This PDF is a selection from an out-of-print volume from the NationalBureau of Economic Research

Volume Title: Foreign Trade Regimes and Economic Development:Israel

Volume Author/Editor: Michael Michaely

Volume Publisher: NBER

Volume ISBN: 0-87014-503-7

Volume URL: http://www.nber.org/books/mich75-1

Publication Date: 1975

Chapter Title: Front matter, table of contents, foreword

Chapter Author: Michael Michaely

Chapter URL: http://www.nber.org/chapters/c4555

Chapter pages in book: (p. -19 - 0)

Foreign Trade Regimesand Economic Development:ISRAEL

Foreign Trade Regimesand Economic Development:

A Specialon Foreign Trade Regimes

and Economic Development

VOLUME III

NATIONAL BUREAU OF ECONOMIC RESEARCH

Conference Series

New York 1975

ISRAEL

by Michael MichaelyTHE HEBREW UNiVERSITY OF JERUSALEM

DISTRIBUTED BY Columbia University PressNew York and London

NATIONAL BUREAU OF ECONOMIC RESEARCH

A Special Conference Series on Foreign Trade Regimesand Economic Development

Library of Congress Card Number: 74—77691ISBN for the series: 0—87014—500—2

ISBN for this volume: 0—87014—503—7

Printed in the United States of AmericaDESIGNED BY JEFFREY M. BARRIE

NATIONAL BUREAU OF ECONOMIC RESEARCH

OFFICERSArthur F. Burns, Honorary ChairmanJ. Wilson Newman, ChairmanMoses Abramovitz, Vice ChairmanJohn R. Meyer, PresidentThomas D. Flynn, TreasurerDouglas H. Eldridge, Vice President-

Executive SecretaryGary Fromni, Director, NBER-Washington

Victor R. Fuchs, Vice President-Research;Co-director NBER-West

Edwin Kuh, Director, Computer Research CenterHal B. Lary, Vice President-ResearchRobert E. Lipsey, Vice President-ResearchSherman J. Maisel, Co-director NBER-WestGeoffrey H. Moore, Vice President-ResearchEdward K. Smith, Vice President

DIRECTORS AT LARGEAtherton Bean, international Multijoods

CorporationAndrew F. Brimmer, Harvard UniversityArthur F. Burns, Board of Governors of

the Federal Reserve SystemWallace J. Campbell, Foundation for

Cooperative HousingErwin D. Canham, Christian Science MonitorEmilio 0. Exxon CorporationSolomon Fabricant, New York UniversityFrank L. Fernbach, United Steelworkers of

AmericaEugene P. Foley, Mon trose Securities, Inc.David L. Grove, International Business

Machines CorporationWalter W. Heller, University of MinnesotaVivian W. Henderson, Clark College

John R. Meyer, Harvard UniversityGeoffrey H. Moore, National Bureau of

Economic Re.iearchJ. Wilson Newman, Dun & Bradstreet, Inc.James J. O'Leary, United States Trust

Company of New YorkRudolph A. Oswald, Service Employees

International UnionAlice M. Rivlin, Brookings InstitutionRobert V. Roosa, Brown Brothers Harriman

&Co.Eli Shapiro, The Travelers CorporationArnold M. Soloway, Jamaicaway Tower,

Boston, MassachusettsLazare Teper, International Ladies' Garment

Workers' UnionTheodore 0. Yntema, Oakland University

DIRECTORS BY UNIVERSITY APPOINTMENTMoses Abramovitz, StanfordGardner Ackley, MichiganCharles H. Berry, PrincetonFrancis M. Boddy, MinnesotaOtto Eckstein, HarvardWalter D. Fisher, NorthwesternR. A. Gordon, California, BerkeleyJ. C. LaForce, California, Los Angeles

Robert J. Lampman, WisconsinMaurice W. Lee, North CarolinaAlmarin Phillips, PennsylvaniaLloyd G. Reynolds, YaleRobert M. Solow, Massachusetts Institute of

TechnologyHenri Theil, ChicagoWilliam S. Vickrey, Columbia

DIRECTORS BY APPOINTMENT OF OTHER ORGANIZATIONSEugene A. Birnbaum, American Management

AssociationThomas D. Flynn, American Institute of

Certified Public AccountantsNathaniel Goldfinger, American Federation

of Labor and Congress of IndustrialOrganizations

Harold G. Halcrow, American AgriculturalEconomics Association

Walter E. Hoadley, American Finance Association

Philip M. Klutznick, Committee forEconomic Development

Paul W. McCracken, American StatisticalAssociation

Roy E. Moor, National Association ofBusiness Economists

Douglass C. North, Economic History AssociationWillard L. Thorp, A merican Economic AssociationRobert M. Will, Canadian Economics Association

DIRECTORS EMERITIPercival F. BrundageFrank W. FetterGottfried Haberler

Albert J. Hettinger, Jr.George B. Roberts

Murray ShieldsBoris ShishkinJoseph H. Willits

SENIOR RESEARCH STAFFGary S. BeckerCharlotte BoschanPhillip CaganStanley DillerSolomon FabricantMilton FriedmanGary FrommVictor R. FuchsJ. Royce Ginn

Raymond W. GoldsmithMichael GortMichael GrossmanF. Thomas JusterJohn F. KainJohn W. KendrickIrving B. KravisEdwin KuhWilliam M. Landes

Hal B. LaryRobert E. LipseySherman J. MaiselBenoit B. MandelbrotJohn R. MeyerRobert T. MichaelJacob MincerIlse MintzGeoffrey H. Moore

M. Ishaq NadiriNancy RugglesRichard RugglesAnna J. SchwartzRobert P. ShayEdward K. SmithGeorge 3. StiglerVictor Zarnowitz

Relation of the Directors of the National Bureau toPublication of the Country Studies in the Series onForeign Trade Regimes and Economic Development

The individual country studies have not passed through the National Bureau'snormal procedures for review and approval of research reports by the Boardof Directors. In view of the way in which these studies were planned and re-viewed at successive working parties of authors and Co-Directors, the Na-tional Bureau's Executive Committee has approved their publication in amanner analogous to conference proceedings, which are exempted from therules governing submission of manuscripts to, and critical review by, theBoard of Directors. It should therefore be understood that the views expressedherein are those of the authors only and do not necessarily reflect those of theNational Bureau or its Board of Directors.

The synthesis volumes in the series, prepared by the Co-Directors of theproject, are subject to the normal procedures for review and approval by theDirectors of the National Bureau.

Contents

Co-Directors' Foreword xiii.

Acknowledgments XVi

Principal Dates and Historical Events xvii

Chapter 1: The Israeli Economy: An Overview 1

i• Institutional and Political Framework 1

ii. Population and Immigration 6iii. Nationa' Product and Expenditures: Size and Composition 10iv. Foreign Trade and Capital Imports 13

v. The Inflationary Process 18

vi. Foreign Trade and Foreign-Exchange Policy: Delineation of Phases 21Notes 25

Chapter 2: Comprehensive Control and Partial Liberalization: The!950s 27

i. Organization of the System of Quantitative Restrictions 27ii. The Scope of the System of Quantitative Restrictions 32iii.. The "Imports-Without-Payment" Market 36iv. Prices in Other "Black" and Free Markets 40v. The Policy Shift: From Quantitative Restrictions to Use of the

Price Mechanism 45

viii CONTENTS

vi. Liberalization and the Nature of the Remaining QRs 48vii. Geographic Discrimination 53Notes 55

Chapter 3: Liberalization of Protective Restrictions: The 1960s 58

i. The Policy Package of 1962 58ii. Guiding Principles in the Introduction of Liberalization 62iii. The Extent of Liberalization 65iv. Liberalization and the Degree of Protection 69v. The Progressive Lowering of Protection Since 1968 75

vi. General Remarks on the Process of Liberalization 78Notes 80

Chapter 4: Protection Through the Price Mechanism 82

i. Methods of Price Intervention in Imports 82ii. Methods of Price Intervention in Exports 85

iii. Exchange Rates and Protective Rates in Imports and Exports 91iv. Formal Devaluation and the Use of Other Price Components 105v. Discrimination in the Exchange-Rate System 108

Notes 115

Chapter 5: The Process of Devaluation 119

i. Main Episodes of Devaluation 119ii. Demand Policies Accompanying Devaluation 123iii. The Foreign-Exchange Rate and Domestic Prices 133iv. The Effectiveness of Changes in the Exchange Rate 137v. Conclusion: Determinants of Successful Devaluation 142

Notes 146

Chapter 6: The Exchange System and the Growth of the Economy 150

i. The Size of Capital: Foreign Investment 150ii. The Size of Capital: Domestic Savings 153iii. Productivity of the Economy: Effect of Quantitative Restrictions 159

CONTENTS lx

iv. The Exchange Rate in the Growth Process 163v. Export Growth and Import Substitution 168

Notes 174

Chapter 7: A Concluding Note: Increasing Reliance on the PriceMechanism 177

Appendix A: Basic Statistical Data 185

Appendix B: Calculation of Effective Exchange Rates and EffectiveProtective Rates 205

Appendix C: Definition of Concepts and Delineation of Phases 212

Index 215

Tables

2-1 Foreign-Exchange Budgets, Fiscal 1952-64 302-2 External Reserves, End-of-Year, 1948—72 352-3 Effectiveness of Import Restrictions, 1956 362-4 Imports Without Payment, 1949—54 392-5 Foreign-Exchange Rates in the Imports-Without-Payment

Market, 1949—51 402-6 Ratio of Free-Market to Official Prices of Food, 1949—58 422-7 Controlled Food Items as a Proportion of Total Food Expendi-

tures, 1948—59 432-8 Free-Market Versus Official Prices, Specified Dates, 1950—52 442-9 Black-Market Rate of Foreign Exchange, Quarterly, 1949—56 462-10 Distribution of Main Categories of Imports, 1951—59 492-11 Share of Exports and Imports of Goods Under Bilateral Pay-

ments Agreements, 1950—59 543-1 Number of References to Guiding Factors in Specific Liberal-

ization Decisions, by Industry, 1962—67 643-2 Extent of Liberalization, 1962—67 663-3 Imports of Goods Subject to Liberalization, by Industry and

in Relation to Other Aggregates, 1962—68 683-4 Means and Dispersions of Nominal Tariff, Effective Tariff, and

Effective Exchange Rate, by Industry, 1967 713-5 Maximum Levels of Tariff Rates, by Industry, 1962—67 723-6 Frequency Distribution of Nominal Tariffs Imposed by Decision

of the Public Commission, by Industry, 1962—67 73

TABLES Xi

Rates of Export Premiums4-1 1956—61 874-2 1966—71 884-3 Effective Exchange Rates for Imports and Exports of Goods,

1949—71Effective Exchange Rates for Value Added in Exports and inImport Substitutes, 1956—60

4-4 By Individual Industry 944-5 Summary Comparison 974-6 Effective Rates of Protection for Exports and Import Substi-

tutes, by Individual Industry, 1956—60 984-7 Effective Rates of Protection, by Major Industrial Sector, 1965 1024-8 Domestic Resource Costs and Effective Protection in the Textile

Industry, 1968 1044-9 Formal and Nonformal Components of Effective Exchange

Rates in Exports and Imports, 1949—71 1074-10 Selected Effective Exchange Rates for Exports, 1949—70 1104-11 Coefficients of Variation of Import Exchange Rates, 1949—62 1114-12 Effective Exchange Rates for Imports, by Category, 1955—71 1145-1 Formal and Effective Exchange Rates, 1949—7 1 122

Major Monetary-Fiscal Variables5-2 1949—56 1245-3 1960—66 1265-4 Foreign-Exchange Deposits of Local Residents, 1957—71 1315-5 Effective Exchange Rates and Consumer Prices, Quarterly

Data for Selected Periods, 1952—71 1355-6 Relative Prices and Quantities of Exports and Imports,

1951—71 1386-1 Private Foreign Investment, 1955—72 1526-2 Ratio of Savings to GNP, 1950—65 1546-3 Effect of Exchange Rate on the Development Budget, 1951—68 1576-4 Productivity of Resources, 1951—65 1616-5 Israel's Terms of Trade, 1950—71 1656-6 National Product and Autonomous Capital Inflow, 1950—66 1666-7 Effective Exchange Rates Adjusted for Purchasing Power

Parity, 1950—71 1676-8 National Product and the Import Surplus, 1950—72 1706-9 Share of Industries in Investment, 1958—69 173

A-i Population, 1948—72 186A-2 Gross National Product, 1950—72 188A-3 Consumption and Savings, 1950—72 189A-4 Capital and Investment, 1950—72 190

xii CHARTS

A-S Composition of Investment, 1952—72 191

A-6 Public-Sector Investment, 1952—72 192A-7 Share of Manufacturing and Agriculture in Net Domestic

Product and Employment, 1950—72 193A-8 Census Value Added in Manufacturing, 1959—70 194A-9 Industrial 'Production, by Industry, 1958—71 195A-b Exports, Imports, and the Import Surplus, 1950—72 196A-il Composition of Exports, by Major Commodity Group,

1950—72 197A-12 Distribution of Imports of Goods, by End Use, 1950—72 198A-13 The Import Surplus, 1950—72 199A-14 Sources of Autonomous Capital Imports, 1950—71 200A-15 Public Finance, 1950—72 202A-16 Money Supply, 1950—72 203A-17 Price Indices, 1950—72 204

Charts

1-1 Key Economic Variables, 1949—72 83-1 Distribution of Importers' Exchange Rates, 195 1—54 and

1959—62 604-1 Ranking of Importers' Exchange Rates by Principal Commodity

Groups, Averages for 1955—61 1125-1 Money Supply and External Reserves, 1949—72 1295-2 Effective Exchange Rate, Consumer Prices, and Implied GNP

Price Deflator, 1950—71 136

Co-Directors' Foreword

This volume is one of a series resulting from the research project on ExchangeControl, Liberalization, and Economic Development sponsored by the Na-tional Bureau of Economic Research, the name of the project having been sub-sequently broadened to Foreign Trade Regimes and Economic Development.Underlying the project was the belief by all participants that the phenomenaof exchange control and liberalization in less developed countries require care-ful and detailed analysis within a sound theoretical framework, and that theeffects of individual policies and restrictions cannot be analyzed without con-sideration of both the nature of their administration arid the economic environ-ment within which they are adopted as determined by the domestic economicpolicy and structure of the particular country.

The research has thus had three aspects: (1) development of an ana-lytical framework for handling exchange control and liberalization; (2) withinthat framework, research on individual countries, undertaken independentlyby senior scholars; and (3) analysis of the results of these independent effortswith a view to identifying those empirical generalizations that appear toemerge from the experience of the countries studied.

The analytical framework developed in the first stage was extensivelycommented upon by those responsible for the research on individual countries,and was then revised to the satisfaction of all participants. That framework,serving as the common basis upon which the country studies were undertaken,is further reflected in the Syntheses reporting on the third aspect of the research.

The analytical framework pinpointed these three principal areas of re-search which all participants undertook to analyze for their own countries.

XjV FOREWORD

Subject to a common focus on these three areas, each participant enjoyedmaximum latitude to develop the analysis of his country's experience in theway he deemed appropriate. Comparison of the country volumes will indicatethat this freedom was indeed utilized, and we believe that it has paid hand-some dividends. The three areas singled out for in-depth analysis in thecountry studies are:

1. The anatomy of exchange conirol: The economic efficiency and dis-tributional implications of alternative methods of exchange control in eachcountry were to be examined and analyzed. Every method of exchange con-trol differs analytically in its effects from every other. In each country studycare has been taken to bring out the implications of the particular methods ofcontrol used. We consider it to be one of the major results of the project thatthese effects have been brought out systematically and clearly in analysis ofthe individual countries' experience.

2. The liberalization episode: Another major area for research was to bea detailed analysis of attempts to liberalize the payments regime. In the ana-lytical framework, devaluation and liberalization were carefully distinguished,and concepts for quantifying the extent of devaluation and of liberalizationwere developed. It was hoped that careful analysis of individual devaluationand liberalization attempts, both successful and unsuccessful, would permitidentification of the political and economic ingredients of an effective effort inthat direction.

3. Growth relationships: Finally, the relationship of the exchange con-trol regime to growth via static-efficiency and other factors was to be investi-gated. In this regard, the possible effects on savings, investment allocation,research and development, and entrepreneurship were to be highlighted.

In addition to identifying the three principal areas to be investigated, theanalytical framework provided a common set of concepts to be used in thestudies and distinguished various phases regarded as useful in tracing the ex-perience of the individual countries and in assuring comparability of the anal-yses. The concepts are defined and the phases delineated in Appendix C.

The country studies undertaken within this project and their authors areas follows:

Brazil Albert Fishlow, University of California, Berkeley

Chile Jere R. Behrman, University of Pennsylvania

Colombia Carlos F. Diaz-Alejandro, Yale University

Egypt Bent Hansen, University of California, Berkeley, andKarim Nashashibi, International Monetary Fund

Ghana J. Clark Leith, University of Western Ontario

FOREWORD xv

India Jagdish N. Bhagwati, Massachusetts Institute of Tech-nology, and T. N. Srinivasan, Indian Statistical Institute

Israel Michael Michaely, The Hebrew University of Jerusalem

Philippines Robert E. Baldwin, University of Wisconsin

South Korea Charles R. Frank, Jr., Princeton University and TheBrookings Institution; Kwang Suk Kim, Korea Develop-ment Institute, Republic of Korea; and Larry E. West-phal, Northwestern University

Turkey Anne 0. Krueger, University of Minnesota

The principal results of the different country studies are brought to-gether in our overall syntheses. Each of the country studies, however, hasbeen made self-contained, so that readers interested in only certain of thesestudies will not be handicapped.

In undertaking this project and bringing it to successful completion, theauthors of the individual country studies have contributed substantially to th.eprogress of the whole endeavor, over and above their individual research.Each has commented upon the research findings of other participants, andhas made numerous suggestions which have improved the overall design andexecution of the project. The country authors who have collaborated with usconstitute an exceptionally able group of development economists, and wewish to thank all of them for their cooperation and participation in the project.

We must also thank the National Bureau of Economic Research for itssponsorship of the project and its assistance with many of the arrangementsnecessary in an undertaking of this magnitude. Hal B. Lary, Vice President-Research, has most energetically and efficiently provided both intellectual andadministrative input into the project over a three-year period. We would alsolike to express our gratitude to the Agency for International Development forhaving financed the National Bureau in undertaking this project. MichaelRoemer and Constantine Michalopoulos particularly deserve our sincerethanks.

JAGDISH N. BHAGWATI

Massachusetts Institute of Technology

ANNE 0. KRUEGERUniversity of Minnesota

Acknowledgments

I express my utmost gratitude to Hal B. Lary and to the Co-Directors of theproject, Jagdish N. Bhagwati and Anne 0. Krueger. Their involvement in thepresent study has undoubtedly gone far beyond shaping the general outline ofthe project. Through their comments in oral discussions and their detailed re-view of several drafts of the study they have made very substantial contribu-tions to the final product.

I have also benefited from suggestions by my colleagues in the projectduring our periodic meetings as well as from presentations of their own stud-ies; particularly helpful have been comments of Albert Fishlow and J. ClarkLeith on an early draft.

Reuven Borkowsky has rendered a most valuable service as researchassistant to this study. I am also indebted to Mario Blecher, for help in thecalculations involved in Chapter 6; to Ester Moskowitz, for meticulous edit-ing of the manuscript; and to H. Irving Forman for skillfully drawing thecharts.

MICHAEL MICHAELY

Principal Dates and Historical Eventsin Israel

1917—18 Palestine is captured from Ottoman Turkey by the British army.1921 The League of Nations grants Britain a mandate over Palestine.

The Jewish Agency is established under the terms of the mandate.The "Histadrut" is established.

1933—36 Large-scale Jewish immigration to Palestine.1939 Imposition of exchange control with the opening of World War II.1947 UN decision to partition Palestine into Jewish and Arab states.1948 War of Independence; State of Israel established in May 1948.1949 Armistice agreements between Israel and neighboring Arab coun-

tries.1949—5 1 Large-scale immigration—doubling of population. Imposition of

widespread quantitative restrictions (QRs).1952 Declaration of "New Economic Policy," starting a process of pro-

gressive devaluation from IL 0.36 to, eventually, IL 1.80 per dol-lar.

1956 Sinai campaign.1962 Declaration of second "New Economic Policy," consisting of de-

valuation from IL 1.80 to IL 3.00 per dollar and liberalization.1967 Six-Day War. Devaluation from IL 3.00 to IL 3.50 per dollar.1970 Imposition of 20 per cent levy on imports.1971 Devaluation from IL 3.50 to IL 4.20 per dollar.

Foreign Trade Regimesand Economic Development:ISL