Neoliberalism as a State Project

Neoliberalism as
a State Project
Changing the Political
Economy of Israel

Edited by
Asa Maron and Michael Shalev

1
OUP CORRECTED PROOF – FINAL, 23/3/2017, SPi

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Acknowledgments

The publication of this volume would not have been possible without the
goodwill of both longtime colleagues and new acquaintances.
Among the latter, John Campbell has been a source of both intellectual
inspiration and wise practical advice. He was kind enough to join the editors
and contributors in April 2015 at a workshop in Beersheva, Israel, where we
deeply benefited from his detailed commentary and friendly encouragement.
We are also indebted to Adam Swallow, the Commissioning Editor for
Economics at Oxford University Press, for his support and encouragement.
In addition, it has been a pleasure to work with OUP’s editing and production
teams.
We owe a great debt to the contributors to this volume for their patience
with our rather heavy-handed editorial style. They drafted and redrafted with
good humor, and were always ready to help out in any way they could. We
specifically wish to thank Zeev (Andy) Rosenhek who, as chair of the
Sociology, Political Science, and Communication Department at the Open
University, arranged for the group to have an initial get-together in an inspir-
ing setting at Zikhron Yaakov in February 2014; Lev Grinberg for generously
inviting John Campbell to cooperate with us and arranging his visit; and
Daniel Maman, who as chair of Sociology and Anthropology at Ben Gurion
University generously hosted our workshop with John Campbell.
A. M., Haifa
M. S., Berkeley
November 2016
Foreword
Israel, Neoliberalism, and Comparative
Political Economy

John L. Campbell

Western scholars in the fields of comparative political economy, sociology,

and political science have ignored Israel. This is both surprising and terribly
unfortunate. It is surprising because, according to the United Nations, Israel
ranks among the top twenty most developed countries in the world—higher
than several Western European countries studied routinely by comparativists
(United Nations 2013). It also ranks among the thirty most competitive econ-
omies in the world and is the third most innovative of all (World Economic
Forum 2015). But the lack of attention paid to Israel is also unfortunate because
it is a country that has much to teach us about the formation of nation-states,
social conflict and nationalism—issues that bear directly on the rise of neo-
liberalism, the subject of this volume.
During the 1960s and 1970s comparativists such as Andrew Shonfield
focused on the large North American and Western European countries such
as the USA, Germany, the UK, and France. This was an effort to understand
how these countries responded differently to the devastation of the Second
World War and how they contributed to the formation of the post-war
advanced capitalist political economy (Shonfield 1965). Later, thanks to Peter
Katzenstein’s research, some smaller European countries were added to the mix
in efforts to see how countries coped with the stagflation crisis of the 1970s and
early 1980s (Katzenstein 1985). Soon thereafter comparativists grew interested
in the leading East Asian countries, notably Japan and South Korea, as emergent
competitors to western capitalist economies. South American countries began to
draw some attention in the wake of the debt crises of the 1980s and 1990s as did
a few more East Asian countries (Haggard 1990; Haggard and Kaufman 1992).
With the collapse of the communist regimes in Eastern and Central Europe,
several comparativists turned their attention to these countries too (Campbell
Foreword

and Pedersen 1996; Haggard and Kaufman 1995). Most recently, the ascendance
of the BRICs (Brazil, Russia, India, and China) among other developing econ-
omies has attracted the gaze of comparativists (Campbell and Hall 2015; Guillén
and Ontiveros 2012). But Israel, not to mention the Middle East more generally,
has never received much attention from them.
North America, Western Europe, and South America also received the lion’s
share of attention as scholars became interested in the globalization of the
international political economy and the rise of neoliberalism. Much of this
work focused on the various mechanisms by which neoliberalism diffused
from one country to another; how powerful political and economic actors,
such as the International Monetary Fund and World Bank, pushed neoliberal-
ism in the guise of the Washington Consensus on to various countries; and
how national institutions mediated the degree to which different countries
embraced neoliberalism or not (Harvey 2005; Simmons, Dobbin, and Garrett
2008). But, again, Israel never received much attention.
Why has Israel been relegated to the sidelines so often by comparativists?
The answer is not obvious but several possibilities come to mind. One is that
Israel did not join the Organisation for Economic Co-operation and Develop-
ment (OECD) until 2010. As a result, data on Israel were not available in a form
that facilitated easy comparisons to other OECD countries.
Furthermore, for whatever reason, comparativists have not been interested
in the Middle East more generally. This is doubly ironic. On the one hand,
much of their research focused on how the stagflation crisis of the mid-1970s
was a watershed moment for the rise of neoliberalism and a game-changer for
the international political economy. But after all, this was a crisis sparked in
the first place by the Organization of the Petroleum Exporting Countries
(OPEC) oil embargo in response to US support for Israel during the 1973
war. On the other hand, Israel and the rest of the Middle East have received
a tremendous amount of attention from scholars interested in international
relations. So how Israel can be a focus of their work but not that of compar-
ativists is curious indeed.
Another reason why comparativists may have neglected Israel is that it is a
very difficult case for them to understand because its complexities challenge
some of their most basic assumptions about how national political economies
operate. There are two reasons for this. First, most comparativists have focused
on class struggles rather than nationalist struggles to explain differences
among national political economies. For instance, many comparativists have
shown that so-called liberal market economies like the USA and the UK have
weak unions, poorly organized employer associations, and little corporatism
so they work much differently than co-ordinated market economies like
Sweden and Germany that have strong unions, well-organized employer
associations, and much corporatism (Hall and Soskice 2001). Of course, this

viii
 Foreword

emphasis on class stems from the fact that the societies they often studied—
North America and Western Europe—tended to be relatively homogeneous
culturally for various historical reasons, not all admirable or pleasant. Put differ-
ently, the question of nationalism had long been settled in the West but not in
Israel. As Ernest Gellner argued, class conflict inside a common culture is rela-
tively mild because it is not mixed up with ethnic, linguistic, religious, or other
forms of nationalist conflict. For him the real political dynamite in modernity
results from the combination of nationalist and class politics (Gellner 1983: chap.
7; Dahrendorf 1957: chap. 6). Although largely absent in the postwar advanced
capitalist countries, such dynamite has been common in Israel where since
its founding in 1948 tensions between Muslims and Jews from a variety of
class, religious, ethnic, and linguistic backgrounds have festered continuously
and often exploded violently. Class and nationalist divisions have also been
commonplace among the Jews with important effects on the Israeli political
economy. Nationalism is not something with which most comparativists are
concerned or that fits neatly into their analytic framework even though recent
scholarship suggests that the degree to which countries are culturally homoge-
neous does affect national economic performance—even in the relatively
homogeneous Western countries (Patsiurko, Campbell, and Hall 2013).
Second, the Israeli state is a stark and contradictory combination of what
Michael Mann called infrastructural and despotic power (Mann 1984). It is a
democratic state affording some of its inhabitants, including Muslims, Christians,
and Jews, citizenship, the right to vote, the obligation to pay taxes, and other
opportunities to participate in the well-ordered functioning of society. But it
is also an oppressive state subjecting a significant proportion of the Arab
population to strict and sometimes violent control, including the suppression
of free movement within the country and access to labor markets and social
services. This too is ironic insofar as much of what is now Israel was once
under British colonial rule yet Israel practices a form of internal colonialism
vis-à-vis the Palestinians living in the occupied territories in Gaza, the West
Bank, and the Golan Heights. The complexities involved are mind-boggling
insofar as some Palestinian Arabs are citizens of Israel but others are not.
Furthermore, beginning with the dismantling of the military government
that controlled Arab citizens toward the end of the second decade of Israeli
sovereignty, state regulation of and discrimination against Palestinian citizens
became less despotic and more contradictory. Yet raw despotic power, unme-
diated by any liberal rights of citizenship, continues to be exercised over the
residents of the occupied territories.1 Nevertheless, the more important point
is that this blending of infrastructural and despotic state power also makes

1
A partial exception are the residents of East Jerusalem, which was unilaterally annexed by Israel
and who have a kind of halfway status as permanent residents of Israel.

ix
Foreword

Israel much different from the West where infrastructural power typically
supersedes despotic power. As a result, the nature of state power in Israel
does not conform to that assumed analytically by most comparativists given
the countries they study.
A final reason for the omission of Israel from comparative analysis is likely
that some of the important studies of the Israeli political economy were
written in Hebrew rather than English. In this sense Israel has suffered the
same fate as Denmark, for instance, another small state that was ignored by
comparativists for a long time because most of the literature available in
English about Scandinavian political economies was only about Sweden.
Thankfully, this problem has diminished somewhat since the 1990s because
of pressure on Israeli academics to publish internationally (See for example,
Shalev 1992; Nitzan and Bichler 2002b; Grinberg 2010, 2014; Maman and
Rosenhek 2011; Ram 2008, 2011). This volume contributes to that effort and
presents a wonderful opportunity for English-speaking comparativists to learn
much about the Israeli case. But there are other reasons too that it should
receive wide readership among comparativists—reasons that bear directly on
our understanding of the rise of neoliberalism.
To begin with, as the editors explain in their Introduction, neoliberalism in
Israel would not have been possible without the state. This, of course, is
paradoxical to the extent that neoliberalism is ostensibly a political and
ideological prescription for reducing the state’s role in the economy and
unleashing market forces. As this volume makes abundantly clear, the rise of
neoliberalism in Israel was driven by state actors seeking in many instances to
enhance and reorganize rather than reduce the state’s power—or at least the
power of certain state agencies. Notable among them were the Ministry of
Finance and the central bank, whose power and autonomy increased signifi-
cantly over the last few decades thanks to various neoliberal reforms. This flies
in the face of much conventional wisdom, which argues that the rise of
neoliberalism was driven by external actors like the IMF and World Bank
wielding conditionality agreements to force governments into neoliberal
reforms; the maneuvering of multinational corporations threatening capital
flight if their neoliberal demands were not met; and the diffusion of neoliberal
ideology from the USA via intellectual networks, notably professional econo-
mists trained in American universities who then returned to their home
countries as disciples of the neoliberal creed.
If Israel sheds new light on the motivations driving the rise of neoliberalism, it
also sheds light on the mechanisms by which neoliberal reforms were achieved.
Much has been written lately about the mechanisms of institutional change,
such as layering, conversion, and drift as articulated by Wolfgang Streeck,
Kathleen Thelen, and James Mahoney (Streeck and Thelen 2005a; Mahoney
and Thelen 2010a). What this volume adds, however, is that neoliberalism does

x
 Foreword

not necessarily follow an ever escalating trajectory—an inescapable march

toward more and more neoliberalism—as their work sometimes implies
(Streeck 2009).2 That is, despite their incremental development reforms taken
in the name of neoliberalism do not always and inevitably produce more
neoliberalism on the ground. What may seem to be neoliberal reform at the
level of appearances and rhetoric may turn out to be something quite different
at the level of concrete political practice. Moreover, sometimes reforms may be
undertaken that actually reverse neoliberal reforms made previously. This
makes sense in light of the basic argument of this volume—that states make
neoliberalism. What the state giveth the state can taketh away! After all, if
neoliberal reform is a project involving political struggles over state power,
then we should not be surprised to learn that these struggles may sometimes
roll back earlier reforms. Nor should we be surprised that these struggles may
involve the mobilization of neoliberal symbols and discourse as legitimizing
cover for ulterior motives. All of this becomes clear in this volume.
Finally, the evidence is mounting particularly in light of the causes of the
2008 financial crisis and since then the failed austerity policies of Western
Europe that neoliberalism has not delivered on its promises. Yet it remains
the dominant policymaking paradigm in many countries. Several scholars
have tried to explain neoliberalism’s resilience. Peter Hall and Michèle
Lamont, for instance, argue that its resilience boils down to political, eco-
nomic, and cultural resources that different groups mobilize at the family,
neighborhood, local, regional, national, and transnational levels to pursue
or defend against neoliberalism (Hall and Lamont 2013). Similarly, Vivien
Schmidt and Mark Thatcher maintain that neoliberalism lives on because it
is a malleable set of principles with few alternatives that can be as easily
articulated; because it has powerful supporters; and because it has been
institutionalized over a long period of time thus making it difficult to
dislodge (Schmidt and Thatcher 2013a). And Colin Crouch suggests that
neoliberalism’s resilience stems from the fact that multinational corpor-
ations, which have a vested interest in neoliberal reforms, dominate the
state in ways that tend to lock neoliberalism into place (Crouch 2011). For
all of these reasons it is said that neoliberalism will continue to dominate
policymaking regardless of how much evidence accumulates to contradict its
claims. While there is truth to these arguments, they all neglect one of the
seminal insights of this volume: the state itself is perhaps the most import-
ant source of neoliberal resilience. State actors have a vested interest in
supporting it and defending it against its critics.

2
Streeck’s discussion of globalization and the rise of neoliberalism in Germany is an example of
an argument about the more or less relentless march to ever more neoliberal outcomes.

xi
Foreword

In short, if we want to understand the origins, mechanisms, and resilience

of neoliberalism, we need to grasp the state’s role in all of this. This volume
does just that in rich historical and analytic detail. In doing so it presents a
case—Israel—that comparativists ought to take much more seriously going
forward than they have in the past.

xii
Contents

List of Figures and Tables xv

Notes on Contributors xvii

1. Introduction 1
Asa Maron and Michael Shalev

Part 1. Transformations of the Key Actors

2. Paving the Way to Neoliberalism: The Self-Destruction
of the Zionist Labor Movement 29
Lev Grinberg

3. Big Business and the State in the Neoliberal Era:

What Changed, What Didn’t? 46
Daniel Maman

4. The Reconfigured Institutional Architecture of the State:

The Rise of Fiscal and Monetary Authorities 60
Daniel Maman and Zeev Rosenhek

5. Institutionalizing the Liberal Creed: Economists in Israel’s

Long Journey Towards Political-Economic Liberalization 74
Ronen Mandelkern

Part 2. Neoliberalism and Social Policy Reform

6. Pathways to Neoliberalism: The Institutional Logic
of a Welfare State Reform 93
Michal Koreh and Michael Shalev

7. “Wisconsin Works” in Israel? Imported Ideas, Domestic

Coalitions, and the Institutional Politics of Recommodification 109
Sara Helman and Asa Maron
Contents

8. Bureaucrats, Politicians, and the Politics of Bureaucratic

Autonomy: Reforming Child Allowances and Healthcare 122
Sharon Asiskovitch

Part 3. Neoliberalism and The Casualization of Employment

9. Precarious Employment in the Public Sector: How Neoliberal
Practices Preceded Ideology 139
Michal Tabibian-Mizrahi and Michael Shalev

10. Contradictions in Neoliberal Reforms: The Regulation of

Labor Subcontracting 153
Guy Mundlak

11. Conclusion 172

Asa Maron and Michael Shalev

Bibliography 189
Index 217

xiv
List of Figures and Tables

Figure
5.1 Economists and Politics in Israel since the 1950s 89

Tables
3.1 Israeli Big Business 48
9.1 Gradual Institutional Change in Hiring Practices in the Health System 147
10.1 Regulating Mediated Employment Arrangements—The State of the Law 166
Notes on Contributors

Sharon Asiskovitch holds a PhD in Political Science from the Hebrew University of
Jerusalem and is a researcher in the Research and Planning Authority of the National
Insurance Institute of Israel, and an adjunct lecturer at the School of Social Work,
Ruppin Academic Center. He is the author of a book on the politics of Israel’s healthcare
system, Price Tag for Life [Hebrew] (2011) and articles on Israel’s welfare state and social
politics in journals that include Social Policy and Administration, Policy and Politics, and
Global Social Policy.
Lev Grinberg is Professor of Sociology at Ben Gurion University (Israel). He has taught as
a visiting professor at UCLA, UC Berkeley and Dartmouth College. He specializes in Israeli
politics, the history of the Zionist Labor Movement, Israel’s political economy, and the
sociology of the Israeli–Palestinian Conflict. His books include Split Corporatism in Israel
(1991), The Histadrut Above All [Hebrew] (1993), Introduction to Political Economy (1997),
Politics and Violence in Israel/Palestine (2010), and Mo(ve)ments of Resistance (2013). His
current research is a comparative study of “occupy” movements of resistance.
Sara Helman is Senior Lecturer in the Department of Sociology and Anthropology, Ben
Gurion University (Israel). She specializes in political sociology, with an emphasis on
the sociology of state–society relations and citizenship, and the sociology of social
movements. She has published in journals including The British Journal of Sociology,
Constellations, Social Policy and Administration, Social Politics, and the Journal of Culture,
Politics and Society, as well as in several book collections. She is currently researching
active labor market policy in Israel, and the ways it redefines the relations between
individuals and state agencies.
Michal Koreh is a Lecturer in the School of Social Work at the University of Haifa.
Previously she was a Postdoctoral Fellow at the Taub Center for Israel Studies, New York
University. As a political economist of the welfare state, her research relates to broad
questions of welfare state development as well as contemporary processes of restruc-
turing. Her research also addresses specific social programs in the areas of social insur-
ance financing, pensions, and poverty amelioration. Her articles are published or
forthcoming in journals that include Socio-Economic Review, Journal of European Social
Policy, Health Policy, and Social Policy and Administration.
Daniel Maman is Associate Professor in the Department of Sociology and Anthropol-
ogy, Ben Gurion University (Israel). His areas of interest include economic sociology,
sociology of finance, comparative political economy, and institutional change. He was
coeditor of The Military, State and Society in Israel (2001), and with Zeev Rosenhek he
Notes on Contributors

coauthored The Israeli Central Bank: Political Economy, Global Logics and Local Actors
(2011). He has published in journals including Socio-Economic Review, Review of Inter-
national Political Economy, Organization Studies, and The British Journal of Sociology. He is
currently studying the emergence and development of financial literacy in Israel.
Ronen Mandelkern is a Lecturer in Political Science at Tel Aviv University. Previously,
he held Postdoctoral Fellowships at the Polonsky Academy at the Van Leer Jerusalem
Institute and at the Max Planck Institute for the Study of Societies (MPIfG), Cologne.
His main research fields are comparative and international political economy, with
a focus on economic liberalization processes in Israel and other developed economies.
He has published in World Politics, New Political Economy, and Comparative Political
Studies.
Asa Maron is a Lecturer in the Sociology Department at the University of Haifa.
Previously he held postdoctoral positions at Stanford University, the Hebrew University
of Jerusalem, and Ben-Gurion University of the Negev. He is a political sociologist
specializing in the sociology of the welfare state and neoliberalism, with an emphasis
on the transformation of the state, its politics, institutional dynamics, and conse-
quences for state–society relations. He has published in Law & Society Review, Adminis-
tration & Society, Social Policy & Administration, and Mediterranean Politics.
Guy Mundlak is Professor of Labor Law and Industrial Relations at Tel Aviv University,
with a joint appointment in the Law Faculty and the Department of Labor Studies. His
interests span diverse areas of labor and social law, including social rights, welfare, and
immigration, as well as industrial relations. He has published extensively on inter-
national, comparative and Israeli labor norms. He is the author of Fading Corporatism
(2007), and co-editor of Comparative Labor Law (2015). He serves on the editorial board
of the International Labour Review, chairs the advisory committee to the Equal Oppor-
tunities Commission in Israel, and is also a social activist.
Zeev Rosenhek is Associate Professor in the Department of Sociology, Political Science,
and Communication at the Open University of Israel. He is a political and economic
sociologist, and has conducted research on the political economy of the welfare state,
labor migration, and the politics of institutionalization of the neoliberal regime in
Israel. He is the co-author with Daniel Maman of The Israeli Central Bank: Political
Economy, Global Logics and Local Actors (2011). He has published numerous articles in
journals that include Ethnic and Racial Studies, Journal of Ethnic and Migration Studies,
Social Problems, Acta Sociologica, Journal of Social Policy, European Journal of Sociology,
Review of International Political Economy, and Socio-Economic Review.
Michael Shalev is a political sociologist, formerly at the Hebrew University of Jerusa-
lem and currently Visiting Professor at the University of California at Berkeley. His
primary research interests are in the political economy of Israel and rich democracies
generally, focusing on the politics of social and economic policy, social stratification,
and the socio-economic underpinnings of political action. He is the author of Labour
and the Political Economy in Israel (1992) and editor of The Privatization of Social Policy?
(1996). He has published in World Politics, Socio-Economic Review, Social Forces and other
journals. Shalev’s recent research is on the mass protests of 2011 in Israel and Southern
Europe.

xviii
 Notes on Contributors

Michal Tabibian-Mizrahi completed her PhD in Sociology at the Hebrew University of

Jerusalem, and her contribution to this volume is based on her dissertation, Dynamics
of Gradual Institutional Change–the Development of Precarious Employment in the Public
Sector. She has served as Senior Researcher in the Research and Information Center of
the Israeli Knesset (parliament) and Senior Division Head in the Department of Gov-
ernance and Society of the Prime Minister’s Office, and is currently Director of Strategy
and Planning in the Ministry of Education.

xix
1

Introduction
Asa Maron and Michael Shalev

This book offers a gallery of recent scholarship exploring the politics, institu-
tional dynamics, and outcomes of neoliberal restructuring in Israel. The focus
is on the political economy broadly defined, with a particular interest in social
and labor market policies. However, our ambitions are nomothetic as well
as idiographic. In the struggle for theoretical primacy between the master
explanations of political economy, power and interests have lost ground in
recent decades as Marxian analysis based on class conflict and the power of
capital gave way to a growing emphasis on ideas and culture on the one hand,
and institutions on the other. This had a significant impact on the study of
neoliberalism, understood as the driving force behind the destabilization of
postwar state–economy–society settlements in economically advanced dem-
ocracies, via a growing primacy of markets and market logic. The main goal
of the volume is to explore neoliberal reforms from a neo-institutional per-
spective which, while attentive to the role of both ideas and institutions in
shaping the role of the state, attempts to reassert the interests and power of
state institutions and actors as pivotal to the success of the neoliberal project.
We seek to understand neoliberalism as a contentious political project which
may be—and in Israel was—advanced and nurtured mainly by engaged state
actors, via arrangements and coalitions with other state and non-state actors.
We contend that the political study of the emergence of neoliberalism has
not been sufficiently attentive to the role of states. While scholars have
explored the role of politicians, particularly in the emblematic cases of Britain
and the United States but also in other countries and regions (Geddes 1995;
Pierson 1994; Swarts 2013; Prasad 2006), this has not generally been coupled
with consideration of the role of state bureaucracies. In addition, most studies
adopt a tipping-point, “one-way” understanding of the transition to neo-
liberalism, neglecting the fact that at least some elements of such transitions
Asa Maron and Michael Shalev

are potentially contentious, mobilizing resistance and possibly even leading

to policy reversals. This volume offers to overcome these limitations, first
by adopting a state-centered perspective on the politics and outcomes of
neoliberal transformations, and second by offering a historical perspective
focused on the capacity of reformers to translate their temporary achieve-
ments into entrenched strategic advantages. The role of the state is not the
only explanation for the ascendancy of neoliberalism, but it is more than just
one of many equally significant interpretive approaches. The scarcity of pre-
vious attention by scholarship on neoliberalism to the role of the state,
coupled with the specific need to correct earlier interpretations of the Israeli
case which neglected its role, justify our decision in this volume to give theor-
etical and empirical primacy to the state.
This volume puts forward a bold proposition, that the very creation of a
neoliberal political economy may be largely a state project. Correspondingly,
the key political conflicts surrounding the realization of this project may occur
within the state. These struggles engage state actors—bureaucrats and their
agencies even more than politicians and their parties—advancing different
policy projects and following distinct interests and logics that in many cases
only partly or tenuously reflect social and economic forces outside of the state.
Neoliberal restructuring and the institutionalization of permanent austerity
are dependent on reconfigured power relations between these actors and are
manifested in a new institutional architecture of the state. This architecture,
in turn, is the context in which intra-state conflicts and coalitions are formed,
and efforts to change social and employment policies play themselves out.
A further guiding principle of this volume is that while neoliberalism is a
compelling political phenomenon with clear trans-national commonalities, it
is neither omnipotent nor universal. Contextually sensitive case studies are
essential to advance scholarly understanding of both the general and particu-
lar features of the contemporary neoliberal order and its underpinnings.
Radically transformed from a developmental political economy to a neoliberal
regime in only a few decades, Israel has experienced vast increases in the
executive power of fiscal and monetary authorities committed to radical
neoliberal reform, alongside sea changes in the structure and capacities of
both labor and capital. The extraordinary powers of organized labor were
swiftly and sharply curtailed, while Israel’s already highly concentrated econ-
omy became dominated by a small number of capitalist “tycoons.” Given the
extent of these transformations, their rapidity, and the relative transparency
of a small country, Israel is an ideal setting to study the constitution of
neoliberalism as a contested state-driven project.
Neoliberalism is not a coherent package of ideas, models and formal insti-
tutions applied identically in all locations and contexts (Campbell and
Pedersen 2001; Schwartz 1994; Manzetti 2010; Veltmeyer, Petras, and Vieux

2
 Introduction

1997; Fourcade-Gourinchas and Babb 2002; Schmidt and Thatcher 2013b).

Varieties of neoliberalism emerge because the new order does not steamroll
everything in its path, but rather interacts with existing institutional and
cultural characteristics of national political-economic regimes, altering or
eliminating some of their illiberal underlying principles and practices while
allowing others to survive and even flourish. Illiberal elements are perpetuated
not simply by institutional inertia, but by the political influence and agency
of segments of society which benefit from arrangements protecting them
from the full force of neoliberal reform—or compensate them for its costs
(Etchemendy 2011). The uneven and localized adoption of neoliberal policies
and practices also reflects resistance and obstacles in the form of institutional
veto points or ad hoc coalitions, many of them inside the state itself.
The remainder of this introduction is divided into three sections. The first
section surveys key contributions of existing scholarship which have shaped
the understanding of the editors and contributors to this volume of the
mechanisms underlying the ascendancy of neoliberalism. The next section
contextualizes the Israeli political economy and welfare state, sketching the
broad lines of their evolution into the neoliberal era. This is followed by an
overview of the chapters to follow.

Theoretical Inspirations

Considerable scholarship on the role of the state in developed political econ-

omies debates the extent to which states have been constrained by the mater-
ial and ideational dictates of globalization and neoliberalism. Both our
theoretical orientation, and the evidence presented in this volume for Israel,
align with the view that contemporary states continue to be extensively
engaged with the economy and society and maintain significant steering
capacities, though they may deploy new policy instruments and pursue new
goals (Block 2008; Campbell and Pedersen 2001; Levy 2006; Schmidt and
Thatcher 2013b; Weiss 2010). However, this book is less concerned with
specifying the role of the state under neoliberalism, than with exploring the
potentially decisive contribution made by states to its rise and consolidation.
Investigating this problemstellung can be justified not only by the importance
of understanding neoliberalism’s past, but also its present and future. The
financial crisis of 2008 and its aftermath have focused attention on the puzzle
posed by the “strange non-death of neoliberalism” (Crouch 2011), its surpris-
ing endurance in the face of real-world failures and growing popular critique.
This is often explained by the persisting ideational hegemony—or resilience—
of neoliberalism and the lack of a coherent alternative theory, ideology and
policy paradigm (Block and Somers 2014; Centeno and Cohen 2012; Schmidt

3
Asa Maron and Michael Shalev

and Thatcher 2013b). However, by tracing the centrality of the state—

particularly state agencies—in advancing, nurturing, and entrenching a neo-
liberal transformation of the political economy, this book implies that the
current resilience of the neoliberal project may also be explained by the
success of neoliberalism as a state project that succeeded in institutionalizing
neoliberal policies and practices in the everyday routines of states.
Taking the seminal volume edited by Campbell and Pedersen (Campbell
and Pedersen 2001) as a starting point, we observe that while it provided
substantial evidence that the various agencies and actors of the state played
prominent roles in the rise of neoliberalism, the state as a distinct field of
institutional actors was not identified explicitly, nor was it theorized. The
formal, normative and cognitive components of the new neoliberal institu-
tional order appeared to have been superimposed on the state, rather than
originating from within it. Questioning this seemingly passive understanding,
the present volume shifts the spotlight to what Leibfried and colleagues
describe as the role of the state as “an active and effective mover of its own
transformations” (Leibfried et al. 2015: 9). This is not a new perspective. More
than two decades ago Barbara Geddes wrote that “To understand the politics
of economic liberalization, analysts need to start by thinking in a more careful
and concrete way about the state and the interests of the officials who consti-
tute it” (Geddes 1995). By deepening our understanding of the state, its
internal power struggles and the interests which they reflect, much can be
learned about the politics that shape neoliberal projects, the actors that build
and sustain them, and the consequences they invoke.

State Theories Revisited

According to some theories, the state is an arena of political struggles over
governmental power between social groups, while others depict it as a mere
instrument in the hands of societal groups (Alford and Friedland 1985). The
missing elements in both approaches are the active and comprehensive role
that states play in society and politics, and the fact that the state is “a structure
with a logic and interests of its own” (Skocpol 1979: 27). Skocpol (Skocpol
1979, 1985) explicitly articulated these two essential aspects of the role of the
modern state: as a structure and an actor. The state as a structure refers to the
institutional features of states—for example, whether they are unitary or
federal or the type of party system—and asks how they affect the strategies,
identities and opportunities of both state and non-state actors.
What determines the role of the state as an actor? An elementary but powerful
analytical distinction has been made between the autonomy and capacities
of states. As Amenta puts it, the power of states to make and implement policy
is dependent, respectively, on their “ability to define independently lines

4
 Introduction

of action” and “to carry out lines of action” (Amenta 2005: 100). Clearly,
capacities like revenue extraction and centralized administrative control are
critical for states’ ability to make their decisions matter. But it is often impossible
to maximize both autonomy and capacity. States lacking resources may have to
sacrifice autonomy in order to cover their resource deficit. On the other hand,
those enjoying capacities without autonomy tend to the opposite tradeoff,
since lack of autonomy means subordination to non-state actors who exploit
state capacities for their own ends.
State autonomy can never be absolute, and coalitions with societal
interests and other states are essential. As a result autonomy is always
contingent, varying both across policy domains and over time. Classic
formulations of the state-centered approach attributed changes in auton-
omy mainly to domestic and international challenges exterior to the state,
coming at a time when its authority, military power and infrastructural
power are underdeveloped or in decline (Trimberger 1978; Skocpol 1979;
Krasner 1984; Mann 1984). This emphasis was accompanied by neglect of
the “internals” of the state itself. Due to the historical growth of states
and diversification of their functions and roles in society, modern states
are polymorphous rather than monolithic (Mann 1984). The state is an
ensemble of institutions, a heterogeneous and unequal field in which
institutional actors with different bureaucratic and professional logics and
organizational interests compete for power, resources, autonomy, and legit-
imacy (e.g. Bourdieu 1999; Carruthers 1994; Chibber 2002; Schmidt 2009;
Martin 1989; Major 2013).
While the highly aggregated conception of the institutional interests of
“the” state proposed by Skocpol and other protagonists of the state-centered
approach tended to overlook the internal institutional fragmentation of
states, their specification of state interests is a valuable starting-point for
understanding what drives the actions of individual state agencies. The
insight that states have primal interests in both capacities and autonomy,
and that tradeoffs may be necessary between the two, is relevant to a disag-
gregated as well as an aggregated perspective on states. And here too a shifting
balance is likely between contestation and cooperation vis-à-vis other actors,
including not only actors from non-state fields, but also—and possibly even
more importantly—other state agencies.
Beyond these general influences, the actions of particular state actors are to
a large extent shaped by their position and function in the state field, and their
corresponding agency-specific interests and professional expertise. These nur-
ture a certain set of goals, interests, responsibilities, and modus operandi (Hall
1986: 19) that are internalized by bureaucratic and professional elites that play
a proactive role in formulating agency-specific policy lines. As a result, the
structured relations between subunits of the state, and the conflicts and

5
Asa Maron and Michael Shalev

coalitions to which they give rise, strongly influence which of the state’s
multiple interests and logics come to the fore.

Explaining Transitions to Neoliberalism

Scholars agree that the rise and establishment of neoliberalism is associated
with changes in the institutional architecture of the state. In order to adopt
neoliberal principles, states must transform. Marxist perspectives link the
transformation of the state to the changing interests of capitalists, the reflec-
tion of a wider shift from a Fordist to a Post-Fordist accumulation regime in the
1970s (Amin 2011). The regulation approach focused on explaining the con-
tingent adjustment of the state to the new demands of capital, by being
attentive to variations in class struggles (Boyer 1990). However, this approach
still falls short in recognizing the lasting importance of domestic structures,
politics and institutions, while remaining mute on intra state variation, and
the dynamics and struggles that can emerge around attempts to replace
entrenched policy goals and instruments (cf. Jessop 1999, 2002 on the tran-
sition from welfare to workfare).
Insightfully embracing a disaggregated perspective, Jayasuriya (2001, 2005)
and Major (2013) have argued that the internal architecture of states, their
subdivision into agencies with varying resources, capacities, and autonomy, is
critical for understanding the transformation of states and their embrace of
neoliberalism. Both authors point to the rise of macroeconomic agencies
within states, and the subsequent development of new relations between
them and other subunits, as central features of the transition to a neoliberal
political economy. Yet notwithstanding the importance of these institutional
reconfigurations, it is essential to recognize both components of the structure/
agency couplet. Changes in internal state architecture, such as the rise of
autonomous central banks and the growing authority and autonomy of eco-
nomic technocrats over budgeting, have indeed provided essential institu-
tional preconditions for the rise of neoliberal relations between state,
society, and economy. But the other side of the same coin is that the experts
who run the state’s economic bureaucracies have actively engaged in political
action designed to promote these very institutional changes, using them to
aggrandize the power and autonomy of their agencies vis-à-vis rival centers of
power. These rivals, at the extreme veto players, may be located outside as well
as inside the state. In the non-state arena they include powerful segments of
capital, labor, and civil society; and within the state, other state agencies,
courts, and elected governments and legislatures.
State agencies in pursuit of autonomy strive to guide and if necessary
discipline powerful societal actors and their organized representatives. The
guiding role of economic bureaucrats in the pre-neoliberal era was evident in

6
 Introduction

the so-called developmental states of East Asia (Johnson 1982; Evans 1989),
but it was also integral to Shonfield’s claim in the 1960s that some form of
planning was essential to the continuing success of the most advanced capit-
alist economies (Shonfield 1965). Neoliberalism has often been understood
from this perspective as a necessary corrective to the emergent contradictions
of postwar settlements that empowered labor and the left. It has been
argued that, as a result of profit squeeze and fiscal crisis in the 1960s and
1970s (Glyn and Sutcliffe 1972; O’Connor 1973), the autonomy of the
state vis-à-vis capital shrank. On top of domestic pressure to increase profit
margins, globalization was said to enhance the leverage of market actors—
especially multinational corporations, international finance, and domestic
business groups—over states, further undermining their capacity to maintain
postwar commitments to labor and society (Cerny 1997; Held 1999). Thus,
states were obliged to reinstate conditions for capital accumulation and the
re-empowerment of capitalist elites (Harvey 2005).
Our focus on the state does not preclude the influence of societal interests
and powers, including the role of capital, international financial institutions,
and domestic civil society organizations in neoliberal restructuring. Neverthe-
less, we follow a significant body of research which rejects the idea that there is
a direct and imperative causal link between economic forces and domestic
policy change. Much of this work has highlighted the critical mediating role
of state institutions and domestic politics (e.g. Swank 2002; Brady, Beckfield,
and Seeleib-Kaiser 2005; Weiss 2003b; Levy 2006), contending that states “can
block, adapt to, mediate, and in some cases even reverse neoliberal tenden-
cies” (Campbell and Pedersen 2001: 1). Moreover, while changes in the inter-
national environment and the financialization of capitalism have imposed
constraints on some state activities, they have also stimulated and enabled
new roles and activities (Levy 2006; Weiss 2003a, 2010).
Even when responding to intense economic pressures for liberalization
and fiscal austerity, states have not simply been passive victims of domestic
and international forces. In his study of state reorganization in small trade-
dependent countries that were in the vanguard of neoliberalism, Schwartz
(1994: 529) emphasized how state actors strategically “pushed institutional
changes that enhance central state autonomy.” It is this state-centered
moment of the relationship between states and neoliberal capitalism that
the present volume seeks to privilege. Accordingly, turning around the
conventional perception, we adopt the view that globalization and the rise
of monetarism and supply-side economics helped to empower monetary and
fiscal state agencies by making it “imperative” for them to impose discipline
on both private economic actors and other units of the state. Increasingly
embedded in international networks of experts and technocrats, the
state’s economic managers have buttressed their professional authority to

7
Asa Maron and Michael Shalev

become national guardians of austerity and competitiveness (e.g. Fourcade-

Gourinchas and Babb 2002; Major 2013; Jayasuriya 2001; Wanna, Jensen,
and Vries 2003).

How and When is Transformative Change Possible?

If it is indeed true that self-interested state actors have played pivotal roles in
neoliberal transformations, how did they succeed in overcoming the conser-
vative institutional biases of state structures and practices?
From a path dependence perspective, major changes are expected to
occur “when new conditions disrupt or overwhelm the specific mechanisms
that previously reproduced the existing path” (Pierson 2000: 266). This type
of disruption is especially likely at critical junctures, “moments when the
freedom of political actors and impact of their decisions is heightened”
(Capoccia and Kelemen 2007: 343), and consequently institutional equilibria
are “punctuated” and dramatically reconfigured (Baumgartner, Jones, and
Mortensen 2014; Krasner 1984).
This perspective, which leads naturally to a focus on crises and radical
responses to them, has been challenged by scholars with an interest in gradual
and cumulative transformation. It is claimed that by paying greater attention
to the agents responsible for the ongoing maintenance of institutions, it can
be discerned that incremental institutional change takes place even under
conditions of apparent institutional inertia (Crouch 2005; Streeck and
Thelen 2005a; Mahoney and Thelen 2010a). Nuanced mechanisms, like fail-
ure to adapt to new conditions or the stepwise accumulation of modest
innovations, may result in a structural break but one that is not necessarily
noticed along the way. Thus, gradual reform assists politicians and bureaucrats
seeking to obfuscate the intended outcomes and effects of the institutional
changes they promote (Pierson 1994). Incrementalism has become widely
recognized as a key means of overcoming the institutionalization of embed-
ded liberalism in the postwar era, which constrained entrepreneurs of liber-
alization (Ruggie 1982).
While a number of the substantive chapters of this volume draw attention
to the role of mechanisms like layering, drift and displacement, the contribu-
tors also utilize complementary theoretical insights into how barriers to insti-
tutional change may be overcome by state actors.
First, change agents within the state form coalitions in the hope of offset-
ting the power of veto players. The coalition partners can be other agencies,
politicians, civil society actors or market actors. These networks of govern-
ance and change aim to circumvent resistance from both within and outside
the state (Newman 2001). They may exploit new ideas in order reinterpret
institutional rules and goals in ways that justify their efforts at institutional

8
 Introduction

change (Palier 2005; Hall and Thelen 2009; Hall 2010; Helman and Maron,
this volume).
Second, in order to bypass institutionalized mechanisms of governance that
are monopolized by state agencies or sub-units opposed to change, change
agents may adopt new modes of governance (like privatization and outsour-
cing) while actively undermining old ones (such as corporatist deliberation).
New (or newly emphasized) modes of governance associated with neoliberal-
ism take the form of private–public networks and partnerships, including the
growing role of both lobbyists and consultants. However, it is important to
recognize that these are not only part of the self-styled neoliberal toolkit, and
in this sense powered by neoliberalism, but also comprise conveniently legit-
imated resources for state agencies in search of enhanced autonomy.
Third, rejecting the accepted view that gradual/indirect change mechanisms
are a theoretical alternative to “big bang” mechanisms like punctuated equi-
librium and critical junctures, this volume treats the two approaches as poten-
tially complementary. Anticipating a conclusion that will be teased out more
fully at the end of the book, it can be said that in Israel a major economic crisis
provided the necessary (albeit not sufficient) conditions for launching a care-
fully conceived and negotiated “Emergency Stabilization Plan” that redefined
key parameters of the political economy. Building on this turning point, and
essential to its maturation and consolidation into a more comprehensive
neoliberal regime, were a succession of reforms based to a large extent on
the other mechanisms discussed here: modest and oblique changes, intrastate
coalitions and conflicts, and the adoption of new modes of governance.

The Change Agents of State-led Liberalization

Among the intra-state contestations surrounding neoliberalism, struggles
between spending agencies and fiscal savers or “guardians” (Wildavsky
1964) have played a prominent role in the reconfiguration of the state. In a
dialectic that is especially clear in the realm of social policy (yet remains
surprisingly understudied), line agencies responsible for performing the sub-
stantive functions of the state try to secure and maintain the goals and the
interests of their constituencies, while Ministries of Finance strive to usurp
control over policymaking and subordinate state projects to an economistic
logic (Bourdieu 1999; Jenson 2012; Wacquant 2010; Phillips et al. 2006).
The rise of state agencies in charge of macroeconomic management as prom-
inent actors in advancing a new institutional order was underpinned by a more
general change in the significance of economists as the new technocrats of
neoliberalism. This raises two issues. First, were the ideas of economists and
those of neoliberalism joined by elective affinity, or did economists’ theories
and ideologies alter as a result of the rise of neoliberal ideas? Second, did the

9
Asa Maron and Michael Shalev

ideas of economists—whether old or new—influence policy due to their inher-

ent properties, or as a result of the growing power and status that economists
enjoyed? And if so, how can their growing power and status to be explained?
One explanation for the normative power and scientific authority that
have enabled economists to dominate governance of the economy is an
international process of professionalization over the course of the twentieth
century (Callon 1998; Fourcade 2006). However, this process has been sub-
ject to substantial context-specific variation. In some contexts the decisive
factor was economists’ entry into positions of bureaucratic authority for the
first time. In others it was generational turnover in the staff of the economic
bureaucracies, or else a more gradual transformation in the beliefs and ideas
carried by economic technocrats (Fourcade-Gourinchas and Babb 2002; Hall
1993). In addition, especially in Latin America, the normative power of
economists was critically reinforced by the ability of American and inter-
national financial organizations to inflict economic sanctions (Dezalay and
Garth 2002).
The ideational or discursive stream of institutionalist theory contends that
in the wake of the rise of monetarist and supply-side economics, economists’
ideas redefined the interests and strategies of institutional actors, while pro-
viding them with both the blueprints and the legitimacy needed to advance
new policy proposals (Blyth 2002; Hay 2001). Nevertheless, the autonomous
causal significance of ideas remains contested. While a strong case has been
made that persuasive ideas play an important role in institutional change
(Blyth 2007; Schmidt 2008), the role of power relations in the selection and
success of persuasive ideas should not be ignored. Case studies have shown
that by promoting think tanks and exploiting their control over the mass
media, business interests have aggrandized and disseminated only some eco-
nomic ideas and rewarded their bearers (Blyth 2001; Campbell 1998). It has
also been demonstrated that economists’ ability to directly influence policy
depends not only on the inherent persuasiveness of their ideas, but also—and
perhaps more importantly—their professional and political capital (Mandelkern
and Shalev 2010).
The growing empowerment of bureaucratic actors and agencies with claims
to impartial economic expertise, and as a result the partial depoliticization
of economic and social policymaking, also raise questions regarding the role
of politicians in neoliberal transitions. Based on a systematic comparison of
countries in Latin America and the European periphery, Geddes (1994) sug-
gested that politicians’ motivation and ability to propel liberalization was
dependent not only on their indebtedness to interest groups, but also—and
even more importantly—on the extent to which they (or their political rivals)
relied on state resources in order to maintain party machines and other
sources of political power. In her study of the impact of the oil crisis on four

10
 Introduction

rich democracies, Prasad (2006) argued that self-interested politicians, operat-

ing within a variety of institutional settings, were pivotal in advancing neo-
liberal reforms. In the UK and the USA, adversarial political structures
provided them reasons to embark on neoliberal policies in order to mobilize
electoral and financial support, while in France and Germany, institutions
which subordinated political conflicts to either technocratic or corporatist
decision-making arrangements provided politicians no such incentives. How-
ever, in these studies the recognition of politicians’ autonomous interests
overshadowed the autonomous interests other state actors may have in trans-
formations of the political-economic regime.
Fourcade-Gourinchas and Babb (2002) have shown that while cadres of
professional economists with senior positions in state bureaucracies played
an important role in all neoliberal transitions, sometimes after a generational
shift, in some contexts these transitions were driven by political elites. Even
when facing bureaucrats who enjoy strong institutional autonomy, if politi-
cians’ own core interests are involved they may exercise their formal authority
in order to veto bureaucratic initiatives or to press an independent reform
agenda (Asiskovitch, Chapter 8, this volume). The relationship between
bureaucratic and political elites is therefore highly contingent. It can easily
shift between cooperation, competition and blame avoidance (Gualmini and
Schmidt 2013).
Like technocrats, politicians may be motivated by ideological as well as
pragmatic motives. But in both cases, ideological choices also have a pragmatic
dimension. Politicians can and do use ideas instrumentally to publicly legitim-
ate their actions, especially in order to whitewash their own self-interest or
avoid accepting blame (Weaver 1986). Moreover, similar to the striving of
bureaucratic agencies for greater autonomy, politicians may choose to exploit
neoliberal policies in order to lessen their dependence on powerful interest
groups with claims that undermine their capacity to govern autonomously.
This drive for autonomy has particular relevance to political parties of the
left and center-left and their reconstitution as “new Labor” or “third way”
parties. On the eve of the neoliberal era, leftwing parties were confronting the
political consequences of deindustrialization, the rise of the service economy
and the growth of higher education, all of which led to shrinkage of their
traditional electoral base and invited a shift in their appeals and policy port-
folio in order to attract classes with different interests and worldviews. These
external pressures often intersected with the interests of aspiring politicians
whose political options, and in some cases also personal aspirations for lead-
ership positions, were blocked by the weight of trade unions in funding and
governing labor parties or challenged by new right populism. The resulting
political interests, and not just the potency of new neoliberal ideas and the
power of the interests supporting them, help to explain why left-leaning

11
Asa Maron and Michael Shalev

parties were often the most effective proponents of neoliberal reforms

(Mudge 2008; Newman 2001; Centeno and Cohen 2012: 323–4).
To sum up, this book is based on a theoretical view of the state as a distinct
field of institutions and institutional actors engaged in advancing conflicting
interests rooted in their specific institutional location and function within the
state. These actors engage in intra-state relations of either collaboration or
competition, seeking to advance short and long term goals—and above all,
their own autonomy—vis-à-vis other state agencies and societal actors. State
managers, economists, and politicians are influenced by ideas, but also utilize
them for instrumental purposes. This reflects the dual role of ideas in politics:
they exert power over actors by molding their actions and even their interests,
but are also mobilized by them as power resources in order to produce legit-
imacy and consent. Along with the inspiring and legitimizing role of ideas,
coalition-building and gradual change are other mechanisms that have aided
the rise of the neoliberal policy paradigm. State actors may tactically advance
ad hoc coalitions to achieve short term goals, or patiently nurture far-sighted
campaigns to conquer long-term goals. Gradual institutional change has
played a central role in the erosion and eclipse of entrenched arrangements
that preceded neoliberalism. This is true of restructuring of the institutional
architecture of the state itself, as well as reforms of specific policy fields.

The Israeli Case

As in other national contexts, the familiar forces of global liberalization were

joined in Israel by specific local histories, settings, and conjunctures. Forged
as a collectivist settler society with hyper-corporatist arrangements and an
extended role for the state in both market and society, liberalization repre-
sented a radical break with Israel’s past of “embedded illiberalism” (Shalev
1999). For two decades a succession of economic crises that began early in the
1960s signaled the unsustainability of Israel’s developmental state, which
until then had not only dominated industrialization and the distribution of
economic and social resources, but was also responsible for massive, expensive
projects of territorial and demographic expansion and the buildup of military
power (Aharoni 1991a; Ben-Porath 1986a; Shalev 1992). Nevertheless, unlike
other over-extended states on the semi-periphery of the world economy, Israel
was not obliged by pressure from the USA and international financial agencies
to embark on economic liberalization (Silver 1990). On the contrary, for a long
time it was shielded from economic catastrophe by aid from the governments
of West Germany and the USA, along with Jewish communities around the
world (Shalev 1992). The turning point came after external subsidies proved
insufficient to prevent a series of external (balance of payments) and internal

12
 Introduction

(fiscal) crises which, combined with slow or no growth, culminated in the

early 1980s in rampant hyperinflation. The state’s response, the Stabilization
Plan introduced in July 1985, is widely regarded as signaling the end of Israel’s
developmental state (Maman and Rosenhek 2012a).

Who (or What) Promoted Neoliberalism in Israel?

Scholarship on Israel has frequently identified neoliberalism as a central pivot
in the subsequent transformations of Israel’s social and economic policies that
this book seeks to explain. Not surprisingly, interpretations of the rise of
neoliberalism in Israel invoke the same broad explanatory approaches as the
international literature. Some interpret neoliberalism as an ideological project
promoted by dedicated political and business elites with the support of the
upper middle class. In this view, imported neoliberal ideas and models pro-
vided powerful blueprints that succeeded in radically diminishing the illiberal
aspects of Israel’s political economy and undermining the state’s role in social
protection (e.g. Doron 2007; Ram 2005).
While there is broad agreement that neoliberalism is a global phenomenon
that reached Israel by virtue of the power of forces beyond the control of the
state, they disagree over what these forces are. For Doron, Israel’s neoliberali-
zation is a result of ideological conversion to neoliberalism as a doctrine.
In contrast, Ram (Ram 2005) argues that it is the outcome of the ubiquitous
transition to a post-Fordist mode of production, while Nitzan and Bichler
(2002) maintain that it results from the changing accumulation requirements
and expanding global reach of the leading capitalist enterprises in the
USA. Common to all of these interpretations is the view that, while the Israeli
state could influence the distribution of profits and losses from globalization
among domestic actors, it has played no independent role in initiating or
structuring policy change. This is equally true of an account of Israel’s liberal-
ization offered by a leading Israeli economist who presided over some import-
ant reforms during his tenure as Director-General of the Ministry of Finance
(MoF). According to Ben-Bassat (2002b) and other economist-technocrats, far
from exercising agency they were responding in the only feasible way to grave
economic problems caused by profligacy and misconduct.
Other accounts of Israel’s liberalization focus on the self-interested actions
of domestic actors in the wake of new international opportunities. For Shafir
and Peled (2000b), the champions of economic liberalization and integration
with the world market were the top managers of big business, notably in the
public and collectively-owned sectors. But while emphasizing the pressure
exerted by Israel’s emergent “business community,” which in the early
1990s pushed for a combined package of peace and privatization in the
hope of enlarging its access to expanding world markets, Shafir and Peled

13
Asa Maron and Michael Shalev

(2002) also noted the role of other change agents. These included state agen-
cies such as the central bank, which actively promoted ideological and insti-
tutional changes in order to enhance their own power and autonomy.
Developments in the world economy and the interests of capitalists pose
important constraints on, and opportunities for, states. However, like
Grinberg (1991, chap. 6) and Shalev (1999), we interpret Israel’s Stabilization
Plan and the search to reduce the government’s fiscal burdens and delegate its
responsibilities for economic growth to markets as having been decisively
shaped by the dialectics of state autonomy. Equally, we maintain that the
discourse of neoliberalism was as much a resource in this struggle for auton-
omy as an explanation for it. Our approach is inspired by the attention that
Shafir and Peled drew to the success of Israel’s central bank in redefining its
authority and autonomy—a transformation later studied in depth from a neo-
institutional perspective by Maman and Rosenhek (2011 and Chapter 4, this
volume). The Bank of Israel’s successful “declaration of independence”
(Maman and Rosenhek 2007) highlights the potential role of state actors as
active and entrepreneurial political agents, and the coalitions and conflicts
this entails with other state actors.

Continuity and Change in Israel’s Welfare State

The Israeli welfare state regime has been characterized as both conservative
and dualist (respectively, Stier, Lewin-Epstein, and Braun 2001; Rosenhek
1995, 2003b). Building on practices established in the pre-sovereignty period,
when social policy was tightly coupled with settlement and state-building,
access to benefits, services and protection schemes is allocated unequally
according to citizenship, nationality, ethnicity, gender, and contribution to
national goals (Rosenhek 2007; Ajzenstadt and Gal 2001; Shafir and Peled
2002). The peak association of workers, the Histadrut, along with closely allied
Zionist labor parties, promoted collectivist forms and institutions of Jewish
settlement (Kimmerling 1983; Grinberg 1993b). Under the banner of “con-
structive socialism,” collective resources were primarily directed to land
purchase and creating the means of production and new jobs needed for
absorbing Jewish immigrants. Income maintenance was a low priority, and
communal authorities played only a residual role in social welfare. In contrast,
employment-based social protection was central, particularly the responsibil-
ity of the Histadrut for health care, providing it with considerable organiza-
tional and political power that it shared with labor parties. Wearing its trade
union hat, the Histadrut used its role in collective bargaining to promote a
contributory pension scheme that enhanced credit-claiming vis-à-vis rank
and file members, and also served the interests of the labor organization as
owner and operator of large segments of industry and banking (Shalev 1992).

14
 Introduction

Because of the organizational, financial, and political advantages of this

system of non-state social protection, for many years the Histadrut, protected
by the Labor Party, resisted expansion of the limited role of universal welfare
provision by the state (Doron 1988). As a result, the labor movement pro-
moted a distinctive welfare regime characterized by reluctance to award basic
social rights of citizenship, a comparatively low level of generosity and cover-
age of decommodifying entitlements, and absence of the social partners from
the governance of most public schemes, which was instead managed either by
state bureaucracies or the Histadrut. However, transfer payments were by no
means the only mechanism of redistribution and protection. They were sup-
plemented by subsidies of basic consumer goods, healthcare, land, and hous-
ing. Moreover, state welfare was unnecessary for many employees and their
families, owing to the job security and protective benefits entrenched in the
internal labor markets of the broad (state-owned or subsidized) public sector.
The 1970s and early 1980s saw expansion of the social insurance system,
supplemented by reform of the social assistance safety net (Doron and Kramer
1991). Some programs continued to be fragmented, especially along national
lines (Jewish vs. Arab citizens) but also reflecting intra-Jewish inequalities of
power and status (Rosenhek 2003b). Despite its official branding as social-
democratic, the Israeli welfare state was still worlds apart from the Scandi-
navian model of a comprehensive, rights-based, and decommodifying welfare
state (Shalev 1989). Nevertheless, cumulative reforms and system maturation
strengthened core universal programs and rendered entitlements more trans-
parent. At the same time, a substantial and persistent component of transfer
payments in Israel is characterized by a variant of the state paternalism and
cooptation that marked the origins of the conservative welfare states of Con-
tinental Europe (Esping-Andersen 1990). This component represents a Repub-
lican bargain under which the Israeli state provides citizens (primarily the
Jewish ones) with compensation for the heavy burdens of the Israeli–Arab
conflict.1 Jewish Israelis hold to a moral economy that expects the state to
safeguard the living standards of the beleaguered collective and to reward
individuals for contributing to nation building/sustaining projects (Shalev
2007). Symbolic and material “loyalty benefits” are targeted to deserving indi-
viduals who perform military service and sacrifice or make other contributions
to what the state defines as the common good (Friedman and Shalev 2010).
To what extent and in what sense has Israel’s distinctive welfare state regime
been transformed in the neoliberal era? No less important for our purposes,
what are the broader changes which made such a transformation possible?

1
This conceptualization is inspired by Shafir and Peled’s (2002) emphasis on Republicanism as a
legitimating discourse of citizenship rights and obligations in Israel, and Levy’s (2008) claim that
citizens’ compliance with the demands of the military is contingent on a “Republican equation.”

15
Asa Maron and Michael Shalev

As we have indicated, at the onset of the 1980s, economic liberalization and

the state’s withdrawal of previous forms of financial and institutional support
ushered in radical changes in Israel’s political economy. The stabilization plan
of 1985 and related measures not only attacked the problems of hyperinfla-
tion and runaway budget deficits, but also rescinded institutionalized arrange-
ments that protected organized workers and subsidized big business, both
private and labor-owned. The old corporatist system of centralized industrial
relations faded away (Mundlak 2007), as did the Histadrut’s massive role as an
investor and employer, along with its responsibility for the supply of social
services (Grinberg and Shafir 2000; Ratson 2010). In tandem, the institutional
architecture of the state was self-consciously restructured by the Treasury and
the central bank. Both agencies greatly enhanced their institutional auton-
omy and power by initiating new laws or altering existing ones (the Budget
Law, the Bank of Israel Law, the Omnibus Arrangements Law, and the Deficit
Reduction Law),2 and also by instituting durable non-statutory arrangements
(inflation targeting, for example).
The Treasury’s earlier loss of budgetary control fed its perception of politi-
cians and other state managers as populist and/or incompetent, and thus
not to be allowed to govern autonomously. Led by the Budget Division, the
MoF won capacities to control the design and implementation of the
state budget to a degree greater than in almost any Organization for Economic
Co-operation and Development (OECD) country, with the intended conse-
quence of undermining the role of democratically elected politicians and
marginalizing other bureaucracies (Ben-Bassat and Dahan 2006; Deri and
Sharon 1994). One of the institutional foundations of this shift is the Omni-
bus Arrangements Law, introduced as an emergency measure in 1985 and
uninterruptedly passed every year by the Knesset since then, which enables
the MoF to promote socio-economic legislation with little parliamentary
supervision (Rolef 2006; Nachmias and Klein 1999). The Ministry also won
control over implementation of budgets by appointing personnel from the
office of the Accountant General as the financial controllers of all other
ministries and public agencies. Finally, while not always successful, the Treas-
ury promoted reorganization of other government agencies in order to either
strengthen its influence or disarm its opponents.
From the 1990s the MoF and the central bank were the most powerful
non-military units of the Israeli state. The Treasury focused on deregulating
labor and financial markets, privatizing public enterprises, outsourcing public
services, and controlling public expenditure. Meanwhile, similar to the role
of central banks in neoliberal transformations in other countries, the Bank of

2
See <http://www.boi.org.il/en/AboutTheBank/Law/Pages/Law.aspx>; Biton and Tzedek (2010);
and sources cited in the next paragraph.

16
 Introduction

Israel won sovereignty over both interest and exchange rates, using its powers
to privilege the role of markets in economic growth and to buttress the MoF’s
efforts to enforce fiscal discipline on governments, the general public, and
state agencies (Maman and Rosenhek 2011 and Chapter 4, this volume).
These changes in the content of policy and in power relations inside the
state substantially altered the conditions under which welfare state institu-
tions and decisions in Israel were interpreted, challenged and reformed
(Rosenhek 2004, 2007). Some scholars characterized the result as “shrinking
social rights” (Shafir and Peled 2002) or even a full-scale transition to a liberal
welfare state regime (Doron 2007), while others pointed out that core welfare
state schemes remained relatively stable (Rosenhek 2007). Supporting the
less alarmist interpretation, through the 1990s global spending levels on
transfer payments and social service provision remained notably resistant to
cost-cutting and structural reforms. From the Treasury’s perspective, the con-
tinuing buoyancy of government spending on transfers to households and
provision of social services posed a sharp contrast to its successes in pruning
other big-ticket budget items—defense, capital subsidies, and debt service
(Shalev 1999). Over the first two decades of liberalization most transfer
payments resisted diminution and social assistance grew substantially. As a
result, redistribution succeeded in restraining the impact of rising market
inequality on income inequality.3
A major turning point was reached in 2002, when the second Palestinian
Intifada and subsequent wave of terrorist activity, an economic crisis, and an
unusually favorable government coalition provided the political opportunity
for the MoF to roll back redistribution by imposing long-desired cuts and
conditionalities on most major cash benefits (Gal and Achdut 2007). Con-
tinuation of this trend, coinciding with regressive income tax reforms, has
resulted in recommodification, rising poverty, and substantial decline in the
effectiveness of redistribution in reducing income inequality.4 A detailed ana-
lysis of social expenditure in Israel and selected OECD member states recently
concluded that “the overall magnitude of public social expenditure in Israel
fell during the 2000s, at a rate without parallel in the other six countries in this
study.” The study found that retrenchment was particularly severe in pro-
grams that mainly serve the most economically vulnerable segments of soci-
ety, while many non-contributory programs not targeted to the needy
(especially what were described earlier as loyalty benefits) escaped the cuts
(Shalev, Gal, and Azary-Viesel 2012: 413–14).

3
Based on data published yearly in the Annual Survey of Israel’s National Insurance Institute on
the impact of redistribution on the Gini index.
4
See the source cited in the previous note. Between 1990 and 2002 the reduction in the Gini
Index attributable to redistribution averaged 32%, while in recent years it has fallen below 25%.

17
Asa Maron and Michael Shalev

Nevertheless, as has become apparent in other welfare states (Bonoli and

Natali 2012), in the era of retrenchment some new programs have been added
and old ones expanded. The most significant social rights added to the Israeli
welfare state since the 1985 Stabilization Plan are the Long-Term Care
Program (1986) and the National Health Insurance Law (1994). However,
the design of these programs, as well as their repercussions, were influenced
in important ways by the fact that they were developed under changed intra-
state power relations. The provision of long-term care was outsourced to non-
state organizations from its outset, since the MoF fiercely resisted any attempt
to expand public sector employment (Ajzenstadt and Rosenhek 2000). The
health insurance law mandated universal enrollment in a state-run health
insurance scheme, effectively turning voluntary but state-subsidized “sick
funds” into sub-contractors to the state. At the same time, new distinctly
neoliberal elements were introduced into the operation of the scheme, includ-
ing encouraging competition between providers aimed at lowering costs and
increasing consumer choice. The MoF has also encouraged the growth of
complementary private insurance schemes, and since 1997 has introduced a
series of reforms of health budgeting that have led to a significant decrease
in public expenditure and corresponding increases in private out-of-pocket
spending.
Privatization of costs is also a significant trend in public education services.
The drivers include growing private expenditure by anxious middle-class par-
ents, particularistic political arrangements to compensate poor Ultra-Orthodox
Jewish voters, and growing engagement of entrepreneurial non-governmental
organizations in the provision of in-class tutoring. The consequence has been
increasing inequality in both educational inputs and outputs (Aviram, Gal, and
Katan 2007; Chernichovsky and Regev 2012; Maron 2015). Concurrently,
higher education has massively expanded and become more accessible since
the 1990s, with mixed results for both horizontal and vertical inequalities
(Rotman, Shavit, and Shalev 2015; Feniger, McDossi, and Ayalon 2015).
The clearest indications of growing inequality paralleling the rise of neo-
liberalism come from data on income distribution and redistribution. Israel is
now a leader among the developed economies in indicators of poverty and
inequality. In the new millennium a combination of benefit retrenchment
for the poor and tax cuts for the affluent has eroded the redistributive impact
of taxes and transfers, a trend that continued even after the rise in market
income inequality bottomed out.5 Moreover, poverty and affluence are closely
connected to national, cultural, and political cleavages. In response the

5
These trends are documented in depth in the Annual Surveys of the National Insurance
Institute (www.btl.gov.il) and the annual “State of the Nation Report” by the Taub Center for
Social Policy Research in Israel (<http://taubcenter.org.il/>).

18
 Introduction

OECD, which Israel joined in 2010, has urged adoption of “reforms to pro-
mote social cohesion and share the fruits of growth” (OECD 2016: 5). Both the
government and the economic bureaucracies interpret this advice as an
injunction to urge, assist, and compel disadvantaged minorities to increase
their commitment to paid employment. Given that the state’s social policies,
and even more its economic-steering interventions, have historically disad-
vantaged the least powerful bloc of Israelis—Palestinian-Arab citizens who
comprise one-fifth of the population—ironically, participation in a liberalized
economy may offer them an unexpected path to more equality (Haidar 1995;
Saʻar 2016; Marantz, Kalev, and Lewin-Epstein 2014).

Overview of the Book

The first of the book’s three main parts describes and explains the most
important transformations of Israel’s political economy since the 1980s. Four
chapters document the unmaking of critical structural barriers to Israel’s tran-
sition to neoliberalism. The exceptional political and economic power of the peak
association of labor (the Histadrut) was drastically trimmed by undermining its
triple foundations: the labor organization’s centrality to a hyper-corporatist
system of industrial relations, its control over an autonomous but state-
subsidized complex of economic enterprises and social services, and its
privileged relationship with the ruling Labor Party (Chapter 2). Domination of
the economy by sheltered and heavily subsidized business groups persisted, but their
composition and ownership changed. Privatization of both Histadrut and state
enterprises, along with new regulatory interventions, redistributed business
power. A coterie of oligarchs was empowered, whose wealth and power no
longer make such massive claims on the state’s resources (Chapter 3). The state
also addressed the lack of institutional autonomy on the part of its fiscal and
monetary agencies, which had rendered these agencies impotent in the face of
macroeconomic and fiscal crisis. The Treasury and the central bank waged
successful struggles for institutional autonomy, which did much to depoliti-
cize policymaking and undermine the power of veto players (Chapter 4). In
parallel, the limited influence of professional economists over economic policy-
making was overcome when, at a critical juncture, economists in academia
and government mobilized their professional and political power to win
acceptance of a blueprint for both immediate stabilization and long-term
liberalization (Chapter 5).
In Chapter 2, Paving the Way to Neoliberalism: The Self-Destruction of
the Zionist Labor Movement, Lev Luis Grinberg shows that elimination of the
unique functions and capacities of the Histadrut—an essential precondition
for Israel’s neoliberal transition—did not result from the rise of neoliberalism

19
Asa Maron and Michael Shalev

as a programmatic project. Rather, the key motivations were the interest of

state agencies in winning autonomy over economic policymaking, and the
interest of Labor Party politicians in ending their political indebtedness to the
Histadrut. These motives drove the withering away of state subsidies, the
reduced scope and content of collective bargaining and the passage of health
and pension reforms that removed critical material and institutional power
resources from Histadrut control. Grinberg argues that in embracing liberal-
ization in order to free itself of the historic symbiosis between the organiza-
tional and political wings of the labor movement, the Labor Party weakened
the instruments of worker representation and protection and forfeited the
option of transforming itself into a social-democratic party.
In Chapter 3, Big Business and the State in the Neoliberal Era: What
Changed, What Didn’t?, Daniel Maman reveals the dual role played by the
state in advancing economic liberalization via a mix of enabling and con-
straining interventions. On the one hand, through neoliberal policies such as
privatization, the creation of new markets and the removal of barriers to cross-
border trade and investment, the state has opened up new opportunities for
big business and facilitated further concentration. On the other hand, state
initiatives were deployed strategically in order to undermine previously held
pivotal positions of big business. Banking was forcibly detached from indus-
trial conglomerates, new financial instruments and actors were created, and
domestic producers were exposed to foreign competition. Through this mix of
enabling and constraining interventions, the state succeeded in sweeping
away the economic elites of the developmental era while facilitating the
emergence of successors who enjoy immense wealth and power. Maman
nevertheless shows that state agencies have lessened the structural depend-
ency of the state and its direct subsidy of capital, while strengthening its
regulatory capacities.
In Chapter 4, The Reconfigured Institutional Architecture of the State: The
Rise of Fiscal and Monetary Authorities, Daniel Maman and Zeev Rosenhek
survey the changing architecture of the state and its consequences. They focus
on the rise of the Treasury and the central bank, as well as the intra-state
politics of coalition-building and conflict between them, both of which were
pivotal in molding the liberalization of Israel’s political economy. The chapter
reinforces two of this book’s central theoretical arguments. First, it challenges
the view that neoliberalism is a fundamentally ideational project by demon-
strating that the construction of institutionalized capacities for state auton-
omy was by and large inspired by the pursuit of institutional self-interest by
proactive state agencies. Second, from a temporal point of view, it documents
how some of these capacities were put in place in advance, thereby serving as
preconditions, while others developed later as part of the thrust to pursue
neoliberal reforms, and were strengthened by them.

20
 Introduction

In Chapter 5, Institutionalizing the Liberal Creed: Economists in Israel’s Long

Journey Towards Political-Economic Liberalization, Ronen Mandelkern traces
the rise of economists and their role in embedding neoliberalism in the state
apparatus. Mandelkern focuses on the gradual process by which economists
became the most influential technocrats and change agents in the state, via
occupation of key sites and agencies within it. His account demonstrates that it
was not the abrupt introduction of neoclassical economics into the illiberal
political economy of Israel which ignited liberalization in the 1980s. In fact,
these models and ideas were domesticated during the 1950s yet remained
detached from politics. The Israeli experience shows that even at times of crisis,
previously subordinated ideas will not shape policy unless promoted by strong
carriers. Moreover, the victory of ideational entrepreneurs proves to be short
lived unless they succeed in institutionalizing their preferred policies.
The second and third parts of the book comprise studies of how, when, and
why landmark neoliberal innovations occurred in the realm of social and
labor market policies. These studies take up topics connected to the fiscal
and substantive aims of the typical neoliberal policy package. The fiscal goal
is to curtail public spending in order to invigorate markets, achieved by
simultaneously lowering the tax burden on private economic actors and
assigning them greater responsibility for meeting their needs for both income
and services. Substantively, recommodification of labor and casualization of
employment are arguably the two most central components of the neoliberal
agenda of welfare state reform.
Recommodification is the antithesis of the Polanyian idea that the essence
of social protection is to reduce the existential dependence of wage-earners on
their earnings (Polanyi 2001; cf. Esping-Andersen 1990). It implies the very
opposite—strengthening the obligation of citizens to be economically self-
sufficient by participating in labor markets and prudently and individually
protecting themselves against economic risks. Recommodification is achieved
by some combination of (a) benefit cuts aimed at rendering dependence on
welfare less attractive as an alternative to earned income, (b) heightened
conditionality of benefit receipt on demonstrated incapability to work or
unavailability of jobs, and (c) activation, meaning incentives and sanctions
designed to encourage the transition “from welfare to work.”
Casualization (or precarization) of employment refers to policies and prac-
tices adopted by the state in its twin roles as employer or regulator, that are
intended to promote “flexible” (hence precarious) forms of employment—the
aim being to ensure that earnings, and employment itself, are driven by
employer needs (demand) and employee performance (supply). While recom-
modification aims to maximize the incentive to take on paid employment,
casualization is intended to maximize the value of employed workers to their
employers and “the economy.”

21
Asa Maron and Michael Shalev

The studies of social policy reforms and the rise of precarious employment
collected in this volume not only cover different policy domains, but also
represent the variety of roles played by economic policy technocrats. In the
social policy case studies the Treasury acted as an institutional entrepreneur,
strategically pursuing top-down reforms aimed at increasing its power and
autonomy, which was both a means of attaining organizational goals and an
end in itself. In contrast, the two employment policy case studies reveal a
much lesser role on the part of MoF officials, instead highlighting the signifi-
cance of other state actors and civil society. In one instance the Treasury was
granted casualization on a silver platter, because the managers of an important
node of the public social services created a developed secondary labor market
well before the era of explicit neoliberal reform. In the other instance, the
success of MoF-led efforts to replace protected public employees by agency or
subcontracted labor was partially negated by its inability to defeat new limits
on casualization.
The three chapters previewed here contribute insights into how, when, and
why the MoF succeeded (or failed) in introducing neoliberal innovations. We
learn that it can be a slow and piecemeal process; that reform can be based on
institutional re-engineering to undermine an existing cross-agency coalition
or, on the contrary, on building a new ad hoc coalition; that success is not
guaranteed and veto players may block bureaucratic initiatives, at least tem-
porarily; and that ideas can play very different roles—window-dressing for
real-political considerations, sources of inspiration, or tools of legitimation.
Chapter 6, Pathways to Neoliberalism: The Institutional Logic of a Welfare
State Reform, by Michal Koreh and Michael Shalev, studies cumulative insti-
tutional changes in social insurance financing since 1986 that ultimately
made possible a neoliberal wave of benefit retrenchment. This is a case in
which proactive state actors paved the way for neoliberal innovation by
advancing an illiberal reform. By gradually shifting employers’ contributions
to social insurance to the state budget, the Treasury massively violated neo-
liberal norms of fiscal probity. In the longer run, it succeeded in weakening a
veto player, thereby gaining the power to cut entitlements and also under-
mine the capacity to finance expansion. The road to this neoliberal reform
was not paved with ideological bricks, it was constructed by a series of prag-
matic maneuvers by fiscal state actors seeking greater autonomy and capacities
vis-à-vis the state’s primary social bureaucracy. However, the case also illustrates
how pragmatically driven reforms can be strengthened by, and in turn
strengthen, neoliberal ideas.
Chapter 7, “Wisconsin Works” in Israel? Imported Ideas, Domestic Coali-
tions, and the Institutional Politics of Recommodification, by Sara Helman
and Asa Maron, probes a case of social and employment policy innovation.
Challenging the view that re-commodification policies are propelled by the

22
 Introduction

cross-border diffusion of neoliberal programmatic and ideological formulas,

this chapter demonstrates the centrality of translation and the construction of
intrastate coalitions in the conversion of international policy panaceas to
domestic institutional changes. Conflicts between the MoF and the Employ-
ment Service over the goals and instruments of reform resulted in a protracted
institutional stalemate. In response the MoF functioned as an institutional
entrepreneur, borrowing the international Wisconsin Works workfare model
to combat increases in unemployment and income maintenance, while sim-
ultaneously neutralizing a veto player within the state. The plan activated a
submerged cultural script rooted in Zionist rather than neoliberal motives,
facilitating an “ambiguous agreement” between conflicting social and fiscal
bureaucrats. Nevertheless, the new program was layered alongside the Employ-
ment Service rather than replacing it, resulting in a destabilizing potential.
Ultimately the reform was politicized by civil society organizations, and the
workfare program was suspended.
In Chapter 8, Bureaucrats, Politicians, and the Politics of Bureaucratic
Autonomy: Reforming Child Allowances and Healthcare, Sharon Asiskovitch
explores struggles between saving and spending state agencies and their out-
comes in two policy realms: healthcare and child benefits. Like the two pre-
ceding chapters, it documents the strategies and tactics used by bureaucrats to
realign existing coalitions and facilitate new ones more favorable to their
agency and professional interests. However, Asiskovitch also emphasizes the
potential role of politicians in either restraining or facilitating the capacity of
the Treasury to autonomously bring about neoliberal reforms. Politicians were
most engaged and influential in social policy issues with electoral conse-
quences that they deemed crucial for their political endurance. In other
instances they were mobilized by bureaucratic actors seeking to advance
their own policy initiatives. The chapter shows how (de)politicization, linked
to the institutional settings and location of social programs, can be utilized by
state actors looking to advance—or prevent—neoliberal change by shifting
deliberations into arenas under their control.
Finally, by focusing on the prehistory and the aftermath of a neoliberal
reform cycle, the last two substantive chapters of this volume shed new
light on the precaritization of public employment wrought by the MoF.
Theoretically, they underline the dangers of reifying the causal role of neo-
liberalism. The first of these chapters shows that the institutional logic of
line agencies can lead them to act as agents of liberalization, without either
the inspiration or legitimation offered by new ideas. The second chapter
reveals a Polanyian double movement in response to the shortfall in social
protection that was created by unleashing labor market forces. It shows how
established state actors and new civil society organizations tried and partly
succeeded, to constrain or mitigate casualization.

23
Asa Maron and Michael Shalev

In Chapter 9, Precarious Employment in the Public Sector: How Neoliberal

Practices Preceded Ideology, Michal Tabibian-Mizrahi and Michael Shalev
show that a segmented internal labor market was created in Israeli public
hospitals as early as the 1960s—well in advance of the arrival of outsourcing,
personal contracts and other practices introduced under the umbrella of
neoliberal doctrine. In the era of liberalization, when the MoF initiated
reforms designed to replace civil servants by casualized labor, it inherited a
ready-made institutional infrastructure in the health sector which it nurtured
and harnessed in order to advance precarious labor. The invention and expan-
sion of casualized hospital employment occurred sequentially via three mech-
anisms of gradual institutional change—layering, conversion, and finally
drift. It was only with the coming of the 1985 Stabilization Plan that conver-
gence occurred between the cumulative effects of gradual and local change
from below, and the declared project of Israel’s emergent new political-
economic regime. Since that time precarity in the public sector has become
formally institutionalized and partially regulated.
In Chapter 10, Contradictions in Liberal Reforms: The Regulation of Labor
SubContracting, Guy Mundlak relates another untold and theoretically
unexpected story of the dynamics of neoliberal reform. Alongside the weak-
ening of the Histadrut and the diminishing scope of collective bargaining
that were hallmarks of the era of neoliberal transformation, two actors
located on the margins of the preceding corporatist era—the labor courts
and civil society organizations—turned into entrepreneurial change agents,
who promoted “juridified” worker protection from casualized employment.
The new reform efforts proceeded through processes of gradual institutional
change, in which the law became a much more prominent instrument for
governing labor relations. Yet the dialectics of liberalization did not end
with the imposition of protective restraints on mediated work, the first
major mechanism of casualization. Employers, including the state, shifted
their efforts to a new mechanism, labor subcontracting, which is more
resistant to reform. The Polanyian counter-movement against liberalization
was thus followed by yet another reliberalizing movement. At the same
time, the multiple arenas and mechanisms through which efforts to soften
the ravages of neoliberalism have been channeled suggests that advocates of
social protection now have access to a more diverse repertoire of action,
although the outcomes of their efforts may be more punctuated and frag-
mented then before.
In the Conclusion we weave together the insights presented in the volume,
reviewing our state-centered explanation for the rise and maintenance of
neoliberalism and discussing the theoretical implications of our findings from
Israel. Finally, our closing remarks address the sustainability of neoliberalism in
Israel, given the illiberal character of other state projects.

24
 Introduction

To recap, this book describes and interprets Israel’s changing political

economy, but also offers generalizations inspired by the Israeli case concern-
ing the contribution of states to their own transformation. It provides power-
ful support for a view of neoliberalism as a political project led by state elites,
and the transition to a neoliberal political economy as driven first and
foremost by the institutional interests of the state and its component agen-
cies. Despite Israel’s distinctiveness, we contend that it is not an exceptional
case. The forces that made liberalization attractive to the Israeli state—the
costs and contradictions of the prevailing domestic policy paradigm, loss of
autonomy by the state’s fiscal and monetary agencies, and the ambition of
rising leftwing politicians to reshape the relationship between their parties
and organized labor—reverberate in many other contexts.
In addition, the Israeli case both suggests and supports valuable analytical
insights into the theoretically disputed ways that a shift in social and eco-
nomic policy paradigms is believed to occur. A moment of acute economic
and non-economic crisis combined with favorable economic conditions to
generate a viable “emergency plan,” making it possible to revive previous
liberalization efforts that had aborted or proven to be short-lived. Yet with-
out numerous subsequent reforms of state institutions and policies, many
carried out patiently and/or by stealth, the neoliberal edifice built on this
foundation would have been fragile and incomplete. Thus, from a long-term
perspective both critical junctures and gradual change played indispensable
roles. The studies collected here also suggest that different specific instances
or types of change lend themselves to different explanations. For instance,
governments and the economic agencies of the state were capable of impos-
ing new rules that diminished the power of some societal interests while
benefiting others. However, change within the state typically required more
patient attempts to undermine veto players, resting on coalition building
and muted incremental reforms.
Theoretically, what comes out clearest from our collective endeavor is the
centrality of the state, its elites and sub-units, as change agents, and the
importance of their institutional interests. Correspondingly, this volume
challenges two popular interpretations of the rise of neoliberalism. One of
these overstates the role of economic imperatives, whether those highlighted
by economists or those of interest to critical political economists. The other
misinterpretation exaggerates the role of ideational change in driving new
state discourse, policies and practices. Both views deny agency, interests, and
power to state actors and institutions.
In Israel, at least, institutional reconfiguration of the state has proven to be
both a precondition for liberalization and a major reason why it does not go
away. Does this guarantee that neoliberalism will remain hegemonic? In the
Conclusion we reflect on apparent contradictions in the Israeli setting

25
Asa Maron and Michael Shalev

between neoliberalism and the unusually expansive character of both the

state’s agenda and citizens’ expectation. The continuing pervasiveness of
neoliberal practices and outcomes (and of some neoliberal ideas) cohabits
with an enduring Republican and collectivist ethos among the Jewish major-
ity. The resultant material and symbolic tensions have sometimes put brakes
on neoliberal principles and practices, but without (yet?) undermining their
resilience.

26
Part 1
Transformations of the Key Actors
2

Paving the Way to Neoliberalism

The Self-Destruction of the Zionist
Labor Movement

Lev Grinberg

Comparative political economists disagree on the reasons for paradigm shifts,

like the interwar and postwar rise of Keynesianism, or the neoliberal trans-
formations during the 1980s. Some attribute major policy changes to state
institutional developments, domestic political processes or the emergence of
new ideas, others insist that paradigm shifts are the direct result of a changing
balance of class power. In our own era, the class argument goes, financializa-
tion and globalization of capital on the one hand, and the decline of organized
labor on the other, have contributed to the transition to neoliberal macro-
economics. This chapter challenges the class power theory by analyzing the
rise of neoliberal policies in Israel as a result of a peculiar institutional tension
and political context, and the intentional action of Labor Party leaders.
In short I will argue that, in addition to global tendencies, politics matter.1
In Israel as elsewhere, some scholars and commentators have explained the
ascension of neoliberalism by global economic imperatives associated with
capitalist interests, and the vastly eroded countervailing power of trade unions
and social-democratic parties (Shafir and Peled 2002; Ram 2008). The prevail-
ing misconception of the role of the Labor Party attributes the neoliberal shift
to the political upheaval of 1977, when the Likud Party formed the governing
coalition for the first time. The villain of this narrative is Benjamin Netanyahu,

1
Unless otherwise stated, the term Labor Party is used throughout this chapter to denote the
historic Mapai party originally formed in 1930 and its various electoral alignments and mergers
with smaller labor movement parties, including the formation of the Israeli Labor Party in 1968.
For further details see Aronoff (1993: figure 1).
Lev Grinberg

who has led the Likud for most of the last two decades, and has been credited
with nailing shut the coffin of Israeli social democracy (e.g. Gutwein 2010).
This misinterpretation reflects Shimon Peres’ argument on November 2005,
after splitting the Labor Party by forming a new Center party, when he accused
Netanyahu—then Finance Minister and Likud leader—of leading Israel’s tran-
sition to “piggish capitalism.” But while Netanyahu has indeed been an
important protagonist and articulator of neoliberal imageries and rhetoric,
his policies were adopted within an already liberalized political economy, in
which the Histadrut lost its veto powers and the state’s senior economic
bureaucrats came to dominate domestic policymaking.2 It was the preceding
structural and institutional changes, wrought largely by Labor Party political
leaders, which made it possible for Netanyahu to propagate what Ben-Porat
(Ben-Porat 2005a) has characterized as a distinctly neo-conservative ideology.
Indeed, as we shall see, in 1985 none other than Shimon Peres (Israel’s Prime
Minster between 1984 and 1986 and Minister of Finance 1988–90) played a
pivotal role in implementing a Stabilization Plan aimed not only at halting
hyperinflation but also at fundamentally liberalizing the political economy.
This chapter analyzes the historical process that led to the dismantling of
the institutional complex that Labor Party forefathers constructed around the
Histadrut. By advancing the neoliberal project, labor political leaders in Israel
were able to relieve themselves and the party of a double burden. On the one
hand, the Histadrut and the economic enterprises and social services under its
control were the home base of an outmoded party machine that was no longer
able to deliver electoral victories in an age of post-clientilistic politics, and
which tarnished the party’s public image and blocked the mobility of aspiring
young politicians. On the other hand, when occupying positions of power
Labor ministers found their room for maneuver in both policy and politics
sharply constrained by pressure from the Histadrut to channel government
aid to its failing institutions.
Since 1967 incessant demands for state subsidies by Histadrut-owned enter-
prises and its private sector allies led to a fiscal crisis of the state and hyperin-
flation, following the liberalization of foreign currency in 1977. In this context
the neoliberal roadmap offered a sound solution for state elites facing an
interventionist developmental state project “gone wrong.” By drastically cut-
ting state subsidies to Histadrut-owned enterprises, thereby ensuring their
privatization, and by ending the Histadrut’s control of health insurance and
occupational pensions and undermining its role and influence in collective

2
The Histadrut, founded in 1920, is the umbrella organization of all labor-controlled institutions,
including welfare services, economic enterprises, pension funds, and trade unions. For a brief
description of the Histadrut see the section, “The Labor Zionist Political Economy,” and for a more
detailed analysis (Grinberg 1993b; Shalev 1992).

30
 Paving the Way to Neoliberalism

bargaining, Labor governments (or Labor ministers within coalition govern-

ments) put paid to the Histadrut’s extraordinary political and economic
powers. The Stabilization Plan of 1985 propelled a gradual transition to a
more technocratic era in which party politics were neutralized, and macroeco-
nomic state agencies became the guardians of a new state project.

The Labor Zionist Political Economy

The institutional history of the Zionist labor movement starts at the turn of
the twentieth century with the first flows of Jewish migrants arriving in
Palestine (still under Ottoman rule), and their encounter with the local Arab
population that was ready to work for lower wages (Shafir 1989). They
responded by establishing political organizations and agricultural unions.
In 1920, following the establishment of the British mandate and mobilization
of financial support from the World Zionist Organization, existing labor move-
ment organizations were restructured around the Histadrut (Shapiro 1976).
The Histadrut was established as a quasi-state institution subsidized by the
Zionist movement in order to facilitate the absorption of Jewish immigrants in
the absence of a Jewish sovereign state. It sought to contribute to the absorp-
tion of property less Jewish settlers while providing a valuable infrastructure
for emergent labor parties. The Histadrut established its own economic enter-
prises, some in the form of co-operatives (in agriculture, transportation and
marketing) and others managed by Histadrut bureaucrats in the framework
known as the Labor Economy, which eventually spanned numerous sectors of
the economy including finance, housing, manufacturing, and port services
(Grinberg 1991, 1996; Shalev 1992). Many Histadrut members were not
directly tied to its activities as a trade union, attracted instead by employment
opportunities and a range of social services that included health, education,
housing, and eventually pensions. The most important and crucial mechanism
for member recruitment was the Sick Fund (Kupat Holim), which provided
health services to the lion’s share of the Jewish population.
In short, the Histadrut was not at all a typical umbrella organization of trade
unions, it was established as a “state-in-the-making” institution, with all the
typical activities a state is expected to display. The “Histadrut Trade Union
Division” was organized as a labor ministry aiming to control the labor markets
characterized by competition with indigenous Arab workers. The “trade union
division” didn’t represent the workers, who were dependent on the Histadrut
for jobs and collective agreements. The meaning of Histadrut membership was
the entitlement to otherwise nonexistent social services, like health, education,
housing, pension insurance, and employment.

31
Lev Grinberg

The Histadrut’s quasi-state apparatuses included military organizations, a

bank, manufacturing and marketing enterprises, farming and transportation
cooperatives, port services, sports and culture organizations, and also taxing
and judicial apparatuses. Histadrut membership also granted political rights,
namely voting every four years for the Histadrut Executive Committee (the
Vaad Hapoel). Both this body and the Histadrut’s executive apparatus
were controlled by political parties, and from 1930 by the hegemonic Mapai
(Workers’ Party of Eretz Israel-Palestine), the largest political party in the
Palestine Jewish community, which ruled the Histadrut in coalition with
smaller labor movement parties. Mapai represented the shared interest of all
strata of Jewish settlers and of the worldwide Zionist movement in the Jewish
colonization of Palestine. The party succeeded in combining Zionist goals
with its self-interest in maintaining and expanding its dominant position
in the Jewish community through control of the Histadrut’s bureaucratic
apparatus and economic enterprises (Horowitz and Lissak 1978; Shapiro
1976, 1977; Medding 1972). Following the 1933 Zionist elections, Mapai
also became the dominant party in the Zionist movement, transforming the
Histadrut from a sub-contractor of the World Zionist Organization into an
equal partner. Both institutions were now ruled by Mapai.
The establishment of the State of Israel in 1948 and the continuation of this
power-sharing triangle (substituting the new state institutions for those of the
Zionist movement) created tensions between the Histadrut’s quasi-state func-
tions and the new parallel state institutions, transforming Mapai—from the
outset Israel’s ruling party—into the broker between them (Grinberg 1993a).
However, Mapai was not autonomous from the Histadrut’s institutional
interests, because its political power depended on control by the Histadrut
apparatus over workers, public services, and capital (Medding 1972; Shapiro
1977). This dependence gradually became a source of continuing frustration
for Mapai politicians. Mapai (and later the Labor Party) were machine parties,
with the Histadrut serving as the home of the machine. The resultant tension
between Histadrut leaders and the leaders of communal or state institutions
revolved around two issues: first, government policy (e.g. conflicts over the
division of functions between Histadrut and state), and second, pertaining
mostly to the younger generation of Labor politicians, political ambitions, and
individual career opportunities.
In the period 1950–65 economic growth was fueled by capital transfers—
mainly German reparations to the State of Israel—and the expansion of the
consumer and labor markets as a result of massive Jewish immigration. All these
were pushed forward by the construction industry, significantly subsidized by
the government, which also initiated large-scale infrastructural projects. Mass
immigration contributed to the relative social mobility of veterans, while
depressing the wages of unskilled workers (Bahral 1965; Rosenfeld and Carmi

32
 Paving the Way to Neoliberalism

1976). Mapai maintained the Histadrut’s quasi-state structure and it continued

to provide public services, thereby obliging the immigrants to join the Histadrut
in order to become eligible for its healthcare and employment services.
The Histadrut’s contribution to economic development and political stabil-
ity was repaid in high direct and indirect state subsidies that facilitated
the maintenance of a large bureaucratic apparatus. The foremost subsidized
service was the Histadrut’s health service, but its economic activities in con-
struction, agriculture, and industry (later including military industries), which
were central elements of the state-building project, also benefited from state
support (Halevi and Klinov-Malul 1968; Bichler 1991; Peri 1983; Shalev 1992).
The form these subsidies took varied: some were direct outlays from ministry
budgets, others took the form of machinery and raw materials donated to
Israel by Germany under the reparations agreement implemented between
1953 and 1963. Yet the most important source of state subsidy followed a more
indirect route. The major source of domestic investment capital in Israel
was the personal savings deposited in pension or provident funds (hereafter
“pension funds”), most of which were owned and managed by the Histadrut.
When a program of state-sponsored industrialization was launched in 1957,
the Israeli government agreed that nearly one-third of the annual accumulations
of these funds would be loaned to the Histadrut for financing government-
approved investments in the Labor Economy.3
The domination of Mapai and the Histadrut was first challenged in the 1960s
when the success of the government’s policy of rapid and heavily subsidized
industrialization resulted in full employment. The unions became stronger and
began asserting their independence, while industrialists sought to establish a
pro-business party (Grinberg 1993b; Shapiro 1991). The political response to
these threats on the part of the parties whose power was based on their control
of the Histadrut was the creation of an electoral block of Labor parties, known
as “the Alignment.”4 In parallel, economic policy was reoriented. First the
government acted in 1965 to quicken and deepen a looming recession, with
the intention of disciplining both workers and employers (Shalev 1984). Then,
after Israel’s victory in the 1967 war and its occupation of new territories,
policies were adopted to facilitate integration of Palestinian workers into
Israel’s low-skilled labor force and capture of their consumer markets by Israeli
suppliers (Farjoun 1980; Semyonov and Lewin-Epstein 1987).

3
Under the agreement between the government and the Histadrut, 35% of pension fund
accumulations was to be invested in the capital market. The remainder would be used to finance
development projects, and in return the funds received “designated” government bonds with a
guaranteed real rate of return. The Histadrut was assigned half of the development funds (and the
associated debt) to use for investing in the Labor Economy (Grinberg 1991, 1993b).
4
The first block was established towards the 1965 elections, between Mapai and Ahdut
Haavoda, the next towards the 1969 elections, when Rafi (Ben Gurion’s splinter faction) joined
them forming the Labor Party, and in again in the same year when Mapam joined the Alignment.

33
Lev Grinberg

The Dual State Institutionalized after 1967

Post-1967 economic and political developments quickly destabilized the

shaky prewar balance between the three vertices of the ruling triangle formed
by the Histadrut, the Labor Party, and the state. The Occupation turned out to
be a historical turning point that was followed by deepening state subsidy of
Histadrut companies and services, and its extension to large enterprises in the
private sector. The integration of Palestinian workers effectively created a
lower caste of cheap and unorganized non-citizen laborers (Semyonov and
Lewin-Epstein 1987). At the same time new flows of foreign capital were
inaugurated (Arnon 1981), mainly aid from the USA, which effectively
financed the purchase of imported weaponry (Bichler 1991).
In the interregnum until the next major Arab-Israeli war in October 1973,
armaments evolved into Israel’s leading industry (Blumenthal 1984; Peri 1983;
Barkai 1987). The Labor Economy invested mainly in this area and profited
considerably from its deep subsidization. This success was ensured both
by political connections with the ruling party and a policy of recruiting
senior executives from among high-ranking military veterans, who had close
connections with senior military commanders (Maman 1997; Peri and
Neubach 1985). The Defense Ministry covertly collaborated with managers
and workers in the arms sector, who pressured the government to expand
their subsidization (Aharoni 1991b). The Ministry succeeded in claiming an
increasing share of the state budget while escaping from the restraints
imposed on civilian state agencies by the Treasury. It also played a central
role in expanding economic activity by virtue of the army’s responsibility for
administering the Occupied Territories (Grinberg 1993a, 2008).
As a result of these developments, the state’s prewar objective of using the
market and budgetary discipline of a recession to transform power relations
between employers, employees, and the state, was turned on its head. After
1967 the balance of power would not shift again for nearly two decades,
because the relative autonomy of the state vis-à-vis powerful economic inter-
ests was lost due to the internal rift between the two competing state agencies
(Ministry of Finance and Defense) and the coalitions they built with powerful
economic actors. The military establishment (the armed forces and the
Ministry of Defense) was ready to cooperate with the Histadrut, still the
dominant quasi-state institution. The Histadrut supported the military gov-
ernment in regulating the employment of Palestinian day workers, while, as
noted, the Labor Economy became one of the main domestic armaments
suppliers. At the same time, organized workers in public services—the back-
bone of the Histadrut in its trade union role—were empowered by the split in
the labor market, owing to their immunity from competition with Palestinian
workers (Grinberg 1991; Farjoun 1980).

34
 Paving the Way to Neoliberalism

Under these new structural conditions, the autonomy enjoyed by both the
Histadrut and the military establishment made the ruling party virtually
redundant as a source of legitimacy and control of people and resources.
Under these circumstances, the old Mapai component of the labor movement
parties (not yet consolidated into the Labor Party) retained only one main
source of power, its continued control of the Finance Ministry. In 1968 the
Mapai Minister of Finance introduced a new program of investment subsidies
for the Labor Economy called the Financial Plan. The motive was to respond
to pressure from top Labor Economy managers for increased state aid, in the
hope of offsetting the Defense Ministry’s autonomous system of capital
subsidies. As in the past, the plan guaranteed positive real returns to pension
fund investments in “designated,” non-negotiable government bonds.
However, in 1968 the government began to provide “inflation insurance,”
which, in a context of rising inflation, introduced a growing element of
subsidy into Histadrut investments in the Labor Economy. (Seeking to secure
other political allies, the Ministry of Finance also began offering subsidized
non-indexed loans to other groups, including homeowners and private
investors.) In another move designed to appease the Histadrut, over the next
decade the share of pension accumulations reserved for the Labor Economy
was gradually increased.5
Many of the internal tensions within the newly established Labor Party,
including those publicized after 1973 as “corruption scandals,” were related to
conflicts over allocation of subsidized loans to Histadrut-owned enterprises
(Yadlin 1980). At the same time, the Treasury’s commitment to subsidizing
these and other non-indexed loans meant that borrowers benefitted from the
growing inflation. This became the main source of the government’s swelling
budget deficits and internal debt in the 1970s (State Comptroller 1977:
111–12, 1980: 50).

Liberalization and Inflation

The October 1973 “Yom Kippur War” spelled the end of rapid growth and
accelerated the negative economic processes which had already surfaced in
1967.6 The structural problem of the increasing share of the public sector in

5
As explained in note 3, the arrangement reached in 1957 split the uses of pension fund
accumulations three ways—capital market investment, and bonds that financed government and
Histadrut investment in equal portions. The proportion designated for the capital market was
gradually decreased (by 1977 the original 35% had been cut to only 8%), and the shares of the
government and the Histadrut rose correspondingly (Grinberg 1991, 1993b).
6
Unless otherwise stated, this and the following section are based on research documented in
Grinberg (1991).

35
Lev Grinberg

the economy only deepened. The balance of payments deteriorated, while

defense spending, capital imports, and loans required to replenish military
equipment spiraled.7 Driven by the energy crisis, increased public spending,
and a new exchange rate policy, inflation reached an annual level of 30–40
percent. Private and Histadrut-owned companies benefited twice over from
inflation, which brought extended capital subsidies in the form of non-
indexed loans and reduced labor costs in real terms.
In November 1977 the Labor Party lost the elections for the first time since
1933, ending its hegemonic control of the state. The new coalition govern-
ment, headed for the first time by the Likud Party, announced a liberalizing
“economic turnabout” centered on eliminating the government’s control of
the exchange rate. The resulting inflation exacerbated the government’s
burden of non-indexed debt, and in May 1979 it announced that repayment
of loans to private capital investors and mortgage lenders would henceforth be
linked to inflation. However, the Financial Plan for the Labor Economy was
exempted from the reform as it was a bilateral agreement with the Histadrut,
not due for renewal until October 1980.
It is important to notice that although the Likud was equipped with a liberal
economic ideology, the new government did not substantively alter the previ-
ous developmental state policies designed by the Labor Party and the Histadrut
(Ben-Porath 1983). On the contrary, except for liberalization of the exchange
rate, the new government was constantly attempting to coordinate its macro-
economic policies with the Histadrut. Paradoxically, the previously pivotal
position of the Histadrut in the economy and politics was actually strengthened
by the Labor Party’s loss of power. The government became dependent on
the Histadrut cooperation in the economic policy field, and Labor became
dependent on the Histadrut’s organizational power and public image in order
to win the next elections.
In the wake of the government steps to reduce subsidies on wages and
profits, the Histadrut allied itself with organized private sector employers in
a successful attempt to bypass the state’s management of the economy and
protect the interests of both capital and labor independently of the Ministry of
Finance. To prevent further erosion of real wages, private employers reached
an agreement with the Histadrut to pay cost-of-living allowances, obliging the
government to also index the wages of public sector employees to price rises.
This agreement was only one component of an extraordinary political–
economic bargain concluded in April 1979. As part of this bargain the

7
From 1970 to 1975 the import surplus more than tripled, from $1,262 to $4,050 million.
Defense-related imports rose from about $490 million in 1972 to $1.25 billion after the 1973 war,
reaching a peak of $1.85 billion in 1975. Loans (from the US government—the main source, but
also the Jewish Diaspora, Germany, and other sources) grew from $475 million in 1970 to $1.47
billion (Arnon 1981: 82–6).

36
 Paving the Way to Neoliberalism

Histadrut shared its privileged non-indexed loan funds with private sector
employers. In turn, the latter consented to expanding both the coverage and
contributions collected by the Histadrut-run occupational pension scheme,
which it will be recalled was the source of these earmarked investment funds.
The Histadrut-owned bank (Bank Hapoalim) used the resulting increase in
pension fund accumulations to extend non-indexed loans to private firms
which, under the terms of the Financial Plan, were underwritten and subsid-
ized by the government (Grinberg 1991).
At the onset of the 1980s, some two years after currency liberalization, the
Israeli economy was in deep crisis. Inflation rose from an annual rate of 30
percent in 1976 to almost 170 percent in the last quarter of 1979. The stock
market boomed but production slowed, real wages dropped, and unemploy-
ment rose substantially. Organized private employers and the Histadrut
threatened an employer lockout and a general strike, respectively, if inflation
was not halted. The first Likud Finance Minister resigned, and his replacement
acted immediately to reduce public spending and private consumption by
freezing credit and further cutting subsidies on basic consumption goods,
causing the recession to deepen. To complete his plan, the new minister
aimed to restrain wages and cut public sector employment in co-operation
with the Histadrut and private employers. However, in October 1980, when it
became evident that both private and Histadrut businesses were escaping the
government’s austerity policies by exploiting subsidized cheap credit, and that
the Histadrut was incapable of restraining powerful public sector unions, the
minister revoked the Financial Plan, ending access to non-indexed loans by
the Histadrut and its allies in the private sector.
The elimination of subsidized credit was a key factor in the subsequent
collapse of many Histadrut-owned businesses and services. In the interim
inflation ran amok as the government lost all control over prices and wages,
due not only to lack of cooperation by the Histadrut and private sector employers
but also the widespread expectation that nothing would be able to halt further
price increases. To make matters worse, in October 1983 a stock market bubble
based on bank shares (a primary means by which the public had protected itself
from inflation) finally burst. Inflation reached a historic high of 466 percent in
1984. The government resigned, discredited also by its failure to withdraw
from South Lebanon since Israel’s controversial invasion in 1982.

The Successful Implementation of a Structural

Adjustment Plan in 1985

In July 1984 new elections were held, which ended in a stalemate. In September
Labor and Likud, the two largest parties, formed a “government of national

37
Lev Grinberg

unity” headed by Labor’s Shimon Peres. Although economists close to the

Labor Party had already finalized an adjustment plan, it was not publicized
and implemented until after the Histadrut elections in May 1985. At that point
conditions were ripe for political exchange between the Histadrut and the
government (both led by the Labor Party), because the former badly needed
government assistance to its ailing social and economic enterprises, while being
in a position to supply the latter with crucial political legitimization.
In July 1985 the government adopted the “emergency economic stabiliza-
tion plan” (EESP) (Mandelkern and Shalev 2010; Bruno and Piterman 1988).
The plan was based on the realization that Israel’s hyperinflation was driven by
the combination of repeated devaluations, protective indexation mechanisms,
lavish government subsidies, and the state’s ability to finance its deficit by
“printing money.” Orthodox measures to cool down the economy like higher
interest rates and budget cuts were included in the plan, but more important
were the “heterodox” measure of simultaneously freezing the exchange rate,
prices, and wages. In addition, a typical Washington Consensus structural
adjustment plan was implemented, including suspension of wage and debt
indexation, public sector employment cuts, prohibiting the central bank from
financing the budget deficit without issuing negotiable bonds, and planned
capital market reforms aimed at ending capital subsidies and tying the govern-
ment’s hands fiscally.
While not all features of the plan were implemented in full, it succeeded
after only nine months in reducing inflation to 25 percent in annual terms.
This was achieved thanks to the government’s resoluteness in obliging the
representatives of workers and employers to accept the plan. The political
underpinnings were furnished by the almost wall-to-wall “national unity”
coalition, with only fifteen of the legislature’s 120 members in opposition.
This made it possible for the Labor Party to take decisions against the interests
of the Histadrut, and enabled the state’s economic agencies to rebuild their
capacities for governing autonomously. The US government assisted by
providing the government with a one-time grant of $1.5 billion (in addition
to the “regular” yearly $3 billion aid), which helped it to resist pressure from
exporters to devalue the shekel. Further political cover was provided by the
prestigious and cohesive team of professional economists which designed and
publicly supported the plan (Mandelkern, Chapter 4 this volume).
The cessation of hyperinflation exposed the precarious condition of many
public and private organizations. The most dramatic corporate collapses were
experienced by Histadrut-owned entities previously dependent on the subsid-
ized Financial Plan. These organizations were especially vulnerable to rising
real interest rates, because ever since 1980 they had been compelled to
refinance massive loans originally taken out without the burden of indexation
(Grinberg and Shafir 2000). Under these circumstances the most critical

38
 Paving the Way to Neoliberalism

negotiations between the Histadrut and the state concerned whether and how
to prevent bankruptcy of enterprises under the umbrella of the Histadrut,
notably the Sick Fund and the Kibbutzim.
The Labor Party came under strong pressure from the Histadrut to remain in
the unity government coalition in order to save its enterprises and services
from collapse. When this pressure became visible at several critical moments
(1986 and 1988), it led to a shift in the attitude of many party members and
also undermined the Histadrut’s standing in public opinion. Instead of being
seen by the Labor Party as an organizational asset, the Histadrut became
perceived as a burden (Grinberg 1991, chap. 6; Grinberg and Shafir 2000).
In the public arena, instead of the party being able to present itself politically
as an alternative to the Likud, it continued to support a bipartisan approach
even though the twin crises of hyperinflation and Israel’s inability to with-
drawal from South Lebanon had already been resolved. Against this background
a younger generation of aspiring leaders within the party began designing a
new political strategy based on radical structural adjustment of the Histadrut
itself (Shafir and Peled 2002, chap. 8; Grinberg and Shafir 2000). The interests of
Labor politicians and those of the higher bureaucratic echelons of the state
converged around their common aim of wresting autonomy from the Histadrut
apparatus by dismantling the foundations of its immense economic, organiza-
tional, and political power.

Peacemaking and Economic Neoliberalization

By the beginning of the 1990s the state had made considerable progress in
balancing its budget, stabilizing its currency, and establishing its institu-
tional autonomy. Privatization of most Histadrut and some public sector
enterprises had reduced the burden of subsidies and created profitable oppor-
tunities for private investors. However, these achievements were insufficient
to establish a viable model of economic growth suitable to an era of global-
ization. Stabilization and its associated structural reforms could not open
Israel’s markets to the world or promote an influx of international capital,
facilitate the import of cheap products, and induce labor market competition
with international low-wage workers. The opening of the economy to global
flows was prevented by Israel’s political isolation and the recession provoked
by the Intifada in 1987. Given the renewed capacity of the state to overcome
the pressure of powerful economic interests, big business began to look for
opportunities in the global arena.
The drive of business leaders to participate in world markets led them to
privately support and public legitimize the Labor Party’s plan to negotiate a
compromise peace agreement with the Palestine Liberation Organization

39
Lev Grinberg

(Grinberg and Shafir 2000; Shafir and Peled 2002; Peres 1993; Ram 2008;
Grinberg 2010). The new Labor government headed by Yitzhak Rabin following
the 1992 elections promised to put an end to Israel’s isolation and allow broad
sectors in Israeli society to share in the profits. Both in Israel and abroad
attempts were made to construct the peace process as an essentially economic
project, as described in Shimon Peres’s vision of a “New Middle East” (Peres
1993; Fischer 1994). On his way home after signing the Declaration of
Principles in Washington, Prime Minister Rabin’s plane landed in Morocco
as an indication of the new atmosphere, and agreed to establish a committee
to promote regional cooperation.8 As described by the chief executive officer
(CEO) of what had until recently been the Histadrut’s largest holding com-
pany, the handshake between Rabin and Arafat at the White House opened
world markets to Israeli entrepreneurs.9 But while the benefits to private
capital were clear, the Jewish lower classes remained skeptical on both
material and ideological grounds (Ben-Porat 2005a).
In the first half of the 1990s a significant restructuring of labor markets took
place. A first reason was the immigration wave to Israel in the early 1990s,
following the collapse of the Soviet Union, which facilitated the implemen-
tation of additional structural adjustment reforms. The new migrants, anxious
to work and cushioned by subsidies from Israel’s Absorption Ministry, under-
mined collective wage agreements and organized labor due to their readiness
to work for lower wages and under inferior conditions of employment. The
second factor was the Palestinian terrorist resistance aimed at sabotaging
the peace process initiated in Oslo in September 1993, which led to Israeli-
imposed border closures and fear on the part of Jewish employers and
customers, resulting in chronic shortages of Palestinian frontier workers. The
response to pressure from employers, as well as the urgency for the state
of housing hundreds of thousands of new immigrants, was a guest worker
program under which cheap, non-unionized workers were imported from
Asia, Africa, Latin America, and Eastern Europe (Bartram 1998; Kemp and
Raijman 2008; Rosenhek 1999b).

The Grand Finale: Health and Pension Reforms

Because stabilization and liberalization diminished the Histadrut’s economic

power and undermined its role in collective bargaining, the two areas of social
protection dominated by the Histadrut became its last bastions of institutional
power. Occupational pension schemes were no longer a source of cheap

8
Haaretz, September 14 and 20, 1993.
9
See the interview in Shafir and Peled (2000a: 257–9).

40
 Paving the Way to Neoliberalism

investment finance. But they continued to tie both workers and employers
to the Histadrut as a trade union, and their value was still protected by bonds
issued and secured by the state. Even more important, in the absence of a
compulsory national health insurance scheme the Sick Fund continued to
ensure the enrollment of about 70 percent of the population. The affiliation of
many if not most Histadrut members was motivated by their need for health-
care, rather than by a quest for representation in the labor market. Moreover,
membership dues were the lifeblood of the Histadrut and the political appar-
atus which it hosted, as only 70–5 percent of dues income was transferred to
the Sick Fund.10
The political implications of this arrangement were highly salient to young
reformist leaders inside the Labor Party, who strove to liberate the party
machine and its institutions from the Histadrut’s unilateral dictates. The
motives of the reformers were both collective and personal. The now infamous
reputation of the Histadrut bureaucratic apparatus, which the Likud turned
into a political issue in the 1988 elections, made Labor’s political rejuvenation
more difficult. At the same time, since the Histadrut apparatus dominated
party bodies responsible for selecting and ranking candidates in local and
national elections, it severely hampered aspiring politicians interested in
making their own way to the top. With the support of Yitzhak Rabin, who
sought allies in his long-running rivalry with Shimon Peres, the younger rebels
succeeded in reforming candidate selection procedures by replacing backroom
committees with primary elections. The resulting new blood was one of the key
factors that secured Labor a victory in the 1992 elections. One of the most
prominent of the rising stars of the young Labor reformists, Haim Ramon, was
appointed Minister of Health, and set about preparing and campaigning for a
National Health Insurance Law that would finally break the connection
between the Sick Fund and the membership and finances of the Histadrut.
In March 1994 the Labor Party convention, still under the sway of the
Histadrut, refused to endorse the proposed legislation. In response Ramon
resigned as Health Minister, and together with allies inside and outside of
Labor he quickly formed a new electoral bloc that successfully contested the
upcoming Histadrut elections. After the election of Ramon as the Histadrut’s
new secretary-general, he co-operated with the government in enacting the
Health Law, which he had previously formulated as Minister of Health. Once
all citizens were insured in the public healthcare scheme the Histadrut’s
membership fell dramatically, particularly among the self-employed, the
unemployed, and retirees. Roughly two-thirds of the Histadrut’s million and
a half members were lost. A decade later a survey revealed the harsh losses:

10
Unless otherwise stated, the data cited and events described in this section concerning reform
of the Histadrut Sick Fund are based on Grinberg and Shafir (2000). See also Asiskovitch (2011).

41
Lev Grinberg

while membership density in 1981 was estimated as 80 percent, ten years after
the detachment of the Histadrut from the Sick Fund only 25 percent of
employees reported membership in the Histadrut, while another 9 percent
said they belonged to independent professional unions (Mundlak, Sol, and
Schram 2012).
In addition to the Sick Fund and the Labor Economy, the third leg of
Histadrut power was its Pension Funds, which attracted almost all of the
savings of organized worker.11 Against the background of decades of Histadrut
veto of the establishment of mandatory universal pension insurance, at the
end of the 1970s the Ministry of Finance developed a strategic reform drive
(Gal 2004b: 49–52). It advanced a two-step reform of the pension system with
the first stage implemented in 1994–5 following Ramon’s election as Histadrut
Secretary General, and immediately after enactment of the National Health
Insurance Law. A Labor-led government and a new reformist Histadrut
leadership provided the necessary political context that enabled state
technocrats to begin implementing radical changes in the occupational
pension system (Ratson 2010).
As noted earlier, the state guaranteed pension fund savings by providing
designated bonds, and by the 1980s the proportion invested in these bonds
had risen to 92 percent. At the end of the decade the Treasury, chafing under
the burden of this subsidy, launched a campaign aggrandizing the “specter of
actuarial deficit” (Avnimelech 2003: 32). It was claimed that the Histadrut had
secured worker’s rights without calculating the future costs of fulfilling these
rights, which was rising rapidly due to population ageing. In March 1995 the
government decided to discontinue the existing pension insurance based on
the principle of defined benefits, in favor of a new system based on a principle
of actuarial balance. The goal was to shift toward a defined contribution
system, which undermines savers’ rights (Peleg 2006: 98).
The next steps of the reform were designed to reduce the percentage of
savings protected by designated state bonds, and promote privatization of the
funds. Both of these transformations were gradual, starting in 1997 with a
decision by the new Likud government. Over the next decade the share of
designated bonds was reduced from 92 percent to 30 percent (Spivak and
Yosef 2005). Capital markets were further empowered with the privatization
of the oldest (and most deficit-ridden) of the Histadrut funds, preceded by
their nationalization. The Treasury’s explicit goal was to “detach the manage-
ment of the funds from the unions” (Peleg 2006: 101), and under legislation
introduced in 2004 the remaining Histadrut funds were privatized.
Enrollment in occupational pension insurance became mandatory in 2008.

11
Public employees were an exception, they were entitled to non-funded budgetary pensions.
From 2004 new employees were not.

42
 Paving the Way to Neoliberalism

While the scheme is superficially similar to the earlier reform of health

insurance, the effective coverage of pension saving is lower and the state is
free of any responsibility for guaranteeing and funding benefits (Luria 2015).

Discussion

In Israel’s first two decades, the peak of the developmental state era, the
Histadrut continued to serve as the backbone of the Zionist labor parties,
just as it had done in the preceding era of Jewish colonization of Palestine.
By the 1960s the inability of the institutional complex centered around the
Histadrut to adapt itself to new conditions of full employment and a strong
civil society undermined both the peak organization and the labor parties.
The occupation of the West Bank and Gaza after the 1967 war provoked an
institutional and political split of the state apparatus and its distributional
functions between the Finance and Defense ministries. This split, and the
political vulnerability of the Labor Party, were exploited by the Histadrut to
extract state subsidies for both the Labor Economy and the large private
enterprises with which it was tacitly allied.
In the context of a costly war and an international price shock, the lost
autonomy of the state and the division between its two most powerful appar-
atuses, led to stagflation, a fiscal crisis of the state, and the fall of the Labor
Party. In the mid-1980s the Labor Party returned to power in a broad coalition
government aiming to halt hyperinflation and bail out the state from bank-
ruptcy. In order to achieve its goal, the National Unity Government delegated
its power to the team of economic technocrats that designed the Stabilization
Plan. Without the political legitimacy of a broad national coalition, the
technocrats would not have succeeded in implementing the plan. A state-
centered interpretation of neoliberal policy reforms is therefore incomplete if
it fails to take into account the contingencies of domestic politics.
The weakening of the Histadrut and the declining power of the Labor Party
enabled the rise of a new generation of young reformist leaders within the
party, who adopted the view held by both the state technocrats and private
capital, namely that the Histadrut’s quasi-state apparatus had become a
burden. They became increasingly reluctant to defend the economic privileges
of the Labor Economy and ultimately refused to rescue it from collapse
and privatization. Pursuing their personal and collective political interests, a
decade after the Stabilization Plan they turned the Histadrut Sick Fund into a
semi-private contractor to a new state-run health insurance scheme, and began
the dismantling and privatization of the Histadrut’s pension funds. These
moves eliminated the remaining foundations of the labor organization’s vast
membership and extraordinary economic and organizational power.

43
Lev Grinberg

It is ironic that the collapse of the Histadrut was orchestrated primarily by

the Labor Party itself. While the Likud as a party definitely had an interest in
undermining the Histadrut as the Labor Party’s most critical power base, in
government its economic policy was motivated by a desire to maintain corpor-
atist political exchange with the Histadrut—until the cancellation of the Finan-
cial Plan. Hyperinflation and fiscal crisis were the result of the state’s inability to
withstand demands for subsidization from powerful stakeholder groups—
above all the Histadrut. However, these crisis conditions ultimately provided
the state with the means to regain autonomy. Rather than the state giving in
to the structural power of domestic and international capitalism, it was this
struggle for autonomy—supported by a favorable political conjuncture—that
explains its turn toward liberalization.
The end of the Histadrut’s key role in the political economy swept away a veto
player potentially capable of preventing or mitigating some of the accumulated
neoliberal reforms that followed. In addition, along with the split of labor in
Israel by divisions between immigrant and veteran Jewish citizens, between
them and Arab citizens, and between citizen and non-citizen workers (from the
Occupied Territories and abroad), the undermining of the Histadrut’s role in
collective bargaining and labor relations further enhanced the segmentation
and weakening of the working class. It also prevented the emergence of new
political actors able to represent the poor, the working, and middle classes in
the political arena.
These were the preconditions for the emergence of Netanyahu’s leadership,
and the market-fundamentalist ideology that he utilized to sanction neoliberal
reforms, but the reforms themselves were largely devised by Treasury officials. It
cannot be disputed that Netanyahu was and is the ideal political leader recom-
mended in the “manual for technopols” (Williamson 1994): he identified his
political success with the implementation of neoliberal reforms, he developed
brilliant rhetoric and dramatic performance (his speeches were directed to the
general public, going over the heads of political parties), and his rhetoric
inflated both external and internal threats, justifying reforms as essential in
order to prevent future economic crisis.
An important difference between the account offered here of the rise of
neoliberalism in Israel and the popular understanding of the process is the
sidelining in this chapter (and this volume in general) of the political agency
exercised by Benjamin Netanyahu. Netanyahu has served as either Prime
Minister or Finance Minister over most of the last two decades and is an
outspoken economic liberal. As recalled at the outset of this chapter, in 1996
Netanyahu initiated the first of his “piggish capitalism” reforms, seeking to
reduce taxes, cut social budgets, privatize services, and liberalize capital markets
and pension savings. His political and ideological commitments to neoconser-
vatism are often seen as having played an indispensable role in its ascendancy.

44
 Paving the Way to Neoliberalism

The argument presented here is, however, that Netanyahu’s contribution to

the construction of neoliberalism played a far less significant role in its success
than the decline of the labor movement propelled by the internal contradic-
tion between the strong conservative power of the Histadrut and the search
for a new historical role for the Labor Party by a new generation of reformist
political leaders. It was the dialectical decline of the latter that paved the way
to Netanyahu’s success by removing the most important potential sources of
ideological and institutional opposition, in both the political arena and civil
society. In their struggle to escape domination by the Histadrut, young Labor
leaders collaborated with the technocratic elites of the Treasury whose goal
was to build up the autonomous power of the state. All of the Histadrut
resources that had previously served to countervail the power of the state—
its public services, pension funds, and economic enterprises, and its role as a
trade union—were dismantled, and no alternative power base was constructed
to replace them.

45
3

Big Business and the State

in the Neoliberal Era
What Changed, What Didn’t?

Daniel Maman

From its establishment in 1948 until the 1980s, the Israeli state functioned
in the socio-economic field according to the institutional principles of a
developmental state model (Levi-Faur 1998; Maman and Rosenhek 2012a).
A far-reaching consequence of the activities of state agencies in this period was
an economic structure with a high level of capital concentration. Bureaucratic
and political elites were widely involved in all dimensions of the economic
sphere, both directly and indirectly, with their main aim being to ensure a
high level of economic activity, industrial development, and full employ-
ment. To this end, the state not only controlled the allocation of key resources
such as land, but also the raising of capital from both internal and external
sources, and its allocation to large entities in both the public and private
sectors. The state also controlled foreign trade. It authorized import monop-
olies, subsidized exporters, and shielded favored sectors and enterprises from
foreign competition (Grinberg 1991; Rosenhek 2003a).
Under these conditions a core of big business took shape in Israel, com-
prised of a relatively small number of corporations that controlled a consid-
erable portion of the national product and exports, and which employed a
large part of the labor force. At the core of this structure were a handful of
business groups, most of which were headed by the large banks that occupied
a pivotal position in the economy. This position granted them not only
economic power, but also extensive political influence over the processes of
resource allocation conducted by the state, allowing them to obtain heavily
subsidized credit and other benefits like tax exemption that encouraged
 Big Business and the State in the Neoliberal Era

horizontal mergers of industrial firms, further strengthening business groups

(Maman 2008).
This chapter documents patterns of both change and continuity in Israel’s
big-business structure in the neoliberal era, and the role of state agencies vis-à-
vis big business. Specifically, the chapter discusses how privatization, financial
liberalization, and direct and indirect state subsidies have contributed to the
dominant position of big business and business groups in the Israeli political
economy. While neoliberal policies have served the interests of private capital
and business groups, they were actively driven by state agencies seeking to
regain autonomy by withdrawing unselective and burdensome state subsidies,
and by shrinking and depoliticizing the public sector.

Big Business in Israel

The structure of the Israeli economy since the late 1960s, similar to that of
other capitalist countries, is a dual one in which small and medium-sized firms
co-exist with big business. In 2013, 94 percent of Israeli businesses had annual
sales of less than 2.5 million shekels (less than $700,000). Collectively, small
and medium-sized enterprises accounted for only about half of the GDP of the
business sector.1 These enterprises, numbering in the hundreds of thousands,
compete with one another as well as with large corporations. In contrast, big
business is comprised of a small number of companies—a few hundred at
most—that enjoy substantial monopoly powers, and are responsible for
considerable proportions of national product, employment, and exports.
To examine changes in the structure of the Israeli big business, I will com-
pare 1985 and 2005. The year 1985 is usually considered the opening of the
neoliberal era, and the year 2005 is several years before the outbreak of the
global financial crisis, which could potentially change the future prospect of
Israeli big business, a topic which I will address in the Conclusions. In 1985, as
can be seen in Table 3.1, the total sales of the 100 largest industrial corpor-
ations made up 69 percent of the GDP of the business sector, their exports
made up 69 percent of total industrial exports (excluding diamonds), and they
employed 42 percent of the entire industrial workforce (Dun and Bradstreet
1986). Moreover, 75 percent of the total state income from corporate taxes in
1986 (a sum that made up 28 percent of total income tax collected) were from
the 300 largest businesses (Ministry of Finance 1991).

1
Eran Azran, “Companies Have Aggressive Tax Programs, Distribute Dividends from Virtual
Profits,” The Marker, February 6, 2014; Ami Tzadik, “Small and Medium Business in Israel and in
Developing Countries,” Knesset Research and Information Center, January 2007. Available at:
<http://www.knesset.gov.il/mmm/data/pdf/m01628.pdf>.

47
Daniel Maman

Table 3.1. Israeli Big Business

1985 2005

Sales of the 100 largest industrial firms 69% 56%

(GDP of the business sector)
Employees of the 100 largest industrial firms 42% 68%
(total industrial workforce)
Exports of the 100 largest industrial firms 69% 82%
(total industrial exports)

A large part of big business was formally owned by the state, the Histadrut and
other public organizations. As explained in the previous chapter (Grinberg,
Chapter 2, this volume), the Histadrut, the central worker’s organization, was a
major partner of the developmental state. With the economic and political
support of the state, it positioned itself as a key actor in almost every sector of
the economy. By the 1970s, the Labor Economy included some of the largest
industrial business groups in the country, as well as the largest construction
company, the largest commercial bank, the largest insurance company, and the
largest retail chain.
Despite liberalization processes that the Israeli economy has undergone
since the 1980s, the organizational structure of the economy remains highly
concentrated. As can be seen from Table 3.1, a comparison of the level of
concentration in 1985 with that in 2005 shows that while the largest corpor-
ations’ contribution to the GDP of the business sector has decreased, the
percentage of the workforce employed by them has risen, as has their share
of total industrial exports (Dun and Bradstreet 2006). Another manifestation
of the concentration level of Israel’s economy is the percentage of large
exporters. In 2005, 329 exporters, or less than 3 percent of all exporters,
were responsible for 84 percent of all of Israel’s exports, each one of which
exported over $10 million worth of goods, totaling over $21 billion in
exports.2 Furthermore, the contribution of a small group of companies to
corporate tax revenues remains very high. Between 2004 and 2010, around
50–60 percent of corporate taxes were received from fewer than 500 compan-
ies (Ministry of Finance 2013: 179–81).
Control of big business in Israel is and always has been vested mainly in a
small number of “business groups,” which are collections of legally independ-
ent firms bound together by formal and/or informal mechanisms such as
ownership, business, and social ties (Granovetter 1994, 2005). Israeli business

2
Ministry of Industry, Trade and Labor, 2006, “The Leading Exporters in the Israeli Industry,”
p. 7. Available at: <http://www.moital.gov.il/NR/rdonlyres/1A76D10E-FDD2-4F00-BDC1-81F894499199/
0/yezuanmovil.pdf>.

48
 Big Business and the State in the Neoliberal Era

groups share a number of structural characteristics that can be illustrated by

comparisons with those in other countries.3
Similar to business groups in Japan, the Israeli groups own from dozens to
hundreds of corporations, are active in a wide variety of industries (with the
exception of high tech), and tend to focus on the financial sector (Kosenko
2007: 30–1). In 1999, for example, the IDB group controlled thirty-two of the
652 companies traded on the Tel Aviv Stock Exchange, and had minority shares
in a further thirteen companies. In addition, the groups employ a considerable
percentage of workers: In 2008, thirteen groups employed 164,000 workers, or
7.8 percent of the salaried positions (Ministry of Finance 2013: 523).
Israeli business groups, like those in South Korea, are controlled by a vertical
structure (Maman 2002). In Israel, 80 percent of companies affiliated to business
groups are held under a pyramidal holding structure with up to seven holding
firms, meaning that the parent company controls the group through six other
companies (Kosenko 2007: 77). However, in contrast to South Korea but similar
to Japan, business collaborations characterize the relationships between Israeli
groups (Maman 2002). For instance, the Ofer and Tshuva Groups are equal
partners in IDE Technologies, which owns the world’s largest desalination plant.
Thus, in the neoliberal era the structure of the economy remains highly
concentrated and big business continues to be controlled by large groups,
suggesting a high degree of structural continuity. At the same time, privatiza-
tion and acquisitions have transformed the ownership of big business. Firms
and business groups that used to be partially or fully owned by the state or the
Histadrut are now fully owned by private capital. Up until the late 1980s there
were seven business groups, some headed by the three largest banks, which
held pivotal positions in the economy. These groups were the Hapoalim and
Koor groups, owned by the Histadrut; the Leumi group, owned by the World
Zionist Organization; the IDB group, owned by the Recanati family; the
Eisenberg group, which acted via The Israel Corporation; the Israel Chemicals
group, which controlled most of Israel’s mineral resources, owned by the state;
and Clal, co-owned by the Hapoalim and IDB groups.
Beginning in the mid-1990s, dramatic changes took place in the ownership
of most business groups. IDB was acquired by Nochi Dankner and the Manor
and Livnat families;4 the Hapoalim group was acquired by the Arison family;
the Ofer family acquired the holdings of the Eisenberg family; and the World

3
Two decades ago, when I began researching business groups, the concept did not exist in
public and academic discourse in Israel, and knowledge about their economic and political
influence was sparse. Since the mid-2000s, state agencies, under the influence of economists
employed by the state bureaucracy, have researched and published a great deal of information,
particularly on their economic power.
4
Following a debt crisis, the IDB group was acquired in 2014 by Moti Ben-Moshe and Eduardo
Elsztain, and in 2015 Elsztain took control of the group.

49
Daniel Maman

Zionist Organization ceased its formal ownership of the Leumi group.5 Along-
side transfers of ownership of the business groups that crystalized in the
developmental state period, a number of new family-owned groups formed.6
Each of these control a huge portion of capital and enjoy tremendous eco-
nomic and political power. Moreover, some of the “old” business groups
merged with new groups. For example, the IDB group acquired the Koor
group and significant portions of the Clal group.
Similar to South Korean and Swedish groups, Israeli business groups enjoy
extensive economic and political power. Their economic power is manifested in
variety of ways. The share of the thirteen largest business groups in the profits of
all Israeli companies was 26 percent in 2008 (Ministry of Finance 2013: 517).
The workers employed by the thirteen largest business groups enjoy higher
salaries than the employees of other companies (Ministry of Finance 2013:
526). However, the most well-documented privileges of big business concern
its access to capital. Companies belonging to business groups have preferential
access to credit from both the banking system and the capital market.
An important reason for this is that business groups own over 40 percent
of banks, mortgage banks, and the insurance industry (Kosenko 2007: 24).
Moreover, business groups tend more to mobilize money from capital markets:
50 percent of the total sum of stock and bond issues on the Tel Aviv Stock
Exchange between 2005 and 2009 was issued by ten of Israel’s biggest business
groups (Ministry of Finance 2011: 202). In turn, access to credit greatly increases
the survival odds of companies belonging to business groups over those of other
companies, as a consequence of an internal capital market that improves these
companies’ access to credit (Ministry of Finance 2013: 514).
The political influence of business groups is grounded in instrumental
sources of power. One of these is donations by group heads to political parties
and campaigns (Maman 2008). Another conspicuous phenomenon is senior
bureaucrats from the state agencies transitioning to executive positions
in business groups, the “revolving door” (Culpepper and Reinke 2014).7 In
exchange for such support, the political and bureaucratic elites grant economic
favors such as changes in land use assignments, as in the case of the “Salt of

5
Since 2012, following the sale of the shares held by the state, there have been no controlling
shareholders in the Leumi group.
6
The most prominent of these “tycoon” families, as they are known in Israel, are the Elovitzes,
the Eliahus, the Arisons, the Binos (Tzadik), the Dankners, the Hamburgers, the Weissman-Birans,
the Wertheims, the Levievs, the Azrielis, the Fischmans, the Strausses, and the Tshuvas.
7
A vivid example is the case of top position holders from Israel Securities Authority which the
IDB group recruited, and a newspaper article which wondered why business groups recruit many
senior bureaucrats from the state agencies and former regulators. This article asserted that the aim is
to signal to current regulators that if they take the appropriate decisions today, someone will recruit
them in the future and pay them large sums of money amounting to millions of shekels over
several years (Avriel, Eytan, “How One Man Succeeded to Control 400 Billion Shekel of Public
Money,” The Marker, February 13, 2015).

50
 Big Business and the State in the Neoliberal Era

Earth Ltd” company owned by the Dankner group (M. Levi 2005). In addition,
the political power of the business groups enables them to push aside, and even
to block, initiatives intended to lead to reforms (Aharoni 2007). Another mech-
anism for political influence is ownership of newspapers and electronic media,
which enables business groups to influence the public discourse and the way
in which the media cover issues connected to the group.8

State Agencies and Big Business in the Neoliberal Era

In a comparison of the emergence of business groups in Israel and South

Korea, during the developmental state period, I claimed that while in South
Korea the chaebol are the result of an intended creation of the South Korea
state, in Israel they are the unintended outcome of state agencies’ policies
(Maman 2002). In other words, in Israel, state agencies created the conditions
and even aided the formation of big business and business groups, but without
directly organizing their establishment. For example, the recession of the
1960s, which was a deliberate state policy (Shalev 1984), was the first turning
point in the formation of the business groups and in its wake came a wave of
mergers and acquisitions of corporations. In addition, the decision to establish
a defense industry in the 1960s gave a big push to the process of the groups’
formations and strengthening. Furthermore, policies followed by state agen-
cies until the mid-1980s expedited the business groups’ establishment and
strengthening by means of tax incentives and the absence of merger regula-
tion (Maman 2008).
The growing strength of capital in the neoliberal era is only partly a conse-
quence of the entry of the Israeli economy into global markets. Four specific
types of state policies and initiatives served to increase the concentration of
big business and refashion the pivotal position of business groups. These are
reviewed in the following four subsections, devoted to privatization of public
and Histadrut-owned enterprises, the struggle to scale back the dominant role
of banks in the economy, new policies of financial liberalization, and changes
in direct and indirect state subsidies of business.

8
Business groups own a substantial portion of the Israeli media: the Fishman group owns
Globes,” a business daily, and had minority shares in Yediót Achronot; the IDB group owned
Maariv, a daily newspaper, between 2011 and 2012; the Wertheim and Tshuva groups own
Keshet, which is a franchisee of Channel 2; the Strauss group holds minority shares in Reshet, a
franchisee of Channel 2; and the Leviev group owns Channel 9. Several retired senior regulators,
such as Didi Lachman-Messer, the former Deputy Attorney General, assert that media ownership
by business groups endangers Israeli democracy, since the “tycoons” use their control of
newspapers and electronic media to advance their economic and political interests (see, for
example, Eran Azran, “Rich People Who Control the Media Do not Hesitate to Use this Power to
Advance Their Interest,” The Marker, December 7, 2011).

51
Daniel Maman

Privatization

The fundamental ideological tenet of the neoliberal doctrine is the withdrawal

of the state from the economy, thus clearing the way for market forces and
private economic actors to operate freely. However, while privatization of
state-owned industrial and financial corporations is a key manifestation of
this doctrine, it may also serve as a strategy to advance the interests of specific
state agencies. By selling state-owned companies to private entities, Israel’s
Ministry of Finance was able not only to reduce the budget deficit, but also
to reduce its vulnerability to the needs and demands of strong employers
and unions (Shalev 2000). In the aftermath of privatization, state ownership
of Israeli corporations dropped from 27 percent in 1985 to 6 percent in 1995
(Kosenko 2007: 67).
The privatization of state-owned and Histadrut-owned firms during the
1990s and early 2000s, generally under extremely beneficial conditions for
the purchasers, was the major factor leading to the emergence and growth of
what are currently the largest business groups in the country (Maman 2008),
perpetuating the concentrated structure of big business. Most privatized com-
panies were acquired by either established or emerging new groups (Kosenko
2007: 67). For example, in 1995 the state sold Israel Chemicals to the Eisen-
berg group which, following intra-family disputes, sold its shares to the Ofer
group (which also acquired the state-owned oil refineries and shipping line).
Privatization of companies owned by the state also contributed to the forma-
tion of new groups, such as the Fischman family, which is active in various
sectors. In real estate this group operates via The Jerusalem Economy Ltd and its
subsidiary, Industrial Building Corp. Ltd, acquired from the state, as a result
becoming one of Israel’s largest real estate companies. In addition, the Fisch-
man group acquired a significant portion of capital shares of Yediót Achronot, the
largest daily newspaper, and Globes, a financial daily. Formation of new groups
and the strengthening of established groups was also a consequence of the
privatization of Histadrut enterprises (Grinberg and Shafir 2000). So, for
example, the Koor group was sold to foreign investors (the Bronfman-Claridges)
and then to the IDB group, and Solel Boneh was sold to the Arison group.

Dismantling Bank Dominance of Big Business

In the 1980s, Israel’s three largest banks, the pivots of what were then the
largest business groups, attracted massive amounts of private savings by
illegally manipulating the prices of their own shares (State of Israel 1986).
When the bubble burst in 1983, the banks were publicly discredited and
the government temporarily nationalized their equity. These exceptional

52
 Big Business and the State in the Neoliberal Era

circumstances made it possible for a determined coalition of state agencies led

by the Ministry of Finance and the Bank of Israel to place the goal of curbing
the power of the banks at the center of the political–economic agenda. The
biggest banks (Leumi, Hapoalim, and Discount) were not only the owners of
the majority of big business, but they also dominated all aspects of financial
activity. According to state agencies, this constituted a major obstacle to the
expansion of financial markets, leaving businesses almost entirely dependent
on the banks for investment finance and constituting a threat to the country’s
financial stability (Ministry of Finance 2004: 4). In 2003, the three largest
banks controlled 78 percent of public deposits, 80 percent of assets managed
by mutual funds, 73 percent of assets managed by provident funds, and 65
percent of the number of issues by underwriters (Ministry of Finance, 2004: 3).
Efforts by state agencies to rein in the banks were concentrated in two different
campaigns launched a decade apart. The first (the Brodet Committee of 1995)
succeeded in largely prohibiting banks from owning real economic assets. The
second (the Bachar Committee of 2004–2005) introduced new players into the
financial markets.9
The Brodet Committee forced banks to limit their holdings in non-financial
corporations to a maximum of 20 percent, thus opening up new opportunities
for established private business groups and encouraging the formation of
new groups. As a result, a small number of families (including the Dankner,
Leviev, Fischman, Strauss, and Tshuva families), popularly known in Israel as
“the tycoons,” came to control a considerable portion of Israeli capital (Maman
2008). When banks were forced to give up their holdings in non-financial
corporations, Bank Hapoalim sold all its shares in the Clal group to its partners
in IDB, and the Leumi group sold its main investment arm, Africa Israel, to the
Leviev family. This explains why there were changes in ownership patterns but
if anything Israel’s economy became even more concentrated.10
The Bachar Committee was formed with the aim of introducing new players
and more competition into the financial system. Until the mid-2000s, bank
dominance of Israel’s financial system was one of the highest in the world,
and provident funds served as a major source of their income.11 Following the
implementation of the Bachar Committee reforms, banks sold their holdings
in provident and mutual funds to insurance companies, private investment
houses and foreign financial bodies. Hence, the ownership structure of Israel’s

9
Respectively, the Committee on Banks’ Holdings in Real Corporations, and the Inter-
Ministerial Committee on Structural Reform of the Capital Market.
10
See for example the article by Gad Peretz citing David Tadmor, the Director General of the
Israel Antitrust Authority, “Tadmor: The Sale of Hapoalim Shares in Clal Did not Decrease the Level
of Concentration,” Haaretz, December 5, 1997.
11
According to an investigation of the Bank Supervision department in the Bank of Israel,
“provident funds controlled by banks paid higher commission than those paid to the banks by
provident funds controlled by others, for identical services” (State Comptroller 2004: 232).

53
Daniel Maman

financial system changed dramatically: whereas on the eve of the reform

commercial banks managed 67 percent of public financial assets, by 2008
their share had fallen to 46 percent. Insurance companies increased their
portion considerably, from 13 percent to 23 percent, and so did private
investment houses, some of them foreign financial corporations (from 3
percent to 14 percent). By 2011, six non-bank financial groups—Migdal,
Clal, Menora-Mivtachim, Harel Insurance & Financial Services, Psagot
Investment House, and The Phoenix (including Excellence)—managed nearly
70 percent of the long-term savings of the public, with Migdal and Clal together
holding approximately 31 percent (Ministry of Finance 2011: 15).

Liberalization of the Financial System

The transformation of the Israeli financial system from a state-led and bank-
based structure to a far more market-based one (Maman and Rosenhek 2012b)
was achieved not only by ending bank dominance, but also by introducing
new instruments and enacting new rules. By 2007, nearly half of corporate
credit was furnished by negotiable instruments of non-banking credit (Bank of
Israel 2008). This reconfiguration of the financial system was one of the most
important pillars of the new political economy of Israel. Institutional investors
emerged as autonomous actors that not only mobilize capital from the public
and manage it, but also allocate it to various players according to their and
their investors’ interests, rather than those of banks, state agencies, or the
Histadrut.
A key component of the financial liberalization process was a reform initi-
ated by the Ministry of Finance and its Capital Markets, Insurance, and
Savings Division, which greatly reduced the scope for institutional investors
to invest in state bonds. As a result, enormous amounts of money were
injected into financial circuits. Institutional investors increased their invest-
ment mainly in corporate bonds (from 9 percent in 2003 to 25 percent in
2007), stocks (9 percent to 13 percent), and investments abroad (4 percent to
9 percent).12
Alongside the policy which coerced institutional investors to expand their
involvement in capital markets, in the early 2000s, in the wake of the bursting
of the dot-com bubble, the Supervisor of Banks at the Bank of Israel imposed
strict limitations on granting lines of credit to large corporations and business
groups, compelling them to seek other sources of funding. The consequent
demand on the part of the largest corporations for alternative sources of

12
See Bank of Israel, Table E28: Asset Portfolio of institutional investors (in Hebrew). <http://
www.bankisrael.gov.il/deptdata/monetar/shukhon/shhe28_h.xls> (accessed September 24, 2014).

54
 Big Business and the State in the Neoliberal Era

funding was consistent with the interests of institutional investors, who

sought to invest the large sums that they had amassed but were prohibited
from investing in low-risk instruments like state bonds. Therefore, in the early
2000s, big business firms began ramping up their bond issues, with the
intention of attracting institutional investors.13
The construction of a corporate bond market as the intended and unin-
tended consequences of measures introduced by regulatory agencies led to big
business firms enjoying access to large sums of capital at low rates and without
collateral, contractual commitments, or financial yardsticks (Ministry of
Finance 2009). Whereas in 2000 large firms issued NIS 300 million worth of
bonds, in 2007 this had reached NIS 87 billion. The share of bonds in Israel’s
GDP reached 27 percent, compared with 25 percent in the US, the world
leader (Bank of Israel 2010: 168). These bond issues served as the main funding
source for a wave of acquisitions. The IDB group raised tens of billions of
shekels, which it used it to purchase many and varied corporations.14 These
included a supermarket chain and the country’s largest cellphone network,
and in the summer of 2006, a controlling interest in the Koor group.15 The IDB
group also engaged in extensive overseas activity, including (in October 2008)
investing over US $1 billion in the Credit Suisse group, which made it a
leading shareholder in that large bank (Maman and Rosenhek 2012a).
The IDB group illustrates the recent tendency by Israeli big capital to go
global, facilitated by the earlier state project of integrating the Israeli economy
into global capital circuits, spurred by more recently expanded opportunities
to finance expansion at home, and taking advantage of profit-making oppor-
tunities offered by the financial crisis and its effects outside of Israel.

Direct and Indirect State Support of Big Business

Despite the rhetoric of “free market,” the state has continued to be signifi-
cantly involved in providing direct and indirect financial and other assistance
to privately owned corporations. As in the developmental state period, the
vast majority of incentives and capital subsidies benefit big business. However,
whereas in Israel’s early decades the state was engaged in raising and allocating
capital with the aim of promoting industrialization and job creation, since the

13
The Capital Markets, Insurance, and Savings Division at the Ministry of Finance did not
impose quantitative limits on institutional investors acquiring corporations’ and business
groups’ bonds, similar to the restrictions that Bank of Israel imposed on the banks. The latter
were imposed to protect bank stability in the wake of the global financial crisis.
14
Tal Levy, “Owes NIS 32 Billion, but Set for the Upcoming Years,” The Marker, September 24,
2013, pp. 60–4.
15
Haggai Amit, “Buy-Profit-Err-Sell: The Deals that Foiled IDB,” The Marker, December 9, 2011.

55
Daniel Maman

1990s, the state’s involvement is more selective and is directed at supporting

export-oriented sectors and promoting research and development.
The most conspicuous example of direct and indirect state support is the
high-tech sector, which benefits from significant tax benefits and exemptions
and extensive direct financial assistance in the form of investment grants to
both local and foreign firms. Since the late 1990s, the state has set up several
programs of financial and organizational assistance targeted specifically at
high-tech research and development (Avnimelech and Teubal 2004; Breznitz
2007a). Moreover, since the mid-1990s, grants from the Research and Devel-
opment Fund of the Chief Scientist in the Ministry of Industry, Trade and
Labor to private enterprises reached US $250–400 million per year (Ministry
of Industry Trade and Labor 2005). In 2009, 573 companies received grants
from the Chief Scientist totaling NIS 1.25 billion, but the ten biggest grants
(15 percent of the total) went to big companies including ECI Telecom, NICE
Systems, and Applied Materials. Furthermore, most of the support was granted
to companies owned by business groups like the Ofer group (Gazit 2010: 5–6).
In addition to direct support, corporations (particularly in high-tech industry)
enjoy tax exemptions and other indirect benefits via the Law for the Encour-
agement of Capital Investments (Dishon 2014). The value of this assistance
rose from NIS 2.3 billion in 2003 to NIS 7.2 billion in 2011. Of the latter
amount, NIS 4 billion was channeled to just four very large firms: Teva
Pharmaceutical Industries, Israel Chemicals (Ofer group), Intel Israel, and
Check Point Technologies (Ministry of Finance 2013: 204, 215). The state
also supports big business through export insurance, provided through
ASHRA—The Israel Foreign Trade Risks Insurance Corporation, Ltd. ASHRA
insures credit transactions of one to ten years and investments abroad.
Among its clients are leading export companies which tend to be the largest
corporations. For instance, in 2010 ASHRA insured transactions of Rotem
Amfert Negev Ltd and Dead Sea Works Ltd, owned by the Ofer group,
totaling tens of millions of dollars (Gazit 2010: 9).

Conclusions

Liberalization of the Israeli political economy strengthened big business by

creating opportunities and incentives for increased concentration. Despite the
resultant benefits for Israel’s wealthiest capitalists and largest corporations,
this chapter argues that liberalization was driven not by their interests and
power, but by the proactive role of the state’s leading agencies. It reflected the
interests of these agencies more than the power of capital.
This is a strong claim, given the well-theorized risk of states becoming
dominated by business interests for either instrumental or structural reasons.

56
 Big Business and the State in the Neoliberal Era

The instrumental power of capital is exercised by political donations and

campaigns, privileged accesses to policymakers, and the activities of lobbyists
and organizations that defend business interests (Culpepper and Reinke
2014). The instrumental influence of “tycoons” over the political elite is
widely discussed in Israel by the media and the public at large, often in the
context of allegations of corruption which sometimes end in convictions. The
various power resources at the disposal of big business have undoubtedly been
utilized, both legally and illegally, to gain lucrative privileges from the state for
particular corporations and wealthy families. This may well explain their gains
and losses relative to other corporations and capitalists, but not Israel’s tran-
sition to a neoliberal political–economic regime.
The alternative view, that business enjoys structural power over the state, is
based on the theory that states are bound to pander to the interests of
capitalists because they control investment and therefore growth, employ-
ment, and the state’s revenue base (Culpepper and Reinke 2014). But in Israel
it is implausible to interpret liberalization simply as the state’s caving in to
business interests. The state agencies that initiated and managed Israel’s tran-
sition to neoliberalism sought and won greater autonomous capacities to steer
economic growth and control the state’s economic activities and policies. To
this end, they engineered a major shift of structural power between different
segments of capital. And they imposed rules and institutional arrangements
governing the expanding role of markets in capital accumulation. Conse-
quently, while no longer financing the investments of Israeli big business,
the state continues to influence which players gain access to investment
finance and under what conditions. This underlines the claim that in the
neoliberal era, the state has not retreated from the economic sphere but has
altered its modes of involvement (Maman and Rosenhek 2012a).
The relationship between state agencies and capital in Israel today is best
described as Janus-faced. On the one hand, large firms and their owners
have taken advantage of the state-led transformation of the Israeli political
economy to advance their interests. Liberalization of trade and capital flows
enabled the integration of big local capital in various spheres of the global
economy, providing firm foundations for strengthening the position of
large corporations and business groups in the local political–economic
field (Ram 2008; Grinberg and Shafir 2000). In addition, as this chapter
has documented, privatization of large industrial and financial corporations
previously owned by the state and the Histadrut, as well as reforms in
banking and finance, have enlarged and further concentrated the big economy.
New avenues were opened for the expansion and strengthening of established
privately owned business groups, and the formation of new groups owned
by a small number of families which won control over a large portion of
the economy’s assets and investments. Furthermore, the introduction and

57
Daniel Maman

development of a non-banking credit market by the actions of state agencies

enabled large firms and business groups to finance massive expansion by
means of mergers and acquisitions.
On the other hand, state agencies have succeeded in using liberalization to
restructure the political economy in order to prevent the prospect of their
recapture by societal interests. By enacting divide and rule strategies—
establishing new markets and market actors and outlawing certain patterns
of cross-holdings and sponsorship—state agencies have been proactive in
attempting to countervail the economic and political power of market actors.
As a result, the ownership of most of the established family business groups
was unseated, and many of the new groups have also changed hands.
Similarly, liberalization of the financial system was conducted in ways that
redistributed economic power, so that the financial groups became key players
alongside the veteran big banks that had previously dominated both the
ownership of the country’s leading business groups and the financing of
capital investment. On occasions when large corporations opposed specific
reforms advanced by state agencies and mobilized their instrumental power in
opposition, they failed when facing a determined coalition of state agencies.
This was the case of the banking sector’s opposition to efforts to restrict bank
ownership and control of real and financial assets.
Importantly, however, while this effort by engaged state agencies was some-
times successful in controlling the power of business interests, this did not
generally result in the empowerment of workers and consumers. Despite
benefits to consumers in several celebrated cases of deregulation such as
cellphone communication, the prime and intended beneficiaries were state
agencies themselves, which enhanced their autonomy by building strategic
capacities to maneuver vis-à-vis capital’s demands.
Against the backdrop of changing state–capital relations elsewhere in the
world in the aftermath of the 2008 financial crisis (Carruthers 2015; Centeno
et al. 2015; Culpepper and Reinke 2014; Davis and Kim 2015; Taylor 2015),
the future prospects of Israeli big business could potentially change beyond
recognition. Most large corporations were hit by the crisis owing to a drop in
the value of their assets, which led them into a spiral in which they were
unable to repay the enormous debt which they had accumulated in the
pre-crisis period. Many corporations approaching insolvency, such as Delek
Real Estate Ltd, controlled by the Tshuva group, reached debt settlements with
their bondholders, most of which are institutional investors that manage the
public’s savings. As a result of the debt burden, significant changes took place
in Israeli big business. The IDB group changed hands; the Ofer group, and
especially its leading corporation, Zim Integrated Shipping Ltd, fell into a deep
crisis; and the Ilan Ben Dov group lost most of its assets. Moreover, in May 2013,
in the wake of criticisms of privileged debt arrangements made by banks for

58
 Big Business and the State in the Neoliberal Era

the sake of indebted business groups, a Commission to Examine Debt Arrange-

ments in Israel was established. In May 2015 the new Minister of Finance
announced that the committee’s recommendations would be implemented,
including passing the control of insolvent companies to court-appointed
trustees.16
In 2010, state agencies initiated the establishment of the Committee for
Enhancing Competitiveness in the Economy (the Shani-Gabbai Committee).
The economic and political weakness of big business and business groups in
the wake of the global financial crisis and mass protests in the summer of 2011
demanding social justice created the conditions for a comprehensive reform.
The Business Concentration Law, which the Knesset passed at the end of
2013, bans business groups from simultaneously owning both financial and
non-financial corporations. Any group that owns both types must divest one
or the other. In addition, the law obliges business groups to change their
pyramidal structure by permitting no more than two layers of listed compan-
ies, whether they have issued stocks or bonds. Moreover, the new law has
granted additional power to regulators, especially to the Antitrust Authority of
Israel, which is now specifically obligated to promote sectorial competition.
It can be confidently predicted that in the coming years significant restruc-
turing will take place in Israeli big business, including the sale of some of the
financial and non-financial corporations owned by today’s business groups,
and a significant wave of mergers and acquisitions.17 State agencies believe
that the recent reforms will produce a more diffuse ownership structure,
promote competition, and substantially reduce the economic and political
power of the business groups. While past experience suggests that such con-
fident predictions may be exaggerated, recent developments affirm the deter-
mination and capacities of the state’s agencies to assert their autonomy
through heavy-handed regulatory involvement.

16
<http://www.calcalist.co.il/local/articles/0,7340,L-3660283,00.html>; <http://www.calcalist.
co.il/markets/articles/0,7340,L-3645191,00.html>.
17
According to the corporate law firm, Gross, Kleinhendler, Hodek, Halevy Greenberg & Co
(GKH), about forty firms worth $23–28 billion will be put up for sale in the coming years
(“Corporate Sell-off Looms as Israel Takes on Tycoons,” Reuters, February 13, 2014).

59
4

The Reconfigured Institutional

Architecture of the State
The Rise of Fiscal and Monetary Authorities

Daniel Maman and Zeev Rosenhek

Since the mid-1980s, Israel’s political economy, like other capitalist economies,
has undergone a fundamental transformation with far-reaching implications.
In line with analogous processes that have occurred in other semi-peripheral
countries, this transformation connotes the decline of the classic intervention-
ist state and the adoption and institutionalization of the neoliberal policy
paradigm. Nevertheless, as we have argued elsewhere (Maman and Rosenhek
2012a), while ideologically and rhetorically speaking the neoliberal doctrine
postulates the state’s withdrawal from the economic arena in order to clear the
way for the free play of market forces and private actors, from an institutional
and policy standpoint the transition has been far more complex, implying not
so much the state’s withdrawal from the economy, but rather changes in its
institutional configuration, goals, and mode of involvement in the economic
field. This transformation was the result of an incremental process of institu-
tional change that altered how different state agencies are involved in regulating
economic processes, the power relations and division of authority between
them, their institutional capabilities to reign over other actors, and the arrange-
ments for policy formulation and implementation in the economic domain.
In this chapter we focus on institutional changes and dynamics that have
marked the state’s reconfiguration in the course of the transition to a neoliberal
regime. In analyzing the transformation of the state and its relationships with
the economy, we first assess changes in the institutional architecture of the state
and then discuss the modes of action of pivotal state agencies in the economic
field and the patterns of relationships among them. Specifically, we examine
 Reconfigured Architecture of the State

the ascendency of the two most powerful state agencies in charge of macroeco-
nomic management—the Ministry of Finance (MoF) and the Bank of Israel
(BoI)—and the ways in which they promoted the adoption of specific arrange-
ments and policies as key factors underpinning the institutionalization of the
neoliberal regime. Our claim is that the incremental process of institutional
transformation that resulted in the liberalization of the Israeli political economy
was fundamentally molded by actions and interactions among state agencies
striving to further their position within the political–economic field. Thus, the
intra-state politics of coalition building and conflict between powerful state agen-
cies competing over institutional resources and their positioning within the field
played a pivotal role in liberalization of the Israeli political economy. Moreover,
rather than the actions of state agencies being determined by ideological commit-
ment to general neoliberal tenets of state withdrawal and free markets, these
agencies engaged in struggles to advance their institutional interest, while draw-
ing on specific economic ideas and models as both a source of inspiration for
reforms that served their interests and as a way of legitimizing those reforms.

Changes in the Institutional Architecture of the State

The main principle underlying the transformation of Israel’s political economy

was a broad reformulation of state–economy relations that affected many and
varied specific policy domains. During the developmental state period, from
the establishment of the state in 1948 until the mid-1980s, state agencies
were widely and deeply involved in all dimension of the economic sphere,
both directly and indirectly, with their main aim being to ensure high levels
of economic activity, industrial development, and employment. As part and
parcel of the process of state building and consolidation, the direct involve-
ment of the state in resource allocation—particularly capital—was intended to
build a state-managed capitalistic economy. This was achieved by engender-
ing and nurturing both private and public economic players that contributed
to economic growth.
In contrast, in the neoliberal era, the involvement of state agencies in the
economy takes place mainly via comprehensive regulatory and other rela-
tively indirect tools intended to establish “free” markets, support their func-
tioning, and aid private actors in accumulating capital. This new mode of
involvement was manifested, to varying degrees and in varying forms, in
many key aspects of Israel’s socio-economic policy over the last three decades,
such as privatization of companies and other state assets, liberalization of
the financial markets, lifting restrictions on capital and goods flows, partial
privatization of social services provision, and the strengthening of practices of

61
Daniel Maman and Zeev Rosenhek

precarious employment via sub-contractors and personnel agencies in the

public sector. In some important cases, this mode of involvement has also
included both overt and subtle subsidy of private capital.
Alongside these policy changes and underlying them, one of the most
significant institutional transformations characterizing the transition to the
neoliberal regime resides in the reconfiguration of the architecture of the state
itself. The shift in the state’s institutional configuration is manifested in a
number of ways. Firstly, the significant weakening of state agencies whose
function in the previous regime was to directly support economic activity and
industrial development. A typical example of the weakening of developmen-
tal agencies is the Ministry of Industry and Trade,1 particularly its Investment
Promotion Center, which in the past fulfilled a significant role in allocating
capital to private actors within the framework of the developmental state
(Dishon 2014). Since the mid-1980s the MoF acted to weaken these agencies
as part of its endeavor to reduce the state budget and to regain its control over
fiscal policy by imposing budgetary discipline. Furthermore, reducing the
state’s direct and overt involvement in capital allocation was viewed as a
necessary condition for the neoliberal project of developing vigorous financial
markets. Such process would conform the institutional interests of the Treasury
in assuring its autonomy, as it would liberate it from its duty of supporting big
business through direct allocation of subsidized capital; a greatly significant
practice that was institutionalized within the framework of the developmental
state. This represents a clear instance where the creation and strengthening of
financial markets as the main mechanism for capital allocation can serve the
state’s interest in protecting itself from pressures of powerful societal interests,
thereby strengthening its autonomy.
Concomitant to the weakening of developmental state agencies, agencies
charged with the regulation of different spheres of economic activity and
markets were strengthened. These include the Antitrust Authority, the Banking
Supervision Division at the BoI, the Securities Authority, and the Supervisor of
Capital Markets, Insurance, and Saving at the MoF. In addition, the presence
of the judicial arm of the state—that is, the courts and the Attorney General—
in the economic sphere has steadily expanded in recent years, particularly
with regard to the establishment and enforcement of legal rules of the game
intended to create an institutional environment that enables and encourages
the putative efficient operation of free markets, as postulated by the neoliberal
“law and economics” school (Maman 2004). In their institutional logics
and activities, these regulatory agencies embody the fundamental function

1
In 2003 the Ministry was renamed to Ministry of Industry, Trade, and Labor, as the
responsibility for labor and employment policy was transferred to it from the Ministry of Welfare
and Labor. In 2013 it was renamed to Ministry of Economy.

62
 Reconfigured Architecture of the State

attributed to the state according to the neoliberal model: that of overseeing

the proper operation of markets and ensuring conditions conducive to accu-
mulation of capital by private actors. Hence, this neoliberal institutional
blueprint provided these agencies with an important political resource in
their endeavor to position themselves as key agencies within the state appar-
atus and within the political–economic field at large.
A cardinal change in the institutional configuration of the Israeli state has
been the emergence of the central bank as one of the most powerful actors
in the political–economic field. A constitutive characteristic of the neoliberal
regime is the granting of independence and autonomy to central banks,
which in numerous countries all over the world were transformed into power-
ful agencies acting energetically to implement and institutionalize neoliberal
principles and practices. Until the global financial crisis that erupted in 2008,
autonomous central banks tended to implement restrictive monetary policy
that prioritizes price stability, even at the cost of a slowing of economic
activity and an increase in unemployment. In addition, powerful central
banks have had the ability to pressure governments to act according to other
neoliberal directives, especially fiscal discipline involving simultaneous reduc-
tions in budget deficits and taxes, which necessitates substantial cuts in
government spending, as well as privatization of public assets and liberaliza-
tion of financial markets (Carruthers, Babb, and Halliday 2001; Marcussen
2005; Polillo and Guillen 2005).
As a key component of the reconfiguration of the state’s institutional archi-
tecture, the BoI succeeded, beginning in the mid-1980s, in gradually accumu-
lating formidable institutional and political power, becoming a pivotal
autonomous actor within the political–economic field. The considerable
increase in the central bank’s political power and institutional capacities
allowed it to fulfill a crucial function in initiating reforms and advancing
the adoption of institutional arrangements and practices prescribed by the
neoliberal paradigm. Among the most important of these institutional
changes were the liberalization of financial markets and removal of restrictions
on capital movement; the gradual flexibilization of the exchange rate regime
and eventual adoption of a free-floating exchange rate; and the adoption of
several institutional arrangements intended to establish and lock in fiscal and
monetary discipline, such as the Budget Deficit Reduction Law and inflation
targeting (Maman and Rosenhek 2011).
In this context, it is worth noting the BoI’s response to the global financial
crisis that erupted in 2008. The independence and the institutional power that
it had accumulated over the years endowed it with the resources and capabil-
ities to respond to the global financial crisis sooner and in a more resolute
manner than the other state agencies. Jointly with other central banks in
advanced capitalist countries, the BoI drastically reduced the interest rate in

63
Daniel Maman and Zeev Rosenhek

order to prevent the economy from sliding into a recession, and acted
decisively to prevent a local financial crisis. In addition, it implemented an
activist policy of massive purchase of foreign currency in order to prevent the
further strengthening of the local currency, thereby procuring in effect over
$50 billion (from March 2008 to December 2013) in aid to Israel’s export
sector (Bank of Israel 2014). Similar to what occurred in many other countries,
the essential role played by the Israeli central bank in the attempts to contain
the crisis evidences its pivotal position as one of the most powerful state
agencies in the political–economic field.
An equally dramatic change in the state’s architecture has been the
re-empowerment of the MoF. Elsewhere we have addressed in detail the impli-
cations of the crisis of the developmental state and the hyperinflation of the
mid-1980s for the position of the Treasury within the institutional configuration
of the state, particularly concerning its institutional capacities to exercise effect-
ive control over fiscal policy and the power relations between it and other state
agencies (Maman and Rosenhek 2011). The main point in this regard is that
most state agencies exploited inflation and its impediments to efficient over-
sight of real spending, in order to expand their activities by means of creating
budgetary deficits that the MoF was compelled eventually to cover, thereby
exacerbating the fiscal crisis of the state. The result was that the Treasury lost
its pivotal position within the political–economic field, especially its ability to
manage macroeconomic processes through its control over effective fiscal tools.
In this regard, the 1985 Stabilization Plan, as well as an amendment to the
Bank of Israel Law which prohibited the bank from loaning money to the
government, were truly essential as instrumental factors in the reconfiguration
of the state architecture, both contributing to the re-empowerment of the
MoF vis-à-vis other state agencies and restoring its control over fiscal policy
and macroeconomic management. As posited by Ben-Bassat and Dahan (2006),
the reforms adopted in 1985 and afterwards granted the Treasury enormous
power, positioning it in the early 2000s in second place among Organization for
Economic Co-operation and Development (OECD) countries regarding the
concentration of power in the budgeting process.
The power acquired over the last three decades by the Treasury and the
central bank is both a manifestation of the strengthening of the neoliberal
policy paradigm and a factor contributing to its further institutionalization.
As we will show in the next section, these two agencies were the leading actors
within the state apparatus promoting the adoption of neoliberal arrange-
ments and practices in diverse policy domains. We also show that rather
than being determined by a principled ideological embrace of neoliberalism,
the two agencies’ actions and the relations between them were fundamentally
molded by their concrete institutional interests in constructing and preserving
their power and autonomy.

64
 Reconfigured Architecture of the State

Constructing Agency Power and Autonomy

in the Neoliberal Era

Our analysis concerning the institutionalization of the neoliberal regime rests

on a conflict-centered neo-institutional perspective, that focuses on the com-
plex interactions between state actors as a fundamental factor shaping
processes of institutional change (see Maman and Rosenhek 2009, 2011).
Rather than considering the liberalization of the economy as a deterministic
process dictated by the functional imperatives of globalization or simply by
the ideological hegemony of the neoliberal doctrine, we see it as an essentially
contested process comprising complex intra-state conflictual dynamics, the
final results of which are largely undetermined a priori. We posit, therefore,
that analyzing the transformation of the political economy requires a focus on
the interplay between state agencies and changes in power relations between
them, as well as the various strategies employed by them while exercising their
political agency with the aim of strengthening their positioning within the
economic–political field (Campbell 2004; Sassen 2006).
Numerous studies conducted on the Israeli political economy point to the
MoF as a powerful pivotal player within the institutional array of the state
(Grinberg and Shafir 2000; Helman 2011; Levi-Faur 2000; Maman and
Rosenhek 2011, 2012a; Shalev 2000). As showed by several other chapters in
this volume, the vast political and institutional resources at its disposal have
enabled it on the one hand to advance reforms in which it was interested, and
on the other to prevent institutional changes which it opposed. This was
manifested in virtually all policy domains, from social policy to numerous
domains of economic policy, including taxation, encouraging capital invest-
ment, finance, and trade. In many cases it had the ability to strongly influence
the content of policy programs and reforms well beyond what is usually
understood as belonging to the sphere of fiscal matters under the authority
of the Treasury.
An important strategy employed by the MoF to assure its control over other
state agencies and to advance neoliberal policies and institutional reforms has
been “tying its own hands.” By promoting the adoption of binding formal
institutional arrangements that locked in fiscal discipline by limiting fiscal
discretion—such as the Budget Deficit Reduction Law of 1992 and inflation
targeting—the MoF enhanced its power and autonomy vis-à-vis other state
agencies, politicians, and societal actors. These arrangements, that seemingly
restrict the Treasury’s freedom of action by imposing practices of rule-based
policy making, function in fact as a buffer protecting it from fiscal and other
demands raised by other state agencies and/or societal actors, resulting there-
fore in its strengthening. Furthermore, by locking in neoliberal practices and
significantly narrowing the range of what can be considered legitimate,

65
Daniel Maman and Zeev Rosenhek

proper, and feasible policies, these arrangements contribute also to the

depoliticization of socio-economic policymaking, strengthening further
the professional–bureaucratic apparatus of the MoF and its positioning as
the main carrier of expertise and economic rationality within the government.
The MoF, particularly its professional–bureaucratic apparatus, is indeed an
extremely powerful actor with a great deal of institutional capacities to
advance the adoption of neoliberal institutional arrangements and policies.
So much so that it is often perceived and presented by many observers of
Israeli political economy as omnipotent, making it responsible for all the ills,
or alternatively all the benefits, of liberalizing reforms. And yet, this is
certainly not the case. As any other state agency, the MoF acts within a
complex institutional field populated by many state and non-state actors
with varying institutional interests and logics and with varying types and
amounts of resources. As shown in Chapters 6 to 8 of this volume, the
MoF’s initiatives are often resisted by other state agencies, and sometimes
successfully so. In other cases, the Treasury failed to advance reforms due to
internal conflicts within its own professional–bureaucratic apparatus that
derive from the specific institutional locations and logics of its diverse organ-
izational units. A typical instance is the conflict that emerged between the
Capital Market, Insurance, and Saving Division and the Budget Division
regarding several aspects of the reform of the pension system. For example,
while the former proposed to reduce tax benefits for high earners and to
expand them for pension savers with low incomes, the latter opposed this
due to budget stability considerations and political unwillingness to confront
powerful actors, such as the Histadrut, representing the interests of relatively
high earners.
More often than not the adoption of reforms and the actual mode of their
implementation are affected by complex dynamics of conflict and coalition
formation between state agencies. A particularly important and highly conse-
quential instance of complex interactions of conflict and collaboration
between the MoF and other state agencies is the relationship that has evolved
since the mid-1980s between it and the central bank. These two agencies,
certainly the two most powerful state actors in the political–economic field
except for the military, led the liberalization of the Israeli political economy,
often joining forces to promote the adoption and institutionalization of
neoliberal principles and practices, including fiscal and monetary discipline,
prioritization of price stability, financial liberalization, and privatization of
public assets.
Two salient examples with important consequences for the transformation
of the Israeli political economy are pertinent in this regard. Firstly, the insti-
tutionalization of the principle of fiscal discipline through the adoption of the
Budget Deficit Reduction Law, which resulted from a coalition between the

66
 Reconfigured Architecture of the State

MoF and the BoI. This collaborative initiative was fed not only by the shared
ideological commitment of both agencies to the neoliberal tenet of budget
deficit avoidance, but also and in fact mainly by the fact that the law served
specific institutional interests of each one of them. The Treasury used the
law as a means for tightening and institutionalizing its control over fiscal
expenditures by other state agencies through the mechanism of tying its
own hands, while the central bank used it to expand and legitimate its indirect
but significant influence over fiscal policy (Maman and Rosenhek 2011). By
locking in fiscal discipline, the law was intended to assure the autonomy of
both the Treasury and the central bank and to strengthen their institutional
capacities to conduct macroeconomic management.
Another important example of successful intra-state coalition building is
the cooperation between several state agencies that led to the adoption of
consequential reforms in the financial system (Maman and Rosenhek 2012a).
Beginning in 1986, a determined coalition of state agencies led by the MoF
and the BoI and including the Securities Authority, the Antitrust Authority
and the Ministry of Justice, advanced a series of gradual institutional changes
that contributed on the one hand to a significant contraction of the state’s
direct roles in the financial system, especially those related to processes of
capital mobilization and allocation, while on the other contributing to build-
ing new financial markets that had not existed during the developmental state
period. While the specific motivations of the parties for supporting financial
liberalization differed, liberalization served well the particular institutional
interests of both agencies. From the BoI’s standpoint, financial liberalization
provided it with tools to implement independent and effective monetary
policy, while for the Treasury, it assisted in implementing fiscal discipline
and reduced government spending, specifically by enabling substantially
reduced state support of pension funds. In this regard, financial liberalization
functioned as the institutional foundation of a broad process of transfer of
the responsibility for pension saving from the state to the citizens. In this way
the reforms not only promoted neoliberal principles of individualization,
privatization, and marketization of risk management, but also protected the
Treasury from having to assume long-term and rigid fiscal burdens that it
could not control.
One of the most important financial markets established as the result of the
same intra-state coalition is the corporate bond market, which had grown by
the mid-2000s into an alternative to corporate funding by the banking system.
Collaboration between the central bank and the Treasury made possible the
implementation of a comprehensive reform of the financial system recom-
mended by an inter-ministerial committee (the Bachar Committee) which
obliged banks to sell their holdings in provident and mutual funds. Each of
the state agencies also acted to advance additional reforms under their

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respective purviews. For instance, following the economic slump of the early
2000s, the Banking Supervision Division at the BoI forced banks to conduct a
policy of credit rationing, mainly for big business firms and business groups,
pushing the large corporations to search for alternatives to bank credit in
financial markets. Similarly, starting in 2000 the MoF adopted a variety of
measures, such as lifting the mandatory requirements on insurance compan-
ies and provident funds to invest most of their assets in governmental bonds,
aimed at changing the conduct of institutional investors and encouraging
them to take greater financial risks.
A major result of these measures was the transformation of the Israeli
financial system from a state-led and bank-based structure to a far more
market-based one, which signified a substantial reallocation of power between
economic actors, particularly the strengthening of private insurance companies
and investment houses. Implementation of these steps led to the emergence of
a significant non-banking credit market in a quite short period of time. While in
2000 83 percent of corporate credit was financed by the banking system (Bank
of Israel 2006: 154), by 2007 the figure had dropped to 52 percent of corporate
credit, with the reminder comprised of negotiable and non-negotiable instru-
ments of non-bank credit (Bank of Israel 2008: 146).
The MoF and the BoI indeed loudly championed the liberalization of Israel’s
political economy and frequently co-operated to promote their common
political project of institutional transformation. However, they also often
jostled and jockeyed for achieving and maintaining a position of preeminence
in the political–economic field. Elsewhere we have extensively analyzed a
series of intense conflicts between the two agencies during the 1990s and
early 2000s over the institutional rules and arrangements outlining their
respective duties and authority, the balance of power between them, and
their positioning within the field, which eventually resulted in the central
banks’ success in acquiring formidable political and institutional power
(Maman and Rosenhek 2011). These conflicts surrounded issues that for the
BoI were fundamental to its independence and capacity of action, such as
the adoption of a regime of explicit inflation targeting. The battle was initiated
by BoI Governor Yaakov Frenkel’s attempt in 1995 to adopt the arrangement
of inflation targeting with the aim of imposing a strict anti-inflationary policy
and neutralize any remaining influence over monetary policy by the MoF.
This dispute went on for several years, during which the parties reached only
temporary and partial compromises, until ultimately the BoI’s goal to formally
adopt an inflation-targeting regime as a fundamental instrument for the
formulation of monetary policy and macroeconomic management in general
was accepted by the government.
The long and intensive struggle over the legislation of a new Bank of Israel
Law was the most salient instance of open conflictual relations that emerged

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 Reconfigured Architecture of the State

between the BoI and the MoF during the 1990s and early 2000s. In spite of
their common ideological support for the project of liberalizing the economy,
the two agencies had opposed institutional interests concerning their respect-
ive autonomy and positioning within the state configuration. The central
bank succeeded in preventing repeated attempts by the Treasury to change
the law in ways that it considered as limiting its independence and under-
mining its institutional capacities. On the other hand, for many years it lacked
sufficient political and institutional resources to overcome the enduring
opposition of the MoF to the legislation of a new law that would correspond
to the globally dominant institutional blueprint of central bank independ-
ence. As a consequence of this deadlock between the two leading state
economic agencies, new legislation was blocked for more than fifteen years.
It was only in 2010, in the shadow of the global financial crisis, that the parties
managed to bridge the gaps between them and reach an agreement on a new
law enshrining the independence of the BoI.
In some cases, when the central bank and the Treasury agreed on the
desirability of changing the existing institutional arrangements but differed
over the specific character of the institutional change they sought, the balance
of power between them led to preservation of the status quo. This is illustrated
by the conflict that emerged surrounding possible changes in the institutional
architecture of the financial regulatory agencies, which began prior to the
global financial crisis but gathered steam thereafter. Though both the BoI
and the MoF agreed that a thorough revision of the organizational structure
of the financial supervisory system was called for, each proposed entirely
different reforms. The BoI advocated shifting the organizational location of
the Capital Markets, Insurance, and Savings Division from the Treasury to the
central bank. In this way, the two main financial regulatory agencies—the
regulator of capital markets and the regulator of the banking system that was
already located within the BoI—would operate under the same organizational
framework: the central bank. The MoF, in contrast, proposed establishing a
new unified and independent regulatory agency that would oversee the entire
financial system, including banks, insurance companies, institutional investors,
and other players, and would be autonomous from and organizationally located
outside both the central bank and the Treasury.
After a series of public skirmishes, the dispute was resolved with both parties
agreeing not to change the organizational structure of the financial regulatory
system. It is likely that the long, intense, and widely publicized conflict
between the BoI and the MoF over the legal status of the central bank had
an effect on the subsequent dispute over the structure of the financial regula-
tory system and led both agencies to prefer the preservation and stabilization
of the existing institutional order rather than opening a new struggle, particu-
larly in the context of a severe global financial crisis that might have

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Daniel Maman and Zeev Rosenhek

threatened financial and economic stability. This case illustrates that when
fundamental conflicts arise between powerful state agencies, particularly
when they consider that the struggle between them might undermine the
stability of the system, they may choose to avoid conflict and reach comprom-
ises that preserve the institutional status quo.
The changing positioning of the BoI and the MoF within the state archi-
tecture as well as the complex relationships of collaborations and struggles
between them evolved within the context of a basic shift in dominant
understandings of the proper relations between the economy and politics.
The understanding of the economy as an autonomous sphere that should be
insulated from politics became broadly prevalent among both elites and the
general public. Thus, within this new setting, a major source of the institu-
tional strengthening of both the Treasury and the central bank was their
success in repositioning themselves as “apolitical” agencies that supposedly
define policy goals and means according to objective knowledge and undis-
puted expertise. The representation of economic policy as a domain in
which decision-making should be conducted by recognized experts immune
from pernicious political influences and the depoliticization of the eco-
nomic field at large, evolved into a fundamental instrumental factor in the
institutionalization of the neoliberal regime. This process of depoliticiza-
tion constituted in Israel, as elsewhere, a central component in the broad
political–institutional setting that facilitated specific liberalizing reforms
in domains such as macroeconomic policy, finance, social policy, and
labor market regulation by legitimizing them. These reforms were generally
presented by leading actors, particularly the BoI and the MoF, as directly
flowing from authoritative scientific knowledge. Moreover, depoliticization
was actively promoted very often by economists, both state managers and
academic experts, adopting a discourse of inevitability that presents particu-
lar institutional changes and policies as inexorably imposed by globalization
and its functional requirements (see for example Maman and Rosenhek
2008, 2012b). The close connection of this discourse to economic theories
and ideologies calls for a discussion of the role of ideas in institutional change
and continuity.
Historical and sociological neo-institutionalists have come to view ideas
and discourses as factors that can drive or prevent institutional change
(Campbell 2010; Hall 2010; Mahoney and Thelen 2010b; Streeck and Thelen
2005b), with some scholars even arguing for an additional neo-institutional
approach: ideational or constructivist institutionalism (Béland and Cox 2011;
Bell 2011; Hay 2011; Schmidt 2008, 2011). According to this approach, idea-
tional devices such as classificatory categories, concepts, and causal claims
shape how political actors determine their interests, preferences, and goals;
provide them with tools to diagnose and explain uncertain situations and

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 Reconfigured Architecture of the State

events; and function as rhetorical resources for recruiting allies and support
(Anderson 2013; Rosenhek 2013). Therefore, ideational dynamics play an
essential role in the politics of both institutional shift and inertia, affecting
the chances for the occurrence of change as well as its specific character.
The use of specific modes of authoritative knowledge, conceptual constructs,
and causal models is important to the shaping and framing of the intra-state
politics of institutional reforms. Ideational constructs of diverse types contrib-
uted in two important ways to promoting changes in the Israeli political econ-
omy, playing both an inspirational role in the design of these changes and an
instrumental role in promoting and legitimizing them. As demonstrated by
Ronen Mandelkern (Chapter 5, this volume), academic economists played a
key role as formulators and diffusers of ideational constructs, particularly causal
models that both underpinned the design of liberalizing reforms and served
to legitimate them.
The important role of academic knowledge in processes of institutional
transformation is illustrated by the strategy employed by the BoI, which
strongly rested on notions, concepts, causal models, and empirical claims
produced and disseminated by the dominant school in the economics
epistemic community in order to formulate and communicate its preferences
for specific institutional changes in all dimensions of the political economy.
As in the case of other central banks all over the world (Marcussen 2006), this
practice made a profound instrumental contribution to BoI’s positioning
in the field as holding the monopoly within the state apparatus over
the knowledge and expertise that should define the contours of proper
and feasible macroeconomic management, and the skills necessary to imple-
ment it. Furthermore, notions, concepts, and models produced by academic
economics served the central bank, as well as other actors, to interpret events
and processes, to define and frame the problems that should be addressed
and to specify the proper institutional tools to do that.
A clear instance of this dynamic was the adoption and legitimization of the
regime of inflation targeting as the most beneficial institutional device to
conduct proper monetary policy. Both the problem (governments’ inflation-
ary bias) and the solution (rule-based policy making) were defined by the
theoretical model of rational expectations, which became broadly accepted
in monetary economics from the 1990s (Maman and Rosenhek 2009). At the
same time as it inspired a new “technical” approach to achieving economic
stabilization and growth, the economic theory and policy practices underpin-
ning inflation targeting also contributed instrumentally to vital institutional
interests of the central bank, by privileging monetary policy (the bank’s home
domain) over fiscal policy (that of the Treasury), and by constructing it as
an exact science that can only be conducted by experts with untrammeled
institutional authority.

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Daniel Maman and Zeev Rosenhek

What emerges here is therefore a complex politics of institutional change in

which ideational constructs deeply impact on how state agencies, as well as
other actors, interpret their institutional environment and specify their inter-
ests and the means to advance them. These same ideational constructs are also
employed instrumentally by state agencies to legitimize their preferences and
delegitimize those of their opponents. The series of gradual institutional
changes that ultimately resulted in the liberalization of the Israeli political
economy was given form and content by this interaction between ideational
factors that underpin actors’ formulations of problems and solutions and
the institutional interests of these actors in accumulating and maintaining
autonomy and power.

Conclusions

The institutionalization of the neoliberal regime has substantially altered the

Israeli state’s mode of involvement in the shaping, management, and regula-
tion of the economy. This transition has been both manifested in and enabled
by changes in the institutional power and positioning of various state agen-
cies. As we have shown, the new institutional architecture of the state is
characterized by the ascendency of the main fiscal and monetary agencies—
the Treasury and the central bank—which succeeded in initiating and
promoting meaningful changes not only in specific policies, but also in the
institutional rules that determine intra-state and state–economy relation-
ships. Therefore, the reconfiguration of the state architecture has been
a fundamental facet in the furtherance of the institutionalization of the
neoliberal regime and its concrete manifestations in various policy domains.
As the liberalization of the political economy entails important shifts in the
balance of power between different state agencies, the trajectories of change
have been shaped to a large extent by intra-state political processes—dynamics
of collaboration and conflict between influential state agencies that promoted,
or alternately sought to prevent, institutional reforms aimed at locking in
neoliberal policies. This intra-state politics has not only had an impact on the
likelihood of particular reforms being implemented and institutionalized,
but also on the specific character of the institutional changes. Due to the
contentious and political character of the processes of institutional change,
their final results are largely undetermined a priori, being affected by the
contingencies characterizing dynamics of conflict and cooperation between
influential state agencies.
We have also shown that the state agencies’ actions and interactions that
have led to the institutional changes cannot be explained simply by their
ideological commitment to general neoliberal principles that supposedly

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impose a uniform and deterministic logic of state withdrawal from the

economy. The institutional transformation was rather the result of far more
complex interplays between ideational constructs employed by the agencies
to interpret the institutional, political, and economic environments and
to formulate and legitimate their preferences, and their basic institutional
interests regarding their positioning within the state apparatus and the
political–economic field at large. This dynamic explains the institutionaliza-
tion of the neoliberal regime and its concrete form and content, making
evident that it is as a far more complex process than what would be implied
by the neoliberal ideological tenet of “less state, more markets.”

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5

Institutionalizing the Liberal Creed

Economists in Israel’s Long Journey Towards
Political-Economic Liberalization

Ronen Mandelkern

This chapter examines the role that professional Israeli economists, mainly
located in academia, the Ministry of Finance (MoF), and the Bank of Israel
(BoI), played in Israel’s neoliberal transformation. Various political and socio-
logical studies point to the crucial role liberal economists played in the global
paradigmatic shift toward neoliberalism, both as a community of professionals
and as individual political entrepreneurs. In these studies the transformation
of economists’ ideas from “Keynesian” or “developmental” to “neo-classical”
provided the “instruction sheet” for neoliberal institutional change. I show in
this chapter that the influence of Israeli economists had on local political–
economic regime shift exemplifies well the political role of economists in
other cases, as purveyors of the economic ideas on which liberalization was
based. However, in Israel the main transformation standing behind the para-
digmatic shift toward economic liberalization was not in economists’ ideas as
such, which even in the 1950s exhibited a strong liberal commitment. Rather,
it was their political influence within the state which had gradually increased
over the years and reached a crucial peak at the height of an economic crisis.
Behind the political strengthening of Israeli economists firstly stood long-
term structural and institutional changes, which gradually eroded the power
of “political” economic governance and opened the floor for greater involve-
ment of professional economists and the statutory state agencies in which
they have operated, namely the MoF and the BoI.
This long-term trend was joined and reinforced by economists’ ability to act
as effective political entrepreneurs in the height of the economic crisis of the
 Institutionalizing the Liberal Creed

early 1980s. As political entrepreneurs, Israeli economists persuaded decision-

makers to adopt and implement an ultraorthodox macroeconomic stabilization
program as an immediate solution for deteriorating economic conditions. At
the same time, these economists have managed to initiate changes of macro-
economic governance, which enhanced the political power of the MoF and the
BoI and supported long-term liberalization efforts and the institutionalization
of their liberal creed. The augmentation of economists’ power to implement
their ideas had sources that were partly exogenous and beyond their control,
and partly endogenous and the result of their own political action.

Economists, Economics, and the Second “Great Transformation”

In accordance with the “ideational turn” in comparative politics and political

economy (Blyth 1997; Hay 2001; Schmidt 2002) and growing sociological
interest in economics as a profession (Coats 1997; Fourcade 2006, 2009), vari-
ous studies have looked into the role economists and economic ideas have
played in economic liberalization processes in both developed and emerging
economies. Against explanations that point toward changing global economic
trends which necessitated economic liberalization, these studies advocate an
alternative explanation for the neoliberal “paradigm shift” (Hall 1993). Follow-
ing Polanyi’s analysis of the social and economic “Great Transformation” of the
nineteenth and early twentieth centuries (Polanyi 2001), these studies show
that economic liberalization was not a “spontaneous” and hence “inevitable”
process, but rather a political project, for which economists’ liberal creed pro-
vided the ideological basis.
The sociological branch of these studies focused on the changes the economic
profession has experienced in both national and international contexts and the
role these changes played in economic liberalization. The economics profession,
according to these studies, was greatly affected by processes of internationalization,
through which American influence became substantial (Bourdieu and Wacquant
1999; Coats 1997; Fourcade 2006—though see Bockman and Eyal 2002 for a more
nuanced account of such American influence). This process was even more signifi-
cant in developing and emerging economies, in which the growing role of econo-
mists in academia and state bodies allowed them to increase their influence on
economic policymaking (Babb 2001; Dezalay and Garth 2002; Fourcade-
Gourinchas and Babb 2002). Their “normative” pressure was combined with
the “coercive” pressures of the US and international financial bodies in the diffu-
sion of economic liberalization reform (Babb 2001). Economists’ political influence
in these countries further increased when they were nominated to powerful
decision-making positions (Chwieroth 2007; Markoff and Montecinos 1993).

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Ronen Mandelkern

Scholars of comparative and international political economy have mainly

looked into the role economists’ ideas played in reshaping economic institu-
tions and the interests of major political–economic players (Blyth 2002; Hay
2001; Hay 2004; McNamara 1999). These studies emphasize the ideational
paradigmatic shift that occurred during the 1970s and 1980s (Hall 1993): the
theoretical and political break-up of Keynesianism in the context of 1970s and
1980s oils crises and stagflation, and the ascendance of neo-classic economic
theories that include monetarism, rational expectations theory, real business
cycles, and public choice theory. According to these alternative theories,
governmental economic intervention should be either completely abandoned
or limited to “pro-market” means: reduced taxation, removal of so-called labor
market “rigidities,” maintenance of price stability, and any other means to
enhance business confidence. Their ascendance as dominant policy frames on
which policy programs were established offered political–economic actors and
policymakers a concrete “instruction sheet” for the structural changes they
sought (Blyth 2003; Campbell 1998).
A more recent wave of studies focused on the role liberal economists played
as political entrepreneurs who have directly influenced policymaking pro-
cesses through which economic liberalization was implemented (Bakir 2009;
Chwieroth 2010; Quaglia 2005). These studies point toward various factors
that allowed economists to become politically influential, such as their tech-
nical knowledge on complicated policy issues, their coherent belief system, and
their pivotal position in international and domestic interchange. By focusing
on individual economists (or particular teams or groups of economists) these
studies link macro processes of ideational and sociological transformations,
that stand in the background of neoliberalism, with micro-level policymaking
processes of which the transformation to neoliberalism is composed.
This chapter builds on this rich array of studies to analyze the role Israeli
economists played in the country’s economic liberalization. It offers an
analysis of both the evolution of the economics profession in Israel and of
the role that certain Israeli economists have played as political entrepreneurs
of economic liberalization. As such, it exemplifies the benefit of integrating
the insights of the sociological and the political–economic approaches to the
study of the economic ideas, economists, and economic liberalization.
More concretely, the following sections demonstrate how the power of
economists’ ideas and ideology depended on the power of the economists
themselves. This applies to the power of economists as a professional com-
munity that was located in concrete political and social contexts that at times
limited its political power and at times expanded it. It also applies to the
power of different individual (or teams of) economists, whose ability to
persuade decision-makers to follow their ideas depended on effectively util-
izing available political power resources. At the same time, economists were

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 Institutionalizing the Liberal Creed

also empowered by their ideas, on which they have built not only to offer
new economic policy but also to design a new structure of macroeconomic
governance that inherently enhanced their own policymaking authority.
The rest of the chapter expands on these empirical issues. It is chronologic-
ally organized: the first section discusses the formation of the discipline and
profession of economics in Israel during the 1950s and 1960s, and one of
the economists’ first—and unsuccessful—attempts to implement broad eco-
nomic liberalization. The second section overviews the transformation of
the political–economic context, which took place mainly during the 1970s,
through which prevailing economic coordination has weakened and the
presence of professional economists in policymaking has increased. The
third section focuses on the direct involvement of Israeli economists in
shaping, promoting, and implementing economic liberalization program
during the height of the 1980s economic crisis in Israel.

Patinkin’s Economics in Israel: A Premature

Birth of the “Liberal Creed”?

Economics in Israel, as an academic discipline, was “born liberal.” From the

outset it presented an intellectual alternative to the dominant social and
political approach to economic matters in Israel.1 This meant continuously
uneasy relations between a coherently liberal economics discipline and a
political–economic regime which has been characterized as embedded illiber-
alism (Shalev 1999), ethnically based split corporatism (Grinberg 1991),
statism (Levi-Faur 1998) and even socialism (Plessner 1994) (see Grinberg,
Chapter 2, this volume).
Economists in Israel did not deny that economic policymaking in Israel
may, and even should, be guided by Zionist and national goals. Yet—in
contrast to the accepted wisdom and practice—they contended that these
goals should be prioritized and constrained in accordance with the country’s
scarce economic resources. Accordingly, they advocated economic liberaliza-
tion, and the diminishment of policies and practices that distorted market
mechanisms, as well as the rationalization of economic policymaking, appli-
cation of professional and long-term considerations throughout the policy-
making process (Mandelkern 2010).
This tension and incongruence between economics and the political econ-
omy is striking from a comparative perspective. In Western countries there

1
This is a simplification: other academic approaches were present, until the mid-1950s (Krampf
2010); but given their rapid demise they could hardly be considered as politically significant
alternatives.

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Ronen Mandelkern

was generally a match between political–economic regimes of embedded

liberalism and Keynesianism as the dominant approach in economics (Hall
1989). In emerging economies, in which political–economic regimes were
characterized by developmentalism, economics was characterized by a match-
ing nationalist tendency. This was especially prominent in the Latin American
ECLA School, which sought an alternative economic approach for peripheral
countries, one that matched their location in the world economy (Babb 2001).
Interestingly, the Israeli tension between economists’ ideas and political–
economic practices was also documented in the socialist economies of the
communist bloc (Bockman and Eyal 2002). In the socialist economies this
tension resulted from a long-term dialogue between local economists and
their American counterparts. The parallel Israeli tension, against that, derived
from what we might define as the transplant of American economics in the
first place.
The immediate reason for this disparity is the context in which the
economics profession was formed in Israel. The economics discipline in Israel
was created from scratch and was dominated by its effectively single founding
father, Don Patinkin, who shortly before arriving in Israel in 1949 graduated
from the University of Chicago.2 Patinkin was not a representative “Chicago
School” economist, dedicated to critiquing Keynesianism (Barkai et al. 1993).
On the contrary, his main academic project was integrating Keynes’s insights
into neoclassical economic theory (Backhouse 2002; Boianovsky 2002).
Accordingly, he “sent” many of his students—some of whom would later on
play a central role in actively promoting economic liberalization in Israel—to
“saltwater” economics departments in the USA and not necessarily to Chicago
and other “freshwater” departments (Krugman 2009). Yet in a social and
political context that questioned—both intellectually and practically—the
relevance of “economic laws” to the local economy (Kleiman 1981: 562–3),
Patinkin’s market-based approach to the study of resource allocation was excep-
tional (Patinkin 1967). The prevailing economic discourse in the early 1950s
revolved around state-based resource allocation, and clashes between these two
approaches produced an intellectual struggle that was won by Patinkin, at least
within the boundaries of the economics discipline (Krampf 2010).
However, Patinkin’s long-term and wide-ranging influence heavily relied on
the cooperation of other prominent actors. Patinkin’s influence would have
been much more limited had the state not supported the department he
founded at the Hebrew University of Jerusalem (HU). Economics, like other
professional disciplines, can hardly develop without symbolic and material

2
Interestingly enough Patinkin was one among several possible Jewish candidates for serving as
founder of the Economics Department of the Hebrew University, among them the Marxist
economist Michal Kalecki (Gross 2006).

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 Institutionalizing the Liberal Creed

support from wider social parties or that of the state (Abbott 1988; Babb 2001;
Fourcade 2009). In Israel the state played a prominent role in providing the
resources needed for academia to flourish, by financing academic institutions
(mainly the HU at the time) and offering jobs to their graduates (Cohen 2006).
This was obviously true for economics as well, which during its formative
period in the 1950s and 1960s provided manpower for the new state admin-
istration, and especially its finance and trade and industry ministries as well as
the central bank. The links between the BoI, the MoF and economics at HU
had additional and more specific articulations, such as the Falk Institute for
Economic Research, which was located within the university and headed by
Patinkin (and, later on, the students who became his colleagues), financed
by the MoF and BoI, and had Yaakov Arnon and David Horowitz (the first
directors of these two agencies) on its board of directors (Goldstein and Dayan
2010; Gross 2006; Horowitz 1975; Krampf 2010; Mandelkern 2010).
Despite the support which his project received from the state, its political
leaders referred to Patinkin’s research, teaching, and policy recommendations
in critical terms. They sought to distance themselves from the economists
who took up positions in the MoF and the BoI and were famously named
“Patinkin’s Boys” (Mandelkern 2010). One illustrative example comes from a
symposium at the Hebrew University held in 1966 and attended by econo-
mists from the university’s Department of Economics. In this occasion
Mordechai Bentov, the Minister of Housing (Mapam), in response to the
economists’ criticism of the government, claimed that “the university’s
economists discuss the Israeli economy’s problems using concepts that are
irrelevant to its character.”3 This echoed the even harsher condemnation of
the economics profession by the prominent Mapai leader, Pinhas Lavon, who
claimed that HU economists “educate a generation of young economists, [ . . . ]
teach them about the outside world, and [ . . . ] cause them to forget the
original [girsa deyankuta] Israeli version” (Lavon 1962: 71). Given the generally
non-conformist stance of Patinkin and his disciples and their implicit
or explicit criticism of prevailing political–economic practices, this is hardly
surprising.
But despite their lack of enthusiasm for economic principles, elected officials
like Levi Eshkol, Finance Minister during most of this formative period, backed
up by his senior officials Arnon and Horowitz, provided political cover as well as
the means of subsistence to Patinkin and his trainees. Their protection was
essential in the context of a highly politicized state administration, the main
branches of which were controlled by Mapai, the ruling party (Medding 1972,
1990). The tension between politicians’ suspicious attitude and their material

3
“Press release,” June 16, 1966, Hebrew University Archives 266/1966.

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Ronen Mandelkern

and symbolic support is further demonstrated by the fact that the political
leadership—especially Eshkol but others (including Ben-Gurion) as well—
regularly consulted with Patinkin and other economists in academia
(Mandelkern 2010; Michaely 2007). This might reflect the fact that economic
policymaking is always a complex task that is saturated with uncertainty, and
all the more so in a rapidly transforming small economy. In seeking to reduce
such uncertainty decision-makers are very likely to consult “the experts”
(Chwieroth 2010; Haas 1992), despite the discrepancies between the convic-
tions of the experts and those of the decision-makers.
In sum, the 1950s and 1960s were marked by ambiguous relations between
the Israeli state and Israeli economics. The state and its leadership nourished
the economics profession and allowed this academic discipline to flourish,
among other things since its university trainees were ready to serve in the
newly formed state administration. But at the same time, the liberal under-
pinnings of economic thought expressed a radical and threatening alternative
to prevailing ideologies and practices. Relations between the state and the
discipline reflect, as a whole, an incoherent combination of support and rejec-
tion. For Israeli economists, this meant that their political influence would
remain quite limited for a rather long period of time; however, state-enabled
consolidation of this professional group of economists carried the seeds for
potentially greater political influence in the future.
The 1962 “New Political Economy” liberalization plan represents well this
ambiguity. The plan contained two main components: sharp devaluation
and liberalization of international trade. The approach behind it perfectly
reflected a liberal economic logic, according to which trade liberalization
would lead to greater economic efficiency in local labor and product mar-
kets. The plan was developed and advocated by economists in the BoI and
the MoF, supported by their counterparts at the HU. It was adopted by the
government in mid-1962 after several years of economists’ advocacy and the
imprint of Israeli economists as political entrepreneurs who designed and
skillfully promoted the plan was prominent (Mandelkern 2016). The plan
was at least in part the result of economists’ wider campaign for “economic
independence”—in which they have called for ending the continuous trade
deficit—which began in the 1950s and in which Patinkin played a crucial
intellectual leadership role (Krampf 2009).
But mere persuasion efforts were probably not enough. The adoption of the
New Economic Policy was firstly enabled by economists’ effective utilization
of substantial economic problems that Israel was facing: the forthcoming
imminent cessation of foreign support and the advancing formation of the
European Common Market, which posed a potential risk to Israeli exports.
The economists convinced policymakers that economic liberalization could
significantly support Israeli demands to European decision-makers (Krampf

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 Institutionalizing the Liberal Creed

2010; Mandelkern 2016). At the same time, political circumstances, namely

the formation of a new government in November 1961, was relatively condu-
cive. These problems and supportive circumstances together reflected the
opening of a “policy window” (Kingdon 1995: 166–72), within which the
economists managed to couple their policy proposal with decision-makers’
rising awareness of mounting economic challenges.
Yet while the plan was seemingly a moment that reflected economists’
impressive political influence, its post-adoption fate exemplifies how limited
this influence has in fact been. On the one hand, devaluation’s economic
impact was quickly neutralized due to wage increases, the result of industrial
militancy in the context of full employment (Grinberg 1993b; Shalev 1992).
On the other hand, responsibility for implementing trade liberalization was
delegated to committees which were composed of representatives from the
Ministry of Trade and Industry, the Employers Association, and the Histadrut
(peak organization of labor). All three organizations were at best hesitant about
economic liberalization. Liberalization meant decreased involvement in eco-
nomic activity—and possibly decreased political impact—for the Ministry of
Trade and Industry, and increased economic risks for industrialists and workers
alike (Levi-Faur 2001; Drezon-Tepler 1990; Grinberg 1993b). Consequently,
removal of protective measures was very limited and mainly included the
replacement of one mode of protection (quantitative) with an alternative one
(fiscal) (Halevi et al. 1991; Tov 1972). In short, the liberalization of reform
initiatives sponsored by economists was quite easily neutralized by the institu-
tions of state-led industrialization and split corporatism (Mandelkern 2016).
The 1962 plan and its aftermath reflect well the “liberal creed” with which
Israeli economics was born as well as its limited political influence in an
“embedded illiberalism” context. While political influence of this liberal
creed was limited, it continued to flourish within the epistemic community
of economists and, more importantly, was institutionally anchored in influ-
ential even if not omnipotent state bodies as well as in academia. These
anchors would become much more influential once the institutions of
“embedded illiberalism” began to decline.

The Erosion of Embedded Illiberalism

and the Rise of the Liberal Creed

The state’s failure in 1962 to establish market imperatives as guidelines for

the local economy and to relax its pivotal role as an engine and as subsidizer
of economic activity was followed by a harsher attempt—the 1966–7 state-
supported recession (Krampf 2010). The recession had important political–
economic consequences but did not bring about economic liberalization as

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Ronen Mandelkern

well: as bigger and stronger companies have more easily survived it, the
recession was followed by intensified dualization of the economy rather
than liberalization (Shalev 1992). Israel’s dual political economy was divided
between powerful and protected conglomerates and corporations and smaller
unprotected businesses. In the labor market is was characterized by “split
corporatism,” in which the upper segment of the labor market dominated
by Ashkenazim (European Jews) enjoyed unionization, protection, and polit-
ical influence, while the lower labor market segment composed mainly of
Arabs and Mizrachim (Jews from Arab countries) and the small-scale economy
remained exposed to market volatility (Shalev 1992; Grinberg 1991; Rosenhek
1999a; Shafir and Peled 2002).
After the 1967 war this dual political economy initially generated impres-
sive economic performance, in terms of renewed growth and full employ-
ment. Yet the war and oil crisis of 1973 produced economic stresses which
exemplified the prevailing regime’s structural shortcomings (Ben-Porath
1986b; Shalev 1992; see also Grinberg, Chapter 2, this volume). Two intercon-
nected economic problems characterized the post-1973 period, which Israeli
economists have later named “the lost decade”: spiraling inflation and
continuous balance of payments deficit.
Although they were intensified by rising oil prices and postwar arms race,
both of these problems had roots in the pre-1973 period and its political–
economic logic of split corporatism and a dual economy. Big business and
finance were dependent on state resources but at the same time the state was
dependent on them as well, as they were economically “too big to fail” and
politically very powerful. Major shares of the state’s economic resources were
allocated to the big economy, through various forms of subsidization, leading
to an ever-growing governmental debt and continuous deficit, and conse-
quently to demand-side inflationary pressures. Demand-side inflation came
on top of the supply-side pressures generated by the oil crisis. Within the
context of split corporatism unionized workers were able to claim wage raises,
while in order to improve the trade balance and erode real wages the govern-
ment continuously devalued the local currency. The result was a vicious circle:
unionized workers could protect themselves from real wage erosion; their
employers required ever more subsidization as well as further devaluations
to support exporters; and the government’s responsiveness to these demands
only brought further inflationary pressures (Mandelkern and Shalev 2010).
The crucial point for our case is that for a variety of reasons the mechanisms
of political–economic coordination on which rapid economic growth had
been based had lost their effectiveness, reflecting the decline of the labor
movement’s control of the economy and further intensifying it. The political
power of the organized interests that stood behind the status quo barely
allowed for the modification—let alone wholesale replacement—of these

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 Institutionalizing the Liberal Creed

mechanisms, which contributed to their eventual demise (Grinberg 1991;

Shalev 1992).
The decline of “political” mechanisms of coordination opened the door to
increased involvement and influence of economists, who offered an alterna-
tive approach to economic decision-making. The economists’ alternative was
not based on corporatist compromise between powerful political–economic
actors, but was constructed as resting on professional expertise and the appli-
cation of general and impartial criteria of contribution to the public interest
(Mandelkern 2010).
The case of the Ben-Shahar Committee, which operated in 1975, illustrates
the rising prominence of professionally based decision-making and its posi-
tioning as an alternative to previous corporatist and politicized mechanisms.
The committee, which designed a reform in the Israeli income tax code, was
composed of three prominent economists and two other professionals. Its
recommendations, which were accepted by the government as well as by the
Histadrut, were based on a liberal approach, in the sense that they sought
minimizing disturbances caused by taxation to labor market mechanisms
(Ben-Porath and Bruno 1977). Notably, the committee was assisted by econo-
mists from the MoF and the HU’s Falk Institute (Ben-Porath and Bruno 1977:
286, n.1). The Ben-Shahar Committee succeeded where previous attempts had
failed, most notably the Asher Committee which ended its work shortly
beforehand. Despite being composed of representatives of the main organized
interests, the Asher Committee failed to reach a compromise regarding income
tax reform (Arin 1981).
In addition to its role in liberalizing the tax code, this reform led by econo-
mists also had wider symbolic and political implications. The committee’s
success led Rabinowitz, the Finance Minister, to offer an advisory position to
Ben-Shahar, the committee’s chair. After he declined the offer it was offered to
and accepted by Michael Bruno. This proved to be the first of many appoint-
ments of economists to advisory and executive positions in the government,
which occurred in the late 1970s and early 1980s.4
The rising dominance and visibility of economists in decision-making
processes was also connected to significant shifts in the political leadership,
especially in the labor movement. After the 1973 war the Labor Party’s top
echelon was staffed mainly by a new generation of politicians who Shapiro

4
Ezra Sadan from the Agricultural Economics Department at HU was the Director General of the
MoF (1981–4); Pinhas Zusman, also from Agricultural Economics at HU, was the Director General
of the Ministry of Defense (1975–8); Eitan Berglas, from Tel Aviv University (TAU), was the Head of
the Budget Division at the MoF (1978–9); Assaf Razin, from TAU, was the Head of the Planning
Authority at the MoF (1979); Yakir Plessner, from Agricultural Economics at HU, was the senior
economic advisor to the Finance Minister (1981–3) and Deputy Governor of the BoI (1982–5).

83
Ronen Mandelkern

(1984: 6–7) characterized as detached from ideology, since they had previ-
ously made careers as bureaucrats and technocrats in the military and defense
apparatuses.
These political trends, namely the declining effectiveness of corporatist
arrangements and the rise of a new political elite, were accompanied by the
incremental growth of professional economists employed in the public sector
in the 1960s and 1970s, including their growing representation in top execu-
tive positions in the MoF and other ministries (Kleiman 1981). Moreover,
during the same period governmental units that were mainly composed of
economists, like the Budget Division of the MoF and the BoI’s Research
Department, developed into well-established bureaucratic agencies with an
organizational memory and consolidation of a coherent ideology (Barkai and
Liviatan 2007).5
The result of these overlapping developments was that even though econo-
mists’ influence over economic policymaking was still very limited, both their
influence and the visibility and credibility of their liberal creed were on the
rise, providing the basis for economists’ increased political influence after the
1980s economic crisis.

Institutionalizing the Liberal Creed: Political

Entrepreneurship in a Context of Crisis

In the early 1980s Israel’s post-1973 economic problems evolved into a full-scale
crisis, as spiraling inflation and a sense of loss of economic control started to
have impact on real economic activity (Kleiman 1984). As in Western Europe at
this time (Scharpf 1987), stabilization attempts based on corporatist economic
co-operation failed. In 1982 Finance Minister Yoram Aridor tried to implement
gradual relaxation of inflation, which required employers and workers to avoid
wage raises. Aridor’s policy failed after only a few months, as the corporatist
partners did not cooperate with his initiative (Plessner 1994: 256).6 The forma-
tion of a unity government in 1984, in which both Likud and Labor took part,
opened the way to “package deals,” explicit tripartite bargains. These attempts
also failed to halt economic deterioration for more than very short periods of
time (Grinberg 1991).
As in other parallel cases (Chwieroth 2010; Fourcade-Gourinchas and Babb
2002), conditions of economic crisis and the failure of corporatist coordin-
ation were not enough to enable economists to become politically influential.

5
Also based on an interview with a senior official of the Budget Division of the MoF,
November 22, 2007.
6
Also based on an interview with the Finance Minister, November 21, 2007.

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 Institutionalizing the Liberal Creed

The essential additional ingredient was for economists themselves to exercise

agency as political entrepreneurs (Kingdon 1995; Sheingate 2003). Conditions
in Israel were ripe for such a development, since economists had accumulated
a variety of power resources, including their recently established connections
with political patrons and their positions in the BoI and the MoF, as well as
their academic capital—not only domestic but also international. From the
early 1980s prominent economists, especially in academia and the central
bank, began to propose economic stabilization plans (Fischer and Frenkel
1982; Gronau et al. 1984; Leiderman et al. 1979; Razin 1984; Razin et al.
1985; Sokoler, Piterman, and Fraenkel 1984). This ideational stirring demon-
strates well the willingness of economists to step down from their ivory towers
and offer advice, support, and political legitimacy in exchange for influence
over policymaking (Keren 1995).
Virtually all of these stabilization plans were based on the assumption that
economic deterioration, and spiraling inflation in particular, resulted from
demand-side pressures for which excessive governmental expenditures were
to blame. This diagnosis obviously matched economists longstanding criti-
cism of the role played by government in the economy. In accordance with
this diagnosis, the main measures included in virtually all programs were fiscal
and monetary restraint as immediate stabilization instruments, to be followed
by structural liberalization reforms.
Eventually, as is well known, it was not until July 1985 that a stabilization
program—the Emergency Economic Stabilization Plan, a turning point for
Israel’s political economy—finally received the blessing of political decision-
makers. The plan was based on severe monetary and fiscal restraint achieved
by budget cuts, and a general freeze of both domestic prices and the exchange
rate (Bruno 1993; Grinberg 1991). Behind this plan stood a team of MoF, BoI,
and academic economists, led by two prominent academics who had both
worked for the MoF during the 1970s.
As in other instances of successful policy-focused political entrepreneurship
(Bakir 2009; Cohen 2012; Kingdon 1995), the success of this team was based
on skillfully persuading political decision-makers to adopt its program for
economic reform. Beyond packaging their ideas in a clear and easily compre-
hended fashion (Bruno 1990), the team’s success was based on its ability to
utilize the academic and social capital of its members, the support it managed
to recruit from American economists, and strong internal co-ordination
(Maman and Rosenhek 2007).
These conditions allowed the stabilization team to control the plan’s fram-
ing and marketing process. An additional critical precondition was provided
by the supportive political conjuncture, which included completion of the
Histadrut’s electoral cycle and Israel’s successful military withdrawal from
Lebanon (Shalev and Grinberg 1989). These political conditions provided the

85
Ronen Mandelkern

“policy window” in which decision-makers could commit to such a dramatic

economic reform.
The stabilization team’s success is even more conspicuous when compared
with the experience of the economists who promoted the 1983 Dollarization
Plan (Mandelkern and Shalev 2010). Both programs were established on
essentially identical causal ideas, according to which inflationary acceleration
resulted from continuous devaluations as well as demand pressures. Accord-
ingly, both programs included almost the same set of stabilization measures
and emphasized the need to freeze the exchange rate. Yet despite the incum-
bent Finance Minister’s enthusiastic support for dollarization, he and the
economists who promoted it failed to persuade other decision-makers. The
weaknesses of the dollarization team, in terms of both internal co-ordination
and academic prestige, limited its ability to convincingly frame and therefore
market the program. These difficulties were combined with an unsupportive
political conjuncture: a weak and narrow coalition government, which faced
an election in less than a year and was preoccupied by Israel’s lingering
military engagement in Lebanon. The comparison of the 1983 and 1985
plans shows that crisis conditions and potentially effective policy proposals
are not sufficient conditions for translating the ideas propagated by econo-
mists into economic policy decisions.
While the political success of the stabilization team was impressive, it did not
guarantee the long-term implementation of fiscal and monetary restraint. The
Stabilization Plan brought with it the much hoped-for economic results, with
inflation falling more or less immediately from more than 400 percent to a
25 percent annual rate. Yet this success brought with it renewed pressures
for more relaxed fiscal and exchange rate policies, threatening renewal of the
old cycle of inflation fueled by devaluations (Bruno 1993; Grinberg 1991). In
this context, the maintenance of stabilization was supported by institutional
“bricolage”—rearrangement of existing institutions (Mandelkern 2015a;
Campbell 2004; Sheingate 2010)—which created barriers against renewed
fiscal and monetary expansions. This included several legislative amendments
regarding the operation of macroeconomic policy, which enhanced the BoI’s
control over monetary and exchange rate policy (such as the ban on “printing
money”) and enhanced the MoF’s control over fiscal policy (The Omnibus
Economic Arrangements Law and the Budget Foundations Law) (Maman and
Rosenhek 2007; Ben-Bassat and Dahan 2006).
These changes were based on economists’ institutionally focused political
entrepreneurship (Crouch 2005; Sheingate 2003, 2010), through which they
succeeded in restructuring prevailing institutions to facilitate new political–
economic goals. As already mentioned, Israeli economists were not just critical
of domestic macroeconomic policies and their harmful economic conse-
quences but have also been traditionally critical of common unprofessional

86
 Institutionalizing the Liberal Creed

and overly politicized policymaking norms. In the context of economic escal-

ation, prominent economists from academia wrote in the local Economic
Quarterly on the general problems of distrust in the government and the role
of organized interests and bureaucracy in disabling any substantial and proper
policy solution. Concurrently, senior officials from the BoI and the MoF were
using the same forum to foreground more concrete problems in the imple-
mentation of monetary policy and fiscal policy. They referred, among other
things, to the limited control the central bank and the MoF’s Budget Division
held over monetary policy and fiscal policy (respectively). The solutions—
greater central bank control over monetary policy and greater centralization of
fiscal management in the Budget Division—were forcefully mooted (Mandelkern
2015a, 2015b).
As in the adoption of ultraorthodox macroeconomic policies, economists
utilized a crisis to gain politicians’ support for their institutionally focused
political entrepreneurship. BoI and MoF officials justified the adoption of the
“non-printing law” as a means to minimize deficit spending and the adoption
of the Budget Foundations Law as a means for greater monitoring of the
“spending” governmental branches. At the height of the crisis, political
decision-makers were very attentive to these arguments, and they allowed
the bypassing of normal legislative procedures. As a consequence, the enact-
ment of these legislative amendments was hardly controversial despite the
fact they actually shifted the boundaries of political authority.7
While these changes had significant effects, they were built on those same
state institutions consolidated in the past as embodiments of “embedded
illiberalism” and now transformed into signifiers of the liberal creed. As
institutionally focused political entrepreneurs, whose ability to radically
rebuild state institutions is very limited, economists creatively pressed for
adaptations of the existing institutions which they staffed and utilized as
power bases.
The 1985 fiscal policy amendments were initially defined as temporary
measures but were later on fully institutionalized. They were joined by add-
itional legislative amendments, the most important of which set strict limita-
tions on the government’s deficit and expenditures. At the same time, the BoI
had strengthened its grip over monetary policy and over macroeconomic
policy as a whole. The result, similar to the pattern observed elsewhere, was

7
Only minor objections were registered against the non-printing law, which was passed in the
Parliament by a huge majority, or to the laws that increased the MoF’s powers. The non-printing
law was accepted almost unanimously by the parliament. The Budget Foundations Law was hardly
debated and most attention was given to the 1985 Budget Law with which it was discussed.
Similarly, discussions over the 1985 Omnibus Economic Arrangements Law generally focused on
its content—its expected impact on wages, workers’ dismissals and taxes—rather than its
implications for the relative power of the MoF.

87
Ronen Mandelkern

a series of gradual but incrementally potent changes (Mahoney and Thelen

2010b; Streeck and Thelen 2005a). These changes institutionalized a monet-
arist framework for macroeconomic policymaking intended to support and
regulate, rather than limit or replace, the operation of market mechanisms.
The liberal creed—prematurely born some fifty years earlier—was finally endo-
genized into state institutions (Ben-Bassat 2002a; Shalev 1999).

Conclusions

Figure 5.1 summarizes the narrative offered in this chapter and illustrates
the deep ideational and institutional roots of economic liberalization in Israel
and the “big, slow-moving and invisible processes” (Pierson 2003) that
enabled it. These roots date back to the 1950s, when Don Patinkin founded
the economics discipline at the HU and his first disciples took part in foun-
ding the BoI and the MoF. The liberal creed which guided these economists,
which carried a message of professionally regulated market economy, contra-
dicted the political–economic context that prevailed in Israel at the time, of
extensive politicized governmental interventions; yet it was the same
political–economic context which allowed the Israeli economics profession
to gradually develop and strengthen within its organizational strongholds.
These strongholds functioned as institutional greenhouses in which the
liberal creed was not just maintained but also flourished. They made possible
the institutionalization of a profession—through the establishment of
common practices, training, and academic capital—that would embody the
liberal creed. Finally, against the backdrop of the crisis of corporatist policy
arrangements and solutions, economists were able to utilize their existing
accomplishments and resources to displace the corporatist logic and institu-
tionalize an alternative liberal logic. In this respect the Israeli experience
parallels that of other countries in which economic bureaucrats played a
pivotal role in a state-led economic liberalization (Fourcade-Gourinchas
and Babb 2002).
Most studies of Israel’s political economy rightly point to the role of
the deep economic crisis and the Stabilization Plan designed by economists
in driving economic liberalization. Nevertheless, Israel’s political–economic
transformation can be properly understood only by acknowledging its deeper
roots, which provided the ideational and institutional bases that economists
could have utilize when the moment was ripe. The crisis presented a golden
opportunity to suggest an institutional alternative in the 1980s. Their ability
to design this alternative rested on a set of theoretical principles common to
the economics profession that preceded neoliberalism. Their capacities to
realize the transition to a new economic role for the state rested on their

88
 Institutionalizing the Liberal Creed

State formation,
politicized 1985:
1975: Ben-
Power struggles Shahar
Stabilization
decision-making Plan
between the state and Committee
organized interests
Politics

1983:
Dollarization
Political and economic Plan
1962: New crises; “Split Corporatism” Intensification of
Economic Breakdown of “old
at its height political and
Plan
corporatism,”
1966: economic crises
Recession dealignment of the
party system
1950s 1960s 1970s 1980s 1990s

Further political
empowerment of
Economists

Economists design, promote, institutional strongholds

and lead the new economic
Economic agenda, utilizing prevailing
professionalism institutional strongholds
as an alternative to
Institutional political policymaking
Formation of
consolidation, first
institutional
attempts to influence
strongholds

Figure 5.1. Economists and Politics in Israel since the 1950s

well-established professionalization, organizationally and ideationally; the

prestige, social connections, and political experience they managed to accu-
mulate over the years; and their direct role in advising and operating key state
agencies. These were the political resources which allowed crucial though
initial reforms in 1985, on which further reforms could be built.
The Israeli experience further demonstrates the transformative potential of
economic ideas that has been documented in many other cases (e.g. Blyth
2002; Hay 2001; McNamara 1999), while also exemplifying that the fulfill-
ment of this potential requires supportive political conditions. At the entre-
preneurial level these include sufficient academic, social, and political capital,
which could be converted into political influence. At the institutional level
the political conditions included the introduction of institutional arrange-
ments which could be utilized for the long-term anchoring of ad hoc and
temporal political successes. This chapter thus underlines the contingent
character of the transition to neoliberalism and challenges deterministic
accounts of any kind, whether they argue that economic conditions obliged
Israel to take the shift it took, or that it was inevitable that the institutional
seeds sown in the 1950s would materialize in the 1980s. The historical origins
highlighted here should be seen as no more, but also no less, than the political
and institutional resources potentially available to the carriers of the liberal
creed, which they succeeded in using and in fact are still using in their
ongoing political struggle (Maman and Rosenhek 2011; Mandelkern 2011).
This chapter has focused on processes that occurred in roughly the first four
decades after Israel’s establishment, climaxing with the decisive rise in the

89
Ronen Mandelkern

political power of the organizational strongholds of liberal economists in

the 1980s. A quick glance at more recent developments reveals the further
maturation of these processes. The BoI has further strengthened; the MoF, and
its Budget Division in particular, further consolidated their role as entrepre-
neurial and effective reformers; and an Economic Council, the backbone of
which is composed of professional economists, was founded. Patinkin’s liberal
creed has indeed become deeply institutionalized (Mandelkern 2015b).

90
Part 2
Neoliberalism and Social Policy Reform
6

Pathways to Neoliberalism
The Institutional Logic of a Welfare State Reform

Michal Koreh and Michael Shalev

Neoliberalism can be understood as a set of programmatic principles—such

as privatization, balanced or surplus budgeting, and “new public manage-
ment”—that comprise both an economic theory and an ideological worldview.
In their masterful comparative analysis of neoliberal transitions in four European
and American states, Fourcade and Babb (Fourcade-Gourinchas and Babb 2002)
delineated two distinct paths: “ideological” and “pragmatic.” In the first, exem-
plified by Thatcher’s Britain, political and business elites formed an aggressive
coalition against a militant working class. In the second path, illustrated by
Mitterrand’s France, neoliberalism was promoted by technocrats as a pragmatic
response to acute external pressure on the domestic economy, reluctantly
accepted by the government of the day.
The case study which is the topic of this chapter concerns one of the building
blocks used by Israel’s Ministry of Finance (MoF) in a decades-long struggle to
refashion Israel’s welfare state into a neoliberal edifice. The dichotomy painted
by Fourcade and Babb on a much larger canvas describes two divergent inter-
pretations of our case, and others like it. The rise of neoliberal policies and
practices in Israel has often been interpreted as the result of an ideological
campaign led by market fundamentalists in the MoF, with the active support
of business interests and the political elite. Instead, we argue that our case is
closer to the pragmatic path to neoliberal practices. However, while Babb and
Fourcade used the term pragmatic to refer to adoption of neoliberal policy tools
as practical solutions to economic problems, we show that the pragmatic path
to neoliberalism can have a tactical dimension. Neoliberal rhetoric and prac-
tices may be embraced in the context of struggles among state agencies over
institutional power and autonomy. More fundamentally, we argue that the
Michal Koreh and Michael Shalev

convergence of some neoliberal principles with the institutional interests of

specific state agencies (in our case, the MoF) is crucial to identifying both
motives and capacities for neoliberal reforms that are endogenous to the state.
Hence, like other case studies in this volume, our chapter underlines the
importance of intra-state conflicts of interest in either motivating neoliberal
reforms or driving changes in the institutional architecture of the state that
make these reforms possible.
As discussed in the Introduction and several other chapters, the year 1985
was a watershed in the evolution of Israel’s political economy due to the
government’s adoption of the Emergency Economic Stabilization Plan. The
plan constituted the first major success by fiscal bureaucrats (backed by allies
in the central bank) in profoundly altering the role of the MoF in the political
economy and strengthening its position vis-à-vis politicians and other
bureaucrats inside the state, and labor and capital outside. One of the most
critical substantive tasks of this autonomy drive was to increase the Treasury’s
control over transfer payments, which resisted retrenchment longer and more
stubbornly than most other major categories of state expenditure (Shalev 1997).
Alongside overt and covert efforts to alter political perceptions of the legit-
imacy and the feasibility of income maintenance, the MoF set out to weaken a
troublesome veto player, the National Insurance Institute (NII), the state agency
responsible for disbursing the lion’s share of social benefits. The struggle to
restructure power relations between these two state agencies pivoted on a series
of low-key and seemingly innocuous changes in the financing of the social
insurance system, which successively lowered the payroll taxes levied on
employers. This stepwise reform shifted a decisive share of financial responsi-
bility for social insurance to the MoF, ironically causing state spending to rise
at a time when fiscal probity was the leitmotif of Treasury policies.
This case typifies the pragmatic core of many neoliberal reforms. They are
initiated in response to the realization of specific agencies that prevailing
institutional arrangements, even if they were previously a source of resources
and capacities, have become a burden that weakens their institutional
position within the state apparatus. To the extent that the institutional interests
of state agencies converge with neoliberal programmatic goals, the two motive
forces are mutually reinforcing. In this vein, Israel’s MoF simultaneously
pursued the strategic aim of increasing its power and autonomy, and trans-
forming the modes and magnitude of state intervention in the economy in a
direction that was increasingly framed in neoliberal terms. Nevertheless, the
behavior of Treasury officials in their drive to reform social insurance finan-
cing reveals that their adoption of neoliberal rhetoric and practices was selective
and instrumental. Certainly, Israel’s fiscal bureaucrats authentically believed
in and energetically pursued fiscal discipline, self-reliant citizens, and other
staples of the neoliberal creed. But these same staples were sacrificed if and

94
 Pathways to Neoliberalism

when it was necessary in order to reach the higher goal of augmenting

institutional autonomy and power.
Further down the road, the Treasury’s success in trimming the wings of the
National Insurance Institute was arguably an indispensable precondition for
the quantitative retrenchment and qualitative changes to the system of social
protection that the MoF successfully pursued in the early 2000s (Doron 2007).
These reforms were aimed at recommodifying citizens and restraining expend-
iture, the two central pillars of neoliberal social policy. Thus, changes in the
institutional architecture of the state played an indispensable role in paving
the way to the neoliberal welfare state.
A theoretically and historically informed perspective on relations between
the Treasury and the NII reveals that their interests are not necessarily
opposed. Indeed, this chapter shows that in an earlier period the MoF used
surplus social insurance revenues to finance the activities of Israel’s develop-
mental state, while permitting the NII to retain part of these surpluses to pay
for benefit improvements. But over time the institutional structure of finan-
cing allowed the NII to acquire the status of a veto player when cutbacks came
onto the agenda, thereby hindering the Treasury’s ability to restrain expend-
iture. Furthermore, program maturation and changes in the political economy
undermined both the motivation and the ability of the MoF to utilize social
insurance surpluses for financing the state budget. This explains why recon-
figuring social insurance financing became so critical to the institutional
capacities and autonomy of the MoF, and why it was willing to take such
extraordinary measures.
The section that follows begins by presenting the major elements of the
financing reform and linking it to contingencies specific to the Israeli context.
We then turn to the task of exposing the logic of institutional autonomy that
drove the reform. A first step provides an overview of key features of social
insurance financing, and the second shows how these features historically
played out in the case under scrutiny.

From a Trilateral System to Treasury Domination

Responsibility for managing and implementing most of the Israeli system of

income maintenance is vested in the National Insurance Institute. The NII
collects taxes and distributes benefits for social insurance programs covering
the typical range of risks, and it also disburses social assistance and a variety of
other non-contributory benefits. In order to guarantee its financial autonomy,
by design the Institute has its own apparatus for revenue collection. Until
the mid-1980s reform, these revenues were based primarily upon earmarked
contributions paid by insured workers and their employers. However, beginning

95
Michal Koreh and Michael Shalev

in 1986, the MoF initiated a series of cuts in employers’ contribution rates to the
NII, which by the late 1990s had been virtually eliminated.1 Reductions in
employers’ contributions were accompanied by special allocations from
the Treasury fully compensating the NII for lost revenues. As a result, the old
trilateral financing system was transformed. While earmarked contributions
from employers and employees had previously served as the main financing
source, with the state budget playing a secondary role, the NII became increas-
ingly dependent on the government as its most important source of funding
(Doron 1999; Koreh 2004). To illustrate this transformation, while in 1985
insured workers, their employers, and the self-employed were together respon-
sible for 80 percent of the financing of the contributory benefits administered by
the NII, by the mid-1990s the government’s share had risen from 20 percent to
almost 60 percent.2
On the surface, this reform has much in common with other typical neo-
liberal reforms. Reducing employers’ taxation burden is a common supply-
side policy associated with the neoliberal policy tool kit. The declared goals of
the reform (though changing over time) resonate with core neoliberal prin-
ciples including achieving and maintaining price stability and facilitating the
creation of jobs by reducing taxes on employers. Furthermore, in the long
term the reform contributed to two central goals of neoliberal social policy:
expenditure restraint and the recommodification of citizens. Nevertheless, as
we explain later in this chapter, the usual suspects thought to explain a reform
of this nature—including a neoliberal ideological turn within the government,
or the growing power of business at the expense of labor—are unable to account
for this case. Instead, the following analysis suggests that the reform was mainly
driven by MoF’s interest in regaining institutional autonomy and control over
spending agencies like the NII.
The first step in the reform process occurred one year into the stabilization
process. In the face of declining profitability in powerful segments of the
economy, policymakers faced the prospect of new rounds of price increases
and were under pressure from exporters to implement an inflationary devalu-
ation. In July 1986 the Treasury pre-emptively responded by unilaterally
reducing employers’ social contributions at its own expense. This was
presented as a temporary measure and was enacted by administrative means.

1
In 1997 employer contributions to social insurance were partially reinstated as a technical
means of offsetting the formal cancellation of their obligation to contribute to the health insurance
system.
2
As noted, this calculation refers only to contributory (insurance-based) benefits. Since the mid-
1990s about one-fifth of the benefits disbursed by the NII are noncontributory and are financed
entirely by general revenues. Between 1984 and 1995 the government’s share of all NII finances,
including this component, rose from one-third to two-thirds. All figures cited in this note and the
body of the text are authors’ calculations based on data supplied by the Research and Planning
Division of the NII in July 2009.

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 Pathways to Neoliberalism

A further cut was implemented at the beginning of 1987 as part of a tripartite

“package deal” between the state and the peak associations of labor and
industry, again with the intention of compensating the employers and assur-
ing their commitment to price stability (Grinberg 1991; Koreh and Shalev,
Chapter 6, this volume). Reductions in employer contributions continued in
the 1990s, but with inflation under control and unemployment occupying
the limelight, lowered contribution rates were now justified by the MoF as
a means of reducing labor costs in order to encourage the creation of new
jobs for the massive wave of immigrants arriving in Israel from the former
Soviet Union.
While reductions in employer contributions were indeed used by the Treas-
ury as a means to cope with acute macroeconomic problems, we argue that
they were primarily motivated by the drive for intra-state restructuring. For
the MoF, the inflation crisis of the early 1980s was not just an economic
problem. It was accompanied by, and to a significant degree resulted from,
the Treasury’s loss of control over spending by the operational agencies of the
state, particularly those with autonomous sources of finance. Consequently,
MoF policies were aimed not only at maintaining price stability, but also at
regaining autonomy and control. We contend that in common with later
reforms of health care and pensions, the MoF’s patient campaign to reform
social insurance finance was deliberately intended to neutralize the NII by
making it dependent on funds controlled by the MoF.
Fiscal bureaucrats hoped to put an end to the old tripartite financing
arrangement, because the financial independence enjoyed by the NII under
this system had reached a point where it conflicted with key Treasury inter-
ests. To understand the dialectic which transformed NII independence into a
threat to the autonomy of the MoF and its ability to perform its core budgetary
and macroeconomic functions, it is necessary to grasp the fiscal dynamics
inherent in social insurance financing, and the corresponding dilemmas they
pose. After a brief exposition of these universal features of social insurance
systems, we show how and why in Israel the initial financing structure ceased
to render advantages for the MoF and instead turned into a burden.

Dilemmas of Social Insurance Financing

Fiscal agencies are the bearers of a core existential requirement for the estab-
lishment and viability of states: their ability to extract revenues. This gives
finance ministries an obvious interest in preventing expenditure from out-
pacing their capacity to raise revenues: they are by nature savers rather than
spenders (Wildavsky 1964). At the same time, finance ministries also care
about the magnitude of both revenues and expenditures for a quite different

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Michal Koreh and Michael Shalev

reason: their responsibility for macroeconomic policy and performance.

In this context a budget surplus or deficit may be seen as a means toward
ends such as growth, investment, and price stability.
In a social insurance system, benefits are paid for by some combination of
general revenues (taxes on income, consumption, etc.) and mandatory con-
tributions from employers and employees. These contributions constitute a
fund of their own, separate from the state budget and earmarked for specific
income maintenance schemes (Campbell and Morgan 2005). The distinction
between contributory and non-contributory finance has profound implica-
tions for the state’s ability to control social expenditure, on the one hand, and
to extract revenues on the other.
In non-contributory systems, where benefits are financed through general
revenues, the Treasury has the capacity to exert centralized control. Since
all social revenues and expenditures pass through the MoF apparatus, it is
relatively simple to move resources from one domain to another and to
implement spending cuts. This is also an important source of power for fiscal
bureaucrats over social bureaucrats. Furthermore, in the absence of the
perceived linkage between individual contributions and benefits—a pillar of
contributory systems—there tends to be less political pressure to spend and
more reliance on residual social assistance. As residual benefits are discretion-
ary rather than an entitlement, it is politically easier to tighten eligibility
criteria once the allocated budget runs out. And since social assistance is
offered only to those with acute and demonstrated need, the potential for
budgetary control is further enhanced (Brodsky et al. 2003).
In contrast, in a contributory system, funds are collected and earmarked for
specific purposes, and they are managed by an independent government
bureaucracy and/or by representatives of the “social partners.” In addition,
when the workforce expands or earnings increase, revenues from contribu-
tions rise correspondingly. Greater availability of earmarked resources tends to
create pressures to raise spending. To make matters worse, there are strong
political barriers to retrenching the entitlements offered by contributory
systems. Insurance-based benefits facilitate broad political coalitions between
working- and middle-class beneficiaries, especially in social-democratic wel-
fare states. In other contexts, especially the conservative welfare states, these
benefits are concentrated among powerful “insider” groups (Rueda 2005).
Despite these evident disadvantages of contributory financing from the
viewpoint of expenditure control, it offers an overwhelming advantage on
the revenue side of the fiscal equation. This is especially the case when
contributions surpass expenditures and the resulting surpluses are invested
in state bonds and added to the capital budget. This advantage was fully
recognized by the founders of both the German and American systems of
social security (Leff 1983; Manow 1997; DeWitt 2007). Later, during the first

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two postwar decades, many governments moved toward contributory systems

in order to increase their revenues (Heidenheimer, Heclo, and Adams 1975;
Sjoberg 1999; Wilensky 2002). One motive for this change was to provide a
macroeconomic instrument for Keynesian fiscal management by using social
taxes to cool down an overheated economy (provided, of course, that the cost
of benefits fell short of revenues from contributions). In addition, govern-
ments found that there was less political resistance to raising earmarked
contributions to social security than to increasing taxes on income or prop-
erty. Part of the burden of social insurance financing on taxpayers is masked
by the role of employer and government contributions. At the same time, the
taxes directly paid by beneficiaries are more favorably regarded than other
taxes because they can be expected to yield benefits in the future (Wilensky
2002; Doron 1999).
The implication of the preceding analysis is that finance ministries face an
unavoidable dilemma in the financing of income maintenance. While a
contributory system facilitates revenue collection, it hampers control of state
expenditures. In turn, the relative salience of revenue raising and expenditure
control depends at any given time on the macroeconomic policy agenda of
finance ministries. The fact that three functions are involved rather than only
one complicates the classic conflict of institutional interests between fiscal
and social bureaucracies, given that the former is responsible for guarding the
public purse while the latter seeks to expand social rights, benefits, and
services. For these reasons, the durability of a financing model is connected
to its ability to accommodate the tension between the multiple MoF interests,
and the degree to which the Treasury’s autonomy is undermined by the fiscal
obligations imposed by the social insurance system and the extent to which
they limit freedom of choice in macroeconomic policy.
The following section shows how this dialectic played out in Israel over the
years that preceded the reform initiative. By the early 1970s an institutional
equilibrium was reached which accommodated the interests of both fiscal and
social bureaucracies. However, with time, this equilibrium was eroded, creating
endogenous pressures within the fiscal bureaucracy to transform the system.

From Compatible to Conflicting Interests

The founding of the NII and the decision to base it on a contributory, tripartite
financing model (employers, employees, and the state) occurred in 1953, a
period of sharp austerity. A newly established state, immediately embroiled in
war, set about absorbing vast numbers of new immigrants in the context of a
weakly industrialized economy. Under these circumstances the government
and the MoF were reluctant to accept any policy that implied a binding

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Michal Koreh and Michael Shalev

expenditure commitment. Their eventual support for the establishment of the

NII was won only after the MoF realized that a contributory system supported
by employers and employees would not only cover the cost of NII disburse-
ments but would also provide a significant source of additional revenue.
Indeed, for a long time contributions to the old-age benefit program—by far
the largest—surpassed expenditures. The resultant surpluses were invested in
government bonds, helping to finance public investment in an era of state-led
industrialization (Morag 1967; Barkai 1998; Doron 1975). The combined
effects of a youthful demographic structure of the Israeli population and the
conditioning of individual entitlement on a history of paying into the system
ensured that both the scope and volume of the transfer payments distributed
by the NII were relatively small. Over the course of time, new programs were
introduced and coverage was extended, but overall expansion was minor.
In this specific historical context, the contributory financing model made
it possible for both fiscal and social bureaucrats to achieve their partially
contradictory goals. The NII enjoyed an autonomous position as it received
earmarked contributions and was not dependent on budgetary allocations,
while the MoF could extract substantial revenues from the public at a politic-
ally negligible price, without facing a major problem of expenditure control.
The Treasury would of course have preferred to manage the social funds itself,
and indeed made several attempts at merging their administration into the
income tax machinery (Doron 2004; Doron and Binder 1958). However, in
view of the fiscal and macroeconomic advantages of the positive balances that
accumulated in the funds, it was able to live with the fact that they were under
NII control.
Over the years, fiscal and macroeconomic considerations continued to play
a major role in sustaining and even expanding the contributory social insur-
ance model. The most prominent example is a decision taken in April 1970 to
double contribution rates. This measure was aimed at resolving two acute
problems. The first was the need to finance rising defense spending, and the
second was to help contain a balance of payments crisis by reducing the
public’s purchasing power. However, even though the motivation for raising
social taxes was not derived from social policy considerations, in seeking to
legitimize increased contribution levels the government offered new social
entitlements, which were then further expanded as legislators and societal
actors demanded new programs and more generous entitlements in light of
the large, visible surpluses of the social insurance system (Koreh Forthcoming).3

3
The expansion of benefits was intensified later on, due to social unrest that developed in the
early 1970s. This unrest, connected to the establishment of the Israeli Black Panther movement
and urban riots under its sponsorship, challenged the legitimacy of the dominant party, which
hoped to restore order through increasing social expenditure and social rights (Hoffnung 2006).

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 Pathways to Neoliberalism

The result was a taxing and spending spiral. Between 1969 and 1976 the
total benefits disbursed by the NII rose from 2.9 percent to 7.1 percent of gross
national product (GNP) (Barkai 1998: 59). From the vantage point of the MoF,
the cost of new entitlements was rapidly outpacing the benefits of increased
charges. In 1972 the Treasury was obliged for the first time to transfer funds to
the NII, exacerbating the tension between the Treasury’s multiple interests.
Macroeconomic developments brought this tension to a head. Following
the costly October 1973 war and subsequent energy price increases, the Israeli
economy entered a period of stagnation which, in the early 1980s, was
accompanied by recurrent crises in the balance of payments and spiraling
inflation (Ben-Porath 1986b). The developmental state model no longer
provided a workable formula for economic growth, nor was it fiscally viable.
Rapidly rising inflation exacerbated the problem of expenditure control by
veiling the magnitude of the spending carried out by government agencies
and the scale of government subsidies to private and semi-public bodies.
The cost of capital subsidies and government lending ballooned, tax collec-
tion was hampered, and the resulting fiscal crisis posed a severe threat to
fundamental state capacities.
These developments intensified the Treasury’s growing disenchantment
with the system of social insurance financing. Like other institutional
changes promoted by fiscal bureaucrats in the framework of the Stabilization
Plan and since then, the reduction of employers’ contribution levels and
their replacement by budgetary allocations was aimed at restructuring power
relations between state agencies. It profoundly changed the fiscal relations
between the MoF and the NII, increasing the autonomy and control of
the former while creating increasing financial dependency of the latter.
As explained in the previous section, increased budgetary financing
enhances the capacity of the finance ministries to exert centralized control,
move resources from one domain to another, and implement spending cuts.

Corroborating Evidence of Intent

Our interpretation of the financing reform assumes that Treasury officials self-
consciously and strategically sought to act as agents of institutional change,
and that they deliberately attempted to disguise their true designs. Not
surprisingly, however, there is no direct evidence for these claims. Moreover,
although we hypothesize that restructuring institutional power relations was
the underlying motive of fiscal bureaucrats from the outset, it may be that
their motives became increasingly strategic as they went along. Consistent
with the first and stronger claim, in the early stages of the financing reform, its
opponents (NII officials and sympathetic members of parliament) expressed

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Michal Koreh and Michael Shalev

their concern that the Treasury’s proposal would lead to growing dependency
of the NII upon the MoF (Koreh 2003). Yet since these critics were themselves
self-interested, it would be hazardous to accept their interpretation without
corroborating evidence. We find indirect support for our interpretation in
the actions and statements of MoF officials when agitating for comparable
reforms in other areas of social protection that enjoyed autonomous sources
of funding.
The strongest evidence of fiscal bureaucrats consciously seeking to restruc-
ture financing in order to erode the autonomy of social bureaucrats was
provided a decade after the first reform of NII finance, when the MoF engin-
eered a restructuring of health insurance financing. This reform left no doubt
that Treasury officials were fully aware that making welfare state institutions
dependent on MoF-managed revenues was an effective way to tighten their
control over expenditure (Koreh 2003).
The reform of health insurance, legislated in 1994 (see Asiskovitch,
Chapter 8, this volume), extended coverage by making enrollment and pay-
ment of a new social tax compulsory for all Israeli residents. In the wake of this
reform a Treasury initiative in 1997 led to elimination of employers’ contri-
butions to health insurance (which had been an integral part of the previous
voluntary system), replacing them by allocations from the state budget. This
decision was taken after a financial forecast showed that revenues from con-
tributions were increasing as a result of economic growth, and were about to
exceed what was needed to cover the health expenditures mandated by the
new law. Fearing that rising revenues from health insurance contributions
would drive health spending upwards, the MoF chose to relieve employers of
their obligation to contribute (Koreh 2001b). But instead of actually laying the
obligation to make up for lost revenues at its own doorstep (as it had done
previously when relieving employers of their fiscal obligations), the Treasury
reinstated the payroll tax for health as a general social insurance contribution.
The increased contribution rate was not substantial enough to undermine
MoF domination of social insurance funding. Indeed, over the decade after
the new system of healthcare finance was introduced, despite fluctuations
in employers’ contribution rates the fiscal dependency of both the NII and
the health insurance system on the budget as their main funding source was
consistently preserved (Koreh 2004; National Insurance Institute 2014).
The healthcare reform buttresses our interpretation because it provides
explicit evidence of the Treasury’s motives. While not articulated a priori,
the reasons for the Treasury’s objections to targeted and earmarked financing
were subsequently disclosed in internal MoF documents. A few years after the
new system was put in place, a Treasury official responded to a proposal to
reinstate employers’ contributions in these words: “It would not be right for
the health budget to be determined in a particularistic way in accordance with

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the revenues available from employers, instead of in accordance with prior-

ities [and] resource constraints” (Riklin 2000; see also Arbel 1998). The insti-
tutional logic of this argument is clear. The state’s overall spending priorities
are specified in the Budget Law and the associated Omnibus Law, both of
which are predominantly determined by Treasury officials (Ben-Bassat and
Dahan 2006). Similarly, when finance comes out of general revenues, it is the
Treasury which defines “resource constraints.” Accordingly, as Mizrachi and
Cohen also conclude, the MoF was clearly guided by the maxim that “to
control welfare-state expenses and be able to reduce them, the government
must first control the funding and management of welfare-state mechanisms
and organizations” (Mizrahi and Cohen 2012: 412).
The case of restructuring the financing of occupational pensions also
supports our institutional interpretation of the pragmatic motives behind
previous reforms of social insurance and health insurance (on the pension
reform, see Grinberg, Chapter 2, this volume). In contrast to healthcare, the
reform of occupational pensions was conducted entirely by the Treasury, in
the framework of its regulatory responsibilities for the capital market. Both the
financing and provision of pensions was privatized, using a design developed
and imposed by the MoF. In a preparatory phase, under cover of allegations of
incompetence and a looming actuarial deficit, the MoF conditioned the state’s
financial guarantees to the pension funds on their consent to being national-
ized. By weakening the position of the labor organization as a veto player and
nominating state officials from the MoF as the fund’s managers, the Treasury
was able to enhance its power over the funds and then to utilize this power to
enforce their privatization. Pensions and their associated financial accumula-
tions were handed over to private insurance companies, expanding the capital
market. The Treasury thereby enhanced not only its control over public
spending, but also its ability to influence investment finance by regulating
non-state actors (Maman 2004; Peleg 2006; Ratson 2010). Thus, while the
process itself was different from both the NII and the health funds, it followed
a similar logic. The MoF again used changes in financing to pursue its interest
in securing cost control and leverage over policy administration by weakening
rival centers of power.

Alternative Explanations of the Social Insurance Reform

In evaluating our proposed explanation for the absorption of the employers’

share of social insurance financing into Israel’s state budget, we began by
reviewing the stepwise course of the reform. The incremental and low-key
character of this reform is typical of processes of far-reaching institutional
change in the welfare state based on a series of gradual steps carried out in

103
Michal Koreh and Michael Shalev

stealth (Hacker 2004; Streeck and Thelen 2005a). Furthermore, like other
instances of small steps that ended up having big consequences, the chain
of events recounted here culminated in significant retrenchment measures.
This temporal sequence is consistent with the motives we attribute to the
MoF, but it cannot explain why these motives were so potent. We also
addressed this lacuna by showing first why and then how, from the Treasury’s
viewpoint, social insurance financing became a benefit that turned into a
burden. We reasoned that once the cost of benefits outpaced social insurance
revenues, thereby compounding ongoing burdens of inflation and fiscal crisis,
the MoF had good reasons to attack the core institutional foundations of the
system, the autonomy of financing and its control by the NII. Then, in a move
aimed at compensating for the lack of explicit evidence of strategic intention-
ality on the part of fiscal bureaucrats, we fast-forwarded to later episodes in
which insurance-based schemes (healthcare and occupation pensions) were
restructured by the Treasury. In these later instances, direct evidence was
found of its drive to weaken (and if possible eliminate) financial independ-
ence, in order to prevent welfare state institutions from acquiring institutional
immunity from MoF control.
A further means of strengthening the plausibility of our account is to
dismiss alternative explanations for the social insurance reform. Of the three
most popular explanations for the social and economic policies of states,
we have focused only on one—the institutional dynamics of the state. The
other two explanations are pressure exerted by societal interests, which in the
power resources approach is equated with the balance of forces between
labor and capital (Korpi 1983); and the power of ideas, including ideological
convictions, legitimating discourses, and “instruction sheets” that prescribe
specific state practices (Blyth 2003). Both these untried solutions to our
empirical puzzle have obvious potential. Given the distributive implications
of relieving employers from the duty of contributing to the financing of social
benefits, it would be natural to assume that business interests played a decisive
role in initiating and supporting the reform and that it was opposed by
organized labor and its political allies. Similarly, in light of the centrality of
the supply side to neoliberal economics, a proposal to liberate employers from
payroll taxes to foster job creation could certainly be interpreted as ideation-
ally inspired (cf. Bradley and Stephens 2007). In addition, if we are right that
the MoF sought to gain power over financing in order to curtail public
expenditure on welfare, it could be that this and other outcomes sought by
neoliberalism (such as the recommodification of labor) provided the inspir-
ation for the struggle recounted in this chapter. However, in our view none of
these alternative explanations is convincing.
The hypothesis that the Treasury was responding to pressure exerted on the
state in the pursuit of class interests has no empirical foundation. We found

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no evidence that the reform was a response to business lobbying. On the

contrary, as noted earlier, the first financing reform was introduced on
the initiative of the Treasury as an expedient means of oiling the wheels of
corporatist bargaining. Moreover, there was almost no political opposition
from either the Histadrut peak association or the previously dominant and
still intermittently ruling Labor Party. Indeed, far from being accompanied
by political turbulence, the debate over eliminating employer contributions
was muted and the decision-making process unfolded far from the public eye,
taking on the character of a seemingly technical intra-state struggle between
fiscal and social bureaucrats.
These theoretically unexpected circumstances can only be understood
against the background of distinctive features of the politics and political
economy of Israel that persisted into the 1980s, and are discussed at length
in Chapters 1 to 5 of this volume. These features included on the employers’
side the existence of an array of direct and indirect subsidies by the develop-
mental state, which among other things enabled large firms (those with most
organizational and political power) to live with high payroll taxes. The lack
of opposition from the Histadrut can be explained by its interests as the
employer of as much as a quarter of Israel’s labor force, and its readiness to
endorse government policies in return for badly needed subsidies for its ailing
social services and businesses.
The ideational hypothesis fares no better. It suggests that instead of
being motivated by pragmatic and timeless interests inherent to ministries
of finance—managing public finances, stabilizing the economy, and above all
maximizing their own institutional autonomy vis-à-vis spending agencies—
the Treasury’s reform drive was actually driven by its ideological commitment
to canonical neoliberal policies. However, in the mid- and late 1980s when the
first major steps were taken to cut social charges on employers, neoliberal
economic policy discourse was still relatively undeveloped in Israel. In any
case, while the goal of freeing employers and the economy from the yoke of
taxation on jobs is consistent with neoliberal doctrine, it does not sit well with
the heavy burden that the reform imposed on the national Treasury, which of
course contradicted the goal of imposing budgetary discipline. (In 2005, for
example, lost revenues were equivalent to nearly a quarter of total public
expenditure on income maintenance.) Moreover, had the Treasury been
primarily concerned with job creation, then like governments in France,
Belgium, and the Netherlands it would most likely have opted for targeted
wage subsidies (Scharpf and Schmidt 2000: 116, 119). This method is both
cheaper and more effective than blanket reductions in social charges, and it
was undoubtedly known to MoF officials at the time (Bendelac 1997).
Rather than playing an inspirational role in the Treasury’s reform struggle,
in practice neoliberal principles were selectively invoked in order to legitimate

105
Michal Koreh and Michael Shalev

its actions. The public justifications offered by the MoF were far from consist-
ent over time, and were clearly tailored to meet current contingencies, in a
manner that suggests opportunism rather than adherence to principles.
Among the reasons publicly offered for cutting employer contributions at
different points in the reform process were a variety of macroeconomic
objectives, including promoting price stability and making exports more
competitive, which have no special relationship to neoliberalism. When the
absorption of a massive immigration wave from the Former Soviet Union
became a policy preoccupation in the early 1990s, the MoF claimed that
cutting payroll taxes were essential in order to meet this national imperative.
The opportunistic character of the justifications mobilized by the Treasury
officials suggests that they were well aware of the potential power of ideas in
persuading policymakers and public opinion to endorse its proposals. It does
not imply that ideas were the source of the proposals themselves.

Conclusions

This chapter has described a quiet revolution in the financing of social insur-
ance in Israel. As supporters of the social security system pointed out early in
the reform process, far from being merely a technical innovation, the transfer
of employer obligations to the state budget had fateful implications for the
future of income maintenance (Koreh 2004; Doron 2006). Although the NII
was compensated for its lost revenues the reform eroded its prior financial
autonomy, and it became far more dependent on general revenues. This
rendered its programs potentially vulnerable to both across-the-board cuts in
public spending and retrenchment of specific benefits. Early in the 2000s,
after three decades of largely unsuccessful struggles against the rising fiscal and
economic significance of transfer payments, the MoF succeeded in imple-
menting a package of cuts and rule changes that finally turned the tide.
While a variety of contingencies generated the conditions under which
broad benefit retrenchment became possible at this time,4 restructuring of
state institutions—including the growing role of the MoF in social insurance
financing—provided essential preconditions.
In the case studied here, the acquisition by fiscal savers of institutional
capacities enabling them to triumph over social spenders was driven by a
striving for autonomy rather than by a priori ideology. The seeds of this
autonomy drive were sown by the fiscal crisis of Israel’s developmental state
that resulted from contraction of discretionary foreign gifts, the rising

4
Among other things, the cuts were facilitated by a dual economic and security crisis and the
unusual makeup of the government coalition (Aviram, Gal, and Katan 2007).

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 Pathways to Neoliberalism

assertiveness of rank and file workers, and other formerly subordinate social
sectors, and the success of big labor and big business in extracting rents from
the state and frustrating its ability to steer the economy (Grinberg, Chapter 2,
this volume). Economic policymakers made successive attempts since the
early 1950s at overcoming barriers to their autonomy by pursuing policies of
liberalization (Mandelkern, Chapter 5, this volume). But it was not until the
crisis of hyperinflation in the mid-1980s that economists in the MoF, the
central bank, and academia succeeded in embarking on a succession of insti-
tutional changes that reduced not only the power of societal forces to extract
rents from the state, but also the ability of spending agencies to determine
public spending and to veto expenditure cuts. In this context, the Treasury’s
highest priority was to introduce policies and practices aimed at bolstering its
autonomy. While these policies and practices were increasingly formulated in
neoliberal terms, the neoliberal instruction sheet was invoked selectively and
instrumentally. It offered an ideational means to disguise the power motives
underpinning MoF reform initiatives by justifying them as essential, inevitable,
and disinterested.
The sphere of social insurance illustrates the dialectical forces which drove
the MoF to re-engineer the architecture of intrastate relations, and supports
our claim that neoliberalism served primarily as a means of achieving auton-
omy rather than an end in itself. The positive-sum game in which the MoF
and NII sometimes engaged in the first decades following the establishment of
the NII enabled the Treasury to obtain abundant and politically inexpensive
revenues and at the same time facilitated the expansion of social insurance.
After 1973, when economic growth ceased while defense spending sky-
rocketed and transfer payments were locked into an upward spiral, the MoF
experienced diminishing returns from collaborating with the NII. Moreover,
the trilateral financing system empowered the NII and allowed it to acquire
the status of a veto player when cutbacks came onto the agenda, thereby
hindering the Treasury’s ability to restrain expenditure. The result was the
series of decisions that eroded the fiscal sovereignty of the NII by eliminating
employer contributions and creating financial dependency on the MoF. Far
from being motivated by market fundamentalism, these moves reflected the
Treasury’s response to an institutional equilibrium that had become dysfunc-
tional in light of the changing prioritization of its dual functions of revenue
raising and cost control. They were also shaped by the broader realization—
imprinted on the Ministry’s institutional memory since the traumatic era of
hyperinflation—that cost control would be impossible without guaranteeing
its institutional supremacy over other state agencies.
This interpretation has been buttressed in two different ways. First, by
pointing to logical and empirical weaknesses in the hypothesis that the behavior
of the MoF was driven by neoliberal imperatives. Second, by comparisons with

107
Michal Koreh and Michael Shalev

subsequent reforms of health and pension insurance, showing that irrespective

of their substance, financing reforms shared a common institutional motive.
In all cases the intended outcome of the reform was to empower the MoF.
Thus, the rise of neoliberal ideology was not the motive force behind the
MoF’s patient campaign to wrest institutional autonomy and power from the
NII by restructuring social insurance financing. Indeed, neoliberal mandates
were ignored unless they contributed to the higher goal of restoring institu-
tional autonomy. At the same time, over the period in which the reform was
instituted, the MoF was increasingly drawn to neoliberalism as a set of idea-
tional principles and institutional practices which could assist the Ministry
to extricate itself from an institutional setting that no longer accommodated
its interests. Consequently, while insisting on the “pragmatic” rather than
“ideological” nature of the reform under study here, we nevertheless acknow-
ledge important feedback effects between pragmatism and ideology. As an
ideational body of principles and practices, neoliberalism provides both rules
for reform and reasons for their legitimation which facilitate institutional
changes aimed at strengthening the autonomy and control of finance minis-
tries and other economic agencies. In turn, when these enhanced capacities
are won, the way is paved for fiscal bureaucrats to promote further policy
changes that adhere to the neoliberal paradigm, which again provides legit-
imacy for their actions. Even if this process includes instrumental and select-
ive usage of neoliberal principles, it can create a cycle of increasing returns that
intensifies and reproduces itself. In this way, changes in the architecture of
social insurance financing in Israel created preconditions critical to the success
of later initiatives aimed at the central goals of neoliberal social policy,
retrenchment, and recommodification. Success in these endeavors was then
a means to further strengthen the Treasury’s autonomy and power.
In sum, at the tactical level opportunistic use of neoliberalism helped to
justify and promote institutional reconfiguration. At the strategic level, by
rendering the social insurance system dependent on state financing the
Treasury was able to enhance its autonomy at the expense of the NII, and
to use this reconfiguration of intrastate power relations to discipline social
spending, paving the way to additional reforms and the rise of the neoliberal
welfare state.

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7

“Wisconsin Works” in Israel?

Imported Ideas, Domestic Coalitions,
and the Institutional Politics
of Recommodification
Sara Helman and Asa Maron

One of the barriers to putting together a reform coalition is that the definition
of policy problems, their causes, as well as alternative solutions to the problems
at stake, are often surrounded by interpretative struggles (e.g. Seeleib-Kaiser and
Fleckenstein 2007). Under such circumstances, different constructions of crisis
may develop into a definitional struggle (Hay 1999: 324). Therefore, establish-
ing even an ambiguous and tentative agreement may be a challenging task. One
possible outcome of the definitional struggle is an institutional deadlock, as
even powerful challengers of the status quo may fail to circumvent institutional
rules or rally enough support to challenge them. Thus, institutional stalemate
may induce the search for ideas from abroad. In light of the institutional
deadlock, powerful actors dissatisfied with current institutional arrangements
may turn to the burgeoning international market of policies and programs
to cope with long-term unemployment and rising social expenditures (see
e.g., Bonoli 2010). However, searching and finding “successful” policy ideas
and programs abroad is only the beginning of a long process in which diffused
ideas may or may not be translated into local policy institutions.
New ideas are evaluated in the context of the historically possible alterna-
tives that entrepreneurs may consider and utilize (Campbell 2010: 199–200).
Accordingly, the capacity of change agents to demonstrate affinity between
innovative and familiar cultural scripts will enhance the probability of initi-
ating institutional change (Campbell 2004: 74–7). This grafting of foreign to
domestic ideas can also be achieved by resurrecting dormant scripts from the
Sara Helman and Asa Maron

past. In the process of institutionalization, particular policy models gain

legitimacy and dominance within the field, although they remain potentially
contested (Fligstein and McAdam 2011; Weishaupt 2011). Yet institutional-
ization does not imply that alternative and competing models or scripts are
washed away. Instead, they can become suppressed and turn into “private or
hidden transcripts” which may be illegitimate or unthinkable (Schneiberg and
Clemens 2006: 214). Suppressed alternative scripts may reemerge and gain
new salience when institutions face new challenges and institutional entre-
preneurs arise to meet them. In our case, employment and welfare regimes
were challenged as a result of growing unemployment spells and expend-
itures. A new cultural script—a hybrid of suppressed local scripts and imported
policy ideas—may appeal to heterogeneous actors who are dissatisfied for
different reasons with current institutional arrangements and policies. The
script enables institutional actors to forge an “ambiguous agreement” that
bridges over conflicting interests and visions of the goals and instruments of
social policy, promoting convergence toward a common policy solution
(Palier 2005: 135). Nevertheless, the robustness of this pathway to reform
depends not only on the endurance of the coalition and its underlying
consensus, but also on the type of institutional change set in motion, and
the political contention that might follow.

The Development of Intra-state Conflict over the

Decommodification of Unemployment and its Governance

From the end of the 1980s and throughout the 2000s, Israel experienced
several waves of unemployment. Unemployment grew from 6.4 percent in
1988 to 11.2 percent in 1992 as a result of the slowdown of the Israeli
economy and the influx of a massive wave of immigration from the Former
Soviet Union. From 1993–5, unemployment rates declined, but in 1997–8,
they began to rise again. This trend was accentuated at the beginning of the
new millennium in the wake of the worldwide recession and the Second
Intifada. In 2003, the unemployment rate reached 10.7 percent of the
working-age population and unemployment benefits grew to 0.68 percent of
the gross domestic product (GDP). Low-skilled workers were especially affected,
experiencing longer spells of unemployment than others (Achdut, Lavi, and
Solah 2000). Longer unemployment spells among low-skilled workers were
among the factors that brought about an increase in the number of working-
age families receiving Income Support, a social assistance program that kicks
in after entitlement to unemployment insurance is exhausted. These longer
unemployment spells were caused by a decrease in the demand for domestic
unskilled workers. The influx of migrant workers lowered the already low

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 “Wisconsin Works” in Israel?

wages in the secondary labor market, and made Income Support a viable
alternative (Zussman and Romanov 2002). Between 1990 and 2000 the
share of working-age families receiving Income Support rose from 2 percent
of the households with working-age heads in 1990 to 4.4 percent in 1998.
As unemployment became a pressing problem, the Employment Service
(IES), the central bureaucratic agency responsible for managing frictional
unemployment, attracted significant public and political attention. Swelling
unemployment figures and expenditures provided a window of opportunity
for the Ministry of Finance (MoF) to initiate a moral crusade against the
IES. MoF senior bureaucrats interpreted the unemployment crisis—and
particularly the resultant growth in public expenditure—as stemming from
the incompetent and irresponsible governance of the IES, which encouraged
“comfortable unemployment” as well as wide-scale abuse of public resources.
Moreover, the IES was perceived as a highly politicized bureaucracy, plagued
by corruption and nepotism (Interview 7;1 Interview 42).
However, the IES was able to stand its ground thanks to institutionalized
veto powers embedded in the legacies of traditional social and labor market
polices. The IES was established in 1959 as a statutory body entrusted with
labor market mediation. Under the unemployment insurance program passed
into law in 1972, while the National Insurance Institute administers its bene-
fits the IES is responsible for administering the work test. Upon the exhaustion
of unemployment benefits (available for a maximum of only 20 weeks),
families with an unemployed breadwinner and without other means of
subsistence are transferred to the social assistance program (Gal 2004a).
Under the Income Security Law enacted in 1980, the IES was also responsible
for awarding the right to social assistance benefits. As a result, it became a
pivotal veto actor in the governance of both short and long-term unemploy-
ment protection schemes.
Over the years the IES underwent processes of gradual institutional change
in the form of conversion and drift (Streeck and Thelen 2005b). Since the
late 1960s new functions were added (conversion), redirecting the IES toward
new goals and deploying its limited resources to functions other than
frictional unemployment. In addition, a gradual process of drift took place.
Two governmental decrees ended the monopoly of the IES over labor market
mediation, through the abolition of the compulsory binding of employers and
job-seekers to the IES and the legal authorization of private manpower agen-
cies. The outcome of this drift was the defection of highly paid and skilled
jobseekers, making the IES a “poor agency” with limited resources and dealing

1
Interview with Senior Figure, Budget Division of the Ministry of Finance. December 2010,
Jerusalem.
2
Interview with Senior Figure, Budget Division of the Ministry of Finance. June 2009, Jerusalem.

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Sara Helman and Asa Maron

mainly with eligibility tests rather than with labor market mediation (State
Comptroller 1993). Continuous attempts to reorganize the IES failed, mainly
due to its partial autonomy and the stern opposition of its union (Interview 4).
In order to further weaken the resistance of the IES to organizational changes,
the MoF gradually but persistently downsized its budget, even during waves of
unemployment (Koreh 2001a; State Comptroller 1993). Consequently, at the
beginning of the new millennium the IES became vulnerable to attempts to
undermine its role in social and labor market policy.
In 1997, at the peak of a new unemployment wave, an inter-ministerial
committee was appointed and mandated to explore alternatives to the current
functioning of the IES (Koreh 2001a). While all participants were dissatisfied
with its functioning at times of soaring unemployment, deep disagreements
developed between “spenders” (the representatives of the Ministry of Labor
and Welfare and the IES) and “savers” (the representatives of the MoF) (Inter-
view 23). “Spenders” interpreted the inability of the IES to cope with growing
unemployment as the result of a dearth of resources, and suggested solving the
unemployment crisis through the allocation of resources to the IES and reorgan-
izing programs such as retraining of professionals, vocational training courses,
public works, and employer subsidies (Interview 2). “Savers” interpreted the
situation as a crisis of the IES, which they perceived as inherently incapable of
controlling its employees and disciplining the unemployed into self-sufficiency.
In consequence, the MoF sought to privatize the functions of the IES by
outsourcing the administration of work tests to private placement agencies
(Interview 4). Private placement agencies were perceived as more efficient and
were expected to bring about a more rapid transition of the unemployed to the
labor market and to reduce public expenditure (Interview 7). The MoF suggested
conducting an experiment to test the feasibility of the privatization of the work
test, and afterwards to swiftly implement it (Interview 4).
The Ministry of Labor and Welfare and the IES adamantly opposed these
initiatives. Despite deep disagreements within the inter-ministerial commit-
tee, its interim report (September 1998) recommended maintaining the public
character of the IES. As a result of this decision, the status quo was maintained
and an institutional stalemate developed.

Assembling a Coalition for Change against

the Backdrop of the Stalemate

The MoF disregarded the report’s main recommendation, and its representa-
tives unilaterally proceeded with their plan to conduct an experiment to test

3
Interview with Senior Figure, Ministry of Labor and Welfare. June 2009, Jerusalem.

112
 “Wisconsin Works” in Israel?

the feasibility of the privatization of the IES and its immediate implementa-
tion (Interview 4). In a search for alternative ways of performing the functions
of the IES, the MoF hired an external private consultant and commissioned
him to shop for policy ideas and instruments. Through international contacts
and study trips to the USA, the consultant became acquainted with the
Wisconsin Works model. He then submitted to the inter-ministerial committee
a proposal, based on the American model, in which soaring unemployment
figures were attributed to the long-term effects of existing social programs and
the monopolistic status of the IES. According to the new model, private one-
stop job centers operating according to “work-first” logic would be established
to compete with IES branches (Kramer 1998).
The underlying philosophy of Wisconsin Works was the “perversity thesis,”
central to welfare reform in the USA, that policies intended to alleviate poverty
create perverse incentives toward welfare dependency and exploitation
(Somers and Block 2005: 265). Neoliberal reasoning of this type, which rejects
the decommodifying logic of the welfare state, contradicts the dominant
moral economy of the welfare state in Israel, which sees the state as respon-
sible for the wellbeing of the Jewish majority (see Maron and Shalev,
Chapter 1, this volume). At the same time, income maintenance was histor-
ically an unattractive approach to social protection, because the viability of
Jewish settlement in Palestine and later Israel depended on creating jobs for
new immigrants and putting them to work. The introduction of a guaranteed
minimum income by the 1980 Income Security Law signaled a contested
victory of modest welfare state universalism over the older cultural script
associated with the Zionist work ethic (Gal and Doron 2000; Bar 2000).
Workfare, the neoliberal version of active labor market or activation pol-
icies, originated in the USA as a coercive and punitive “work-first” recommo-
difying policy (Peck 2001). The spread of workfare to Israel and elsewhere in
the world is typically attributed to the power of a globalized neoliberal ortho-
doxy. This chapter demonstrates how, on the contrary, the introduction
of new employment and social policies in Israel bearing the Wisconsin moni-
ker was an attempt to resolve intra-state conflict regarding the goals and
instruments of state intervention in the labor market.
Studies in other settings have shown that conflicts between social partners
(particularly labor unions) and the state, or between and within political parties,
were central to the unfolding of activation reform trajectories. However, in
Israel, as a result of the specific institutional features and development of the
labor movement discussed elsewhere in this volume, activation and its govern-
ance developed into a conflict between different state agencies—primarily the
MoF and the IES.
Conflicting policy solutions promoted by the MoF and the IES to the “crisis”
of long-term unemployment at the end of the 1990s led to an institutional

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Sara Helman and Asa Maron

deadlock. In this chapter we focus on the importation of a workfare program

(Wisconsin Works) from the USA to Israel, to demonstrate how imported
policy ideas were mobilized to overcome the deadlock and support domestic
neoliberal reform and consequently institutional change. We maintain that
policy entrepreneurs were able to overcome resistance by using imported
policy ideas to invoke submerged “cultural scripts” (Wierzbicka 1994) in the
area of labor market and social policy. Via translation, these scripts shared by
proponents and opponents of workfare were revived, making it possible to
assemble a change coalition and advance domestic institutional change.
Nevertheless, due to the persistence of intra-state conflicts over the goals
and instruments of social and labor policies, workfare was implemented
alongside existing labor and social policy institutions to create a new institu-
tional layer, in the hope that in time it would render the IES obsolete. While
layering enabled the MoF to circumvent both opposition to the program and
existing institutions, it also made the program vulnerable to politicization.
This politicization brought about the interruption of the program five years
after its inception.

Ways Out of a Stalemate: The Role

of Coalitions and (Imported) Ideas

In order to propel change under conditions of institutional deadlock, actors

need to undertake strategic initiatives by working within existing institutions
or around them (Streeck and Thelen 2005b). The growing contestation over
welfare state institutions has made it pivotal for change-seeking actors to
assemble facilitating coalitions (Mahoney and Thelen 2010b; Palier 2005).
Coalitions are coordinated constellations of actors formed to advance political
goals. Coalition building plays a central role in establishing support for (or at
least decreasing resistance to) change by recruiting potential opponents and
allying potential collaborators in order to solve a common policy problem.
By utilizing innovative policy ideas, actors may realign entrenched interests
and power structures, and assemble new coalitions to overcome resistance to
institutional change (e.g., Weishaupt 2011).
After the private consultant (taking advantage of the social capital he had
accumulated during his years as a senior official in the MoF) succeeded in
mobilizing the interest and commitment of the MoF’s coordinator of Labor
and Welfare (Interview 4; Interview 54), an official policy document was

4
Interview with Private Consultant, formerly employed by the Budget Division of the Ministry
of Finance. June 2009, Jerusalem.

114
 “Wisconsin Works” in Israel?

drafted by the Budget Division of the MoF (Shaviv 1999). This document
attempted to build a discursive bridge between the underlying framework
of Wisconsin Works and the submerged Israeli script that delegitimated the
undeserving poor, by underscoring long-term dependence on social benefits,
the danger of inactivity traps, and the intergenerational transmission of
poverty. Moreover, while arguing that welfare reform was essential in order
to liberalize the labor market and encourage wage restraint at its lower end,
the document also suggested that it would help end Israel’s dependence on
non-Jewish migrant laborers, whose presence is deeply discordant with the
Zionist commitment to Israel as a Jewish state in both demographic and
cultural terms.
The substantive targets of the proposed reform were social assistance
and other subsistence allowances. While the social assistance program
accounted for only 7 percent of the expenditures of the National Insurance
Institute (NII), what turned it into a focusing event (Béland 2005) was not
only the increase in the number of claimants, but also a dramatic growth
in expenditure, which increased from NIS 670 million in 1990 to NIS 3.7
billion in 2001 (Gal and Achdut 2007: 90). Moreover, data provided by the
NII and the Bank of Israel (BoI) showed that even in periods during which
unemployment rates declined, the rate of working-age social assistance
beneficiaries continued to increase (Zussman and Romanov 2002: graph 2).
Policymakers attributed this loophole to lenient eligibility criteria for social
assistance benefits that rendered unemployment “comfortable” and encour-
aged welfare fraud.
In order to integrate working-age social assistance beneficiaries into the
labor market and reduce their dependence on social benefits, the new model
promoted selectivity in the allocation of social benefits. The latter were to be
coupled with workforce development at the lower ends of the labor market
by re-establishing the link between income and work through the require-
ment to work for benefits and ultimately reintegrate into the labor market.
The proposal also suggested eliminating the automatic eligibility for in-kind
benefits and services (including short-term vocational training), and linking
these to an individually tailored job-seeking plan (Shaviv 1999: 3–4). These
principles addressed the need to shape social assistance claimants and trans-
form them into job-seekers. The policy document constructed a reform
imperative (Cox 2001) and legitimated it in the context of similar problems
present in other Western countries, focusing on the Wisconsin reform which
“brought about a sharp decline in the number of dependents on welfare
payments” (Shaviv 1999).
The new cultural script, bridging American and Israeli welfare logics, played
a key role in the translation process. Its transformative potential was demon-
strated by the success of the small team of institutional entrepreneurs

115
Sara Helman and Asa Maron

responsible for promoting the imported workfare model (the private consult-
ant and the MoF coordinator) in winning the consent of workfare opponents.
By invoking Israel’s older anti-decommodification cultural script in their
intensive lobbying, they succeeded in a relatively short time in attracting
key senior officials from the social bureaucracy (the NII, the Ministry of
Labor and Social Affairs, and the Ministry of Immigrants Absorption), paving
the way for the formation of a new coalition based on “ambiguous agreement”
(Palier 2005).
The coalition was composed of different actors who supported institutional
change for different reasons. Central amongst them were: insurrectionists (the
MoF), opportunists (representatives of the IES), and subversives (the NII)
(Mahoney and Thelen 2010b). Insurrectionists at the MoF found in the new
policy instrument an answer to the rising expenditures and a way to displace
the old policy instruments and their underlying assumptions. The IES repre-
sentatives acted as opportunists, hoping that by joining the coalition they
would be able to receive much-needed new budgets and manpower. Central to
the coalition was the Director of the Social Assistance Division at the NII,
acting as a subversive force by remaining loyal to the submerged work ethic
that had preceded the decommodifying program which she was responsible
for implementing. In her words:

The work test was not really serious, and the number of those classified as “hard to
place” continued to grow. As those in charge of the payment of the social assist-
ance allowance we felt very frustrated. We wanted the benefit to reach people that
really need it, and my employees and I felt a lot of frustration when we saw that
there were people who were abusing the system. The unbearable lightness of the
work test gave access to the system to healthy people perfectly able to work.
(Interview 65)

This new bureaucratic coalition was able to bypass the opposition of the
IES union and other senior officers in the administration of social security
(Interview 1;6 Interview 2; Interview 3;7 Interview 6), and to remove the
obstacles that had stood in the way of reform in the governance of long-term
unemployment.
Based on the ambiguous agreement between the abovementioned actors,
the Commission for the Reform of the Treatment of the Unemployed Recipi-
ents of Long-term Subsistence Allowances (popularly known as the Tamir
Commission) was appointed. The mandate of the commission—composed

5
Interview with Senior Figure, Social Assistance Allowances Unit of the National Insurance
Institute. August 2009, Jerusalem.
6
Interview with Senior Union Figure, Israeli Employment Service. 2009, Jerusalem.
7
Interview with Senior Figure, Research and Planning Unit of the National Insurance Institute.
October 2009, Jerusalem.

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 “Wisconsin Works” in Israel?

of carefully selected high-ranking public servants who were dissatisfied with

the old policy paradigm—was planning and overseeing a workfare experiment
in four locales. The interim report of the Tamir Commission was published in
2001. In order to help families and individuals to release themselves from
dependence on social benefits, the committee recommended the establish-
ment of one-stop centers that would concentrate at one site the authority,
instruments, and responsibility for the treatment and delivery of services to
the relevant population. The Commission proposed the establishment of four
centers, each based on a different logic of action. One was to be operated by
the IES, a second by a non-profit organization, a third by a for-profit organ-
ization, and a fourth through a combination of for-profit and non-profit
principles (Tamir 2001; Finance and Ministry of Industry n.d.).
The one-stop centers would fill out claims for social assistance benefits and
assist people in integrating into the labor market or work-related activities,
thereby circumventing the local IES branch (Tamir 2001: 15–18). As imported
policy models changed through translation, some elements of the original
model were emulated, while others were rejected. One-stop centers, case
managers, and the conditioning of social assistance benefits on participation
in the labor market or work-related activities were among the emulated
features, but other features of Wisconsin Works, such as the revocation of
entitlements to social assistance benefits, were rejected as inappropriate to the
Israeli welfare logic.
The new program was to be implemented by the end of 2001, yet it took
another four years until it was finally launched in August 2005. This time lag
opened up the possibility of a struggle over its governance. Newly appointed
senior officials at the MoF used their power resources and autonomy to
streamline the Tamir Commission’s proposals in accordance with their
Ministry’s initial objectives, in the process entrenching its monopolistic control
over the program’s implementation. First, contrary to the recommendations of
the Tamir Commission and the deliberations over the 2004 Appropriations and
Reconciliation Omnibus Law, the MoF used its influence to transfer the deliber-
ations over the program to the Finance Committee of the Knesset (the Israeli
legislature), thereby avoiding the opposition of the Labor, Social Welfare, and
Health Committee—a more friendly arena for social policy issues. In the very
same deliberations the IES was excluded from participating in the experiment,
thereby ensuring that the one-stop centers would be operated solely by private
agencies (Knesset 2003). Moreover, due to its emphasis on cost containment and
the strict obligations of future participants without ensuring their rights, the
program was much more demanding than the original plan, (Koreh 2003: 4–6).
The economic model of the experimental program rewarded the private
contractor for a sharp decrease in social assistance claimants, and special
bonuses were granted on closed files.

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Sara Helman and Asa Maron

Implementation and the Dialectics of Institutional Layering

The new program was implemented alongside existing institutions. Layering

as a mechanism of institutional change is premised on the assumption that a
new institution will eventually make obsolete entrenched institutional
arrangements. Nevertheless, layering under contested planning and imple-
mentation may engender unintended consequences and institutional
instability. Such was the case in the implementation of the workfare program
in Israel.
The experimental program “From Welfare to Employment” was launched
in August 2005 and implemented by for-profit agencies in four localities.
It targeted 14,000 working-age recipients and claimants of social assistance
benefits. The delegation of the implementation of the workfare program to
private agencies and the administrative discretion granted to them did not
imply that the MoF—and through it, the state—settled for a regulatory role.
The MoF strove to ensure its control over the implementation of the program,
and through it the governance of unemployment and the unemployed.
In order to “row” and “steer” simultaneously, the MoF restructured the
relationships of administration and decision-making between the different
ministries, and assigned the institutional jurisdiction of the program to the
newly created Ministry of Industry, Trade, and Labor.8 In February 2003, the
Prime Minister’s Office and the MoF promoted a structural reorganization of
the ministries, and the responsibility for employment and labor market policy
was transferred to the Ministry of Industry and Trade which was historically
oriented toward the interests of business (Doron 2007: 40).
While the MoF sought to tightly control the implementation of the
program, it did not grant central importance to the supervisory body itself,
since it believed that private agents would act in accordance with the contract
rules and market incentives. At this stage, the MoF settled for a policy of faire-
faire (the state inciting others to do; see Schmidt and Woll 2013), as it did not
foresee the need for active intervention in the implementation of the workfare
program. The faith of the MoF in market mechanisms and the convergence
around workfare principles prevented the Ministry from learning from pro-
grams implemented elsewhere and discouraged the borrowing of regulatory

8
In 2001, the Minister of Labor and Social Welfare requested that the government authorize
him to establish a supervisory body under the jurisdiction of his ministry. The request was denied
as the MoF opposed its subordination to the Ministry of Labor and Social Welfare, fearing to lose
control over an expensive program over which it had a monopoly to a ministry that it viewed as led
by political whim and run by incompetent social bureaucrats. However, as the MoF is not an
executive ministry, and was not able to actively control the operation of the program, it sought to
reassign the jurisdiction of the supervisory body to a friendlier institutional environment.
The Ministry of Welfare and Social Affairs, committed to the social rights of disadvantaged
groups, was excluded from the supervision of the program.

118
 “Wisconsin Works” in Israel?

and administrative practices (see e.g., Ministry of Social Welfare 2000). Moreover,
in its zeal to promote a new statutory approach towards the long-term
unemployed and other working-age recipients of subsistence allowances, the
MoF excluded other state agents from the supervision of the program. These
included, for example, the IES (Knesset 2003) and the Ministry of Welfare and
Social Affairs (Knesset 2005), which could have contributed their professional
knowledge on the target population, accumulated over the course of many
years. The programmatic coalition assembled for the Tamir Commission was
also excluded from the planning of the supervisory body (Interview 6; Dinur
2007; Novack 2006). These exclusions alienated allies within the state, and
intensified contestation regarding the character of the program.
In 2003, the category of hard to place (mainly individuals with mental and
physical disabilities who did not qualify for disability benefits, and people
aged 50 to 55 years who did not qualify for old-age pensions) was annulled by
governmental decree, and the individuals belonging to it were reclassified as
unemployed (Achdut 2005: 121–2). Despite the heterogeneity of the hard to
place category, the MoF and the Ministry of Industry, Trade, and Labor adam-
antly opposed conducting early screening of this population, as suggested by
other state professional agencies (Ministry of Social Welfare 2000: 20–1;
Finance Committee 2003: 44). They adhered to the slogan “everyone is cap-
able of working,” claiming that unfettered labor markets are the only effective
screening mechanism.
However, the domination of the MoF backfired and the uniform treatment
applied to a heterogeneous population awakened a public uproar led by
participants in the program, members of parliament, advocacy organizations,
and the press (see e.g., Badarne 2006; Knesset 2005; Gilboa Tanami 2008).
It was at this stage that parliamentary politics began to play a role. In response
to an outpouring of complaints from constituents forced to participate in the
experimental program, legislators formed a cross-party coalition under the
umbrella of the Labor Committee of the Knesset, Social Welfare and Health
that became involved in attempts to change the details of the program
(Knesset 2005).
In response, in 2007 the incoming Minister of Industry, Trade, and Labor
reorganized the program under a new name—Beacons of Employment. The
reorganized program exempted people over 45 years of age from the obliga-
tion to participate, and introduced changes in the system of rewarding private
agencies. The exemptions were targeted at two groups that were constituents
of coalition partners (Israel Beitenu, representing immigrant professionals
from the Former Soviet Union, and Shas, the Minister’s political party,
which represented many Torah students, who were eligible until age 45
years for educational stipends from the Ministry of Education). In 2008, the
experimental program was extended for two additional years, and plans were

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Sara Helman and Asa Maron

made to expand it to the national level. In 2010, it was decided to expand

the program to two more cities as an interim step toward its nationwide
expansion. Both moves required parliamentary approval.
However, the zeal displayed by the MoF to isolate politicians and social
bureaucrats from the control and implementation of the program engendered
a counter-coalition composed of politicians, the IES and advocacy NGOs that
brought about the interruption of the program only five years after its incep-
tion. Mounting public opposition to the program alienated even members of
the governmental coalition, and deliberation was powered back into the
Labor, Social Welfare, and Health Commission. In May 2010, during deliber-
ations over the renewal of the approval of the program, the government was
defeated in the Knesset and the program was suspended (<http://www.ynet.
co.il/articles/0,7340,L-3882129,00.html>).
Despite the abrupt termination of the program, the institutional script of
workfare did not vanish. Following its defeat, the MoF focused on preparing
new policy initiatives, and struggled to maintain and restore workfare as the
dominant institutional logic of the employment and social policy regime.
In May 2013 the newly established government of Israel brought to the Knesset
a proposal to renew the program, this time at the national level. After the
Knesset plenum approved the proposal, two new programs were promoted by
the MoF with the co-operation of the Ministry of Trade, Industry, and Employ-
ment. The first one, “Circles of Employment,” operates through the IES, but is
run by employment counselors and coaches hired on temporary contracts. Its
main goal is to provide job search skills and coaching to new claimants of social
assistance benefits. The program was implemented in sixteen branches and
included nearly 7,000 working-age claimants of social assistance benefits. How-
ever, it was discontinued in late 2015 when the Ministry of Justice demanded
that the MoF to cut back the scope of the 2016 Omnibus Budget Law.
In response the MoF and the Ministry of Trade, Industry, and Employment
proposed a second program, “Back to Work,” targeting 1,000 families who
receive social assistance benefits. Its underlying goals were similar to those of
the canceled “Beacons for Employment” program, but adamant opposition
from the Labor, Social Affairs, and Health Committee of the Knesset blocked
its implementation (Knesset 2014). At the time of writing, six years after sus-
pension of the experimental workfare program, the MoF still awaits a window of
political opportunity in order to reintroduce workfare on a national scale.

Conclusions

This chapter offered a multi-layered understanding of the relations between

imported policy ideas and neoliberal reforms by focusing on domestic

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 “Wisconsin Works” in Israel?

institutional dynamics: first, historical policy legacies that privilege some

foreign ideas over others; second, the hybrid outcomes of reforms in which
change accrues alongside existing institutions to produce a layered policy
regime; and third, post-reform dialectics in which politicians struggle for
public legitimacy and bureaucratic change agents attempt to promote further
neoliberal reforms.
Intra-state conflicts over the governance of working-age unemployment
developed into a deadlock which obstructed attempts to modernize the instru-
ments of labor market and social policies. A globally acclaimed blueprint was
borrowed and translated by institutional entrepreneurs in order to legitimate
the reform attempts of the MoF. With the intention of bridging the gap between
the neoliberal reasoning of the workfare model and the embedded illiberal
logics of the Israeli welfare state, a suppressed cultural script was revived—that
of the unproductive and undeserving Israeli poor, dependent on subsistence
allowances. A wide consensus over the need to reform “old and incompetent”
policy instruments of the IES (the allegedly lenient administration of work
tests) emerged as different actors rallied into a coalition focused on eliminating
dependency via the conditioning of state support on employment or work-
related activities. This ideational agreement notwithstanding, power struggles
over the implementation of the program advanced an exclusionary mode of
governance which bred public and political discontent.
What kind of institutional change was set in motion by translating and
implementing ideas diffused from abroad in the Israeli context? The reform
program did not substitute for the IES, but was established alongside it, as a
new organizational layer (Streeck and Thelen 2005b: 22–4). While the IES was
excluded from the program’s implementation, it was not entirely removed
and displaced. It was expected that layering the experimental program at the
margins of the IES would progressively erode its already unstable position,
making it obsolete in the long run. This process was supposed to be the
consequence of the government-approved nationwide expansion of the
program, and the future establishment of a statutory body—The Employment
Authority—that would govern and regulate the actions of the private agencies
responsible for the implementation and delivery of the program (Dinur 2007).
The unexpected defeat of the MoF as a result of political resistance in the
Knesset did not halt its attempts to produce and disseminate new policy
initiatives in order to re-rally political support for the program at the Knesset.
The 2013 elections brought a new Finance Minister who was sympathetic to
the notion of workfare, yet the continuing resistance in the Knesset to bypassing
the Labor, Social Welfare, and Health Committee—the stronghold of workfare
resistance—proved that in order to win a second round, the MoF will have to
invest more in gaining political consent.

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8

Bureaucrats, Politicians, and the Politics

of Bureaucratic Autonomy
Reforming Child Allowances and Healthcare

Sharon Asiskovitch

Bureaucratic actors are located at the center of social policymaking.1 They

possess experience and knowledge, both professional and political; they are
familiar with their fields, and they know how to play the game of politics.
Scholars of the politics of social policy have not always paid sufficient atten-
tion to the role of bureaucratic elites, particularly the senior officials of
finance ministries, who in Israel have transparently as well as covertly
been key players in advancing neoliberal welfare state reform. Even if their
centrality to the politics of neoliberal transformation is recognized, this type
of politics is not well understood. Moreover, some analysts have been
tempted by the centrality of fiscal bureaucrats as entrepreneurial agents of
neoliberalization to attribute omnipotence to their ideas and influence (for
Israel, see Doron 2007, 2009). This chapter emphasizes possible limits to their
power potentially posed by other state elites—the senior officials of other
state bureaucracies, on the one hand, and politicians on the other. It illus-
trates the relevance of conflicts of interests between fiscal bureaucrats, on the
one hand, and social bureaucrats and politicians on the other, showing that
where these conflicts are intense neoliberal reforms may be blocked or muted, at
least for a time.

1
This chapter is based in part on previous studies by the author, especially Asiskovitch (2006)
which provides additional detail, including original source materials not cited here. The author
thanks the editors for their useful suggestions and comments. The views expressed in the chapter
are those of the author, and do not necessarily represent those of his employer, the National
Insurance Institute of Israel.
 Reforming Child Allowances and Healthcare

Theoretically, the analysis harks back to the original model of bureaucratic

politics proposed by Allison (1969) and others, which argued that backstage
struggles within and between government agencies, rather than the front-
stage maneuvering of politicians, were the true drivers of US foreign politics.
However, the perspective guiding this chapter emphasizes that the power and
autonomy of fiscal bureaucrats at the Ministry of Finance (MoF) can be sty-
mied by politicians, as well as by bureaucrats from other state agencies.
Moreover, both government and opposition politicians may try to exploit
the reputation and professional legitimacy of the economic agencies of the
state to advance their own interests in legitimating unpopular policies and
advancing policy agendas (e.g., Maman and Rosenhek 2011). The bureaucratic
politics framework sheds important light on the conditions under which
neoliberal restructuring can occur, demonstrating how such changes are not
inevitable but the result of political maneuvering by engaged policy actors.
Whether bureaucrats can initiate, promote, or block reforms depends on
their resources and skills. When bureaucratic agencies engage in politics, they
have to create alliances with other powerful actors involved in the decision-
making processes in order to promote many parts of their preferred agenda.
The most important actors they must deal with are politicians, especially
those holding key positions. In addition, like other actors, bureaucrats must
adapt their goals and/or strategies to the institutional settings in which they
operate. These settings, primarily the political arena and public economic
decision-making processes, shape actors’ power, preferences, and strategies.
They also shape the alliances that bureaucrats forge with other actors in order
to advance their policy preferences.
The substantive focus of this chapter is on two key areas of social policy—
child allowances and healthcare. Research on the Israeli welfare state has
traced the rising prominence of policies associated with liberal welfare
regimes: targeting was adopted, levels of benefits were reduced, and the pri-
vatization of social services was promoted (Gal 2004b; Aviram, Gal, and Katan
2007). However, as demonstrated in this chapter, the transformation of the
Israeli welfare state since the mid-1980s has not followed a straightforward
trajectory moving toward liberalization. Numerous political struggles have
occurred, many of them between the MoF and welfare state agencies. While
liberalization and retrenchment characterize many individual reforms, stabil-
ity and even expansion can also be found. One reason for this is that bureau-
cratic actors are guided by their agencies’ long-term interests and may engage
in successive rounds of welfare state restructuring, attempting to capitalize on
past achievements or to apply “damage-control” strategies following defeats.
The two case studies discussed in this chapter were selected to illustrate
variation in the roles played by state bureaucracies in key domains of social
policymaking. The first case is the child allowances scheme, a longstanding

123
Sharon Asiskovitch

mechanism of child poverty reduction, and the second is the National Health
Insurance Law legislated in 1994 and implemented the following year. Both
cases are characterized by dramatic changes but varied in their evolutionary
paths, the role of bureaucratic actors, and the nature of interactions between
bureaucrats and politicians. The first case demonstrates that the level of social
policy politicization is influenced by changes in a program’s rules of entitle-
ment, and that in turn the level of politicization determines whether and how
bureaucrats are involved in policymaking. The second case goes a step further
to show how bureaucratic actors may respond to a highly politicized change
in the institutional arrangement of a social policy field by shifting the locus of
decision-making to the bureaucratic arena, where powerful bureaucracies
dominate policymaking.

The Role of Bureaucratic and Political Actors in Policymaking

Most approaches to the study of welfare states since the mid-1970s—an era
of retrenchment—marginalize the role of bureaucrats. Studies focusing on
globalization or post-industrialism and theories centered on new social risks
generated by forces like the aging of societies, transformation of the family,
and immigration emphasize pressures external to the welfare state and tend
to neglect how local actors, including bureaucratic actors, may mediate these
pressures into actual policies (e.g., Pierson 2001; Gilbert 2002). Even approaches
which probe the mediation of “objective” pressures via domestic politics—such
as Pierson’s “new politics of the welfare state” or the older social-democratic
approach—treat state bureaucracies as a technical aspect of government,
responsible for implementing the policies articulated by politicians and polit-
ical parties in government (Pierson 2004; Castles 2004; Korpi and Palme 2003).
However, other studies have paid greater attention to the role of bureaucracies in
contemporary welfare state transformations in a variety of settings (Asiskovitch
2009, 2010; Howard 2001; Peng 2002; Yang 2004; Marier 2005; Phillips et al.
2006; Gal 2002).
Central to the politics of welfare state reform in Israel are intra-state conflicts
between economic bureaucrats and social bureaucrats, savers versus spenders
(Yang 2004; Wildavsky 1993). Changes in the processes and politics of budget-
ing and decision-making affecting individual welfare state services and pro-
grams have been introduced since 1985 to give precedence to the preferences
and interests of the fiscal bureaucrats of the MoF over politicians and
social bureaucrats (see Campbell, Foreword, this volume; Koreh and Shalev,
Chapter 6, this volume; Helman and Maron, Chapter 7, this volume). However,
the outcomes of these struggles are contingent on both the power resources of

124
 Reforming Child Allowances and Healthcare

the parties involved and the strategies utilized by engaged politicians and
bureaucratic agencies.
Politicians and bureaucrats enjoy different sources of power. While bureau-
crats possess professional knowledge and expertise and are responsible for
implementation, politicians hold the formal authority for decision-making.
It is widely assumed that politicians’ primary goals are to be re-elected and that
they therefore tend to focus on short-term targets while ignoring costs and
other implementation obstacles. Bureaucrats, in contrast, are appointed rather
than elected, and are therefore not expected to be concerned with their
popularity. They are thought to focus on long-term goals and to be aware of
implementation obstacles.
Another traditional perception of politicians and bureaucrats asserts that
politicians articulate policies while bureaucrats implement them. However,
some studies have recognized that while these two sets of actors may differ in
their goals and strategies, the boundaries between their roles in policymaking
processes are blurred (Aberbach and Putnam 1981; Campbell 1988). Both
politicians and bureaucrats are involved in all levels of policymaking—
articulation, promotion, and implementation of policies.
The bureaucratic politics approach offers a more realistic and nuanced
approach than over-simplified characterizations of roles and relations within
the state. It holds that the state is not a unitary entity, but rather is composed
of various actors with differing outlooks and conflicting interests. No single
actor holds enough power to enforce their will on the others, and, as a result,
policymaking is the outcome of negotiations and compromises between the
various actors (Allison 1969; Rosati 1981; Welch 1992). Lacking absolute power,
state actors need to create alliances in order to consolidate power resources
against rivals. In the process, actors who do not share the same views may
struggle, compromise, or bargain, and much is dependent upon their ability
to enlist the support of key decision-makers.
This chapter expands the boundaries of the bureaucratic politics approach
in two ways. First, the focus is on bureaucratic agencies rather than individ-
ual bureaucrats. Second, politicians and the legislature are included in the
model (Art 1973), which is especially important when studying coalition-
based parliamentary regimes like that of Israel, where conflicts and schisms
between political parties may drive politicians to seek alliances with bureau-
cratic actors.2 Empirical evidence is presented in support of the claim that
bargaining is endemic to relations between politicians and bureaucrats
(Bendor and Hammond 1992; Laffin 1997). This is particularly true when
policy issues are highly publicized.

2
The original bureaucratic politics approach was developed in studies of a presidential regime
(Allison 1969).

125
Sharon Asiskovitch

The incorporation of politicians and their relations with bureaucrats into

the model sheds light on the roles of bureaucrats in shaping political–
economic decisions in the realm of the welfare state (Rourke 1972). Social
programs invoke a variety of political issues and agendas, from reducing
poverty and inequality to ethnic politics, identity politics, gender relations,
and the boundaries of the national political community. Welfare state
programs can be linked to several issues simultaneously, or different parts of
a program or service may be linked to different issues. Consequently, some
elements of the same program or service may be dominated by politicians and
others by bureaucrats.
Issue linkage explains the involvement of bureaucratic actors and their
power vis-à-vis politicians. Where the issues at stake are more relevant to
the electoral interests of politicians, less technical, and more intertwined
with salient ideological conflicts, the influence of politicians is expected to
be greater. Conversely, bureaucratic actors will exert greater influence over
programs with less direct significance for the interests of politicians, and
which are considered to be more technical and less ideological (Baekgaard,
Blom-Hansen, and Serritzlew 2015; Kellow 1984; Rosati 1981). At the same
time, as we shall see, politicization or bureaucratization of a social program
may serve as a strategic goal in itself, pursued by actors seeking to channel
future struggles over the welfare state into favorable policy arenas. Even
small institutional changes may accumulate to influence the balance of
power between winners and losers in future rounds of political struggle
(Riker 1980).

Child Allowances

The child allowance scheme has been a primary battleground for defining the
boundaries and solidarity of the Israeli political community. Until 1997 two
different programs were in operation. The first was universal, paying benefits
to all families with children aged 0–17 years (Doron and Kramer 1991;
Rosenhek 1999a). The second program was the Demobilized Soldiers’ Benefit,
granting child benefits for the third, fourth, and fifth children of families if at
least one family member served in the military, police, or prison service. While
the universal program benefited all families, the targeted program benefited
mostly Jewish families, as the vast majority of Israel’s Arab citizens are not
conscripted into military service (Rosenhek 1995).
Each program was tied to distinct political issues and, as a result, generated a
institutional alignment and was governed by different actors. The universal
program was linked to issues of inequality and reducing poverty among
families with children, especially large Jewish families. The targeted program

126
 Reforming Child Allowances and Healthcare

was linked to the use of the welfare state to shape the boundaries of the
national political community in the context of a national cleavage and the
Israeli–Arab conflict. Its enactment reflected the political marginality of
the Arab minority and the hegemony of the Republican principle of citizen-
ship among the Jewish majority (Rosenhek and Shalev 2000). While the
Demobilized Soldiers’ Benefit was devised by bureaucrats, its evolution was
controlled by politicians since it was linked to issues at the heart of Israeli
politics. For this very reason, bureaucratic actors preferred to avoid the issue.
In contrast, bureaucratic actors played the central role in the evolution of the
universal child allowance, while politicians and political parties set the
boundaries (Asiskovitch 2009).
The child allowance program became one of the key battlefields over the
nature of class compromise offered by the Israeli welfare state, when income
testing was introduced into the program in 1984. Between April 1984 and
June 1985, taxes were imposed by the MoF on benefits for the first two
children (and in June 1985 on the benefit for the third child, as well) in
families with no more than three children (small families) above a certain
income threshold (Gabay 1993). In July 1985 the National Insurance Institute
(NII) stopped granting benefits for the first child in small families (no more
than three children) with income that surpasses a certain threshold (Gordon
and Eliav 1997).
These measures were proposed by the MoF, against opposition from the NII
which administered child allowances as well as an opposition group within
the MoF which opposed changing the tax system (Gabay 1993; National
Insurance Institute 1987, 1988, 1990). The primary rationale for this policy
was the severe economic crisis at the time and the need to cut public spending.
The grave economic environment convinced the politicians to adopt funda-
mental changes. Nonetheless, income testing was not applied to families with
more than three children (large families), since larger families tend to be
poorer and the MoF considered that politicians would reject proposals that
harm them. Most large families in Israel are either Ultra-Orthodox Jewish or
Muslim Arab (Sikron 2004). At the time, political parties representing Ultra-
Orthodox Jews were members of the government coalition and, thus, the MoF
framed a policy that would be acceptable to Ultra-Orthodox politicians, whose
electorate is composed of large families (Avnimelech and Tamir 2002).
As reforms of child allowances fell under the responsibility of the Finance
Committee of the Knesset, the MoF found it relatively easy to extend the order
annually, and in 1990, to extend income testing to the second child in small
families.
According to the MoF, the NII opposed income testing in child allowances
since it saw it as a first step in the transformation of the Israeli social security
system into a residual “safety net” (Ministry of Finance 1985). Thresholds

127
Sharon Asiskovitch

were set to determine who was eligible (earnings from work had to be below
the threshold). The level at which the threshold was set was the result of a
compromise between the MoF and the NII—the former aiming at lower and
more targeted thresholds and the latter preferring higher thresholds that
would infringe less on the universal nature of the benefit.3
In the years following the introduction of income testing, the NII
discovered that a large share of poor wage-earners did not receive the benefits
they were entitled to (Gordon and Eliav 1997; State Comptroller 1987).
Data about low take-up rates were used by the NII to gradually transform the
discourse around income testing of child allowances. The NII maintained that
the reduction in public spending was gained due to the fact that 20–50 percent
of deserving (and poor) families had failed to enjoy their rights (Gordon and
Eliav 1997). Following the 1992 elections, the new Prime Minister and the
Minister of Finance both supported the position of the NII in favor of abol-
ishing income testing, hoping to increase electoral support among poor
voters. In April 1994 universalism was reintroduced (Ben-Arie 1999).
In the second half of the 1990s the MoF tried to swing the pendulum back
again and revive income testing to for child allowances. The findings of the
NII, however, were used to persuade politicians that such a move would not
achieve its goal of targeting poor families, although it would have reduced
public spending.
The change of government following the 1992 elections also led to an even
more significant reform, the abolition of the Demobilized Soldiers’ Benefit
(Asiskovitch 2010). The minority government headed by the Labor Party
required the parliamentary support of Arab parties. Although the latter were
not members of the government coalition, they promised to block a no-
confidence vote in return for among other things unification of the dual
system of child allowances. Arab politicians argued that the existing system
discriminated against Arabs in favor of Jews and harmed the basic needs of
Arab children. Right-wing parties defended the additional benefit for families
with demobilized soldiers, framing it as a modest reward to individuals who
risk their lives by serving the nation.
A law abolishing the Demobilized Soldiers’ Benefit and its integration into
the universal child benefit was passed in parliament following a heated
debate. Between 1994 and 1997, benefits for families eligible under the child
allowances scheme and not entitled to benefits from the Demobilized Soldiers’
Benefit were gradually increased until they reached the value of the two
benefits combined.

3
Based on an interview with the former general director of Israel’s National Insurance Institute.
The interview was conducted by the author in Jerusalem, March 21, 2005.

128
 Reforming Child Allowances and Healthcare

Where the politics of the Demobilized Soldiers’ Benefit involved politicians

and political parties, the main bureaucratic actors—the NII and the MoF—
decided to limit their involvement in these political processes, regardless of
their views on the matter. For bureaucrats, the possible political costs of such
involvement were considered to be too high.4
Following these changes to the child allowances scheme and the issues
linked to it, the discourse and the political process changed, leading to the
incorporation of both socio-economic and ethno-national issues into the
politics of the program. In 1997, for the first time, public criticism was voiced
of large Jewish families enjoying generous child benefits. This new discourse,
adopted by secular politicians, combined two themes. The first was the
redrawing of the boundaries of the political community as two groups were
identified: “Zionists” (secular and religious Jews considered loyal to the values
of the Israeli polity as both “Jewish and democratic”) versus “non-Zionists”
(Ultra-Orthodox Jews and Arabs). The second theme was based on a socio-
economic divide: “Zionists” participate in the labor market at high rates and
are characterized by small families versus “non-Zionists” who prefer public
subsidy to paid employment and are characterized by large families. The
former present themselves as bearing the burden of paying for the growing
needs of the latter (Pearl 2003).
This new discourse did not immediately translate into new policies. Follow-
ing the collapse of the coalition government in 2000, the Ultra-Orthodox
Jewish parties, supported by the Arab parties and the right-wing opposition,
were successful in increasing the benefits granted for every fifth child and
beyond by up to 50 percent beginning in 2001 (Doron 2007). The MoF
opposed the increase due to the expected increase in public spending, and
the NII feared a backlash from the secular parties and the MoF (Ministry of
Finance 2001; National Insurance Institute 2001).
The next few years saw a series of proposals for cutting benefit levels. Several
were accepted, and the new politics of child benefits have seen ad hoc coalitions
between politicians and bureaucratic agencies, as well as the involvement of
bureaucrats in decision-making processes which they had previously avoided.
A proposal to reintroduce differential benefit levels based on parents’ prior
military service was promoted by the MoF in 2002. The Treasury argued that
such policies are necessary at a time of severe economic austerity and public
attacks on excessive use of welfare benefits. The NII used its data and responded
to the proposal with estimates that most of the affected families were expected
to be Jewish. In so doing the NII provided Ultra-Orthodox Jewish parties with
ammunition to fight the proposal. However, the powerful position of these

4
This position was articulated by former senior bureaucrats in both the NII and MoF in
interviews by the author (Asiskovitch 2006).

129
Sharon Asiskovitch

parties soon ended with the dissolution of the coalition. This window of oppor-
tunity enabled the MoF to win the support of the new government.
Under the banner of the 2003 emergency economic plan, the MoF
succeeded in gradually flattening all benefits to the levels paid for the first
two children (Gal 2004b; Doron 2007). The MoF’s position, which held that a
severe economic crisis required severe policy measures and criticized popula-
tions characterized by large families for excessive use of welfare benefits, met
with a receptive government that shared its view on the role of the child
allowances scheme (Ministry of Finance 2003).
The dramatic changes that occurred during the two decades discussed thus
far were the outcome of shifts in the power of politicians and bureaucrats, due
in most instances to the dynamics of partisan politics. Shifts in power
relations in an earlier round of reform brought about institutional changes
that reshaped the child benefit program in a future round.

Restructuring Healthcare

The National Health Insurance Law (hereafter the Health Law), which came
into effect at the beginning of 1995, institutionalized the right to a fixed
package of medical services for all citizens and permanent residents (Gross,
Rosen, and Shirom 1999; Shalev 2003).5 The law set in place three bilateral
relationships between the state, the Sick Funds,6 and the citizens. Citizens pay
a health insurance tax to the state, which allocates it to the Sick Funds; the Sick
Funds receive a share of these fees based on a capitation formula and deliver
services to the citizens directly or indirectly; and the state allocates funding to
the Sick Funds and has the right to regulate their financial and medical
activities. The Health Law established that the state insures the citizens, and
several problems that characterized the healthcare system prior to the law
were remedied: almost the entire population became covered; Sick Funds were
prohibited from screening their clients according to their medical condition or
other criteria; and individuals gained the ability to easily switch between Sick
Funds. This new social right of citizenship represented an important expan-
sion of the welfare state during an age of austerity.
Prior to the passage of the Health Law, medical insurance and primary
healthcare were provided by a small number of voluntary Sick Funds with
close ties to partisan politics, and bureaucratic actors played a secondary role

5
Unless otherwise stated, sources and additional details are provided in Asiskovitch (2006, 2011).
6
Between the early twentieth century and the mid-1970s, a structure of four Sick Funds evolved.
These Sick Funds are not-for-profit medical insurers and (direct or indirect) service providers (Bin
Nun, Berlovitz, and Shani 2010).

130
 Reforming Child Allowances and Healthcare

in policymaking (Bin Nun, Berlovitz, and Shani 2010; Zalmanovitch 2002).

In particular there was a direct link between the Labor Party, the Histadrut
(the peak associations of workers), and its associated Sick Fund: the Histadrut
owned the General Sick Fund and the Labor Party controlled the Histadrut (see
Grinberg, Chapter 2, this volume). The Labor Party’s chief rival, the right-wing
Likud Party, had previously tried but failed to break these ties by instituting its
own reform legislation.
Under the old healthcare regime, decision-making was controlled by
senior politicians and favored the interests of Histadrut Sick Fund over the
smaller funds and marginalized the Ministry of Health (MoH) (Halevy 1979;
Zalmanovitch 2002). Decisions about public funding to healthcare services
were concluded between senior politicians, the MoF, and the Histadrut.
The political upheaval of 1977, when the Labor Party lost its leading pos-
ition in Israeli politics, led to cuts in government subsidy by the Likud-led
governments. This retrenchment coincided with rising pressure on the
Histadrut Sick Fund due to its large numbers of elderly and ailing members.
This in turn led to mounting debts and a subsequent financial crisis of
its hospitals, bringing the entire healthcare system close to collapse
(Chernichovsky and Chinitz 1995).
In 1994, following the Labor Party’s victory in the 1992 general elections,
the Health Insurance Law was finally legislated.7 It was aimed at severing the
direct link between the Histadrut and the General Sick Fund while man-
aging the crisis of the latter. Importantly, while the successful legislation of
the Health Law was the result of conflict among politicians, and between
them and the Histadrut (Grinberg and Shafir 2000; Shafir and Peled 2002),
the framing and articulation of most of the law was left to bureaucratic and
semi-bureaucratic actors: the Ministry of Health, the Treasury, and the Sick
Funds. Much of its content is the outcome of bargaining and compromises
between these actors (Chernichovsky and Chinitz 1995; Rosen and Bin
Nun 2007).
Of the main bureaucratic actors involved, the Health Ministry supported
the law while the MoF opposed it. The former championed the new legislation
as it assumed that it would be empowered vis-à-vis other actors in the health-
care field. The MoF opposed any legislation mandating spending not under its
budgetary control and threatening to weaken its power vis-à-vis other actors.
Senior MoF bureaucrats opposed the position of their minister, who supported
it because of party alliances and politics. They were obliged to participate and
help bring the legislative process to a successful completion against their
institutional interest of fiscal control. However, the MoF succeeded in partially

7
On the motives and dynamics underlying this about-face on the part of the Labor Party, see
Grinberg, Chapter 2, this volume.

131
Sharon Asiskovitch

compensating for this by influencing the detailed provisions and implemen-

tation of the legislation.
Various sections of the Health Law were inserted because of pressures from
the MoF, following compromises with the Health Ministry. For example the
index according to which the cost of the basic package of services is updated
only partially reflects growth in costs. The MoF was afraid that an index fully
taking into account increases in the population and its aging would increase
public spending on healthcare. Both ministries refused to create a mechanism
granting the Sick Funds much power over future health policymaking in the
framework of the new legislation, as they looked to shape the new institu-
tional arrangement to secure their own autonomy and influence. Both min-
istries also preferred to keep the guaranteed package of publicly provided
health services vague, hoping in this way to restrain future public spending.
The passing of the Health Law inevitably shifted the politics of healthcare
and medical insurance from the arena of partisan politics into the bureaucratic
realm. This led to changes in the components of the political process of
healthcare policymaking—the actors involved, their powers, and the institu-
tional arrangements of policymaking. Moreover, once the Histadrut vanished
from the politics of healthcare, the interest of politicians diminished in com-
parison to the era prior to the act. The power of the MoF increased, while that
of the Health Ministry did not.
After the passage of the new legislation discussions over amendments to the
law and to healthcare financing were moved to the Finance Committee of the
Knesset, one in which the MoF enjoys significant influence (Koreh and Shalev,
Chapter 6, this volume). Since late 1996 the Treasury has submitted a number
of proposals to amend the law in order to deal with the indebtedness of the
Sick Funds (Bin Nun, Berlovitz, and Shani 2010; Gross, Rosen, and Shirom
1999). Many of these amendments were introduced in the framework of the
Omnibus Economic Arrangements Law passed in conjunction with the
budget, enabling their passage despite opposition from the Health Ministry
and the Sick Funds (Cohen 2010).
Once the Health Law was enacted, the Sick Funds found themselves in a
new institutional environment, in which they directed their political efforts
mainly at struggles against policies advanced by the MoF that they considered
would undermine their autonomy and/or lead them into further debt
(Bin Nun, Berlovitz, and Shani 2010). Their main argument was that the cost
of the basic package of services was not being updated to accommodate their
increased responsibilities under the act. But they were unable to block new
measures of financial supervision over Sick Fund operations when these were
presented to coalition politicians as essential to handling growing debts. The
MoF was, however, willing to negotiate ad hoc deals, under which additional
government funding could be obtained in exchange for efficiency measures.

132
 Reforming Child Allowances and Healthcare

The Health Insurance Law changed the institutional alignment of the

healthcare system in favor of the MoF. Nevertheless, not all MoF proposals
were accepted by the politicians, who sometimes resisted pressure from the
Treasury exerted in the name of fiscal prudence. Several amendments were
considered too radical—including imposing an additional healthcare tax,
allowing the Sick Funds to offer flexible packages of basic services, and
establishing a fifth private Sick Fund to foster competition and increase the
marketization of service provisioning. Not only politicians but also health
bureaucrats, the Israel Medical Association, patient advocacy groups, and
several NGOs rejected these patently neoliberal reforms, despite the fact that
they were challenged through the Omnibus Law, often an effective instru-
ment deployed by the MoF for neutralizing political opposition (see also
Koreh and Shalev, Chapter 6, this volume). The government also agreed
to introduce a mechanism for annually incorporating and financing new
medical technologies (Shalev 2003). On all these occasions, public campaigns
by NGOs spurred politicians to reject proposals by the MoF or alternative to
oblige it to increase public spending.
In sum, the passage of the Health Insurance Law institutionalized a social
right to healthcare services, and measures that would have directly limited the
scope of this right from the perspective of individual citizens proved difficult
to advance. Accordingly, in the course of the late 1990s and early 2000s the
reforms successfully introduced by the Treasury were those not perceived by
politicians as directly curtailing the new social right. Despite that limitation,
the substantive impact of the policies advanced by the MoF was quite consid-
erable. Two noteworthy outcomes were gradual declines in access to services
(Gross, Bremly-Grinberg, and Mazliach 2005, 2007; Gross, Bremly-Grinberg,
and Weizberg 2009) and increasing private out-of-pocket spending on supple-
mentary insurances and private medicine by individual households (Horev
and Kedar 2010, 2012).

Conclusions

Changes in two areas of the Israeli welfare state scrutinized in this chapter
have been the outcome of political conflicts, and the overall transformation of
the Israeli welfare state is the result of such program-specific conflicts. The
expansions, contractions and changes in the modus operandi of child allow-
ances and health insurance demonstrate that since the 1990s bureaucratic
actors have exerted considerable influence over social policy. They were not
the only actors in the field, however, and their influence relative to the other
principal actor—politicians—varied across programs and over time.

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Sharon Asiskovitch

The influence of bureaucratic actors has been greatest when the issues linked
to the program were not considered by politicians to be crucial to their public
support, their electoral survival, and/or their political power vis-à-vis other
politicians. When the salient issues left space for bureaucratic actors to act as
entrepreneurs and decision-makers, their roles in policymaking expanded.
They took part in defining the problems as well as the solutions and they
influenced all stages of decision-making, from determining how decisions
were to be made to how they were implemented—providing that the institu-
tional arrangements governing specific plans made it possible. In addition, in
cases where changes to the rules required legislative amendments, bureaucratic
actors had no choice but to ally themselves with politicians in order to promote
their policy preferences.
Intra-state relations between different agencies were also seen to play a
critical role in changing social policy or preventing change. Conflicts between
bureaucratic actors often emerge as a result of differing agency interests and
professional worldviews. Policy outcomes may thus reflect the power relations
between bureaucratic actors and their willingness to bargain, compromise,
and form alliances. The key split revealed by the two case studies was between
fiscal and social bureaucrats. Their relative power, influence over policy-
making, and change strategies were shaped by the institutional features of
the programs concerned, and their roles in making and/or implementing
policies.
The most important resource of the MoF has been its central role in
financing cash benefits and social services. The Treasury could advance its
cause by fostering an atmosphere of crisis in the wake of declining macro-
economic performance or by raising questions about the financial viability
of service providers such as the Sick Funds. Channeling legislative debates to
supportive arenas like the Finance Committee of the Knesset also contrib-
uted to the MoF’s successes, as did its ability to package unpopular policies in
the Omnibus Law. Nevertheless, the Treasury also encountered constraints
and was compelled to limit its aspirations. A powerful resource of the social
bureaucrats and service providers is their role in implementation, which
does not follow declared policy. In addition, they control information on
their own operations—data which they may be able to exploit to support
their positions. Establishment of social rights also serves in itself as leverage
against overt, dramatic retrenchment, due to the public and politicians’
expectations: policies create their own political defenses through feedback
processes (Pierson 2004; Steinmo, Thelen, and Longstreth 1992).
The main goal of this chapter was to demonstrate the potentially decisive
importance of bureaucratic actors participating in the transformation of wel-
fare state programs. Bureaucrats’ roles and influence vary across programs and
times as circumstances change. The chapter demonstrates how specific

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institutional arrangements and issues linked to particular policy programs

play a decisive role in determining the division of power and legitimacy of
engaged policy actors. Non-state actors such as interest groups and service
providers may also play an important role in the politics and policymaking of
healthcare vis-à-vis bureaucratic actors, by challenging their professional
authority with factual information and expert opinions, contacting and
lobbying politicians, and participating directly in policymaking and imple-
mentation. The healthcare system following the legislation of the Health Law
in Israel illustrates such a configuration of oppositional power, and its limits.

135
Part 3
Neoliberalism and The Casualization
of Employment
9

Precarious Employment
in the Public Sector
How Neoliberal Practices Preceded Ideology

Michal Tabibian-Mizrahi and Michael Shalev

The conventional narrative concerning the Israeli civil service presents a

career-based service which employees join and serve throughout their profes-
sional careers. It is widely believed that it is only since the mid-1980s that
precarious employment practices entered the sphere of public sector hiring. In
contrast, this chapter exposes a civil service that as early as the end of its first
decade adopted a range of precarious employment practices alongside tenured
hiring, long before a neoliberal regime shift was in sight. This will be demon-
strated by a case study of Israel’s health system from the 1950s until today,
which we argue is representative of similar processes that occurred throughout
the public sector.
From the state’s establishment in 1948, Israel’s civil service has encom-
passed the twin economic logics of a dual labor market. Civil servants, tenured
state employees, worked alongside precarious indirect employees of the state
hired under other arrangements. Within the civil service framework there
were arrangements for hiring temporary workers for fixed or open terms.
More recently, a growing segment of public employment has been mediated
by businesses and non-profits, first mainly via temporary work agencies but
increasingly by outsourcing the provision of services (Mundlak, Chapter 10,
this volume). In addition, state agencies hire individuals as consultants and
service-providers on a freelance or a retainer basis.
Unlike tenured employment, these forms of hiring are intended to prevent
the formation of an employer–employee relationship between the state and
civil servants. However, these mechanisms and strategies of precarious
employment in the public sector did not appear as a result of the adoption
Michal Tabibian-Mizrahi and Michael Shalev

of a neoliberal ideological framework mandating a smaller state bureaucracy

and a diminished role of the public sector as an employer as a matter of
principle. Instead, they were born out of mundane struggles between bureau-
cratic constraints and managerial needs.
It would be equally mistaken to interpret the rise of precarious public
employment as simply a byproduct of change in Israel’s political–economic
regime. The folk understanding of changes in hiring patterns in Israel links
them to the weakening of the developmental state model and the gradual
transition to a neoliberal model discussed extensively in this volume. The
consensus among researchers is that the Israeli economy underwent an
economic and ideological change in the wake of the Stabilization Plan adopted
in July 1985 that represented a milestone leading to the shift. This claim has
become unchallenged wisdom, even though some researchers have identified
earlier milestones (Shafir and Peled 2000b, 2002: 232–3; Zilberfarb 2005).
The findings reported in this chapter imply that the adoption of neoliberal
practices in Israel has been a gradual process whose roots can be traced to
earlier decades. A series of developments documented in this chapter (and in
greater detail in Tabibian-Mizrachi 2012) reveal that innovative and even
revolutionary changes in civil service hiring practices have evolved since the
early 1960s, gathering momentum in the subsequent decade. In this domain,
at least, neoliberal practices preceded the neoliberal ideological shift, and even
paved the way for the latter’s assimilation. Yet it is also true that following the
ideological shift these practices became more prominent, receiving more
room to grow and develop, and being conferred with greater significance
and legitimacy. This dialectic of ideas and organizational practices constituted
an important mechanism entrenching neoliberal modes of employment
within the state.
The evolution of precarious hiring policy in Israel’s civil service was shaped
on two levels. Officially, civil service hiring arrangements were codified as
tenured hiring under the Civil Service Law of 1959, but in parallel new hiring
practices involving contractors and service providers evolved. This dualism was
the outcome of several potentially conflictual relationships: between actors
inside the health system; between the state and workers’ organizations;
between different groups of health workers; and above all, between different
state agencies (especially the Civil Service Commission versus the Ministry of
Finance, which have followed opposed agendas vis-à-vis tenured employment).
Three broad themes of this volume are illustrated in this chapter.

1. The heterogeneity of the state. The case study demonstrates the significance
of diverse interests and actors within the state for a key institutional
change identified with neoliberalism. It also shows that the dominant
change agent has evolved over time. The period from the state’s

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 Precarious Employment in the Public Sector

establishment to the mid-1970s was marked by initiatives of the Health

Ministry; the 1980s and 1990s by the dominance of the Finance Ministry;
and in the 2000s the legal system played a central entrepreneurial role.
2. The significance of the Ministry of Finance (MoF). While employment policy
in the civil service is officially determined by the Civil Service Commis-
sion, the Budget Division of the MoF is responsible for setting wages. It is
able to use this authority to either instigate or veto changes in civil
service personnel standards by altering budgets. Initiatives taken by the
Budget Division, and the response of other actors, have been critical in
promoting a neoliberal employment regime within Israel’s public sector.
3. The importance of gradual institutional change. In civil service hiring prac-
tices, a combination of all three of the well-known mechanisms identi-
fied by Streeck and Thelen (2005b) was at work: layering, conversion, and
drift. These mechanisms appeared in an ordered sequence, reinforcing
one other and contributing to both the assimilation and the success of
the overall institutional change.

The remainder of the chapter is divided into three sections. The evolution of
precarious employment is charted in two parts, one recounting its rise and
consolidation, and the other describing adjustments and challenges that led
to the creation of regulatory arrangements. The third section is analytical, and
is aimed at drawing out implications of the findings for theories of institu-
tional change and for understanding the rise of neoliberal practices in Israel
and elsewhere.

The Rise and Consolidation of Precarious

Employment in the Public Health System

In the context of this chapter the term “public health system” refers to
hospital care provided by the state. Until the implementation of a National
Health Insurance Law in 1995, healthcare was dominated by one large and a
few small non-governmental Sick Funds that provided services to dues-paying
members. In addition to primary care provided through a network of local
clinics, the Sick Funds also operated their own hospitals. Other hospitals were
run by the state, and in a few cases local authorities, and these also served
Sick Fund members. Roughly speaking, ownership of the country’s largest,
non-specialist hospitals was and still is more or less evenly split between the
Sick Funds, the private sector, and the Ministry of Health. It is the latter,
known in Israel as “government hospitals,” that concern us here.
The 1960s and 1970s were critical years for the development of the health
system, as large-scale immigration and economic development led to growing

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Michal Tabibian-Mizrahi and Michael Shalev

demand for services, straining budgets and resources. Concurrently, during

the early 1960s the Health Ministry struggled to exploit opportunities for
foreign funding for medical research. Until that time, as a result of a cumber-
some administrative apparatus and a lack of adequate statutory and manager-
ial instruments, it was often compelled to forfeit potentially large grants
available from abroad. In response, senior bureaucrats of the Health Ministry
decided to establish a Research Fund able to legally receive and utilize capital
endowments. The Ottoman Society Law (1909), an existing legal framework
dating back to the last years of Ottoman rule in Palestine, was exploited to set
up a state-managed non-profit organization.1
Founded in 1962, the Research Fund was formally mandated to support and
advance public medical research. The fund added a new institutional layer
intended to handle a defined, dedicated domain: financial management of
research conducted by the Ministry and by the hospitals under its direct
control. Retrospectively, this mundane administrative solution constituted a
first critical juncture, a path that defined key aspects of the Health Ministry’s
operations in the years to come.
After a decade of activity, in 1972 the allocation of a substantial research
budget to the fund by the Ministry’s Chief Scientist spurred expansion of the
fund’s activities. It began to function as a mechanism for hiring new employ-
ees, working under an implicit directive not to link new research personnel
with the Health Ministry as employer. It was hoped that the Research Fund
would make it possible to respond to the chronic shortage of research person-
nel in the Health Ministry, while circumventing budgetary constraints
imposed by the Finance Ministry and the tenure constraint imposed by the
Civil Service Commission.
Around the same time, in 1972, a complementary mechanism was also
introduced—the Society for Public Health Services (SPHS). The purpose of
the SPHS was to hire “external” workers, in order to bypass the regulated
internal labor market of the civil service. Like the Research Fund, it was
founded as an Ottoman Society and managed by senior Health Ministry
employees under the direct supervision of the Health Ministry’s director-
general. In 1977 it was officially determined that the SPHS would also under-
take additional tasks, related to managing financial and other assets relevant
to achieving its goals.
Until the end of the 1980s working hours in government hospitals ended at
2 p.m., and thereafter practitioners were free to work in private practice. These
arrangements resulted in massive underutilization of infrastructures and long
waiting lists and queues. Facing similar constraints, in 1984 the largest of the

1
Detailed information on the history summarized in this section, and references to the archival
and other sources on which it is based, can be found in Tabibian-Mizrachi (2012).

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 Precarious Employment in the Public Sector

Sick Funds introduced an arrangement under which the physicians working in

its local clinics were offered the opportunity of working a second shift in
return for a bonus. This model later inspired the adaptation of government
hospitals to greatly expanded demand for public health services as a result of
the immigration of approximately one million immigrants from the Former
Soviet Union after 1989.
Owing to the high percentage of physicians and nurses among the immi-
grants, this influx also offered a potential solution to the problem. Policy-
makers recognized the need to absorb immigrant physicians and nurses into
the health system in order to cope with rising demand, while at the same time
facilitating their economic absorption. Concurrently, the authorities were
under pressure from powerful unionized doctors to cater to the interest of
veteran employees in protecting themselves from immigrant competitors and
improve their own wages. The response to this conundrum was an insider/
outsider settlement, under which streamlined recertification requirements
enabled immigrants to rapidly enter low-status and low-paid jobs within the
health services, while veteran doctors were compensated by improved jobs
and conditions (see Sussman and Zakai 1998; and in English, Friedberg 2001).
This was the context in which an official decision was made to use the
Health Ministry’s Research Fund and the SPHS to absorb the newcomer phys-
icians and nurses into state-operated hospitals and other public health services
provided by Ministry of Health, and to operate for longer hours using double
shifts. The Research Fund was the main mechanism for hiring personnel to
staff the extra shift, at lower ranks and on precarious hiring terms. Since
induction of personnel to the new lower tier of the employment system was
based on length of residence in Israel as well as professional seniority, it
automatically became an immigrant-only track.
The Research Fund’s objectives were formally amended so that research
became only one of its domains of activity, and its primary goal was defined
as improving hospital infrastructures and services. The “queue-shortening
campaign” was planned to end after seven months, but has survived ever
since in varying formats. The extra shifts not only resulted in significantly
shortened waiting times, but in more efficient use of equipment and person-
nel. It also made it easier for hospitals to offer advanced services such as MRI,
IVF, and dental care.

The Age of Regulation and (Liberalized) Compromise

Over time, several different actors imposed regulatory limits on the use of the
parallel system of precarious employment in state hospitals. In the late 1980s,
expert committees charged with resolving what was framed as a “crisis” of the

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Michal Tabibian-Mizrahi and Michael Shalev

health system recommended ending the anomalous private–public character

of the operations of state hospitals by transforming them into independent
non-profit organizations. From the early 1990s both the legislature (the Knes-
set) and the courts became involved in regulating the activities of the Research
Fund and the SPHS.
In the mid-1990s several key regulatory statutes were passed with implica-
tions for the system of parallel employment in government hospitals.

1. The Mandatory Tenders Law of 1992 established a framework for the

management of procurement tenders in the public sector. It is intended
to promote three main goals: ensuring ethical behavior, promoting
economic efficiency, and creating equal opportunities. In fact the law
provides the means for contracting with service providers, including
temporary work agencies.
2. The National Health Insurance Law of 1994 restructured and regulated
all aspects of the health system. By disconnecting the link between
health insurance and membership in the roof organization of labor
(Histadrut), which drastically decreased trade union density (Grinberg,
Chapter 2, this volume).
3. The Employment of Workers by Labor Contractors Law of 1996 defines a
labor contractor as a “person engaged in the provision of labor services to
others.” The law stipulated procedures for licensing temporary work
agencies and the working conditions of the workers they supplied, and
mandated that temporary workers be hired as regular employees after
nine months. While its implementation was repeatedly postponed, this
legislation and its amendments had a restraining effect on the activities
of SPHS. This in turn spurred attempts to bypass these restraints by
developing alternative modalities of indirect employment.
4. Local Research Funds were originally required to report to a central body,
but in the late 1990s they were decentralized. In 1997 they were awarded
the status of non-profits (Ottoman Societies), and a year later at the
initiative of the MoF, they were statutorily redefined as “health corpor-
ations.” This was a new legal entity, a non-profit organization established
alongside a government hospital, and paid to provide healthcare services
on behalf of the hospital or using its facilities.

The formalization of health corporations was a reaction to two major High

Court rulings, in 1995 and 1998, in response to law suits by private companies
operating in the health services industry alleging that the operations of the
Fund and the Society constituted unfair competition. The first suit, brought by
a medical imaging provider, called on the court to order the Health Ministry
to desist from allowing the Research Fund to enjoy unpaid access to state

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 Precarious Employment in the Public Sector

property, such as the imaging equipment procured for public hospitals.2

The justices accepted the Health Ministry’s position that this practice was
beneficial to “the welfare of the patients and the entire public in need of
state health services.” However, the court expressed the hope that the prob-
lem would be resolved in the future by implementing the proposal to turn
government hospitals into non-profits.
In its judgment in the second case three years later, the High Court rejected
the Health Ministry’s view that the public interest justified its reliance on non-
statutory methods of administration and employment.3 In this instance, five
companies filed suit against the Ministry’s decision to provide health services
to schoolchildren via the SPHS. The court ruled in favor of the companies,
noting that the Society was clearly part and parcel of the Health Ministry, yet
its employment practices ignored the Civil Service Commission and the laws
governing public employment.
These developments underscore the contradictions between the multiple
roles of the state, and the seemingly paradoxical role played by private busi-
nesses. The latter insisted that the government respect the rigidities built into
the public employment system. Their goal was not to protect the employees
concerned, but to force state hospitals to outsource the provision of precarious
labor to the private sector instead of “insourcing” it through the Research
Funds and the SPHS. Meanwhile, in its role as a service provider, the state
consistently acted to avoid the constraints that it had placed upon itself in
its roles as both employer and regulator. The Treasury, always in search of
methods to lower the operating costs of services which it is obliged to finance,
and keen to pursue its strategic interest in shrinking the scope of powerful and
protected public employment, generally favored outsourcing. But in the case
of the government hospitals, with their autonomously developed practices of
non-standard employment, the Treasury did its best to support the system,
seemingly unconcerned that the state was crowding out private businesses by
giving itself an unfair advantage.
The years 2000 and 2001 were marked by a third set of reforms. In 2000
the Employment of Workers by Labor Contractors Law was amended.
A key innovation limited the employment of subcontracted personnel to a
maximum of nine months, after which they would have to be either dismissed
or absorbed in the workplace as regular employees. In addition, the amend-
ment mandated that workers provided by temporary work agencies would be
entitled to the same wages and social benefits as comparable permanent
employees—and from their first day at work. This amendment was planned

2
High Court petition 4721/94 Care Medical Services, Ltd. et al. v Health Minister, ruling 51(1), 29.
3
High Court petition 5012/97 Matan Health & Nursing Care Services et al. v the Health Ministry,
official High Court Ruling 98(1), 326 (1998).

145
Michal Tabibian-Mizrahi and Michael Shalev

to come into effect in October 2001, but was postponed three times by the
MoF via the Omnibus Law, finally becoming operational at the beginning
of 2008.
Following the amendment, a decision was made to rehire nearly all SPHS
employees into the civil service, on the grounds that their work belonged to
the core activities of the Health Ministry. In September 2005, 600 workers of
SPHS and Research Fund were absorbed into the Health Ministry, and from
this time onwards the Ministry was permitted to purchase subcontracted
services solely in specific fields.
In December 2001, the Ministry of Health codified the legal and organiza-
tional status of the Research Funds in their new guise as health corporations.
These regulations define health corporations as non-profit corporations with
capital assets. They specify detailed rules concerning the organizational struc-
ture of the Funds, their areas of activity in the hospital, the fees that they levy,
and more. This move closed a historical circle, marking the official institu-
tionalization of the Research Funds. In the process they lost some, but by no
means did this officially indicate the institutionalization of the historical
Research Fund and the original capacities to bypass the internal labor market
of the civil service.

Discussion
Phases and Mechanisms of Institutionalization
This study of employment practices in Israel’s state-owned hospitals has
revealed a long journey toward the institutionalization of precarious hiring
practices in the public sector. What began as local initiatives by hospital
managers sparked path-dependent processes that created new institutional
arrangements. The key stages of the process can best be summarized and
understood by linking them to the operation of mechanisms of gradual
institutional change that have been identified in the literature. As noted
previously at the start of the chapter, three different mechanisms operated
sequentially in different historical phases: (1) layering of multiple objectives;
(2) conversion of objectives; and (3) a slow process of drift as existing institu-
tional practices were eroded due to the activities of newly formed institutions.
These dynamics and their periodization are summarized in Table 2.
The first phase in the process was layering, or creating new institutional forms
on top of or alongside existing ones. The Health Ministry Research Fund and
later the SPHS came into being as state-governed entities, new to the organiza-
tional toolbox of government hospitals, offering an administrative solution to a
specific organizational need (to mobilize and deploy research funds). Both
the domains of activity of these new entities and the responsibility for carrying

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Table 9.1. Gradual Institutional Change in Hiring Practices in the Health System

Period Main process Main actor Main change The foundation on which the
mechanism subsequent stage was laid

1960s and Formation of Health Ministry Layering Creating a new institutional

1970s alternative entities layer free of administrative
(Research Fund and constraints on hiring
SPHS)
Mid-1980s Significantly expanded Finance Conversion Converting the objectives of
hiring via the Ministry alternative entities in such
Research Fund and a way as to enable hiring
the SPHS on a significant scale
Mid-1990s Regulatory activity and Legislature and Drift Acceptance of hiring via
judicial intervention Judiciary alternative mechanisms,
alongside setting limits and
norms

out their tasks belonged to the Ministry of Health, the agency that established
them. At the same time, it was able to operate them with almost no intervention
from other state bodies, and independently of the initiating agency’s tightly
regulated internal labor market.
The formation of these new entities occurred in a context of strong internal
actors and weak external actors, which pushed the system to add new layers.
The Budget Division of the MoF constituted a significant internal actor.
Initially in the framework of the Stabilization Plan of 1985, the Division
prohibited operational ministries from enlarging their payroll by adding
new positions. At the same time, many of these ministries faced public
demand to expand services with no regard for how they were provided.
Entities in the private market able to supply precarious labor to state agencies,
or to completely take over service provision, benefited from the new rules
offering them new channels of activity. This situation in turn led both the
Health Ministry and the Civil Service Commission to regroup and institution-
alize alternative practices.
The second phase of gradual change followed the conversion mechanism,
starting from 1972 when new objectives were articulated for the new
entities. The need for conversion arose when the state was grappling with
problems in other spheres. In some cases the added objectives were intended
to make it possible to hire personnel outside of the standard employment
framework. This cycle of conversion could be repeated several times over,
each time expanding and amending the objectives of the entities that had
been created.
The Research Fund and the SPHS were established by the Health Ministry in
the mid-1960s and early 1970s, enabling their exploitation when responding
to challenges that appeared during the 1970s and beyond. The template for
non-profits available under the Ottoman Societies Law blazed a new trail that

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Michal Tabibian-Mizrahi and Michael Shalev

state agencies found convenient and worthwhile. The more the success of
these entities gathered momentum, the more the advantages grew (increasing
returns), generating positive feedback that created dependency upon this path.
The third and final phase in the institutionalization process was drift,
starting in the 1990s. This phase was both a consequence of the preceding
phases and evidence of their success, manifested in the proliferation of tasks
assigned to the new entities and in the growing number of personnel hired
under their auspices. Moreover, at this point the use of these entities was not
only the legacy of the Ministry of Health, but also benefited from the support
of veto players within the state, notably the Budget Division of the MoF. This
support defended or extended the legitimacy of the Research Fund and the
SPHS, strengthening them in the long term.
The interpretation proposed here has potentially important theoretical impli-
cations for understanding gradual institutional change. Scholarship in this
area has focused on drawing distinctions between its many mechanisms
(Hacker 2005; Mahoney and Thelen 2010b; Streeck and Thelen 2005b), and
more recently also probing the conditions that invoke particular mechanisms
(Mahoney and Thelen 2010b). The present study implies that more attention
should be paid to the potential role of multiple mechanisms—each adopted by
different change agents—in driving interlocking changes. The appearance of
different mechanisms in a specific chronological order had mutually reinfor-
cing effects, further underlining the importance of treating them interactively.

The Rise of Neoliberalism in Time

In Politics in Time, Paul Pierson emphasized the importance of looking back
in time—if need be, far back—for the causes of social and political change
(Pierson 2004; see also Mahoney 2000). This injunction is certainly borne out
by the results of the present research. As has already been emphasized, some
changes in hiring practices date back to the 1960s or earlier, even before the
critical evolutionary juncture reached in the early 1970s. In line with Pierson
and Mahoney, long-term change occurred not simply because of a concaten-
ation of events triggered by one-to-one processes of cause and effect, but due
to a specific sequence of events in which positive policy feedbacks stimulated
further change. Analysts of structural institutional change need to avoid the
tendency to focus on rapid, explicit processes and minimize slower, longer-
term, yet no less important ones. This has important implications for under-
standing the timing of the transition to a neoliberal political economy in
Israel.
While the mid-1980s economic crisis is widely perceived as constituting the
turning point, as mentioned at the outset of this chapter, a minority of
scholarly opinion holds that liberalization processes in Israel began before

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this (Shafir and Peled 2002: 232–3; Zilberfarb 2005; Maman and Rosenhek
2011: 1–2). It is important in this context to distinguish between neoliberal-
ism as a programmatic or ideological phenomenon, and practices which fit
neoliberal concepts and mandates but are not intrinsically or necessarily
linked to them. The account presented here shows that neoliberal practices
created a new reality which preceded ideational change. At the same time, the
institution of these practices provided a solid foundation for the assimilation
and consequent flourishing of a new theoretical model and ideological dis-
course from the mid-1980s onwards. It was only after the ideological shift
occurred that these practices acquired conspicuousness, extensive develop-
ment, and legitimacy.
The stimulus for initial institutional change was growing pressure to
perform alongside increasing resource constraints in the health system—a
combination that led to the creation in the 1970s of new practices that can
be seen retrospectively as neoliberal in spirit. Only later did the state institu-
tionalize these practices and provide them with legitimacy in the framework
of a paradigm shift. This does not mean that ideational change played no role
in the change process. Since quantitative and qualitative changes in Health
Ministry hiring via the SPHS fully gained momentum only at the end of the
1980s, it appears that new ideas not only grew out of emergent practices but
also contributed to their intensification. A further implication is that at least in
this case, gradual change played a trailblazing role in laying the groundwork
for a more visible and dramatic punctuation of the existing institutional
equilibrium (Krasner 1988). It can be suggested that the success of the neo-
liberal shift lies in the fact that for over a decade its seeds were sown in the
form of introducing liberal practices, paving the way to a more gradual tran-
sition between policy paradigms than prevailing understandings suggest.
From this perspective the Stabilization Plan of 1985 was in fact the point of
encounter between two change processes: the first- and second-order ones
that grew from the bottom up and produced neoliberal practices; and the
third-order ones that championed the ideology (Hall 1993). It was the point
at which ideas and practice began to cohere.

From Co-ordinative to Communicative Discourse

Vivien Schmidt (Schmidt 2008, 2011) has distinguished between two types of
discursive interactions: co-ordinative discourse among policymaking elites, and
communicative discourse between state elites and the public. Policymaking in
Israel was historically conducted mainly by political elites, predominantly the
leaders of the governing Labor Party and the Histadrut labor organization, its
principal partner and source of resources (Shimshoni 1982; Medding 1972;
Shalev 1992). The field of employment and labor relations was regulated by

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Michal Tabibian-Mizrahi and Michael Shalev

corporatist institutional arrangements in which the Histadrut played the

pivotal role, in collaboration with large private employers (Grinberg 1991,
Chapter 2, this volume). Interaction between political, bureaucratic, and
Histadrut elites was key to policy innovation, based on decision-making
processes that demanded compromise and co-ordination, carried out through
a process of persuasion. In the context of the present case study, this
co-ordinative discourse engaged managers and professionals under the
umbrella of the Health Ministry who sought to expand the workforce using
precarious hiring practices, and professional economists, jurists, and human
resource managers in the civil service, who largely supported these initiatives
and furthered their implementation.
In spite of the Histadrut’s status at the time as a veto player in Israel’s political
economy, it was not a partner to the co-ordinative discourse around the emer-
gence of precarious employment in the health sector. Indeed, until the rela-
tively recent reforms described here and in Chapter 10, the labor organization
was largely complicit in the broader development of precarity in Israel
(Paz-Fuchs 2010; Mundlak 2007). As an encompassing workers’ organization,
the Histadrut faced an internal conflict between protecting the interests of
strong (tenured) and weak groups of public employees, a dilemma it frequently
resolved by informally adopting or acquiescing to insider/outsider arrange-
ments. Moreover, as emphasized by Grinberg (Chapter 2, this volume), the
Histadrut’s role as a trade union was often secondary to its interests as the
owner and operator of business enterprises and social services. Finally, powerful
segments of the labor force (including hospital employees) developed autono-
mous sectorial and workplace mechanisms of representation and were largely
self-governing. The result of this configuration was that the Histadrut lacked
either motives or capacities to oppose employment arrangements that bene-
fited organized hospital employees (in the case of doctors, working second
shifts and consenting to the subordinated incorporation of immigrant
physicians), or which they did not perceive as threatening (in the case of the
virtual outsourcing of low-level support jobs).
Returning to the discourse that surrounded the rise of institutional arrange-
ments for precarious employment in public hospitals and the public sector
more generally, we have seen that important changes occurred from the mid-
1980s. Against the backdrop of both economic crisis and the arrival in Israel
of New Public Management ideas, precarious hiring practices rose above the
surface and became visible to all. As discussed by Mundlak (Chapter 10, this
volume), civil society organizations played a critical role in defining precarity
as a political issue. This sparked a transition to communicative discourse in the
political sphere, led by senior economic bureaucrats seeking to generate public
legitimacy for the new hiring practices. These officials presented economic
explanations based on considerations of efficiency and effectiveness in the

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public sector, efforts that were supported by the growing influence of eco-
nomic experts that reached new heights with their successful advocacy of the
Stabilization Plan (Mandelkern and Shalev 2010; Mandelkern, Chapter 5, this
volume). Nevertheless, these attempts to depoliticize precarity were only
partially successful. The rights discourse promoted first by NGOs and later
by the Histadrut resulted in the new regulatory responses discussed earlier in
this chapter and in Chapter 10.

Substantive Implications
The gradual process of change in civil service hiring documented in this
chapter had important effects on both economy and society in Israel. It
broke conventions that had seemed axiomatic: the view that civil servants
must be tenured, as well as the state’s obligation to maintain employer–
employee relations with all of its employees. The adoption of new practices
facilitated the rise of new worldviews on the part of state elites concerning
both the management of public employees and the provision of services to its
citizens.
The hiring practices adopted in the civil service spread throughout the
public sector, including local authorities, state-run companies, and other
public entities. In the private sector, they reinforced innovations that had
already emerged. More directly, the state’s adoption of precarious practices
stimulated the creation and empowerment of businesses and non-profits
engaged in supplying the state with labor under the new arrangements.
These organizations were skilled in generating positive feedback vis-à-vis
policymakers, offering them additional tools for bypassing internal public
sector labor markets.
The changes in public sector employment practices that originated long
ago as ad hoc managerial initiatives in the health services (and most likely in
other areas of state activity as well) have made critical contributions to Israel’s
transition from a corporatist to a neoliberal political economy. The state
played a leading role as innovator in the introduction of labor market “flexi-
bility” (here understood as casualization and precaritization of employment).
This role did not stop with the introduction of new employment arrange-
ments. By reducing its reliance on tenured employees, the state contributed to
the broader neoliberal goals of transferring public functions to private actors,
decreasing public expenditure, and undermining the scope and power of the
unionized workforce.
At the same time, the reform experience was accompanied by a change in
the state’s view of its own abilities. This is especially true for line agencies like
the Health Ministry, which succeeded in leading a gradual yet sweeping
process of change in its hiring practices without the necessity for conducting

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Michal Tabibian-Mizrahi and Michael Shalev

long, tedious negotiations. In the process of “doing” what came to be under-

stood as neoliberal reforms, such agencies acquired the ability to innovate by
trial and error, to copy successful mechanisms and transmit knowledge from
agency to agency, and to ignore pressures for bureaucratic centralization and
standardization, instead creating new layers that were more convenient for
agency managers.

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10

Contradictions in Neoliberal Reforms

The Regulation of Labor Subcontracting

Guy Mundlak

Neoliberalism is typically associated with the commoditization and flexibili-

zation of the labor market and a project of deregulation. It is a general term
that points at a trajectory, often designating an ideology rather than a
particular institutional or theoretical blueprint (Kennedy 2012). Arguments
on neoliberalism therefore cluster around the acknowledgment of alterna-
tives, or a previous “Other.” In the context of the employment relationship,
this Other is designated as the “standard employment relationship” (SER)—in
which an employer and employee enter an ongoing relationship for an indef-
inite period of time, typically on the employer’s premises (workplace), in
routinized time schedules, with protection from unfair dismissals and a guar-
antee of rights at work and to social security that aids in lifecycle changes
(such as retirement) and temporary interruptions during the career (such as
maternity leave and ongoing training) (Stone and Arthurs 2013; Vosko 2008).
The SER developed throughout the middle decades of the twentieth
century, in conjunction with the rise of collective bargaining and the devel-
opment of the welfare state. It was the outcome of industrial norms that were
shaped by technology, market structures, and social norms of solidarity, as
well as by collective bargaining and regulation. It was never mandated as such,
but constituted by a web of norms (Bosch 2004). Since the late 1970s there
have been abundant indications of the multiple forms of employment rela-
tionships that depart from the SER. While at first they were designated as
“atypical” forms of employment, over time the actual persistence of a “typical”
has been questioned. The emphasis is therefore on the precarious forms of
employment associated with the deviation from the security that was integral
to the SER (Standing 2011).
Guy Mundlak

The decline of the SER’s pervasiveness in Israel cannot be simply attributed

to a neoliberal turn in the Israeli economy and politics. On the one hand, this
decline is the product of universal trends, such as globalization and increased
competition, the move from traditional industry to a service economy,
the changing nature of the public sector, and growing anomie in society
(Emmenegger et al. 2012). Furthermore, it also features characteristics of coun-
tries that liberalized previously highly coordinated systems, with a rapid
individualization and the privatization of risk in the labor market (Baccaro
and Howell 2011). These include declining union membership, decentraliza-
tion of collective bargaining, attempts by the state to curtail the role of the
social partners, and pressure to enhance employer flexibility. In Israel, the
centralized system of collective bargaining with its vast coverage of state-wide,
sectoral and enterprise bargaining, coupled with tripartite consultation, with
a high rate of concentration of workers’ representation by the Histadrut was
transformed in the mid-1990s. Following the removal of primary welfare
functions from its monopolist domain (most notably healthcare), the indus-
trial relations systems heavily tilted to a liberal and fragmented system of
interests representation (Mundlak 2007, 2009). Finally, some accounts refer
to local, although hardly idiosyncratic, features of the Israeli path, such as the
growing presence of the economic right in government since 1977, retrench-
ment of the welfare state around 2002–5, and the orthodoxy of privatization
(Doron 2007).
While various deviations from the SER abound, one of the most significant
in the Israeli system, and also perhaps the most controversial, is that of
mediated employment, also referred to as triangular employment relation-
ships. In this triangular relationship, work can be performed through different
types of employment mediators, the most common being temporary work
agencies and subcontractors (Rabin-Margalioth 2009; Nadiv and Feldman
2010; Davidov 2010).
A straightforward narrative of neoliberalization would highlight growing
reliance on mediated employment relationships, and its contribution to
employers’ attempts to circumvent the mutual responsibility that character-
ized the bilateral SER arrangement. To question these assumptions, the first
section of this chapter describes the growing body of law that governs medi-
ated work, with a particular emphasis on the regulation of subcontracting that
followed the regulation of temp-work agencies. The account offered can be
used to claim that an ever-growing body of regulation, which draws on a
network of statutes, judicial decisions, collective agreements, and executive
extension decrees, offers a regulatory safety net that resurrects the SER.1

1
Extension decrees are issued by the Minister responsible for regulation of employment. They
extend a sectoral or nationwide collective agreement erga omnes, i.e. outside of the bargaining

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 Contradictions in Neoliberal Reforms

The second section of the chapter offers a critique of these two interpret-
ations. In response to commentators who see only raging neoliberalism,
I demonstrate that the process of governing subcontracting arrangements
reflects an incremental conversion of previous institutions and the layering of
new governance methods to countervail some of the harsh effects of subcon-
tracting (on these concepts see Mahoney and Thelen 2010a). In this process,
the complex tripartite interaction between workers, employers, and the state,
with the important addition of civil society as a fourth element, seeks to
improve the substandard wages, working conditions, and fringe benefits of
the least well-off workers. At the same time, claims that the new body of
regulation contradicts neoliberal processes of privatization, atomization, and
marketization are also in need of revision. Whether intentionally or not, the
fragmented process of hyper-regulation has not succeeded in forming a strong
coalition of interests and remains an overstretched bandage over the structural
dualist trend in the Israeli labor market. The failure to put together a compre-
hensive response to dualism generally and subcontracting in particular,
coupled with the patchwork of regulatory and negotiated responses, may
weaken the collective strength of workers in the service economy and reveals
the fragility of partial and unco-ordinated regulatory solutions.

Regulating Mediated Employment

The Background: Regulation of Temp-work Agencies since 1990
In previous work I described the regulation of temp-work agencies in Israel
from the early 1990s (Mundlak 2007). In brief, mediated employment
through temp-work agencies (TWAs) was singled out to begin with for two
reasons. First, it was a form of employment in which there was a particular
concern for its precarious practices. Empirically, it was associated with a high
level of abusive employment practices, such as denial of the most basic
statutory rights. Morally, it was associated with the profit of a mediator from
someone else’s labor. Institutionally, it was deemed necessary to regulate
following the dissolution of the monopolist role accorded to the state Employ-
ment Service in 1992. Second, mediated work through TWAs was targeted
for regulation because it is a practice that was relatively easy to define and
identify. TWAs are companies that provide a singular service—“renting” out
labor power on an hourly basis to a different company, which is designated as
the “user” of services. In this they are different from a subcontractor that is a
form of functional outsourcing, in which human labor is used together with

domain. Their normative status is similar to that of secondary legislation and in effect they bind
employers and workers like statutory employment provisions.

155
Guy Mundlak

other factors to provide a service (such as cleaning) or for manufacturing (part

of an assembly line). The problematics of defining subcontracting will be
explained in subsequent sections.
The regulation of TWAs sought to achieve a dual objective—to legitimize
the practice, and at the same time to restrict it to temporary work, alleviate
its precariousness, and secure the workers’ rights (Mundlak, Sol, and Schram
2012). The Law on the Employment of Workers through Temporary Work
Agencies (1996) sought to balance these objectives by means that combined
statutory regulation and collective bargaining. Its two major features were a
licensing system in which TWAs were required to obtain a permit and secure
a guarantee to pay their workers’ wages, and a set of substantive employ-
ment rights.
Initially, the law’s outcomes were perverse. It led to an almost immediate
proliferation in the practice of employment through TWAs, of which the large
share was for long-term, rather than temporary, employment (Nadiv 2003,
2005). In 2000 the law was amended, adding two significant provisions that
were intended to undo these outcomes. First, it required that workers placed
by TWAs should receive equal rights to those of similar employees hired
directly by the user, from the first day of employment (“the equality norm”).2
Second, it required that a worker who had been placed with the same user for
nine months retroactively be considered a direct employee of the user (“the
temporary norm”).3 The equality norm came into effect in 2002, but the law
permitted it to be derogated by a collective agreement with a state-wide
extension decree. Such an agreement was signed in 2004, made applicable
only to the private sector.4 The temporary norm was stalled by omnibus
legislation that accompanies the annual Budget Law, and was implemented
only in 2008 following the success of a conjunctural political coalition and
despite the objection of the Ministry of Finance.5
This brief description of the law as it currently stands conceals fourteen
years of complex political negotiations with multiple players and conflicting
ideological positions that extend beyond the political division between right
and left. For the current purpose it is sufficient to note that since 2004—and
even more so since 2008—employing workers through TWAs has become a
highly regulated business. As a result, despite the general problem of slack
enforcement of workers’ rights, the economic appeal of hiring workers

2
The Law on the Employment of Workers by Labor Contractors [Temp-Work Agencies] (1996),
Section 13(2000 Amendment).
3
Ibid., Section 12A.
4
Collective Agreement on the Employment of Workers through Temporary Work Agencies
in the Private Sector (Collective Agreements Registry 7019/2007, 16.2.2004), extended by the
Minister of Labor (YH—Government Records 5326, 1.9.2004).
5
Last statutory amendment to withhold Section 12A, was in the Omnibus Legislation of
April 11, 2005, and expired in 2008.

156
 Contradictions in Neoliberal Reforms

through TWAs has for the most part evaporated. In the private sector it is still
an effective means of hiring short-term temporary workers. In the public
sector, where the equality norm still prevails, reliance on hiring through
TWAs has become negligible (Tal-Spiro 2014).
This capsule summary of the change in the regulation of TWAs could have
been used to show that unlike the caricature of raging neoliberalism, a sophis-
ticated political interaction brought about an effective protection of the
precariat. It is not hermetic protection, but the result of a political compromise
that over time corrected itself through a process of political learning, and
crystalized a common objective.
The other side of the coin warrants a less optimistic spin. The political
compromise was made possible by the amebic nature of institutions in Israel’s
dualistic labor market. As has been observed in other contexts, when regula-
tory pressure undermines one arrangement, other arrangements can provide a
functional substitute (Palier and Thelen 2010). The political compromise was
not the product of a deep consensus on shared goals, but a contingent solu-
tion to a particular form of precariousness. Fifteen years of experimenting with
the regulation of TWAs hardly affected the law pertaining to subcontracting,
which remained unregulated. Following the regulatory order, cleaning work-
ers were not internalized and made into employees of the user firm. Instead
they were moved from the heavily regulated zone of TWAs to subcontracting.
So what lessons can be learned from the regulation of TWAs? One conclu-
sion would fully discount its achievements, resurrecting the claim of a whole-
sale triumph of neoliberalism. An alternative interpretation would see it as a
preliminary attempt at striking a political compromise with regard to a single
area of precarious employment, primarily because that area was relatively easy
to define. As a result, similar safeguards could be replicated to other mediated
arrangements, the contours of which are more difficult to draw. To identify
which of these two conclusions is more valid, I turn to describing the evolu-
tion of the regulation of workers’ rights in subcontracting arrangements,
primarily after the 2000 amendment regulating TWAs.

The Problematics of Subcontracting

The use of subcontracting has been reported to start decades ago in low-wage
occupations such as cleaning (Bondy 2012). It is associated with other forms of
non-standard employment that also have a long history, such as those utilized
in government hospitals from the 1960s (Tabibian-Mizrahi and Shalev,
Chapter 9, this volume) and various forms of privatization and outsourcing of
public services introduced since the 1980s (Maron 2015). The scope of subcon-
tracting is difficult to establish, not only due to the lack of any systemic
measurement effort but also because of the definitional problem. What exactly

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Guy Mundlak

is subcontracting? (Shamir 2016; Marchington et al. 2009). How, and to what

extent, should we distinguish between an establishment that draws on the
services of cleaning workers employed by a subcontractor for ongoing daily
cleaning; the small manufacturer of packaging for a large industrial enterprise
and diverse forms of production chains; employment of workers through not-
for-profits that deliver services on behalf of the welfare state; the growing
employment of teachers through intermediaries instead of through traditional
channels governed by collective agreements; and the creation of in-house
intermediaries that employ healthcare professionals in hospitals? The world
of subcontracting is institutionally and functionally diverse (Weil 2014).
A curious feature of subcontracting in Israel is that areas in which anec-
dotal evidence suggests that it flourishes have actually been covered by
branch-level collective agreements for decades, most notably in cleaning
and private security.6 Despite this broad coverage, which may remove the
precariousness that is often associated with work in these sectors, it has
been lacking in two respects. First, there are other sectors, such as transpor-
tation, in which subcontracting is practiced but which are not covered by
branch-level collective agreements. Second, even in those sectors where
collective agreements prevail, their reach into shop-floor practices and the
fulfillment of rights is limited. There are indications that, particularly since
the massive decline in Histadrut membership after 1995, most employees
in these sectors were not active trade union members, the Histadrut was not
active in enforcing the workers’ rights under the collective agreement and
extension order, and Workers’ Committees in the covered enterprises were
nonexistent.7 When considering the simplistic argument about how soli-
darity and equality were undermined over time by neoliberal tendencies, it
is important not to idealize the past. In Israel, formal appearances of dense
coverage were always undermined by dualistic tendencies and slack imple-
mentation (Shalev 1992).

Regulation of Subcontracting 1990–2004

Subcontracting did not become an explicit regulatory target until the
mid-2000s. The regulatory efforts reviewed in an earlier section, and others
not mentioned there,8 concentrated solely on TWAs. Public discourse on

6
See, for example, the extension decree for the Security Sector (30.12.1973) YP 1976, 5, and for
Cleaning and Maintenance Sector (1.11.1979) YP 2574, 189.
7
Systemic data is difficult to find, but there is evidence throughout the case law, particularly on
class suit actions in these sectors. See, Supreme Court HCJ 1893/11 National Association of Security
Companies and others V. The National Labor Court and Others (30.8.2015).
8
These include numerous amendments that have been made to particular labor laws, which
sought to address the implications of the triangular situation in terms of the shared responsibility
that is placed on the user-company and the TWA.

158
 Contradictions in Neoliberal Reforms

problems of mediated employment, and NGOs advocating for workers’ rights

since the early 1990s, similarly targeted TWAs. It is not entirely clear why, but
it appears that given the weak structure (at that time) of civil society organ-
izations (outside of the Histadrut) dedicated to improving workers’ rights, the
state-led agenda served as the focal point for the responses of business, trade
unions, and emergent NGOs.
To the extent that the legal system regulated subcontracting during this
period, it did so indirectly. The principal relevant legal instrument was a general
formulation by the Labor Court in 1992 regarding triangular employment
relationships (“Kfar-Ruth Test”).9 In a nutshell, the court held that there is a
rebuttable presumption that the user of services is the employer. However, the
court must determine various factual matters on a case-by-case basis, and then
assign the employer’s responsibilities either to the subcontractor or the user
of services. Less commonly, the court applied a joint-employer formulation.10
The dichotomous assignment of the employer’s status to either the user of
the service or the subcontractor escalated the problematics associated with
subcontracting. Drawing on the court’s general test, the best strategy for
employers who relied on subcontracting and wanted to avoid the judicial
assignment of responsibility, was to create a factual façade in which the user
has no relationship whatsoever to the workers. Human resource managers
took measures to ignore the subcontractors’ employees and to separate them
from employees hired directly by the user.11
With the growing disparity between the heavy regulatory hand that was laid
on TWAs and the ease of distancing the user of services from the subcontract-
or’s employees, attention gradually shifted to subcontracting. In 2005 initial
reports emerged documenting unfair and illegal working conditions among
subcontractors. The reports were written by human rights NGOs (Yedid and
the Haifa University Legal Clinics 2005; Tadjar 2006), and also confirmed
by the parliamentary research department (S. Levi 2005), initially highlighting
the problems with regard to security guards. This refocused attention was
inductive. It did not seek to propose a general principle or a rule regarding
when subcontracting is legitimate (similar to the concept that developed with
regard to TWAs that distinguished, for example, between short-term and long-
term employment). Instead it highlighted the cumulative problems faced by
workers in a sector where subcontracting is the norm. The findings empha-
sized subcontracting as one component of precarious employment, side by

9
National Labor Court 3-142/1992 Hassan Aliyah Al-Harinat—Kfar Ruth (7.9.1992).
10
See, for example, the importance of joint employment with regard to migrant workers:
Beersheva Labor Court 1382/04 Abai Talaya—Afdor Inc. (9.5.2005).
11
On the use of non-metaphorical walls, see: Jerusalem Labor Court 2513/00 Anat Zarifa and
others—The Ministry of Finance and others (21.12.2005).

159
Guy Mundlak

side with the nature of the job, mobility within and outside the sector, and
hurdles to claiming rights and opportunities for employment protection.
The Labor Court at this preliminary stage contributed to the hesitation
with regard to the underlying question of whether subcontracting is at all
legitimate. In a leading case, in which the issue at stake was a single worker on
the administrative staff of a public research institution who was continuously
working for the institute but employed by various TWAs and subcontractors
who substituted one another as her designated employer, the Labor Court was
split.12 The dissenting opinion held that there is something intrinsically
wrong with the continuous employment of a worker as a temp who is shifted
from one employment mediator to another. This general statement was
oblivious to the type of mediated work, whether through TWAs or subcon-
tracting. By contrast, the majority’s opinion was that subcontracting is a
legitimate form of mediated employment as long as it is conducted in good
faith and not for the purpose of abusing the worker’s rights. The distinction
proposed by the majority between good-faith and malign forms of subcon-
tracting was difficult to implement. Subcontracting often goes hand in hand
with avoidance of labor’s organized power and employment standards that are
accorded by collective agreements to workers employed directly. These two
positions mark the two strands of subsequent developments.

Developing the Particular Law of Subcontracting: 2005–11

From 2005 the law on subcontracting started to develop along two distinct
trajectories, although each was agile in its implementation. One approach
sought to maintain the ease of subcontracting. In 2011, the National Labor
Court abolished the “Kfar Ruth” presumption that the user of service is the
employer. Instead, the Court held that the factual analysis must be comple-
mented by a general question—whether reliance on subcontracting is a ficti-
tious or manipulative form of employment that is solely intended to avoid the
employer’s responsibility.13 This approach preserves the structure of the pre-
vious cases, but seeks to alter the boundary between legitimate and illegitim-
ate forms of subcontracting. It places a heavier burden of proof on the workers
who claim a direct legal relationship with the user of service. Nevertheless, the
Court used this test several times to associate the worker with the user of
services as her employer, holding that this finding is necessary to ensure
freedom of association (the actual ability to organize), the right to take part

12
National Labor Court 273/03 Dovrat Schwab—State of Israel (2.11.2006). See also: National
Labor Court 410/06 The National Insurance Institute—Raid Fahum (2.11.2008).
13
National Labor Court 478/09 Itzhak Hassidim—The Municipality of Jerusalem (13.1.2011).

160
 Contradictions in Neoliberal Reforms

in the internal labor market of the user of services (e.g., to apply for promo-
tion), and the preservation of workers’ dignity.14
The other trajectory of change was initiated independently by a regional
labor court and by the state in its role as employer. The former held, in an
innovative decision, that a user of services (a major bank in this case) oblivious
to the subcontractor’s infringement of fundamental employment standards
relevant to its employee (a cleaning worker), nevertheless has a residual
responsibility toward the worker.15 The case was brought to the court by a
legal clinic, supported by a coalition of NGOs (hereafter NGO coalition)
informally established around that time for the purpose of advancing better
enforcement of employment standards in the Israeli labor market. Even
though the case was not decided by the National Labor Court, it received
much attention in labor law firms’ briefs to the employers they represented.
The ruling by the Tel Aviv Regional Labor Court was complemented by
several guidelines issued by the state’s Accountant General, starting from
2008.16 These instructed government ministries and agencies to avoid
decisions in tender offers for service subcontracting when the costs proposed
by the participant in the tender were lower than what is required in minimum
employment standards legislation. There was also a new requirement that
subcontractors demonstrate good employment records from past transactions,
and the addition of several protective layers and auditing measures by the state’s
accountants. These two interventions sought to increase the responsibility of
the user of services, but without identifying the user of services as the employer
and without applying the two pillars of existing regulation governing TWAs
(the equality norm and the temporary norm). The innovation was limited to
forging a residual responsibility on the part of users of services for upholding
minimum statutory standards. Nevertheless, its importance cannot be over-
stated. While the Kfar-Ruth test served as an incentive for users of subcontract-
ing to shut their eyes, distance themselves from the employment relationship,
and erect a barrier between the user’s and subcontractor’s workers, the new
case law and administrative guidelines penalized such behavior and encouraged
the user of services to proactively reach out to the workers and take preventive
measures.
These developments obfuscated the extant legal doctrine regarding subcon-
tracting. On the one hand the National Labor Court amended the focus of the

14
See, for example—National Labor Court 602/09 Ministry of Education—The Organization for
Academic Development of Science and Culture (24.1.2012); National Labor Court 6818-10-10 The
National Insurance Institute—Moshe Dayan (24.4.2012).
15
Tel-Aviv Labor Court 3054/04 Natalya Shmuelov—Moshe Punnes Cleaning Services and Bank
Ha-Poalim (10.12.2006).
16
The guidelines changed and developed over time—see Guideline 7.11.3 on Protecting the
Rights of Workers Employed by Subcontractors in Security and Cleaning (16.3.2010).

161
Guy Mundlak

Kfar-Ruth test, tweaking the borderlines between legitimate and illegitimate

subcontracting. On the other hand, the regional Labor Court and the state’s
internal guidelines imposed residual responsibilities on the users of services,
switching the focus from deciding the borderline to a principle of shared
responsibility. The former encouraged disregard of the subcontractors’ work-
ers, while the latter required attention and responsibility. These contradictory
instructions, with their questionable distinction between benign and malign
forms of subcontracting, made it difficult to ascertain a clear message regarding
what the law—and more importantly, social values—were actually claiming on
this topic.
In 2007 initial attempts were made by the Ministry of Industry, Trade, and
Labor (hereafter the Ministry) to draft a bill to improve enforcement of
workers’ rights, which included a formulation of shared responsibility
between the user of service and the contractor.17 In this, the Ministry framed
the problematics of subcontracting as being a subset of slack enforcement in
the labor market, and removed it from the alternative legal framing already
established for TWAs, with its emphasis on the norm of equal remuneration
and the restricted objective of temporary employment.
The Ministry sought to complete the legislative process by means of tripar-
tite deliberations with the peak level management of the Histadrut (labor) and
the Coordinating Bureau of Economic Organizations. The NGO coalition
asked to take part in the deliberations but was shunned by the tripartite actors.
It later succeeded in lobbying several members of Parliament to raise numer-
ous reservations concerning the proposed arrangement, particularly with
regard to the adequacy of protection the proposed law extends to workers
employed through subcontractors. The legislative process stalled, and was
gradually abandoned.

The Social Protest of Summer 2011 and its Aftermath

In the summer of 2011, following the Arab Spring and at a time when social
movements in other countries launched mass protests, Israelis established
tent cities around the country, calling for “social justice” (Filc and Ram
2013). The connection between subcontracting and this exceptional social
outburst may seem tenuous at first sight. The protest was first and foremost
over the cost of living in Israel—housing, food, daycare, and more. The protest
was also initiated by people who may seem to be removed from subcontract-
ing concerns—middle-class youngsters in the central boulevards of Israeli

17
Proposed Law on the Improvement of Enforcement of Labor Laws (2008), Government
Proposals 363, p. 373 (2008) (5.2.2008).

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 Contradictions in Neoliberal Reforms

society. Almost inexplicably, the social protest led to the next, and thus far the
ultimate, stage in regulating the practice of employment subcontracting.
Nevertheless, there are several possible explanations for this path.
First, the social protest grew in uncoordinated fashion, with different
groups establishing “neighborhoods” in the tent cities around the country.
In one such neighborhood were activists protesting subcontracting arrange-
ments in the labor market. These protests echoed a growing realization, which
had recently surfaced in the public discourse, of how pervasive subcontracting
had become in many sectors and occupations. This particular “neighborhood”
was joined by several others inhabited by participants in industrial action that
took place in the same year—social workers and physicians. Although their
disputes were very different in nature, class-based protests against social
injustice at work intermeshed with status-oriented demands for the recogni-
tion of social justice for all. Second, Shalev and Rosenhek (2013) pointed out
that the middle-class youth who initiated the protest actually found out that
their university degrees, unlike those of their parents, were no guarantee of
fulfilling their expectations of attaining a middle-class lifestyle. One of the
reasons is that many found work in white-collar occupations, as teachers,
social workers, or IT professionals, under subcontracting, freelancing, and
other precarious employment arrangements. Although they took to the streets
over the cost of living, their protest could not be detached from grave
concerns about income. Finally, it is important to pinpoint the role of the
Histadrut. While the leader of the Histadrut tried to offer the trade union’s
authority and stature to the demonstrators, they were refused by the activists.
The Histadrut was seen as too much a part of the “old system” against which
they were protesting. Following this rejection, the labor organization stepped
back and was no longer actively involved, but it sought an opportunity to
come back to the front and leverage the amorphous term—“social justice”—
that was rapidly becoming the center of public consensus.
Following the protests, the state established a special commission in its
quest to appease the demonstrators, headed by the economist Professor
Manuel Trajtenberg. Rights at work generally, and in subcontracting arrange-
ments in particular, were not part of the committee’s jurisdiction. Nevertheless,
in its final report the committee stated that the problem of slack enforcement of
employment rights must be remedied (State of Israel 2011). At the same time, a
committee of experts established by the leadership of the social protest formed a
team to make recommendations on changes in the labor market. This team,
heavily influenced by representatives of the NGO coalition and their friends in
civil society, produced an extensive list of recommendations that included
almost every conceivable social-democratic proposal (Yonah and Spivak
2012). One of its recommendations was to abolish subcontracting in favor of
“direct employment.”

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Guy Mundlak

Even though the issue of subcontracting was only at the margins of the
social protest, its call for users of services to internalize subcontractors’ workers
into their own payrolls and therefore be fully responsible for them, which had
gained recognition among social advocates a short time before the protest,
finally reached the broader public discourse. “Direct employment” became a
catchphrase that designates an alternative to the framework that the courts
and the Accountant-General sketched in earlier years, which was confined to
improved enforcement of minimum rights. It was also the approach advo-
cated years earlier by the dissenting opinion in the National Labor Court.18
After the social protest ended, a series of events took place, bringing the two
interpretive frameworks into direct collision. The Histadrut sought to reclaim
its position as the leading advocate of social justice and tapped into the issue
raised by the social protest which was closest to its ethos—subcontracting.
After it threatened to declare a state-wide strike, the Ministry expedited the
already-forgotten proposal for the statute to improve the enforcement of labor
laws, and the Knesset passed it at the end of 2011. The government was eager
to demonstrate its concern for the issues the protestors raised.
Like the bill proposed four years earlier, the 2011 law ties the regulation of
subcontracting to significant improvements in the Ministry’s supervision and
enforcement measures. With regard to the former, the law applies at present
to three sectors—cleaning, security guards, and cafeteria workers. The law
extends the trajectory developed earlier by the regional Labor Court and the
Accountant-General, by placing a residual responsibility on the users of
services. However, the responsibility has been increased in scope (e.g., extend-
ing to matters such as pensions that are regulated in extension decrees) and is
subject to a list of specific requirements. Some conditions offer incentives for
users to monitor subcontractors, for example auditing of the wage slips of
subcontractors’ employees by a professional third party, and procedures for
workers to file complaints. The law also specifies conditions under which
increased sanctions apply, such as negotiating a contract with a subcontractor
that determines wages and working conditions that are below a minimum
threshold.
The law on TWAs has also been amended to apply the registration require-
ments for temporary employment agencies to subcontractors in the cleaning
and security sectors. Although this adds to the impression of an incremental
regulatory convergence between the two forms of mediated employment, the
twin pillars of TWAs regulation—the temporary norm and the equality
norm—have not been replicated. Moreover, the recently legislated law on
enforcement states explicitly that any action taken by the user of services to

18
See supra note 12.

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 Contradictions in Neoliberal Reforms

secure the rights of the subcontractors’ workers will not serve as an indication
for assigning the user the status of “employer.”
Despite the passing of this important legislation the Histadrut decided to
carry out its threat and instigated the state-wide strike, calling for the abolition
of subcontracting arrangements in favor of direct employment. Following the
four-day strike in February 2012, negotiations began over new collective
agreements. The years of negotiations that followed proceeded in convoluted
fashion, and it suffices to present the final outcomes. First, despite statements
to the media about a shift toward direct employment, very few workers were
actually moved from mediated to direct employment. Subcontracting
remained the norm. Second, new collective agreements were concluded for
the security and cleaning sectors and extended by the Minister of the
Economy to cover all the employers in the two sectors.19 The agreements
also affected statutory provisions that apply to the public sector employers-
users of services.20 The agreements raised wages by almost 10 percent above the
minimum wage, guaranteed pensions above the minimum threshold that was
established in a different statewide extension decree (2008),21 and provided
mid-term saving plans and bonuses. At the same time, the new agreements also
sought to stifle the Labor Court’s growing willingness to increase protection to
workers in the two sectors, following findings that exposed years of failure by
the state agencies and social partners to extend protection to workers covered
by collective agreements.22
These developments bring us to the time this chapter was completed at the
beginning of 2016. The current situation, which is less confused and contra-
dictory than before the social protest but still complex, is summarized in
Table 10.1.

19
Collective Agreement for the Security Sector 7029/2014 (22.7.2014), Extended on 2.10.2014,
YP 6899 (26.10.2014); Collective Agreement for the Cleaning sector 7035/2013, Extended on
5.2.2014, YP 6759 (19.2.2014).
20
Law on Employment of Workers by Service Contractors in Security and Cleaning in Public
Bodies (2013).
21
Collective Agreement on Comprehensive Pension Insurance in the Economy 7019/2007,
Extended on 1.1.2008 (amended later in 2011, extending the level of pension).
22
In a nutshell, The Law on Class Action Suits (2006) permitted filing class action suits on
employment matters, except against employers who are bound by a collective agreement. It was
assumed that collective labor relations are the preferred form of group action in the sphere of labor.
However, the Labor Court realized that some workers who are covered by sector-wide collective
agreements, be they security guards or cleaning workers, are barred from using class action suits,
but the trade union does not offer them actual protection. Collective agreements in these sectors
are outdated and are not actively enforced. Signing new agreements in these sectors aided in
legitimizing the monopoly the law gave to collective industrial relations, defeating other forms
of group action that are intended to make access to justice more effective. The Labor Court rapidly
reacted to the new agreements, withdrawing from the abovementioned decision. Supreme Court
HCJ 1893/11, supra note 7.

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Guy Mundlak

Table 10.1. Regulating Mediated Employment Arrangements—The State of the Law

Registration Regulation Temporary Equality Residual Summary

requirement of wages norm norm responsibility Score3
of the user

Temp-work Yes Yes Yes Yes Yes 5

agencies, public (equality
sector1 norm)
Temp-work Yes Yes Yes No Yes 4
agencies, (collective
private sector1 agreement)
Subcontractors, Yes Yes No No Yes 3
cleaning and (collective
security2 agreement)
Subcontractors, No No No No Limited4 0.5
other sectors

Note:
1
Information technology workers employed through temp-work agencies do not enjoy most of the arrangements
(wages, temporary, and equality), and therefore their effective score is 2.
2
Cafeteria staff enjoy some of the arrangements of this group but not others. For reasons of simplicity, they are clustered
here, although their total score would be 1 (no registration requirement and no regulation of wages).
3
The score is based on one point for every positive response. It is a crude measure, intended to indicate the rank order of
regulatory intensity.
4
The Law on Enforcement does not apply to the category of subcontracting in other sectors, but the principle of residual
responsibility that was developed in the case law before the law may still apply. Currently there is no decision that
discusses whether the new law preempts previous court rulings, or layers upon them.
“Collective agreement” denotes conditions established by an agreement with an extension decree.

Interpreting the Regulation of Mediated

Employment 1996–2014

In 1995 the state of the law basically came down to a dichotomous distinction
between the employment mediator and the user of services as filling the role
of employer. Starting from 1996 with the legislation of the TWA law, and over
the course of almost two decades, various layers of protection were added as a
result of interest group pressures, struggles by workers and their representa-
tives, attempts at legitimization by business, and political tit-for-tat. Through-
out this period the rhetoric of change has attempted to address concerns about
neoliberalism from all sides of the political map. NGOs have claimed that
subcontracting in Israel is more extensive than in other OECD countries.
By contrast, employers have warned of the dire consequences of regulation,
which will lead businesses to leave Israel and join the global race to the
bottom. The protagonists have often cited unsubstantiated figures, inaccurate
descriptions, and legal analyses, and have relied on normative prophecies.
Both sides have made use of the generic claims of the neoliberal debate—
uninhibited flexibilization versus overzealous regulation.
In contrast to the binary character of the political rhetoric that has accom-
panied the debate over subcontracting, the regulatory evolution described

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 Contradictions in Neoliberal Reforms

here justifies a more nuanced interpretation. In the next subsection I claim

that the new regulation cannot be dismissed as merely a prop to continued
neoliberal hegemony. At the same time, in the subsection that follows
I question the sustainability and effectiveness of the new regulation, empha-
sizing the inability of the current governance system to undo dualist tenden-
cies in the Israeli labor market.

More than just a Neoliberal Turn of Events

As the Introduction and other chapters of this volume have emphasized,
the real existing world of neoliberalism is far more contradictory and driven
by interests and power relations than the popular view of neoliberalism as a
coherent set of goals and institutions (marketization, the withdrawal of the
state in favor of an expanded market sphere, retrenchment of the welfare
state, privatization, weakening the power of trade unions) meshed together
by an overarching ideology of market fundamentalism.
The evidence assembled in this chapter shows that in the governance of
precarious employment arrangements the state did not withdraw, but actually
reappeared through various, partially coordinated agents—the legislature, the
judiciary, the Ministry, the Accountant-General—and also as an employer and
a party to collective agreements. For better or worse, the state is currently more
involved in the labor market than in the past, when corporatist arrangements
prevailed (Mundlak 2007). This process of “juridification,” alluding to the
legal tool that enshrines a large part of the state’s policy, compensates for
the decreasing impact of the social partners.
In itself, the growing intervention of the state’s agents in regulating the
labor market does not refute the claim of growing neoliberalism. What appears
to be a paradox has been identified in the literature as a process in which
marketization and regulation actually intertwine (Vogel 1996; Levi-Faur
2005). Liberalization of Israel’s political economy has undermined workers’
security and collective rights, but at the same time the regulatory process did
yield benefits for those who paid the price, first in terms of actual rights and
even monetary gains, and second in terms of facilitating diverse strategies for
change by numerous agents.
Accordingly, the regulatory process described here resonates with Polanyi’s
account of the “double movement,” where processes of marketization are offset
by stronger public intervention (Polanyi 2001). The layering of regulation
described here indicates that unlike the two-step process described by Polanyi
(marketization generates a protectionist response), there is actually an iterative
movement in which regulation is continuously shaped and molded by compet-
ing pressures. The current state of the law represents a response to constantly
changing circumstances. The statute to enforce labor laws was passed under the

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Guy Mundlak

threat of strikes. The government became more supportive in light of the

political pressures that followed the social protest, and the Histadrut and the
employers’ associations were motivated by the threat of delegitimation.
A second feature of the new regulation is that it does not conform to the
image of primacy for the market’s invisible hand. The new governance struc-
ture that was developed points at the resurrection and adaptation of the
traditional institutions associated with the corporatist past, namely tripartite
negotiations over labor legislation, nationwide strikes, sector-wide collective
bargaining, and extension decrees (Mundlak 2009). Unlike in the corporatist
past, there are also new agents and avenues for workers’ voices. The regulatory
layering depicted here demonstrates several nonconcentric circles of action:
political changes, judicial activism, negotiations between “social partners” at
peak level, the emergence of an active civil society that is actually constituted
by the fight for contract workers’ rights, and finally the mass demonstrations
of summer 2011. It is difficult to establish a clear pattern of causation between
these different arenas of social and political action, but in retrospect it is clear
that each type of action was an essential step in the process of regulation. The
fact that transformative action is taken in different spheres is important,
because change is difficult to achieve solely within one social subsystem.
Each subsystem can potentially compensate for another’s blind spots.
Neoliberalism having now been reconsidered, the recent layering of
arrangements for regulating subcontracting indicates that the earlier TWA
regulation may have served as the basis for an incremental regulatory emula-
tion that is still in the making. The process of layering seeks to actively adjust
the regulatory framework to cover the growing sector of subcontracting
(Mahoney and Thelen 2010a).

Less than a Structural Social Reform

The growing role of the regulatory state can be considered as progress if the
growth in mediated employment is an exogenous occurrence. Such a claim
may point to mediated employment as a natural outcome of changing
methods of production and the delivery of services, and processes of global-
ization that entail the “fissuring of employment” (Weil 2014). If this is the
case, then the state stepped in as a benevolent regulator to increase protection
for those workers who were paying the price of the new regime of accumula-
tion. However, a different perspective may be suggested, according to which
the state and the parties to collective agreements are also implicated in creat-
ing the precariat. The new regulation masks this cultivation of dualist tenden-
cies by a formal appearance of extending rights (Palier and Thelen 2010).
Did the regulatory correction suffice to undo the dualism associated with

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mediated employment? I claim there are two significant limitations to the

view of the current state of affairs as a matter of correction.
First, the developments since 2005, and particularly since 2011, have grad-
ually shifted the emphasis from the claim of direct employment to protective
measures against violations of statutory rights and some bargaining benefits.
The choice of one track comes at the expense of the other. Despite the
emergence of the popular call for “direct employment” following the social
protest, the outcomes have been to the contrary. First, the agreements eventu-
ally secured direct employment for small and well-defined groups of workers.
Second, the Law on Enforcement that was passed, like the case law decisions
and executive actions of the Accountant-General before it, imposed greater
responsibility on the users of services. However, to avoid those users’ concerns
that this would implicate them as the formal employers of subcontractors’
employees, the law holds explicitly that acting according to the law will not
be held to forge a direct relationship. This was the essence of the compromise—
the state, including the judiciary, will refrain from making claims regarding
direct employment, in return for greater protection of workers employed by
subcontractors. The outcomes of these legally mandated protections are yet to
be tested in action, and they may be quite positive, but it is clear that direct
employment is already a slogan of the past.
Opting for the track of remedying violations of minimum rights is similar
to the benefits accorded to the poor in liberal welfare regimes. This is not a
comprehensive and universal treatment of dualist tendencies, but a form of
limited aid to those workers who are least well off. The structural arrange-
ments of subcontracting still make it difficult for the workers to organize and
attempt to further raise their wages. There is no arrangement for promoting
mobility out of the two targeted sectors—cleaning and security. Moreover, the
new arrangements focus exclusively on the sectors that employ those who are
the least well off. They do not address a host of other workers employed in
subcontracting arrangements, such as information technology professionals,
teachers, and social workers. There is no attempt to pool together diverse
practices that are related to subcontracting and the law remains at the level
of securing minimum (plus) standards.
The residual nature of the new arrangements further points to their second
structural weakness, which concerns their fragmented scope. The rise in
subcontracting was the result of the tighter seal on long-term temping
through TWAs. The new regulations focus on some sectors and completely
disregard others. This amebic process has several consequences. First, it
implies that there is no real agreement between the social partners, merely
tradeoffs that are dependent on regulatory contingencies. Second, it weakens
class-based capacities to induce change. The political clientele of the various
arrangements has been systematically fragmented. Agency workers lost a

169
Guy Mundlak

shared cause with those employed by subcontractors, and subcontractors

employed for transportation have no shared cause with workers in the clean-
ing and security sectors. Significant structural change should make it possible
to forge new and stable coalitions. When the workers of two weak sectors
are granted some remedial relief, the possibility of structuring a class-based
coalition that brings them together with workers in more lucrative occupa-
tions becomes even more remote. Considering the relationship between
political representation and segmentation in the labor market (Rueda
2007), the fragmentation of the secondary labor market—and, needless to
say, the distancing of alternatives that may bridge the primary and secondary
labor markets—undermines political capacities to advance a more structural
and comprehensive protection.
The use of traditional instruments for advancing workers’ rights can be
viewed as an achievement in itself. However, drawing again on the traditional
instruments of centralized and coordinated bargaining (sectoral bargaining,
extension decrees, and tripartite negotiations over policy matters) does not
ensure a greater level of equality (Thelen 2014). Not only were some of these
instruments partly responsible for the dualism in the Israeli labor market in
the past, but they are currently being used in a different economic environ-
ment, and they cannot really replicate whatever achievements they had.
Consequently, new gains for workers employed by subcontractors are a
significant withdrawal from the earlier arrangements achieved for TWA work-
ers. They raise labor costs, but their price is contained. They will be difficult to
extrapolate to others; they do not sufficiently alter power relations; and not
only do they refrain from bridging the primary and secondary labor markets,
but they actually segment the secondary labor market into bits and pieces that
will be more difficult to cement in the future.

The Road Ahead

Is the current incremental change on subcontracting part of a clear trajectory,

or merely incidental progress that relies on the existence of alternatives to
bypass the small roadblocks the law has structured? The assessment of losers
and winners should be tested over time, including the difficult assessment of
the counterfactual scenario (what would have happened if the bargaining
partners or the legislature had decided to advance direct employment?).
One scenario suggests that this is an incremental process. Difficulties in
identifying what the limits of “direct employment” are and defining subcon-
tracting, gradually give way to regulating those areas that can be named and
labeled. Once the process starts, it may progress into rougher terrains.
For example, the Histadrut fought the reorganization of the Postal Services

170
 Contradictions in Neoliberal Reforms

in 2014, emphasizing that the trade union would endorse reforms that are
needed for the economic recovery of the Postal Services and its competitive
stand, but clarifying that temping practices and the substitution of tenured
workers with precarious forms of employment is where they draw the line.
The second scenario suggests that as some forms of precarious employment
are made less worthwhile for employers, others will develop instead. For
example, in collective bargaining for social workers, the agreement covered
only the state’s employees and sufficed with raising wages for social workers
employed by licensed providers of personal services for the state, but refused
to extend the collective agreement to cover them (that is—applying the
equality norm).23 Both examples illustrate the unpredictable logic of iterative
regulatory movements.

23
Collective Agreement for Social Workers (30.5.2011).

171
11

Conclusion
Asa Maron and Michael Shalev

Our closing reflections discuss the theoretical implications of the studies

collected in this volume, distilling theoretical lessons that can be learned
from the Israeli case and placing them in comparative perspective. We then
comment on the viability and sustainability of neoliberalism in Israel, stres-
sing features of the Israeli context that seemingly contradict and undermine
the neoliberal project.
This book is inspired by, and aspires to contribute to, the theoretical
return to the state—a move that was inhibited by both new constraints on
states, and changing ideas inside and outside of the social sciences. Retaining
a focus on the state encountered resistance because so many dominant dis-
courses appeared to deflate its role: globalization, permanent austerity, recom-
modification, and the triumph of markets. The financial crisis and its
aftermath have served as a reminder that the state is always called upon—
and has good reasons—to save capitalism from its own instability and contra-
dictions. It remains to be seen whether this reinvigoration of state interven-
tion was more than a transitional rescue operation, and whether it will evolve
into a regime that is qualitatively different from neoliberalism. Regardless, our
retrospective look at the Israeli case has underlined the importance of the state
and its internal transformation for making neoliberalism possible. Bringing
statist interests back in, this book has exposed intrinsic motivations for state
agencies to advance neoliberal policy reforms. Our historical perspective
makes it possible to see that neoliberalism is about the often contentious
transformations of intra-state relations, as well as those between state and
society.
 Conclusion

Israel and the Limits of Conventional Explanations

for the Rise of Neoliberalism

John Campbell’s Foreword and our own Introduction argue that Israel is a case
worthy of more attention by comparativists and theorists of political econ-
omy. As a preface to discussing the analytical contribution of this book for the
study of neoliberalism, we wish to emphasize how Israel challenges widely
accepted explanations for the rise of neoliberalism. We will then go on to
argue that a state-centered approach to the rise of neoliberalism provides a
coherent explanation for these apparent anomalies, one that may also be
applicable in other contexts.
Three popular explanations of neoliberalism are challenged by the Israeli
case: (1) the interests and power of domestic capitalists; (2) irresistible instru-
mental and structural pressures in the context of economic globalization; and
(3) ideological conversion of state elites.
(1) Domestic capitalists. Marxist and institutionalist scholars attentive to the
power of capital have underlined its role in advancing neoliberal reforms by
capturing state elites and institutions to serve capitalist interests (Harvey 2005;
Hacker and Pierson 2010). The aim was to reinstate conditions for private
profit accumulation by deregulation, tax cuts, and above all breaking the
power of organized labor. In turn, the rise of neoliberalism is expected to be
followed by a resurgence of capital’s economic and political power.
As shown by Maman in Chapter 3, the privileged position in Israel of large
enterprises and business groups as producers, employers, exporters, and
taxpayers was evident long before the adoption of the neoliberal paradigm
by state agencies. Moreover, while privatization provided profitable oppor-
tunities for creating or reinvigorating business groups, other policies were
deployed with the intention of constraining the aggregate power and concen-
tration of market actors. The creation of a new capital market by privatizing
the Histadrut’s pension funds and putting them in the hands of insurance
companies (thereby stimulating the corporate bond market that financed the
expansion of old/new business groups) was one important market-enhancing
policy. Another was the privatization of enterprises formerly owned by the
state or the Histadrut and other quasi-state institutions, an opportunity used
by both established entrepreneurs and executives and some newcomers to
create giant family-based fortunes based on control of new or re-engineered
business groups.
The Ministry of Finance (MoF) and the central bank have sought to protect
their autonomy from market actors by setting limits on corporate power and
interests. While these efforts were only partially successful, they reveal that
liberalization has been accompanied by the rise of countervailing state
powers, by means of (a) revised institutional arrangements (notably in the

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Asa Maron and Michael Shalev

sphere of government funding for industrial investment), (b) new policy

instruments (stricter regulation of corporate holdings, financial services and
savings, and new privatized entities and capital market vehicles), and (c) new
market actors (insurance companies and institutional investors). Although
regulators lost the war for “competitiveness”—as Maman documents, the
overall level of concentration has remained very high—they did win some
important battles, notably several that were aimed at constraining the permis-
sible domains of activity of Israel’s three large banks. Rhetoric aside, the
primary goal of this new state project was not to protect consumers but to
prevent future capture of the state by building its strategic capacity to
maneuver vis-à-vis capital’s interests and demands.
The end of the long era of Histadrut control over key economic enterprises
and social services, and the decoupling of Histadrut membership from the
healthcare system, greatly weakened the labor organization economically,
politically, and organizationally. But while the power of organized labor was
seriously undermined (Cohen et al. 2007; Kristal 2013), business interests were
not the prime mover of these reforms. As Grinberg emphasizes in Chapter 2,
the Histadrut closely collaborated with big business owners and managers in
the private sector, coordinating its pension funds, policy lobbying, and trade
union activity in the service of this collaboration. Steep rents were extracted
from the state by this all-powerful coalition, which exploited the state’s
structural dependence to entrench mechanisms of capital subsidy. The his-
toric anomaly of the Histadrut performing state functions (public sector
enterprises, healthcare, pensions) became a burden on the state, while the
dependence of the long-dominant Labor Party on Histadrut resources and the
powers of the Histadrut-based party machine obliged Labor politicians to use
state power to safeguard their power base, and ceded control over their careers
to the machine.
As Grinberg shows, the Histadrut was a drain on the many resources con-
trolled by the state’s two most powerful agencies—the MoF, which supplied
massive, subsidized investment finance, and the Ministry of Defense, which
channeled profit-making opportunities through military procurement and
the benefits of the Occupation. When the state responded by eliminating
the Histadrut’s access to cheap investment finance and refusing rescue
subsidies, the result was de facto privatization of its enterprises. But this was
not privatization as a liberalizing measure. The first Likud government collab-
orated with the Histadrut and eliminated its access to pension fund capital in
an attempt to regain control over economic policy. Later on, Labor politicians
played the decisive role in refusing state subsidies to the Histadrut and elim-
inating its role in healthcare.
(2) Economic globalization. The second dominant explanation for the rise
of neoliberalism focuses on the power of international capitalist elites and

174
 Conclusion

multinational corporations, as opposed to domestic capitalists. Even more

commonly, scholars point to the growing structural pressures imposed by
global markets and international organizations that have led to convergence
around the principles of the so-called Washington Consensus. Yet there is
much evidence to suggest that the effect of these trends is neither determin-
istic nor uniform across different countries and periods (for reviews see
Drezner 2001; Brady, Beckfield, and Zhao 2007).
Unlike peripheral states in the developing world, but similar to other afflu-
ent democracies, Israel’s neoliberalization was not driven by compulsion and
threats. Because of its special relationship with the USA, conditioning of loans
by international organizations was irrelevant to Israel. American geopolitical,
military, and financial support has rarely, if ever, been conditional on imple-
mentation of domestic policy reforms.1 International organizations such as
the World Bank and IMF were summoned by Israeli politicians and senior
bureaucrats looking for legitimization of their local policy agendas (Shalev
1992; Maman and Rosenhek 2011). Moreover, as Shafir and Peled (2000b)
have argued, when in the late 1980s and early 1990s economic globalization
opened up new opportunities for big business in Israel, it became clear to the
potential beneficiaries that these opportunities were blocked more by the
persistence of the Israeli–Palestinian conflict than the vestiges of the develop-
mental state. As a result, members of the business elite mobilized politically to
demand peace, not liberalization.
The business elite was only one of the forces promoting liberalization and
integration into international markets. More broadly, the interests of the
dominant social sector and key non-state institutions had outgrown statism.
This was true not only of big businessmen for whom global markets beckoned.
The reform coalition included skilled professionals who could earn more and
advance further by leaving the protective confines of the public sector; Labor
Party politicians burdened by the long shadow cast by the Histadrut; and state
agencies like the Supreme Court and the central bank, motivated by their
interest in wresting enhanced authority and autonomy (Shafir and Peled 2002).
(3) Ideological conversion. Neoliberal economic ideas gained importance in
policymaking circles with the crisis of Keynesian models in the 1970s and
1980s (Hall 1989). According to some authors, ideational buy-in by state elites
is the main reason for the neoliberal turn (e.g., Swarts 2013). We reject
the claim that neoliberal ideas are necessarily or primarily constitutive of the
interests and goals pursued by states that adopt neoliberal practices. It is true

1
A partial exception is the US government’s provision of generous foreign aid to assist Israel to
maintain foreign reserves while battling hyperinflation in the mid-1980s (mentioned in Chapter 2,
this volume). However, this aid was designed to encourage the government to adopt stabilization
measures, not structural reforms. Moreover, for fear of a Congressional override no explicit
conditionality was invoked (Fischer 2005).

175
Asa Maron and Michael Shalev

that the rise of neoliberal imaginaries and policy principles, gradually becom-
ing taken for granted, is no less observable in Israel than in other countries. Yet,
as discussed later in this chapter, in Israel neoliberal ideas have co-existed—
sometimes uneasily—with quite different conceptions of the role of the state.
What matters most for the resilience of neoliberal transformations is institu-
tionalization of neoliberal policy principles within intra-state arrangements.
A number of findings reported in this book explicitly challenge
strong ideational explanations for the rise and dominance of neoliberalism.
Mandelkern (Chapter 5) shows that the neoliberal creed was espoused by
professional economists long before the contemporary age of structural
reform, thriving within specific enclaves in academia and the public sector
since the 1950s. However, economists’ liberalizing aspirations—which cannot
be separated from their personal and collective drive for influence and
autonomy—were often frustrated by the political elite and organized interests.
The power of these veto players, the opportunities offered by a profound
economic crisis, and the proactive political entrepreneurship of leading aca-
demic and technocratic economists are what opened the door to depoliticiza-
tion and the cumulative introduction of liberalizing structural reforms.
Neoliberal ideas reinforced and codified economists’ longstanding predisposi-
tions, at the same time providing a set of principles and practices which have
come to be influential among both technocrats and politicians.
Two process-tracing chapters follow Weir’s dictum that exploring causal
interconnections between policy ideas and practice “requires an approach
that is fundamentally historical” (Weir 1992: 129). Tabibian and Shalev
(Chapter 9) reveal that neoliberal ideas, far from driving reform of public
sector employment relations, were embraced post facto within an already
instituted array of practices and mechanisms fostering precarious public sector
employment. Koreh and Shalev (Chapter 6) document a case in which
neoliberal ideas were mobilized along with other ad hoc justifications for a
reform of social insurance financing that was substantively at odds with
neoliberal doctrine. In another instance in which neoliberal discourses and
rationalities were adopted opportunistically by reform-seeking actors, Helman
and Maron (Chapter 7) demonstrate how the neoliberal concept of workfare
was utilized to help build an improbable intrastate coalition in a bid to gain
fiscal and administrative control over social assistance.

Rethinking Cause and Effect: A State-centered Explanation

Our argument proceeds beyond challenging common explanations for the

rise of neoliberalism. We propose that it is the role of the state, broadly
interpreted, that can account for Israel’s deviations from standard theoretical

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 Conclusion

expectations. The rise of neoliberalism in Israel is explained primarily by the

state’s growing dependence on big labor and big business, and cumulative
build-up of the accompanying burdens on the state. The dialectical conse-
quences of dependence and burden sparked the state’s struggle for emancipa-
tion. After elaborating this interpretation, we refer to studies of liberalizing
reforms in other settings which reinforce the case for a state-centered approach.
The historic pre-state alliance between the Zionist settlement movement
and Jewish settlers facing a hostile labor market, an alliance embodied in the
creation of the Histadrut, was a pivotal moment that later set the trajectory of
the State of Israel (Shalev 1992). When Israel achieved sovereignty in 1948,
the state was overshadowed in major respects by the Histadrut’s comprehen-
sive apparatus, and a symbiotic triangular relationship developed between the
state, the ruling Labor Party, and the Histadrut (Grinberg, Chapter 2). By the
1980s economic technocrats and Labor politicians alike sought to break loose
from these fetters by ending the state’s manifold support for the Histadrut and
unleashing the disciplinary forces of the market.
A similar quest for state autonomy via liberalization occurred twenty years
before the Stabilization Plan of the mid-1980s, when the government embraced
“recession as a policy instrument” (Greenwald 1972). However, in this earlier
phase liberalization was intended to strengthen rather than weaken the
Histadrut. It was followed by the conquests of 1967 that breathed new life
into the military-developmental state, at the same time greatly strengthening
the distributional coalition led by the Histadrut (Grinberg 1991, 1993b; Shalev
1992). The exhaustion of this growth model after 1973 eventually gave rise to
the Stabilization Plan of 1985, made politically possible by the establishment of
a wall-to-wall coalition government led by a Labor Prime Minister. The pivotal
moment in Israel’s liberalization was thus not 1977, when for the first time
Labor ceded its hegemony to a government led by the rightwing Likud.
As noted earlier, while the Likud had both political and ideological reasons for
dismantling the developmental state, it was unable to do so because of the
continuing power of the Histadrut, which was subsequently curtailed by Labor
Party politicians.
Political and economic contingencies and the agency and interests of poli-
ticians thus played an indispensable role in inaugurating the movement of
Israel’s political economy in a neoliberal direction. Nevertheless, it was a crisis
of the state—saddled by the burden of simultaneously subsidizing big busi-
ness, powerful groups of workers and the Histadrut, and conspicuously unable
either to steer the economy or manage its fiscal obligations—which ultimately
explains the collapse of the old developmental model and the embrace of
neoliberalism. This crisis was experienced most painfully by the state’s eco-
nomic policymaking agencies, and it presented unprecedented opportunities
for steering reforms.

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Asa Maron and Michael Shalev

As Maman and Rosenhek document in Chapter 4, the Treasury and the

central bank were responsible for a long series of structural and procedural
reforms that embedded neoliberalism in the institutional architecture of the
state, as well as the rise of new governance mechanisms that cut across state
and society. Their relentless struggle to regain lost autonomy, or to win
autonomy they had never before enjoyed, was the most important precondi-
tion for a durable shift in the political–economic regime. It was the result of
these agencies’ experience of growing impotence and subordination vis-à-vis
politicians, operational state agencies, and politically powerful interests,
which ended with the trauma of hyperinflation and their equally traumatic
inability to respond. They had lost much of their capacity to influence the
adoption and implementation of policies linked to their core competencies
(macroeconomic policy), and were obliged to adjust interest rates, exchange
rates, and state revenues in response to decisions not under their control. The
dependency of the MoF and BoI (Bank of Israel) were embedded in strategic
alliances and historic settlements that developed during the developmental
state period or prior to statehood. As a result, reshuffling these alliances and
settlements became a primary goal for both the Treasury and the Bank.
Entrenched organizational settlements and coalitions between state agencies
similarly undermine the MoF’s autonomy and capacities for governance. Such
intra-state settlements included the collaboration between the government and
Central Bank (Chapter 4), the collaboration between the MoF and the National
Insurance Institute (Chapter 6), and the settlement between the MoF, Public
Employment Service, and the National Insurance Institute (Chapter 7). The
inability of the MoF to adequately resolve the inflation crisis of the early
1980s deepened its mistrust of both politicians and other bureaucrats, who
were perceived as irresponsible and populist (Deri and Sharon 1994: 16–18).
In order to maintain the expanded authority and autonomy it received
in the context of the Stabilization Plan, the Treasury had to develop its
mastery not only of economic ideas and instruments but also of governance
mechanisms (Mandelkern 2015b). Institutional reforms within the state
enabled economist-bureaucrats to win control over state spending and key
economic policy arenas and instruments. The MoF centralized and depoliti-
cized decisions on public spending, disempowering elected and appointed
officials. Thus, new institutional arrangements played an indispensable role
in both engineering the new order and ensuring its durability. Some of them
were drawn directly from the neoliberal toolbox, like rule-based budgeting
and central bank independence. Others, such as the rise of precarious employ-
ment in the public sector, were existing practices that were extended and
rebranded as neoliberal (Chapter 9).
In yet further cases, the MoF appropriated or limited the powers formerly
vested in other institutions. The legislature was partially bypassed by the

178
 Conclusion

Omnibus Economic Arrangements Law, and oversight of operational state

agencies was enhanced by direct MoF control of their disbursements. In
addition, specific supporting reforms were—and still are—promoted with
the intention of neutralizing veto players inside the state, as shown in the
case studies of social insurance financing and workfare in Chapters 6 and 7
respectively. While they may advance substantive goals that are revered by
neoliberalism, such as cutting state expenditure, the common denominator of
these measures is defense and enhancement of Treasury autonomy, which has
clearly been an end in itself as well as a means to other ends.

Beyond the Israeli Experience

Under projects like the welfare state, state socialism, corporatism, and devel-
opmentalism, the state fosters and nurtures alliances and coalitions in both
society and economy in order to meet goals such as economic growth and
development, containment of distributional conflicts, and generally the
maintenance of social order and political authority. Such alliances include
state–society coalitions between ruling parties or state agencies and social
classes, class fractions, and organized sectoral interests. Paradoxically, however,
as these strategic allies grow stronger and more independent from state insti-
tutions and policies, they become a burden on the state and political elites by
claiming resources, challenging authority, and undermining autonomy.
In considering the theoretical contribution of this book to the study of
neoliberalism, we searched for and found evidence from the secondary litera-
ture on other countries that similar trends and mechanisms have featured in
neoliberal projects pursued in other settings. We focus here on two promin-
ent aspects of the Israeli case: first, how alliances formed by states (or particu-
lar state actors) with classes, class fractions, or organized interests were
dialectically transformed from a benefit to a burden; and second, the import-
ance of the internals of the state as arena of conflict and negotiation that
drives neoliberal reform.
The antiunion offensive launched by Margaret Thatcher in the UK is an
iconic illustration of neoliberalism as a path for state actors and agencies
to free the state and themselves from a historic deadlock. Thatcher explicitly
framed the Tories’ new political–economic project as the renunciation of
decades of laborism, characterizing trade unions as “the enemy from within.”
After her fall from power, New Labour took steps to end the unions’ substantial
political leverage over the party, which embraced a discursive shift away from
class politics. Privatization of governmental assets undermined unionization
and robbed future British governments of vital infrastructural elements in

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Asa Maron and Michael Shalev

industrial and economic policies, thereby eroding the possibility of returning

to a social-democratic state project (King and Wood 1999).
In societies with strong corporatist traditions and institutions such as
Germany and the Netherlands, the social partners mobilized against the
introduction of neoliberal labor market policies. These states advanced
reforms in social and employment policies by eliminating the historic role
of trade unions in central decision-making mechanisms and also undermin-
ing their role as negotiators of collective agreements and providers of services
and benefits (Clegg and Van Wijnbergen 2011; Hinrichs 2010). In the Neth-
erlands, the state eroded the power and authority of the unions by promoting
devolution of public functions to local government and privatizing various
policy implementation functions. In Germany, the Hartz Commission was
established in order to circumvent and dilute union resistance (Dyson 2005).
Motivated by the prospect of political profits, a growing faction within the
SDP supported breaking the party’s historic ties to the unions (Seeleib-Kaiser
and Fleckenstein 2007).
In Denmark longstanding formal and financial connections between the
Social Democratic Party and the Danish Trade Union Confederation were
severed in 2003. Since 2007 trade unions have been formally excluded from
their historic incorporation in policymaking processes. They were assigned an
inferior external role with more resemblance to lobbyists than social partners
(Jørgensen and Schulze 2011).
Autonomy drives by technocrats and state agencies in the domestic policy
arena are also not unique to Israel. Savoie (1990) argues that in Canada,
following welfare state expansion and economic development policies in the
years 1960 to 1970, the spending agencies of the state became more powerful
and undermined the capacity of fiscal bureaucrats to maintain a balanced
budget. In this context neoliberalism provided the Treasury with an oppor-
tunity to discipline the spenders in government, particularly at the provincial
level, following years of failed attempts at exercising a disciplinary role.
In Hungary, an example of a state from the former Socialist Bloc transition-
ing to neoliberalism, neoliberalism provided state actors with opportunity,
legitimacy, and concrete guidelines for reshuffling power and authority
within the Hungarian state (Phillips et al. 2006). The 1995 neoliberal austerity
package was implemented via intra-state restructuring which instituted fiscal
austerity in a new architecture. This happened against the backdrop of a
hitherto entrenched “state socialist” model of economic governance in
which the Treasury was dependent and subject to direct political control by
the Prime Minister’s Office and the Minister of National Planning. In order to
replace the old state project, the Ministries of Labor and National Planning
were dissolved.

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 Conclusion

The Hungarian case supports our second main point regarding the associ-
ation between neoliberalism and changes in the institutional architecture of
the state. Scholars tend to agree that neoliberalism both triggers such changes
and depends on their materialization. However, the literature does not always
specify the causal mechanisms underpinning intra-state transformations. The
Israeli experience, in which the Treasury and the central bank played a key role,
appears to be widely applicable. These agencies and their senior personnel
actively pursue their interests in enhanced power, autonomy, and prestige by
a combination of “big bang” structural reforms and gradual accumulation of
modest victories.
As Schwartz observed more than two decades ago in his study of the
advance and consequences of neoliberalism in four countries, state actors
striving to advance neoliberal reforms “are engaged in a strategic politics
that attempts to change the rules of the game rather than just seeking their
preferred outcomes in the context of extant rules” (Schwartz 1994: 529). We
interpret efforts “to change the rules of the game” as strategic attempts by state
actors to reshuffle intra-state power relations by changing the division of
functions and authority. Their goal is to simultaneously secure and maintain
neoliberalism while protecting and enlarging their autonomy within the state.
The international diffusion of central bank independence via reforms of
intra-state relations between governments, politicians, and other bureaucratic
agencies has been thoroughly studied from an institutionalist perspectives
(e.g., Jayasuriya 2001; Maman and Rosenhek 2011; Major 2013). Less atten-
tion has been paid to the prominent role of finance ministries in the transition
to and maintenance of neoliberalism. However, in order to institute neo-
liberalism fiscal bureaucrats must become empowered vis-à-vis other state
and societal actors with competing interests (Maman and Rosenhek,
Chapter 4, this volume; Schwartz 1994). Such changes are political in the
sense of challenging existing divisions of autonomy and authority within
the state, which in turn set and enforce a new agenda including policy
priorities and redistribution goals. As a result, they are contested and often
turn into struggles between political actors, including conflicts between cen-
tral banks and finance ministries.
In recent decades virtually all OECD countries have experienced reforms in
their institutions and procedures of budgeting. Studies reveal an overall
increase, sometimes dramatic, in the centralized powers of finance ministries
and other budget-related agencies (Wanna, Jensen, and Vries 2003). The
entrepreneurial construction of crisis, a recognized facilitator of neoliberal
reform (Hay 2001; Swarts 2013: 192–3), was especially prominent among
finance ministries that used real or imagined crises as an opportunity to
consolidate their influence through changes in law or bureaucratic procedure

181
Asa Maron and Michael Shalev

in many states, including the UK, Canada, New Zealand, and Denmark
(Roberts 2011: 51). Even in the USA, where a federal state struggled with
undisciplined budgeting and exploding debt, attempts were made to consoli-
date budgetary control (e.g., the Omnibus Budget Reconciliation Act of
1981)—albeit unsuccessfully, due to resistance by Congress and the Supreme
Court (King and Wood 1999: 392).

Israel and Neoliberalism: A Sustainable Hybrid?

The rise of neoliberalism since the 1980s represents an extraordinary

and unexpected break with Israel’s past as a distinctly illiberal political econ-
omy, dominated by the state, the Histadrut, and the ruling party, in which
economic growth was powered by a succession of state-anchored mechan-
isms. Moreover, while all states—including those which have fully embraced
neoliberalism—pursue their own domestic and geopolitical projects, with
associated budgetary burdens and barriers to textbook economic efficiency,
the magnitude and cost of the projects to which the Israeli state is committed
are without parallel among other advanced capitalist societies. In addition, the
demographic, military, and territorial projects of the state impose levels of
personal sacrifice and collective mobilization that far exceed the obligations of
citizenship characteristic of other affluent democracies. These obligations are
legitimized by a broad consensus around the importance of social equality and
solidarity, and the corresponding responsibilities of the state. On the face of it,
this set of beliefs stands in diametrical opposition to the neoliberal zeitgeist.
Is neoliberalism sustainable when embedded in such a web of contradic-
tions? The evidence to date suggests that, by and large, it is, and the theoretical
perspective of this volume provides an explanation. The endurance of neo-
liberalism in Israel has been nurtured by the capacity of state actors to depol-
iticize and institute their successes by changing the architecture of the state
through sustained and effective political action. The government and the
Knesset (legislature) have accepted the technocratization of monetary policy
and the authority of central bank economists in this realm. The Treasury holds
a less hallowed position. But although some controversies have publicized its
immense power, politicians, interest groups, and the managers of operational
state agencies have learned to contend with and adjust to the direct and indirect
control of policy design and implementation acquired by the MoF. The
Ministry has excelled at promoting its institutional interests stealthily and
incrementally. When necessary it has delayed or softened the consequences
of policy reforms just enough to make them acceptable by opponents, and has
successfully capitalized on the short lives of Israel’s governments since the mid-
1990s. By collaborating with the Prime Minister’s Office and the Finance

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 Conclusion

Committee of the Knesset, the Treasury has conducted strategic negotiation

with politicians in both government and opposition and has been able to
present its own interest as the government’s position in policy disputes. At
the fore, the Treasury presents itself as a professional and politically neutral
gatekeeper with the mission of safeguarding both state and society from the
particularism, “sectorialism” and short-termism of Israeli politics.
Nevertheless, the studies collected in this book show that reforms are not
always successful. They often depend on gradual and cumulative changes
marked by setbacks and sometimes even reversals. Politicians do not neces-
sarily take a back seat. As Asiskovitch illustrates (Chapter 8), they can and
occasionally do exercise veto power against threats to the status quo, or else
insist on policy innovations that contradict the neoliberalism program.
Neoliberal policies have sometimes also met opposition from forces outside
the state—civil society watchdogs, interest-group coalitions, and even mass
protesters—which succeeded in retarding or offsetting the implementation
and consolidation of new policies. The cancellation (which may or may not
prove to be permanent) of Israel’s welfare-to-work pilot program is a conspicu-
ous illustration (Helman and Maron, Chapter 7). In a different context, a Pola-
nyian double movement has occurred in the field of employment precarity
(Mundlak, Chapter 10), although regulatory protection remains incomplete.
While neoliberal policy reversal is possible, it is noteworthy that the reversals
in question were confined to specific domains. Moreover, attempts to chal-
lenge the neoliberal state and its new authority structure through the judicial
system have enjoyed little or no success. Examples include unsuccessful peti-
tions by civil society organizations to the Supreme Court questioning the
constitutional legitimacy of the 2003 cuts in Income Support and the Omnibus
Economic Arrangements Act in 2007. More dramatically, in the summer of
2011 public discontent with neoliberalism exploded in massive, widely sup-
ported street protests critiquing rising inequality and demanding a revival of
state socio-economic activism (Grinberg 2013). Unlike the Indignados protests
in crisis-stricken Southern Europe, the main drivers of popular discontent were
rising living costs, especially housing, in conjunction with declining relative
incomes among young families. The protests were led by students and young
middle-class families, paying the price of the state ceasing its historic role in
promoting the upward mobility of favored constituencies in the housing and
labor markets (Rosenfeld and Carmi 1976; Rosenhek and Shalev 2014).
The visible impact of the protests on policy and politics was limited, but the
massive mobilization of Israelis in street protests signified an ideological
contradiction and generated a short-lived but profound legitimation crisis
for neoliberalism. The neoliberal approach to citizenship emphasizes the
limited obligations of the state for citizens’ welfare, and the duty of citizens
to contribute to collective wellbeing by being self-sufficient and expecting

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Asa Maron and Michael Shalev

state support only as a last resort. Against this, a broad and stable consensus
among the mass public in Israel sees the state as responsible for playing an
active role in ameliorating the misfortunes of individual citizens and promot-
ing social solidarity and equality—at least among the Jewish majority (Shalev
2007). The other side of the coin is that the good citizen is conceived in
Republican rather than liberal terms, as someone who actively contributes to
the welfare of the Jewish majority, quintessentially in the military sphere.
These contributions are recognized by Israel’s welfare state, which funnels
an array of transfer payments (“loyalty benefits”) to those who serve in the
military or pay a personal price deriving from war preparation, war, and
terrorism, as well as to Jewish immigrants and the members of other groups
prioritized by the state’s national project. These benefits preserve the core of
the Republican bargain between citizens and the state, and have proven
resilient to neoliberal retrenchment (Friedman and Shalev 2010; Shalev and
Gal Forthcoming).
Writing early in the new millennium, Shafir and Peled (2002) predicted that
the emergent combination of economic liberalization and nascent peacemak-
ing would lead most Jewish Israelis to relax their historically collectivist
inclinations and would undermine the Republican principle of citizenship.
In its stead, Jewish Israelis were expected to gravitate either toward liberal
aspirations or its mirror image, an ethno-national conception of the state and
its citizens, justifying privileges for Jewish over Arab citizens and permanent
Israeli rule over the historically Jewish territories captured in the 1967 war.
In practice, continued Israeli–Palestinian violence, growing tension between
Jewish and Arab citizens, and controversies among Jews over how to share the
burden of military service have kept alive the Republican citizenship dis-
course. The upshot is that even though neoliberal ideology is antithetical to
the public’s expectation of the state playing an active role in promoting
equality and preventing economic deprivation, elements of the neoliberal
creed have been grafted onto all three of Israel’s citizenship discourses. For
example the worldview of the longstanding Prime Minister, Benjamin Neta-
nyahu, blends economic liberalism with Jewish ethno-nationalism, in a
synthesis that bears a strong family resemblance to neoconservatism in the
USA (Ben-Porat 2005b). Challenging Netanyahu from what is defined in Israel
as the political center, in the 2013 elections the Yesh Atid party and its leader,
political newcomer Yair Lapid, won 14 percent of the vote on a platform that
grafted the neoliberal citizen’s obligation to be a working, self-supporting
taxpayer onto the Republican duty to perform military service.
Israelis continue to be concerned by the contradiction between their widely
held belief in the need for more equality and the reality of stark inequality
(Cohen, Mizrahi, and Yuval 2011). Compared to the average European Union
member state, both poverty and the gap between the top and bottom income

184
 Conclusion

deciles are twice as high in Israel, whereas the share of public social spending
in gross domestic product (GDP) is only two-thirds as high.2 However, under
the influence of the ethno-national and Republican principles of citizen rights
and obligations, rising poverty is not a politically compelling contradic-
tion. Poverty is concentrated in three social sectors, comprising as much as
30 percent of the population, that are viewed by many Israelis as undeserving:
Palestinian residents of East Jerusalem, the Palestinian citizens of Israel, and
Ultra-Orthodox (Haredi) Jews.3 Ironically, neoliberal prescriptions may hold
out more hope of improving the living standards of these minorities than
redistribution by the welfare state. An array of policies adopted in recent years
encourage or virtually compel Arabs and the Ultra-Orthodox to increase their
labor market participation. At the same time, the most profit-driven and color-
blind segments of Israel’s globalized and liberalized economy offer at least
some members of these minorities new opportunities and unexpected paths
to upward mobility.4 Supporting this trend, despite the overall stability of
educational stratification in Israel (Feniger, McDossi, and Ayalon 2015), the
greatly expanded and partially privatized system of higher education offers
more opportunities for the members of peripheral groups to obtain
employment-enabling credentials (Ali 2013).5
In addition to opposition to specific neoliberal policies and contradictions
between neoliberalism and other principles of legitimation, at first sight the
high priority that the state awards to national security and maintenance of the
Occupation also appears to challenge the long-term viability of neoliberalism
in Israel. Nevertheless, the contrast between interventionism in these spheres
and laissez-faire in others should not be exaggerated. As Maman and Rosenhek
(2012a) contend, the impact of neoliberalism on domestic policy in Israel has
been far from the advertised one—more a reconfiguration of state power than
its radical diminution. Moreover, the tension between liberalization and
statism is not irreconcilable. On the contrary, in some respects the state has
harnessed markets as an additional tool for facilitating smooth implementation
of its distinctive projects. In 1981, at the dawn of the neoliberal era, the second

2
Calculations based on OECD figures for both the pre-crisis and crisis years <http://www.oecd.org/
israel/OECD-SocietyAtaGlance2014-Highlights-Israel.pdf>.
3
More than one-fifth of Israel’s population of 8.3 million (not including Palestinians in the
Occupied Territories) are Palestinian Arabs, 80% of them citizens and the remainder residents of
annexed East Jerusalem. Approximately 8%–10% of the population are Ultra-Orthodox Jews.
Sources: Statistical Abstract of Israel 2015, Tables 2.1 and 2.16; Friedman et al. (2011: Table 34).
4
Noteworthy examples are the growing employment of young Palestinian women in shopping
malls that serve a “mixed” clientele (Marantz, Kalev, and Lewin-Epstein 2014), and the substantial
number of Ultra-Orthodox women working in the high-tech sector (<http://www.timesofisrael.
com/israels-ultra-orthodox-women-flock-to-high-tech>; <http://www.haaretz.com/israel-news/
business/.premium-1.713364>).
5
Recent data suggest an emergent gender and generational shift in rates of Arab higher education.
See <http://www.haaretz.com/israel-news/.premium-1.680454>.

185
Asa Maron and Michael Shalev

Likud government “turned settlement, for the first time in Zionist history, into
a capitalist venture” (Shafir and Peled 2002: 173; Maggor 2015). With the aim
of attracting aspirants to middle-class lifestyles, home buyers, developers, and
contractors were offered an array of subsidized opportunities to build or
purchase homes in new suburban centers on the other side of Israel’s former
border with Jordan. These market-oriented measures were complemented by
more traditional state interventions: preferential spending and grants to
develop transportation, security, local services, and other forms of infrastruc-
ture for settlements and settlers (Shafir and Peled 2002: chapter 6; Bassok 2003).
It may nevertheless be questioned whether the Israeli state is capable of
sustaining the fiscal burdens of national security and territorial control with-
out taking measures that would deter private sector economic activity and
investment. Defense spending as a proportion of national product, is an
accessible if imperfect indicator of the military burden. This ratio is close to
6 percent in Israel, compared with roughly 4 percent in the USA, 2 percent in
the UK, and 1 percent in Sweden, Canada, and Belgium.6 Importantly, the
magnitude of Israel’s measured defense spending has fallen dramatically since
the early 1980s, when it constituted nearly one-fifth of GDP, or a decade later
when it still exceeded one-tenth.7
Several mechanisms serve to partially offset the economic burden of
Israel’s military commitments. Since the mid-1970s the USA has provided
generous aid that effectively finances the purchase of expensive American
military hardware. Another compensating factor is economic complemen-
tarities between the defense sector and the civilian economy. While Israel’s
military-industrial complex is smaller and less pivotal to the profitability of
big business than it used to be (Mintz 1983; Bichler and Nitzan 1996),
domestic and international sales by Israeli arms suppliers are very substantial.8
In addition, the military has played a pivotal role in the emergence and sustain-
ability of Israel’s cutting-edge ICT sector, including training new cadres of its
top employees (O’Riain 2004; Breznitz 2007b). Similarly, the costs of the Occu-
pation to Israel are partially offset by benefits. Dovish economists and think
tanks warn that it imposes heavy burdens on the Israeli economy (Arnon and

6
Averages for 2011–14 using World Bank data from <http://data.worldbank.org/indicator/MS.
MIL.XPND.GD.ZS>.
7
Bank of Israel, Annual Report, 2014, Statistical Appendix Table 6.A.2.
8
There is a dearth of research on the contemporary political economy of the Israeli armaments
industry. However, estimates for recent years by the Congressional Research Service and the
Stockholm International Peace Research Institute (SIPRI) suggest that Israel is one of the top ten
suppliers worldwide (Sources: Theohary 2015: Table 20 and SIPRI data for 2010–15 retrieved
from <http://armstrade.sipri.org/armstrade/page/toplist.php>. No comprehensive official data is
available in Israel, but government statements indicate that Israeli suppliers contracted arms sales
totaling $7.4bn in 2012 and $5.7bn in 2015 (Gili Cohen, Haaretz newspaper, January 9, 2014 and
April 6, 2016). Domestic procurement is more modest, typically not far above $2bn (<www.globes.
co.il/en/article-record-defense-procurements-in-2014-1001031786>).

186
 Conclusion

Bamya 2015; Swirski 2008a), but the Occupation is also a source of profits to
some, most obviously settlers but also industries and services that exploit the
captive Palestinian market and labor force (Hever 2010; Swirski 2008b).
In addition, many of the costs are borne by the Palestinians and the inter-
national donor community (Farsakh 2013).
None of this is to say that in Israel neoliberalism and nationalism co-exist
in a stable equilibrium, let alone that they will continue to do so. Our point is
simply that in some respects neoliberalism and the state’s other projects are
both more complementary and less contradictory than they appear. Having
said that, Israel’s past history has shown that it is not immune to destabilizing
ruptures caused either by the exhaustion of engines of economic growth or by
violent clashes with Arab states and the Palestinian population under Israel’s
control. Furthermore, just as models of political economy may be consoli-
dated by an accumulation of gradual reforms, they may also be deconstructed
in small steps. Nevertheless, at this moment in time Israel’s recognizable yet
bounded variant of neoliberalism remains robust.

187
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Index

Accountant General 16, 161, 164, 167, 169 Commission to Examine Debt
active labor market policy 113 Arrangements 59
Alignment see Labor Party Committee on Enhancing
Antitrust Authority 53, 59, 62, 67 Competitiveness 50, 59
Aridor, Yoram 84 communicative discourse 149–51
Arnon, Yaakov 79 conversion x, 13, 23, 24, 111, 141, 146, 147,
Arrangements Law see Omnibus Economic 155, 175–6
Arrangements Law Coordinating Bureau of Economic
Asher Committee 83 Organizations 162
Attorney General 51, 62 coordinative discourse 149–51
corporate bond market 55, 67, 173
Bachar Committee 53, 67
balance of payments 12, 36, 100, 101 Demobilized Soldiers’ Benefit 126–9
Bank Hapoalim 37, 49, 53 Denmark (liberalization) 180
Bank of Israel (BoI) depoliticization 19, 66, 70, 178, 182
attainment of autonomy 14, 63, 69 designated bonds 33, 35, 42
Bank of Israel Law 16, 64, 68–9 devaluation 38, 80, 81, 96
Banking Supervision Division 62, 68 Dollarization Plan 86
Supervisor of Banks 54 double movement 23, 167, 183
Beacons of Employment 119–20 drift x, 8, 24, 111, 141, 146, 148
Ben-Shahar Committee 83 dual labor market 139, 157
bricolage 86 dualism 140, 155, 157, 158, 167, 168–70
British Mandate 31
Brodet Committee 53 Economic Council 90
Bruno, Michael 83 Economic Quarterly 87
Budget Deficit Reduction Law 63, 65, 66–7 elections
Budget Law 87, 103, 156 1933 elections 32
Budget Foundations Law 86–7 1965 elections 33
Business Concentration Law 59 1977 elections 29, 36, 131
business interests 10, 56, 57, 58, 93, 104, 173–4 1984 elections 37
1988 elections 41
Canada (liberalization) 180 1992 elections 40, 41, 128, 131
Capital Markets, Insurance and Savings 2013 elections 121, 184
Division see Ministry of Finance (MoF) embedded illiberalism 12, 77, 81–4, 87
Capitalist interests see business interests Emergency Economic Plan of 2003 130
Chicago School 78 Emergency Economic Stabilization Plan of
Civil Service Commission 140–1, 142 1985 see Stabilization Plan
Civil Service Law 140 Employers Association 81, see also
Class Action Suits Law 165 Coordinating Bureau of Economic
collective bargaining 14, 20, 24, 31, 40, 44, Organizations
153, 154, 156, 168, 171 Employment of Workers by Labor Contractors
Commission for the Reform of the Treatment of Law 144, 156
the Unemployed Recipients of Long-term Employment Service (IES) 22–3, 111–12, 113,
Subsistence Allowances 116–17, 119 116, 117, 120, 121, 155, 178
Index

Encouragement of Capital Investments Insurance and Saving Division see Ministry of

Law 56 Finance (MoF)
Enforcement Law 169 Inter-ministerial committee on Income
Eshkol, Levi 79, 80 Support 1997 112–13
European Common Market 80 International Monetary Fund viii
Investment Promotion Center 62
Falk Institute for Economic Research 79, 83 iterative movement 167, 170–1
Finance Committee of the Knesset see Knesset
financial crisis of 2008 xi, 47, 55, 58–9, 63, Keynesianism 29, 74–8, 99, 175
69–70, 172 Kfar Ruth Judgment 159, 160
Financial Plan see Histadrut: Financial Plan Knesset (parliament)
foreign currency liberalization 30 Finance Committee 117, 127, 132, 134, 183
Frenkel, Yaakov 68 Labor, Welfare and Health Committee 117,
full employment 33, 43, 46 119, 121

General Sick Fund see Histadrut: Sick Fund Labor Committee of the Knesset see Knesset
Germany vii, viii, xi, 33, 36 Labor Contractors Law 145
liberalization 180 Labor Court 24, 158–66
globalization 174–5 Labor Economy see Histadrut: Labor Economy
government hospitals 141–6, 157 Labor Party 19–20, 27–45, 83, 105, 128, 131,
gradual institutional change 12, 24, 67, 72, 149, 174, 175, 177
111, 141, 146–8 Labor Alignment 33
Mapai Party 29–35, 79
Hartz Commission 180 Lavon, Pinhas 79
health insurance 30, 39–43, 96, 101–3, 130–5, layering x, 114, 118, 121, 141, 146, 155,
141, 144, see also National Health 167, 168
Insurance Law Lebanon 37, 39, 85–6
Hebrew University of Jerusalem 78–9, 83 Likud Party 29, 30, 35–9, 42, 44, 84, 131, 174,
Histadrut 177, 186
Enterprises see Histadrut: Labor Economy loyalty benefits 15, 17, 184
Executive Committee 32
Financial Plan 35, 36–7, 38, 44 Mandatory Tenders Law 144
Labor Economy 27–36, 37–39, 45, Mapai Party see Labor Party
51–2, 158 Mapam Party 33, 79
membership 31, 40–3, 144, 158 mediated employment 154–60, 164–70
Pension Funds see pension funds Medical Association 133
Sick Fund 40, 43, 130–3, 141 military burden 186–7
social services 14–15, 30–2, 105, 150 military establishment 5, 12, 34, 35, 84
Trade Union Division 31, 34, 41, 45, 144, military industry 31, 33
150, 158, 163, 165, 171 Ministry of Defense 34–5, 43, 83, 174
Horowitz, David 79 Ministry of Finance (MoF)
Hungary 180 autonomy of MoF 93–7, 101–2, 105–8, 173,
hyperinflation 30, 39, 64, 178 178–9
Budget Division 16, 66, 115, 141, 147–8
ideational explanations 3–4, 10, 70–3, 75–6, Capital Markets, Insurance and Savings
85, 88–90, 103–8, 121, 149, 175–6, 176 Division 54, 55, 69
Income Security Law see Income Support Insurance and Saving Division 62, 66
Income Support 95, 98, 110–20 Supervisor of Capital Markets 62
inflation targeting 16, 63, 65, 68, 71 Ministry of Health (MoH) 131, 141–50
insider/outsider 143, 150 Ministry of Immigrant Absorption 40, 116
institutional alignment 126, 133 Ministry of Industry, Trade and Labor 56, 62,
institutional autonomy 11, 16, 19, 95, 96, 118, 119, 162, 164, 167
105, 108 Ministry of Justice 67
institutional change Ministry of Labor and Social Affairs 116
theories 8 Ministry of Welfare and Social Affairs 119
see also gradual institutional change; Mitterrand’s, France 93
conversion; drift; layering monetarism 76

218
 Index

National Health Insurance Law 18, 41–2, 124, South Korea vii, 49, 51
130–3, 141, 144 Stabilization Plan 38–9, 64, 74–5, 85, 94–5,
Neoliberalism 151, 177–9
explanations for its ascendance in standard employment relationship (SER) 153
Israel 13–14 state autonomy 34, 39, 43, 44, 58, 59, 61–72,
general explanations for its ascendance 6–8, 176–8
9–12 state subsidies 30, 33, 34–40, 43, 47, 51, 55–6,
sustainability in Israel 182–7 101, 105–6, 174
Netanyahu, Benjamin 29–30, 44–5, 184 states
Netherlands - liberalization 180 as agents of liberalization 9–12
New Public Management 93, 150 theory of 4–6
non-indexed loans 34–7 subcontracting 153–87
Supervisor of Banks see Bank of Israel
Occupied Territories 34, 44, 185–6 Supervisor of Capital Markets see Ministry of
OECD viii, 16, 17, 19, 64, 166, 181, 185 Finance (MoF)
oil crisis (1973) 82, 101 Sweden viii, x
Omnibus Economic Arrangements Law 16, 86,
87, 103, 117, 132, 133, 134, 146, 179, 183 Tamir Commission see Commission for the
Ottoman Society Law 142, 144, 148 Reform of the Treatment of the
Unemployed Recipients of Long-term
Palestinian workers 33, 34 Subsistence Allowances
Patinkin, Dov 77–81, 88–90 Tel Aviv Stock Exchange (TASE) 49
payroll taxes 94, 105–6 temp-work agencies (TWAs) 154–7, 166
pension funds Thatcher’s Britain 93, 179–80
Histadrut pension funds 30, 33, 35, 42, 43, trade unions 11, 14, 29–31, 159, 167, 174,
45, 173, 174 179–80, 180
state support of pension funds 67, 103 Trajtenberg, Manuel 163
Peres, Shimon 29–30, 38, 40, 41
Polanyi, Karl 75, 167, 183 UK 179–80
political upheaval of 1977 see elections, 1977 see also Thatcher’s Britain
privatization 9, 14, 18, 19, 30, 39, 42, 43, 47, Ultra-Orthodox Jews 18, 127, 129, 185
49, 51–2, 57–9, 63, 66, 67, 93, 103, 112, unemployment 23, 37, 63, 97, 109–21
113, 123, 154, 155, 157, 167, 174, 179 United States vii, viii, x, 34, 36, 38, 55,
56, 75, 78, 113, 114, 123, 175, 182,
Rabin, Yitzhak 40, 41 184, 186
Ramon, Haim 41–2
recession 33, 34, 37, 39, 51, 64, 81, 110, 177 Vaad Hapoel see Histadrut Executive Committee
Republican principle of citizenship 184 veto player 6, 8, 19, 22, 44, 94–5, 103, 107,
Research Fund 141–8 150, 176, 179
retrenchment 18–19, 22, 94, 95, 104, 106, 108,
123, 124, 131, 134, 154, 167 War of 1967 29–31, 35, 43, 82, 184
War of 1973 viii, 34
Securities Authority 50, 62, 67 World War Two vii
Shani-Gabbai Committee see Committee for welfare state
Enhancing Competitiveness in the Canada 180
Economy history and characteristics in Israel 14–15,
social assistance see Income Support 184–5
social democracy 30, 98, 124, 163, 180 in neoliberal era in Israel 14–19
social protest (summer 2011) 162–6, 169, 183 Wisconsin Works 113
Social Welfare and Health Committee of the World Bank viii, x, 175
Knesset see Knesset World Zionist Organization 31, 32, 49–50
Society for Public Health Services (SPHS) 142
soldiers’ benefits 126–30 Yesh Atid Party 184

219