Politicization of Policy Prescriptions: Friedman and Israeli Economic Reform, 1977

Abstract

In May 1977, a political sea change took place in Israel, when the Likud Bloc replaced the Labor Party that had ruled since 1948. The government invited Friedman to serve as an unofficial economic policy adviser. Friedman visited Israel in July 1977 and proposed a broad package of free market-oriented reforms. This chapter documents Friedman’s views, activities, and influence using a wide range of primary sources. He advocated gradual disinflation, floating the currency, phasing out exchange controls, reducing government expenditures and taxes, privatizing state lands, and abolishing subsidies and directed credit. However, before his visit, Friedman was reported as calling for “a free labor market and a certain amount of unemployment.” This led to opposition attacks; consequently, the government distanced themselves from his views. In October 1977, the government announced an “economic revolution.” It liberalized exchange controls, reduced subsidies and tariffs, and essentially floated the currency. Friedman was not informed of this in advance. Still, he lauded the government for its “courage and wisdom” and predicted a “reduction of inflationary pressures.” But the government again distanced itself from his views. The “revolution” did not succeed; inflation accelerated. Still, parts of his agenda were ultimately implemented by later Israeli governments.