Abstract
This chapter documents Richard Kahn’s role as an unofficial advisor to the Israeli government, using archival and published sources. In 1957, Kahn predicted that the EEC customs union would harm Israel’s trade and that the EEC would reject Israel’s application for Associate Membership. He proposed a major reform of the COLA that would significantly reduce real wage protection and move Israel closer to the Swedish wage system. In 1962, he took a neutral position regarding the sustainability of Israel’s international imbalances. He also criticized Israeli policymakers for overestimating the potential benefits of an Israel-EEC commercial agreement and argued that the EEC would make reducing Israel’s trade deficit more difficult, even if the UK did not join. Ultimately, Israeli policymakers ignored Kahn’s advice: they continued to push for EEC Associate Membership and failed to adopt his proposal for COLA reform. In that sense, Kahn was unsuccessful as an advisor, but he was probably successful in the more limited sense of helping government officials attain greater clarity on economic issues.
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Notes
- 1.
In preparing this synopsis, we have utilized the list of Kahn’s publications in Pasinetti (1991).
- 2.
For an assessment of Kahn’s contributions in their historical context, see Marcuzzo (2012).
- 3.
“The economic system is a sticky and patchy affair—very far from the ideal world of perfect mobility and foresight beloved of theoretical economists” (Kahn 1952b).
- 4.
For Kahn’s retrospective on his role in the Radcliffe Committee, see Marcuzzo (1988, 53–7).
- 5.
As early as 1951, Friedman rejected the cost-push view of inflation (Nelson 2009), of which Kahn was an adherent. Kahn must have been familiar with Friedman’s views; Friedman spent the year 1953–1954 in Cambridge and interacted socially with both Kahn and Joan Robinson. Friedman also debated Robinson concerning flexible exchange rates (Friedman and Friedman 1999, 245–6).
- 6.
- 7.
Kahn accepted the Edgeworth-Bickerdike optimum tariff argument: “restrictions on imports, provided that they are not too drastic and provided that they do not cause other countries to do likewise, are bound, on account of the favorable effect on the terms of trade, to benefit a country” (Kahn 1950a). He also asserted that unilateral liberalization would necessitate higher unemployment in order to prevent the trade deficit from expanding (Kahn 1952a).
- 8.
- 9.
Kahn did not comment on the potential effects of payments unions on Israel. Kahn’s proposed alternative to the European Payments Union, the “Discount Scheme,” was designed to stimulate imports from within Europe and exports outside of Europe, in order to improve Europe’s reserve position in an era of dollar scarcity (Kahn 1949b, 1950b). Obviously, this scheme would have harmed Israel.
- 10.
Doris and Beatrice were Kahn’s eldest and second sisters. Beatrice immigrated to Mandatory Palestine before 1939; by 1944, both Doris and Beatrice were already settled in Palestine (Palestine Post 1944). Kahn’s other siblings were Constance (Connie) Papineau, who was married to a British military officer and resided in both South Africa and the UK; Peggy, a sister who died in the 1930s (Kahn to Denis Smith, 4/4/73, Kahn papers, RFK 18/7); and at least one brother who died in childhood (David Papineau, personal communication).
- 11.
Kahn was involved in the construction of the Cambridge synagogue (completed 1937) and served as a synagogue trustee from 1936 to 1977 (Tabor 1989). In 1979–1980, he agreed to chair a major event in the history of British Ultra-Orthodox Jewry, the “Centenary of Independent Orthodoxy 1880–1980 and Golden Jubilee of the Jewish Secondary Schools Movement” (RFK 21/4). Furthermore, the notations in his 1962 and 1973 travel diaries (RFK 21/3, 18/7) reflect a traditional but nonpracticing Judaism.
- 12.
- 13.
Paul Samuelson called Patinkin “an Abraham that all see as the Father of their nation’s science … the Adam of Israeli economics and economists” (Leeson 2000).
- 14.
Kahn’s connection with HU predated Patinkin’s hiring. In 1938, Kahn (at HU’s request) recommended Michal Kalecki and Abba Lerner for a chair in economics. Neither accepted a permanent position, but Lerner served as visiting professor in 1955–1956 (Gross 2005).
- 15.
The sequence of letters indicates that Patinkin visited Cambridge in 1952.
- 16.
- 17.
AIB was founded in 1959 and was later renamed Bank Leumi UK (Halevi et al. 1981, 201).
- 18.
On this issue, see also Halevi (1969).
- 19.
Simon Kuznets approved of this policy (Kuznets 2012, 95–6).
- 20.
Kreinin (1958) attributed the 1950s inflation to union wage pressures and low savings.
- 21.
Over 1955–1961, inflation in the UK, West Germany, and the US averaged 2.8%, 2.0%, and 1.9%, respectively (Sources: the UK and US, http://www.measuringworth.com/inflation/; West Germany: OECD StatExtracts).
- 22.
- 23.
- 24.
- 25.
A similar view was expressed by Schlomo Riemer, a student of both Patinkin and Kahn: “… the simple, sad truth is that after 14 years of massive, unremitting foreign aid aggregating to upwards of $4,000,000,000 there is not the moral strength and resolve left in Israel society, in the ranks of government and opposition alike, to put the country on its economic feet” (Riemer 1962).
- 26.
After working for the US government and the NBER, Creamer served as the founding director of the Falk Institute in the early 1950s. He subsequently returned to the US and served as a senior economist at the Conference Board and as a member of the Falk Institute’s US Advisory Board.
- 27.
This passage dates from the late 1950s. Kreinin (1956) expressed a similar view.
- 28.
Other distinguished participants included Patinkin, Kuznets, and the sociologist Talcott Parsons.
- 29.
Eshkol was abroad until July 2, having traveled to France and the US to raise funds for immigrant housing.
- 30.
During 1957–1958, Patinkin worked closely with Bartur as a member of the government’s Inter-Ministry Committee on the Common Market and Free Trade Area (Patinkin Papers, Box 69, Krampf 2010b). Arnon, a personal friend of Patinkin’s, placed Patinkin’s students in positions at the Finance Ministry (Gross 2005). From 1957 to 1968, Patinkin worked with Horowitz as a member of the BOI Advisory Committee (Patinkin 1994), which (despite its name) functioned as a board of directors (Krampf 2010a). Naphtali was instrumental in bringing Patinkin to HU (Patinkin 1995).
- 31.
Kreinin (1968) cites import liberalization and exchange rate unification as efficiency-enhancing measures that would fail to pass without external pressure.
- 32.
The 1964 commercial agreement reduced the common external tariff on some industrial goods that were of importance to Israel, by some 20%. The agreement was non-preferential—i.e., all tariff concessions granted to Israel were also granted to competing countries (Pomfret and Toren 1980, 17).
- 33.
Evans estimates that wage increases not justified by productivity growth were responsible for 7.8 percentage points of inflation each year; the CLA was at least partially responsible.
- 34.
Kleiman and Ophir use annual and quarterly data for 1955–1965.
- 35.
Artstein and Z. Sussman find that inflation is explained by the following variables (coefficient sign in parentheses): import prices (+), money growth minus output growth (+), the reciprocal of lagged unemployment (+), Arab workers from the West Bank and Gaza (−, applicable from 1967), the product/labor ratio (+), one minus the rate of indirect tax (−), and a dummy for wage controls (−).
- 36.
Michaely cites the following empirical regularity: Over 1949–1971, price movements lagged money supply movements by 10–12 months.
- 37.
Kahn was referring to the Swedish wage agreement of February 1957, whose key provisions were the following: Hourly wages would increase by 2% or 10 öre per hour (whichever was greater) in 1957 and by 3.5% in 1958; piece rates would rise by 2% in 1958. Workers could reopen the agreement to demand a CLA if the CPI (1949=100) increased from 143 to 150 over March–November 1957, unless the increase was caused by new taxes on consumption (Sen Gupta 1958). This represented an increase of 7.4% at an annualized rate, which was substantially higher than the 4.6% year-over-year inflation rate recorded in February 1957 (up from 3.6% in December 1956). Actual inflation in Sweden for March–November 1957 was 3.6% (annualized), so this provision was never triggered (Swedish inflation data is taken from OECD StatExtracts).
- 38.
While in Israel, Kahn did not articulate a fully developed conception of wage policy.
- 39.
From 1968 to 1975, the housing component was also excluded.
- 40.
Patinkin endorsed the SNEP in a letter to BOI Governor Horowitz (Patinkin 1962).
- 41.
The nominal exchange rate was frozen until November 1967, when the IL was devalued by 16.7%.
- 42.
Exports to the EEC expanded sixfold, while the EEC’s share in Israeli exports rose from 17.4% to 30% (Kreinin 1968 and Table 4.2). In 1961, the EEC and the UK (which was outside the EEC until 1973) accounted for 27.5% and 14.2% of Israeli exports, respectively (Table 4.3); the combined share of the EEC and European Free Trade Area (EFTA) countries (including the UK) was over 50% (Riemer 1962).
- 43.
Becker (1960) stated that the Histadrut “is opposed to wage increases that lack a foundation of increased productivity, since this will inevitably produce inflationary pressure and lower the real wages of the worker.” This is broadly consistent with Kahn’s views. But as Evans (1970) demonstrates, “wage increases that lack a foundation of increased productivity” were rampant during 1952–1965.
- 44.
The draft Four-Year Development Plan (Economic Planning Authority 1962) was a very ambitious document, which called for rapid export-led growth, price stability, a higher savings rate, and slower growth in per capita private and public consumption. Although the Plan was written in Hebrew, Kahn was sufficiently familiar with it to cite it in his Note. For example, the following sentence from the Note (cited above) was based on the Plan: “Of the addition to the national product over the period 1955 to 1961, 90 per cent is represented by the increase in private and public consumption.” Regarding the Plan’s fate, Kahn wrote: “While I was still in Israel I was told that the draft plan had already been substantially softened and that the planned brake on further improvement in the standard of living had to a considerable extent been released. It is relevant that the original plan would almost certainly have required heavy additional taxation if it was to be fulfilled” (Note 1963). According to Halevi (1969), the Plan was shelved because Finance Minister Pinchas Sapir (who took office in June 1963) was “less committed to the concept of overall national planning.”
- 45.
- 46.
The CET was a cause for concern in Israeli government circles throughout the 1960s. Kreinin (1968) estimated that the CET would reduce Israeli exports by 6% and pointed out that general uncertainty regarding EEC trade policy was depressing investment in Israel.
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Schiffman, D., Young, W., Zelekha, Y. (2017). Ex-officio Adviser: Kahn in Israel, 1957 and 1962. In: The Role of Economic Advisers in Israel's Economic Policy. Springer, Cham. https://doi.org/10.1007/978-3-319-60682-8_4
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