The Economic Advisory Staff and State-Building in Israel, 1953-1955

Abstract

This paper documents the activities and influence of the Economic Advisory Staff (EAS), a group of US economists that advised the Government of Israel (GOI) between May 1953 and July 1955. The EAS’ senior members were Oscar Gass (Director), Bernard Bell (Deputy Director), Bertram Gross, Abba Lerner, Marion Clawson and Arye Gaathon. We evaluate the EAS’ influence using the conceptual framework of learning and signaling. The EAS promoted learning by producing 120 memoranda on a broad range of topics, more than paying for itself through project evaluation, and developing good relationships with four GOI ministries. However, several factors impaired learning and signaling, thus preventing the EAS from actualizing its full potential. The following factors impaired learning: GOI policymakers disparaged advisors while boasting of their own expertise; the GOI had multiple foreign and domestic advisors who often disagreed with the EAS; and there was no problem-solving intermediary between the GOI and the EAS. The following factors impaired signaling: The GOI recruited a Democratic/New Deal-oriented EAS, just as the Eisenhower Administration (EA) was taking office; the EAS failed to produce a long-term plan, as demanded by the GOI and the Eisenhower Administration; the Eisenhower Administration showed complete indifference towards the EAS; when Israel’s short-term debt situation improved, the Eisenhower Administration reduced Israel’s aid for fiscal year 1955, thus creating perverse incentives for the GOI; and the Eisenhower Administration completely lost interest in Israeli economic policy, beginning in August 1954. The EAS’ recommendations were broadly consistent with the Washington Consensus, but with some significant exceptions (e.g. the EAS’ support for export subsidies). Despite the EAS’ efforts to persuade policymakers and the public, the GOI rejected most of the EAS’ recommendations in the money doctoring fields, industry, agriculture/irrigation and antitrust (project evaluation was the only exception). This was almost inevitable, because the EAS and the GOI had divergent policy goals: The EAS prioritized allocative efficiency and cost control, while the GOI prioritized state-building—national security, regional development and full employment. Our findings support the view that the Eisenhower Administration failed to promote economic reform abroad via conditionality, because of its general policy of cutting foreign aid, and its prioritization of strategic considerations over economic considerations.