A
key player in the socialization of Israel was the Histadrut, the General
Federation of Labor, subscribers to the socialist dogma that capital exploits
labor and that the only way to prevent such “robbery” is to grant control of
the means of production to the state. As it proceeded to unionize almost all
workers, the Histadrut gained control of nearly every economic and social
sector, including the kibbutzim, housing, transportation, banks, social
welfare, health care, and education. The federation’s political instrument was
the Labor party, which effectively ruled Israel from the founding of Israel in
1948 until 1973 and the Yom Kippur War. In the early years, few asked whether
any limits should be placed on the role of government.
Israel’s
economic performance seemed to confirm Keynes’s judgment. Real GDP growth from
1955 to 1975 was an astounding 12.6 percent, putting Israel among the
fastest-growing economies in the world, with one of the lowest income
differentials. However, this rapid growth was accompanied by rising levels of
private consumption and, over time, increasing income inequality. There was an
increasing demand for economic reform to free the economy from the government’s
centralized decision-making. In 1961, supporters of economic liberalization
formed the Liberal party—the first political movement committed to a market
economy.
The Israeli
“economic miracle” evaporated in 1965 when the country suffered its first major
recession. Economic growth halted and unemployment rose threefold from 1965 to
1967. Before the government could attempt corrective action, the Six-Day War
erupted, altering Israel’s economic and political map. Paradoxically, the war
brought short-lived prosperity to Israel, owing to increased military spending
and a major influx of workers from new territories. But government-led economic
growth was accompanied by accelerating inflation, reaching an annual rate of 17
percent from 1971 to 1973.
For the
first time, there was a public debate between supporters of free-enterprise
economics and supporters of traditional socialist arrangements. Leading the way
for the free market was the future Nobel Prize winner Milton Friedman, who
urged Israeli policymakers to “set your people free” and liberalize the
economy. The 1973 war and its economic impacts reinforced the feelings of many
Israelis that the Labor party’s socialist model could not handle the country’s
growing economic challenges. The 1977 elections resulted in the victory of the
Likud party, with its staunch pro-free-market philosophy. The Likud took as one
of its coalition partners the Liberal party.
Because
socialism’s roots in Israel were so deep, real reform proceeded slowly.
Friedman was asked to draw up a program that would move Israel from socialism
toward a free-market economy. His major reforms included fewer government
programs and reduced government spending; less government intervention in
fiscal, trade, and labor policies; income-tax cuts; and privatization. A great
debate ensued between government officials seeking reform and special interests
that preferred the status quo.
Meanwhile,
the government kept borrowing and spending and driving up inflation, which
averaged 77 percent for 1978–79 and reached a peak of 450 percent in 1984–85.
The government’s share of the economy grew to 76 percent, while fiscal deficits
and national debt skyrocketed. The government printed money through loans from
the Bank of Israel, which contributed to the inflation by churning out money.
Finally, in
January 1983, the bubble burst, and thousands of private citizens and
businesses as well as government-run enterprises faced bankruptcy. Israel was
close to collapse. At this critical moment, a sympathetic U.S. president,
Ronald Reagan, and his secretary of state, George Shultz, came to the rescue.
They offered a grant of $1.5 billion if the Israeli government agreed to
abandon its socialist rulebook and adopt some form of U.S.-style capitalism,
using American-trained professionals.
The
Histadrut strongly resisted, unwilling to give up their decades-old power and
to concede that socialism was responsible for Israel’s economic troubles.
However, the people had had enough of soaring inflation and non-existent growth
and rejected the Histadrut’s policy of resistance. Still, the Israeli
government hesitated, unwilling to spend political capital on economic reform.
An exasperated Secretary Schulz informed Israel that if it did not begin
freeing up the economy, the U.S. would freeze “all monetary transfers” to the
country. The threat worked. The Israeli government officially adopted most of
the free-market “recommendations.”
The impact
of a basic shift in Israeli economic policy was immediate and pervasive. Within
a year, inflation tumbled from 450 percent to just 20 percent, a budget deficit
of 15 percent of GDP shrank to zero, the Histadrut’s economic and business
empire disappeared along with its political domination, and the Israeli economy
was opened to imports. Of particular importance was the Israeli high-tech
revolution, which led to a 600 percent increase in investment in Israel,
transforming the country into a major player in the high-tech world.
There were
troubling side effects such as social gaps, poverty, and concerns about social
justice, but the socialist rhetoric and ideology, according to Glenn Frankel,
the Washington
Pos t’s correspondent in Israel, “has been permanently retired.” The
socialist Labor party endorsed privatization and the divestment of many
publicly held companies that had become corrupted by featherbedding, rigid work
rules, phony bookkeeping, favoritism, and incompetent managers.
After
modest expansion in the 1990s, Israel’s economic growth topped the charts in
the developing world in the 2000s, propelled by low inflation and a reduction
in the size of government. Unemployment was still too high and taxes took up 40
percent of GDP, much of it caused by the need for a large military. However,
political parties are agreed that there is no turning back to the economic
policies of the early years—the debate is about the rate of further market
reform. “The world’s most successful experiment in socialism,” Light wrote,
“appears to have resolutely embraced capitalism.”
India
For nearly
30 years, the Indian government adhered to a socialist line, restricting
imports, prohibiting foreign direct investment, protecting small companies from
competition from large corporations, and maintaining price controls on a wide
variety of industries including steel, cement, fertilizers, petroleum, and
pharmaceuticals. Any producer who exceeded their licensed capacity faced
possible imprisonment.
As the
Indian economist Swaminathan S. Anklesaria Aiyar wrote, “India was perhaps the
only country in the world where improving productivity . . . was a
crime.” It was a strict application of the socialist principle that the market
cannot be trusted to produce good economic or social outcomes. Economic
inequality was regulated through taxes—the top personal income tax rate hit a
stifling 97.75 percent.
Some 14
public banks were nationalized in 1969; six more banks were taken over by the
government in 1980. Driven by the principle of “self-reliance,” almost anything
that could be produced domestically could not be imported regardless of the
cost. It was the “zenith” of Indian socialism, which still failed to satisfy
the basic needs of an ever expanding population. In 1977–78, more than half of
India was living below the poverty line.
At the same
time, notes Indian-American economist Arvind Panagariya, a series of external
shocks shook the country, including a war with Pakistan in 1965, which came on
the heels of a war with China in 1962; another war with Pakistan in 1971;
consecutive droughts in 1971–72 and 1972–73, and the oil price crisis of
October 1973, which contributed to a 40 percent deterioration in India’s
foreign trade.
Economic
performance from 1965 to 1981 was worse than than at any other time of the
post-independence period. As in Israel, economic reform became an imperative.
Prime Minister Indira Gandhi had pushed her policy agenda as far to the left as
possible. In 1980, the Congress party won a two-thirds majority in the
Parliament, and Gandhi adopted, at last, a more pragmatic, non-ideological
course. But as with everything else in India, economic reform proceeded slowly.
An
industrial-policy statement continued the piecemeal retreat from socialism that
had begun in 1975, allowing companies to expand their capacity, encouraging
investment in a wide variety of industries, and introducing private-sector
participation in telecommunications. Further liberalization received a major
boost under Rajiv Gandhi, who succeeded his mother in 1984 following her
assassination. As a result, GDP growth reached an encouraging 5.5 percent.
Economics
continued to trump ideology under Rajiv Gandhi, who was free of the socialist
baggage carried by an earlier generation. His successor, P. V. Narasimha Rao,
put an end to licensing except in selected sectors and opened the door to much
wider foreign investment. Finance minister Manmohan Singh cut the tariff rates
from an astronomical 355 percent to 65 percent. According to Arvind Panagariya,
“the government had introduced enough liberalizing measures to set the economy
on the course to sustaining approximately 6 percent growth on a long-term
basis.” In fact, India’s GDP growth reached a peak of over 9 percent in 2005–8,
followed by a dip to just under 7 percent in 2017–18.
A major
development of the economic reforms was the remarkable expansion of India’s
middle class. The Economist estimates there are 78 million
Indians in the middle-middle and upper middle-class category. By including the
lower middle class, Indian economists Krishnan and Hatekar figure that India’s
new middle class grew from 304.2 million in 2004–5 to an amazing 606.3 million
in 2011–12, almost one-half of the entire Indian population. The daily income
of the three middle classes are lower middle, $2–$4; middle middle, $4–$6;
upper middle, $6–$10.
While this
is extremely low by U.S. standards, a dollar goes a long way in India, where
the annual per capita income is approximately $6,500. If only half of the lower
middle class makes the transition to upper-class or middle income, that would
mean an Indian middle class of about 350 million Indians—a mid-point between The
Economist and Krishnan and Hatekar estimates. Such an enormous
middle class confirms the judgment of the Heritage Foundation, in its Index of
Economic Freedom, that India is developing into an “open-market economy.”
In 2017,
India overtook Germany to become the fourth-largest auto market in the world,
and it is expected to displace Japan in 2020. That same year, India overtook
the U.S. in smartphone sales to become the second-largest smartphone market in
the world. Usually described as an agricultural country, India is today 31
percent urbanized. With an annual GDP of $8.7 trillion, India ranks fifth in
the world, behind the United States, China, Japan, and Great Britain. Never
before in recorded history, Indian economist Gurcharan Das has noted, have so
many people risen so quickly.
All this
has been accomplished because the political leaders of India sought and adopted
a better economic system—free enterprise—after some four decades of fitful
progress and unequal prosperity under socialism.
United Kingdom
The
government owned the largest manufacturing firms in such industries as autos
and steel. The top individual tax rates were 83 percent on “earned income” and
a crushing 98 percent on income from capital. Much of the housing was
government-owned. For decades, the U.K. had grown more slowly than economies on
the continent. Great Britain was no longer “great” and seemed headed for the
economic dust bin.
The major
hindrance to economic reform was the powerful trade unions, which since 1913
had been allowed to spend union funds on political objectives, such as
controlling the Labour party. Unions inhibited productivity and discouraged
investment. From 1950 to 1975, the U.K.’s investment and productivity record
was the worst of any major industrial country. Trade-union demands increased
the size of the public sector and public expenditures to 59 percent of GDP.
Wage and benefits demands by organized labor led to continual strikes that
paralyzed transportation and production.
In 1978,
Labour prime minister James Callaghan decided that, rather than hold an
election, he would “soldier on” to the following spring. It was a fatal
mistake. His government encountered the legendary “winter of discontent” in the
first months of 1979. Public-sector workers went on strike for weeks. Mountains
of uncollected rubbish piled high in cities. Bodies remained unburied and rats
ran in the streets.
Newly
elected Conservative prime minister Margaret Thatcher, the United Kingdom’s
first female PM, took on what she considered her main opponent—the unions.
Flying pickets, the ground troops of industrial conflict who would travel to
support workers on strike at another site, were banned and could no longer
blockade factories or ports. Strike ballots were made compulsory. The closed
shop, which forced workers to join a union to get a job, was outlawed. Union
membership plummeted from a peak of 12 million in the late 1970s to half that
by the late 1980s. “It’s now or never for [our] economic policies,” Thatcher
declared, “let’s stick to our guns.” The top rate of personal income tax was
cut in half, to 45 percent, and exchange controls were abolished.
Privatization
was a core Thatcher reform. Not only was it fundamental to the improvement of
the economy. It was “one of the central means of reversing the corrosive and
corrupting effects of socialism,” she wrote in her memoirs. Through
privatization that leads to the widest possible ownership by members of the
public, “the state’s power is reduced and the power of the people enhanced.”
Privatization “is at the center of any programme of reclaiming territory for
freedom.” She was as good as her word, selling off government-owned airlines,
airports, utilities, and phone, steel, and oil companies.
In the
1980s, Britain’s economy grew faster than that of any other European economy
except Spain. U.K. business investment grew faster than in any other country
except Japan. Productivity grew faster than in any other industrial economy.
Some 3.3 million new jobs were created between March 1983 and March 1990.
Inflation fell from a high of 27 percent in 1975 to 2.5 percent in 1986. From
1981 to 1989, under a Conservative government, real GDP growth averaged 3.2
percent.
By the time
Thatcher left government, the state-owned sector of industry had been reduced
by some 60 percent. As she recounted in her memoirs, about one in four Britons
owned shares in the market. Over 600,000 jobs had passed from the public to the
private sector. The U.K. had “set a worldwide trend in privatization in
countries as different as Czechoslovakia and New Zealand.” Turning decisively
away from Keynesian management, the once sick man of Europe now bloomed with
robust economic health. No succeeding British government, Labour or
Conservative, has tried to renationalize what Margaret Thatcher denationalized.
China . Mao left China
backward and deeply divided.
Mao’s
successor, Deng Xiaoping, turned China in a different direction, seeking to
create a mixed economy in which capitalism and socialism would coexist with the
Communist Party monitoring and constantly adjusting the proper mix. For the
past four decades, China has been the economic marvel of the world for the
following reasons:
It began
its economic ascent almost from ground zero because of Mao’s ideological
stubbornness. It has engaged in the calculated theft of intellectual property,
especially from the U.S., for decades. It has taken full advantage of globalism
and its membership in the World Trade Organization, while ignoring the
prescribed rules against such practices as intellectual-property theft. It has
used tariffs and other protectionist measures to gain trade advantages with the
U.S. and other competitors.
It created
a middle class of some 300 million people, who enjoy a decent living and at the
same time constitute a sizable domestic market for goods and services. It
continues to use the forced labor of the laogai to make cheap consumer goods
that are sold in Walmart and other Western stores. It allows an enormous black
market to exist because Party members profit from its sales.
It permits
foreign investors to buy into Chinese companies, but the government—i.e., the
Communist Party—always retains a majority interest. It operates an estimated
150,000 state-owned enterprises that guarantee jobs for tens of millions of
Chinese. It depends on the energy and experience of the most entrepreneurial
people in the world, second only to Americans.
In short,
the People’s Republic of China was an economic failure for its first three
decades under Mao and Soviet socialism. It began its climb to become the
second-largest economy in the world when it abandoned socialism in the late
Seventies and initiated its experiment, which so far has been successful, in
capitalism with Chinese characteristics.
There are
clear signs that such success is no longer automatic. China is experiencing a
slowing economy, is ruled by a dictatorial but divided Communist Party clinging
to power, faces widespread public demands for the guarantee of fundamental
human rights, and suffers from a seriously degraded environment. History
suggests that these problems can best be solved by a democratic government
ruled by the people, not a one-party authoritarian state that resorts to
violence in a crisis, as Beijing did at Tiananmen Square and is doing in Hong
Kong.
Conclusion
Socialism
is guilty of a fatal conceit: It believes its system can make better decisions
for the people than they can for themselves. It is the end product of a
19th-century prophet whose prophecies (such as the inevitable disappearance of
the middle class) have been proven wrong time and again.
According
to the World Bank, more than one billion people have lifted themselves out of
poverty in the past 25 years, “one of the greatest human achievements of our
time.” Of those billion, approximately 731 million are Chinese, and 168 million
Indians. The main driver of this uplift from poverty has been the globalization
of the international trading system. China owes most of its success to the
trade freedom offered by the U.S. and the rest of the world. The latest edition
of Index of Economic Freedom from the Heritage Foundation confirms the
global trend toward economic freedom: Economies rated “free” or “mostly free”
enjoy incomes that are more than five times higher than the incomes of
“repressed economies” such as those of North Korea, Venezuela, and Cuba.
Israel’s
socialist miracle turned out to be a mirage, India discarded socialist ideology
and chose a more market-oriented path, and the United Kingdom set an example
for the rest of the world with its emphasis on privatization and deregulation.
Whether we are talking about the actions of an agricultural country of 1.3
billion, or the nation that sparked the industrial revolution, or a small
Middle Eastern country populated by some of the smartest people in the world,
capitalism tops socialism every time.
