During the 1980s and the 1990s the Israeli economy went through a rapid and drastic structural as well as a policy paradigm change in the direction of privatization and liberalization (Aharoni, 1991; Ben-Basat, 2002; Ben-Porath, 1986), and academic economists have, again, played a crucial role in this process.
The shift started in 1977 when, after three decades of hegemony of the labor movement, the Likud center-right party took over the election. The Likud government immediately liberalized the foreign exchange market but without concomitant fiscal restraints, the outcome was a hyperinflation of up to 435 percent (in 1984). The crisis created an opportunity for a deep structural change in the economy. The Stabilization Plan of 1985 was designed by several top Israeli economists, interestingly helped by American economists (most notably, Stanley Fischer, who later became the Governor of the BI, and Herbert Stein). It included several steps necessary to stop the inflationary spiral but, in addition, and exploiting the public's eagerness to get out of the crisis, included major revisions in the mechanisms of economic policy-making (Mandelkern, 2010). These revisions opened the way towards liberalization, privatization, and fiscal consolidation.The Stabilization Plan was followed by more changes made later in order to bolster the power and autonomy of professional economists. For example, the Bank of Israel Law was amended, barring the government from funding the deficit by printing money (Maman and Rosenhek, 2009). The MOF has received much more power to restrain government expenses, many state- owned companies were privatized, and welfare services have been out-sourced. In short, the Israeli economy merged with neo-liberal trends that gradually engulfed almost the entire globe during the 1980s∕1990s. Nevertheless, either due to the Israeli policy legacy, or due to its security conditions, the Israeli economy still retains some features of its collectivist past. The economic discourse is highly national, the state supports certain economic branches, especially in the military industry, and appeals to national considerations to favor several large firms (Shalev, 1998).
The neo-liberal turn shed the many past socialist vestiges of a country built, not exclusively but primarily, by socialist pioneers and led for decades by at-least-formally socialist parties. The economists have been the midwives of this transformation. In the 1930s and 1940s they helped policy makers to move from obsolete agrarian fixation and utopian collectivist settlement toward ideas of nation-building based on private enterprise, but regulated and controlled by the national interest. In the 1950s, 1960s, and 1970s they helped the state quell mounting demands from various sectors and conduct its affair rationally, and in the 1980s and 1990s they pulled the state and the society as a whole towards the neo-liberal pole.