From full employment to export-oriented development
The strategy of rapid development during the first decade after independence was designed to address the urgent need to absorb hundreds of thousands ofJews within a very short period of time.
The government allocated resources to labor intensive industries and subsidized enterprises on the basis ofjob creation. The prioritization ofjob creation over productivity hampered the competitiveness of the Israeli economy in the global economy and hence this policy put a strain on the balance of payments. Professional economists in the government and BI shared the same response to this problem: reducing the intervention of the government in the labor market, giving up the goal of full employment, and promoting export through subsidies and the devaluation of the Israeli shekel (Kleiman, 1981; Levi-Faur, 2001; Krampf, 2014).This position was led by the leading economist in the country, Don Patinkin. In 1960, in his lone book on the Israeli economy (Patinkin, 1960), he was not enamored by Israel's rapid growth, around 10 percent annually, arguing that this growth was fueled by massive import of capital. The Israeli economy, he argued, remained uncompetitive and dependent on foreign aid. Unemployment was structural rather than frictional, and therefore Keynesian policies would be ineffective. Patinkin thus backed the MOF and BI's policy with his academic authority, paving the way toward a policy paradigm change in Israel. After several failed attempts to implement this policy and worsening balance of payment deficits, a recession policy was implemented (1964). The academic economists played a key and active role in legitimizing this planned recession that ended only due to the 1967 war. A traumatic scar in the collective memory as it is, the recession does mark the seizure of control by professional economists belonging to the postwar orthodoxy, control that has nothing but solidified ever since.