, merging the two existing firms (Alliance and General) to reduce excess capacity/overhead, and giving the merged firm a “transitional” export subsidy. Eshkol maintained the price freeze but ignored the merger recommendation.
71The EAS gave Kaiser-Frazer a lukewarm endorsement, as follows: Kaiser-Frazer is Israel’s largest industrial exporter (accounting for 20% of Israel’s industrial exports, with 90% of output exported), and is (unlike many other industrial enterprises) a net contributor to foreign currency reserves. However, Kaiser-Frazer is a “pygmy operation” whose exports depend entirely on clearing agreements with “dollar-short countries”—Turkey, Finland and Yugoslavia. Furthermore, Israeli consumers pay 10%-32% more for an Israeli-made Kaiser-Frazer auto, vs. a US-made Kaiser-Frazer auto. The EAS recommended that Kaiser-Frazer manufacture or purchase more parts domestically, and begin manufacturing trucks. The EAS rejected cost-plus pricing in favor of a pricing formula based on prices of imported equivalents (#48). Implementation of EAS recommendations was partial at best: From 1961, Kaiser-Frazer manufactured parts at its new Ashkelon facility; the extent of import substitution is unknown. Cost-plus pricing was replaced by return-on-investment-based pricing in 1957 (Haaretz, August 21, 1957); domestic consumer prices remained high because the GOI generally blocked competing imports (Rubner, 1960, 275). The demise of Kaiser-Frazer USA’s passenger car division in 1955 led to drastic changes at Kaiser-Frazer Israel: By 1961, Jeep trucks accounted for 28% of total sales (all Jeep vehicles accounted for 70%) (Edgar F. Kaiser Papers 343:12). Kaiser-Frazer Israel was sold in 1969.
72The EAS argued that the American-Israel Paper Mills monopoly, with its exorbitant prices, caused a net loss for the economy; Israel would be better off importing all of its paper needs (#36). Nevertheless, the GOI supported American-Israel Paper Mills in various ways, including infant industry protection and acquiescence to unauthorized price increases (Kelman, 2016).
73Marion Clawson identified the following major weaknesses (#62, unless otherwise indicated):
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Agriculture is not geared to land characteristics.
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The types and sizes of farms result in low productivity, high costs and hence low real incomes.
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Compared to the US, Israeli agriculture is often more capital intensive, although capital is more expensive and labor is cheaper.
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Distortions are rampant in agricultural markets; some distortions worsen Israel’s foreign reserve shortage (#53). GOI controls of credit, supplies and equipment stimulate production in high-cost regions.
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Current and projected irrigation costs are 5-10 times the maximum costs in similarly situated countries. Therefore, crops such as cotton cannot be grown competitively. Irrigation construction costs are excessive (#54).
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The timing of irrigation development by region has been very poor. Costly irrigation in the Negev desert comes at the expense of much cheaper irrigation in the coastal plain.
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GOI agricultural plans are “unrealistic” because they almost completely ignore economic considerations (#64). Plan C projects a massive increase in agricultural output by 1960, without taking into account that prices must decline sharply in order to sell the increased output. Therefore, Plan C’s projections for agricultural income, farm units and employment are extremely overoptimistic (#83).
74Clawson recommended the following:
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Reduce central irrigation construction costs by 20% (#54).
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Reduce local irrigation distribution costs (equivalent to 1/3 of total irrigation costs), by setting a minimum field size of 40 dunams (#6) and exploiting gravity (#58).
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Cease establishing new agricultural settlements until the number of partially developed settlements declines from 300 to 100 (#62). For the next 5-7 years, establish at most 10 new Negev settlements, and reduce planned diversion of water to the Negev from 200 to 90 million cubic meters—less than enough for full irrigation of existing settlements (#82).
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Agriculture should not absorb many more workers, at least for several years (#84).
75Clawson knew that he was bucking the conventional wisdom on Negev irrigation and settlement:
I recognize that there is strong sentiment and powerful forces pushing for maximum irrigation development ... The idea of dry but fertile land lying more or less unused, and of potential irrigation water wholly unused, impresses many people as unsound national policy, if not downright unmoral. But costs cannot be escaped (#51).
76The GOI rejected Clawson’s recommendations. Eshkol declared that expensive irrigation projects would continue, regardless of foreign experts’ disapproval (Knesset Minutes, January 13, 1954). He also told Gass to discard the EAS’ agricultural plan, and prepare a new plan that would allow for costly Negev irrigation (Nevo-Eshkol, 1988, 80):
Mr. Gass: According to your plan, Israeli agriculture ends here [50 km south of Tel Aviv] ... We want it to end here [170 km south of Tel Aviv] ... Please take care of this, expert gentlemen.
77Similarly, Eshkol stated: “[The LTP] must take into account the development of all parts of the Land, from Metulla to Eilat” (emphasis in original; August 3, 1954, 762/7-Peh).
78During the 1950s, monopolies and GOI-sanctioned cartels were rampant (Rubner, 1960, 81); Israel had no antitrust law. On January 1, 1954, the GOI formed a Cartel Committee, consisting of Deputy Minister Susayeff (Chair), Bell (EAS), Shimon Horn (MOF) and A. Arieli (MOF) (Haboker, January 3, 1954). In April 1954, Gass brought Democratic National Committee general counsel Harold Leventhal (who was also Gass’ personal attorney) to Israel. Leventhal drafted an antitrust law, providing for a “Competitive Practices Authority ... to ensure ... free and fair competition ... to the maximum extent, and to reduce trade restraints ... except where ... necessary and desirable in the public interest.” Leventhal allowed two exemptions—exports and labor agreements, with the important caveat that labor-managed firms were not exempt (#42).
79When the Cartel Committee finished its work in January 1955, it unanimously supported an antitrust law providing for a Competitive Practices Authority, but was deadlocked on one key issue: Horn and Arieli wanted to exempt vertically integrated arrangements, which were common in the Histadrut sector, from Competitive Practices Authority oversight. Susayeff and Bell opposed this exemption, consistent with Leventhal’s caveat. After efforts to break the deadlock failed, the Cartel Committee submitted two separate reports (7752/6-Gimmel). Mapai and the left-wing parties adopted the Horn-Arieli report; Eshkol called the Susayeff-Bell report “a blow to the foundations of the Histadrut ... economy” (Maariv, January 10, 1955). The right-liberal parties adopted the Susayeff-Bell report.
80Bell went public. In a February 2, 1955 address to the Israeli Political Science Association (reported by multiple newspapers), he argued that all concentrations of economic power that are being abused should be subject to the antitrust law, with no distinction between horizontal and vertical arrangements. He also lamented the public’s indifference to the economic harm caused by the cartels.
81The Knesset finally passed Israel’s first antitrust law in July 1959. The new law categorically exempted vertical arrangements, in accordance with Eshkol’s position; Leventhal and Bell-Susayeff were ignored.
82When policymakers choose foreign economic advisors, they have two objectives: Learning about a proposed policy’s likelihood of success, and signaling to others that the policy has a high likelihood of success.
83How successful was the EAS in maximizing learning and signaling, in its role as foreign advisor to the developmental State of Israel? The EAS contributed to learning in the following ways:
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The EAS’ staff produced 120 memoranda in various fields;
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The EAS more than paid for itself through project evaluation;
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By the end of its tenure, the EAS developed good working relationships with four GOI ministries.
- 28 Ben-Gurion and Eshkol repeatedly claimed that they knew better than foreign advisors, and were unaf (...)
84However, several factors impaired both learning and signaling, thus preventing the EAS from actualizing its full potential. Some of these factors were attributable to the GOI, some were attributable to the EAS, and others were beyond either party’s control. The following factors impaired learning: a. GOI policymakers disparaged advisors while boasting of their own expertise.28 b. The GOI had multiple foreign and domestic advisors who often disagreed with the EAS. c. There was no intermediary who could persuade the GOI to seriously consider the EAS’ recommendations.
85The following factors impaired signaling:
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With an incoming Republican president, the GOI recruited a Democratic/New Deal-oriented EAS, most probably because it saw a Democratic EAS as more ideologically compatible and thus more conducive to learning;
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The EAS failed to produce a LTP as demanded by the EA, due in part to a delay caused by Gass’ opposition;
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The Eisenhower Administration showed complete indifference to the EAS;
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When Israel’s short-term debt situation improved by March 1954, the Eisenhower Administration reduced Israel’s aid for fiscal year 1955, thus creating a perverse incentive for Israel to avoid signaling its progress towards economic independence;
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- 29 Therefore, the EAS would most likely have had little signaling value, even if it had been comprised (...)
From August 1954, the Eisenhower Administration completely lost interest in Israeli economic policy, and shifted to an exclusive focus on the Arab-Israeli conflict.29
- 30 A broader definition of the Washington Consensus includes adherence to GATT/WTO rules. The GATT alw (...)
86The EAS’ recommendations were broadly consistent with the “Ten Commandments” of the Washington Consensus (as formulated by John Williamson in 1989; see Williamson, 2004), with the following exceptions: The EAS did not call for cutting marginal tax rates, repealing the 9% interest rate ceiling (known as the “Ottoman Law”) or privatization. The EAS emphasized antitrust policy, which was not an element of the Washington Consensus. The EAS also advocated export subsidies, contrary to GATT rules.30
87Despite the EAS’ efforts to persuade policymakers (and the public), the GOI rejected most of the EAS’s recommendations in the money doctoring fields, industry, agriculture/irrigation and antitrust (the only exception was project evaluation, in which the GOI adopted most of the EAS’ recommendations). This was almost inevitable, because the EAS and the GOI had divergent goals for economic policy: The EAS prioritized allocative efficiency and cost control, while the GOI prioritized state-building—national security, regional development and full employment. This divergence led to fundamental disagreements on many issues: central bank independence and DC, multiple exchange rates, import substitution and export promotion at domestic consumers’ expense, exemption of vertically integrated arrangements from antitrust laws, costly irrigation projects and new agricultural settlements—especially in the Negev region, and wage cuts as a remedy for excessive wages.
88We close with a general observation regarding the Eisenhower Administration’s economic diplomacy. Calvo-Gonzalez (2006) argues that the Eisenhower Administration failed to promote economic reform abroad through conditionality, for two reasons:
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Due to its general policy of cutting foreign aid, the Eisenhower Administration was unwilling to increase foreign aid in exchange for reforms;
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The Eisenhower Administration prioritized strategic (i.e. Cold War) considerations over economic considerations.
89Our story supports this narrative: By opportunistically cutting Israel’s foreign aid in fiscal year 1955, the Eisenhower Administration sent a clear message that it would punish (and certainly not reward) the GOI for improved economic outcomes or free-market reforms. By losing interest in Israeli economic independence to focus exclusively on the Arab-Israeli conflict, the Eisenhower Administration demonstrated that strategic considerations would always be paramount; this tendency would only intensify during the 1956 Suez crisis and its aftermath.
We thank the staff at Israel State Archives and the Forest History Society (Durham, NC, USA) for their assistance. We thank participants at the Economics and Public Reason conference (Lausanne, May 2018), and two anonymous referees, for useful comments and suggestions. Eli Goldstein acknowledges financial support from Ashkelon Academic College.