The 1985 Emergency Stabilization Plan: A Reexamination

Abstract

The Emergency Stabilization Plan is recognized as a turning point in the economic history of Israel. It transformed Israel from an economy characterized by extensive state intervention to a market economy, in which the private sector is much more dominant. Although there is an extensive literature on the long-term impact of the plan, historical research on the plan itself—its formation, implementation, and immediate consequences—is limited. Moreover, the existing research focuses on the domestic factors that allegedly caused the crisis. In this article, I reopen the ‘black box’ of the Stabilization Plan to identify the international factors that contributed to the economic crisis, with the goal of tracing the evolution of the Plan and its implementation based on archival research and reevaluating its successes and failures.

The article makes three key arguments: First, I argue that the economic crisis of the 1980s was fundamentally a debt crisis, which was caused by international factors, in contrast to existing research which underlines the role of inflation, which was allegedly caused by the government's careless fiscal policy.

Second, I argue that the Stabilization Plan proposed by Michael Bruno and approved by the government was based on neo-mercantilist principles that were designed to address Israel's trade balance deficit and external debt. The policy was grounded on the logic of internal devaluation, according to which the lowering of real wages will encourage Israeli exports and improve the competitiveness of the Israeli economy. This claim challenges the existing literature which emphasizes the neoliberal components of the Plan and the reduction of state involvement in the economy.

Thirdly, I argue that the Plan proposed by Bruno and approved by the government in fact failed to achieve two of its declared objectives: lower inflation and an improvement in the balance of payments. It failed due to the very effective protests by workers and the Histadrut (the national labor union) against the government’s intention to freeze wages. I further argue that the policy instrument that eventually stabilized prices was an interest rate hike initiated by the Bank of Israel, with the support of the Minister of Finance. I argue that the involvement of the Bank of Israel was not part of Bruno’s original plan. Although the Bank’s policy led to a reduction of inflation, it did not achieve the Plan’s other objective, that is, to improve Israel’s balance of payments.

Based on this interpretation, it appears that the Stabilization Plan was not an ideological transformation from a collectivist ideology to a liberal one, but rather a modification of Israel’s collectivist spirit to better suit the globalized era.