IASPS
Quarterly Report
Winter 2001
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of the President
The
Director's Column
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Tell IASPS: We Want Freedom
IASPS and Its Impact
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The Director's Column
By Dr. Alvin Rabushka
Director, Division for Economic Policy Research
The Heart of the Matter
From time to time, it's useful to remind readers of the Quarterly Report and other IASPS publications why we do what we do.
We have one
main purpose: endowing Israelis with the same freedom enjoyed by Americans. For
the better part of the last century, every prime minister and government of
Israel have concentrated on strengthening the State at the expense of
individuals and families.
I deliberately use an upper-case letter for State and lower-case letters
for individuals and families. The establishment, or restoration, of a Jewish
nation in the traditional land of the Jewish people in the twentieth century has
evolved into a social, economic, and political system that denies fundamental
freedoms to its residents. Their loss of freedom grows daily, as is evident in
the articles posted on the Institute's website.
From Private to Public
The system is socialism. Socialism means primacy of the State. The State consists of elected and appointed officials, aided and abetted by intellectuals, the media, managers of state-owned enterprises, owners of state-sanctioned monopolies and cartels, and an oppressive national labor union that shuts down vital public institutions at the drop of a hat. These are Israel's version of the nomenklatura, the reviled Communist leadership that ran the Soviet Union for decades.
Few people know Israel's early twentieth century economic history, and what little they know reflects its socialist roots. But the facts are unambiguous.
Until the advent of independence in 1948, Israel was largely a free-enterprise economy. Most capital investments in Israel were made by private entrepreneurs with their own funds. The major source of investment in construction, manufacturing, and even in citrus orchards was private. Kibbutzim may have been the pronounced symbols of the new socialist spirit, but they were inconsequential in the country's development. Indeed, private individuals bought most of the land. Data published in the 1938-1939 Statistical Abstract of Jewish Palestine document that the overwhelming preponderance of investment in Israel during the British Mandatory period was private. Between 1918 and 1929, 73 percent of all investment was private. During 1930-1937, 84 percent was private. Investment slowed during World War II.
Apart from private capital, two other sources of capital, national capital and public capital, made much smaller contributions to Israel's pre-State development.
National capital consisted of funds collected by different organs of the World Zionist Organization (WZO), gifts to Hadassah hospitals, or money used to finance the settlement of German Jews.
Public capital
included funds of the American Jewish Joint Distribution Committee (AJJDC), the
Palestine Jewish Colonization Association (PJCA), and money contributed to
mainly socialist political parties. The PJCA was established by Baron Rothschild
in 1924 to support his colonization efforts; in 1948, the company transferred
its assets to the State of Israel and to Keren Kayemet, an organ of the
WZO.
Fund the Histadrut
To summarize, non-private funds supplied only a fifth of the capital in the development of Israel during the British Mandate. But these funds were crucial to the leaders of Histadrut and the socialist parties, giving them resources to build their own power.
They used
these funds to buy land and support education, health care, social work, and
general administration, laying the foundation for what later became Israel's
full-blown welfare state. When the State was founded in 1948, a dramatic
turnaround occurred. The change was so profound that private capital investments
in Israel contracted to no more than 15 percent of the total between 1948 and
1990.
Reparations
In what must rank as one of the great ironies in economic history, German reparations financed the transformation of Israel from a private-investment, private-enterprise, free-market economy to a socialist system that fulfilled the vision of Jewish leftists. On September 10, 1952, the government of Israel signed a reparations agreement with the Federal Republic of Germany. The German government gave $850 million, a huge sum at the time, to the government of Israel as collective compensation for the millions of Jews who died at the hands of the Nazi regime and had their property stolen.
Prime Minister David Ben-Gurion hired an economic consultant to prepare a plan for the use of German reparations. The consultant, a man named Mr. Trone, recognized that Israel's infrastructure required substantial investment. Investing reparation payments in genuine public goods for the benefit of all the people, such as roads, telecommunications, utilities, and manpower training, would enhance the efficiency of existing private capital, as well as encourage new private capital.
Ben-Gurion rejected his plan outright. Instead, his government established a special state-owned enterprise to administer the funds. Ben-Gurion appointed the chief executive officer of a large Histadrut enterprise as its manager. This former Histadrut manager allocated a large share of the funds to various Histadrut enterprises and financed the establishment and growth of state-owned enterprises. Private industry was given no access to these funds. Civil servants supported increasing state control as it enhanced their power. Then, as well as now, retiring civil servants were given high positions in state-owned firms. Boards of directors and managers of State and Histadrut firms were selected by political parties, creating an incestuous relationship between government and the business sector. It is important to point out that the Central Bureau of Statistics describes business activity in Israel under the rubric of the business sector, not the private sector. The business sector in Israel is not really private in the meaningful sense of the word.
German reparations thus begat socialism. Socialism strengthened the State, while it weakened individuals and families. Socialism continues to shrink the nation, while depriving the people of freedom. Power to the State is the unspoken Israeli motto, in stark contrast to the "People Power" movements that toppled governments in Asia, the Balkans, and Latin America in recent years.
And so it was
for 70 years in the former Soviet Union, until the communist system came
tumbling down. To the extent that the Russian people today have some measure of
freedom, it is because the West did not give Mikhail Gorbachev $50 billion in
aid to prop up the Soviet economy, which would have helped to keep the
nomenklatura in power for many more years.
Freedom
Why do we do what we do? The work of IASPS is to strengthen the nation by strengthening individuals and families.
The goal is freedom in general, and economic freedom in particular. Freedom requires replacing socialism with private markets. But private markets and freedom are a poor match for socialism, when foreigners give billions of dollars each year to the State.
Freedom remains a high calling, and so we persist.
