Levi Eshkol - Minister of finance in the period
1952 - 1963


By David Kochav


Senior Economic Advisor to the Government of Israel; Senior Economist and Director, Special Studies Unit, World Bank; Director - Econonomic Planning Authority, Government of Israel; Advisor to the Minister of Finance; Senior Vice President, Bank Leumi, Israel; and more ...




Levi Eshkol was appointed Minister of Finance in June 1952 and served in this capacity until June 1963, when he became Prime Minister and Minister of Defence.During this period he shaped the economic policy in the years of peak economic growth.
When Eshkol was appointed Minister of Finance, he had to deal with extremely serious problems, stemming first and foremost from the size of the immigration and its composition. During the first three years of the existence of the State some 700,000 immigrants came to Israel, half of them from Europe and half from North Africa and the Middle east. In their countries of origin the immigrants had been mostly artisans, clerks or people engaged in small trade.
In 1952, Eshkol's first year in office, the unemployment reached a very high rate. Some 14% of the workforce were fully or partially unemployed.
Another serious problem was the shortage of housing for the new immigrants. In the middle of 1955, about 250 000 immigrants lived in transitory camps, temporary quarters set up at the edges of cities and development towns. The population of these transit camps accounted for 18% of the total population approximately 40% of the immigrants.
At the time Eshkol was appointed Minister of Finance, the economy experienced a serious balance of payments crisis, reflected by lack of foreign currency needed to finance essential imports of raw materials and fuel.
The beginning of Eshkol's tenure as Minister of Finance was devoted to efforts to stabilize the economy and to shift from dealing with inflation by a system of price controls and rationing to a macroeconomic policy including: putting an end to financing by government printing presses, curtailing public credit and devaluation of currency. The decision to adopt this policy was taken at the beginning of 1952 towards the end of Eshkol's predecessor Eliezer Kaplan's term of office. However the execution of this policy was entrusted to a new team headed by Finance Minister Eshkol. Simultaneously and gradually foundations were laid, for progress towards the achievement of the main goal of economic policy, namely rapid growth of the economy as the main instrument for the absorption of immigration and reduction of the balance of payments deficit.
The main instrument of the economic policy was the fiscal policy relating to Government income and expenditures within the framework of the ordinary budget and the development budget. Ordinary budget expenditures during the Eshkol period grew continuously, particularly for social services, such as education, health and welfare. Defence expenditures also laid a heavy burden on the budget, reaching during the Eshkol period the high rate of 8% of the GNP.
One of the main efforts of the Ministry of Finance during Eshkol's term of office, was the establishment of an efficient tax collection system. The actual tax collection rate increased gradually from 18% of the GNP in 1952 t0 28%in 1955, and to 36% in 1961.
During Eshkol's term of office the Development Budget became the main instrument for acceleration of economic growth. Thanks to untiring efforts, 80% of the development budget was raised from foreign sources - US Government grants, sales of Independence Loan bonds, U.S. Export/Import Bank loans, World Bank loans, as well as the German Reparations. The remainder of the Development Budget was financed from sales of bonds to domestic pension funds. In order to protect the real value of these savings, the Ministry assumed a heavy financial obligation, as since 1954 both the principal and the interest on these bonds have been linked to the cost of living index.
The Development Budget was used to finance construction of permanent housing for the new immigrants and for other eligible groups of population. This funding enabled the liquidation of the transitory camps. It also financed a wide range of investments in infrastructure - in power and water supply, the construction of the Ashdod port, as well as construction of an extensive network of roads and highways.
About a half of the development budget was earmarked for concessionary loans to private and public companies, for agriculture, industry, transport and tourism sectors.
Eshkol knew well that the fiscal policy tended to be expansionary and consequently strongly inflationary, and should therefore be balanced by restraining monetary policy. Eshkol strongly supported the initiative of David Horovitz, which resulted in the establishment of the Bank of Israel at the end of 1954, though he was aware that the independence of the bank meant that the freedom of action of the Ministry of Finance would be significantly curtailed.
During Eshkol's term of office as Minister of Finance GNP grew at an average yearly rate of 11% in real terms. The rapid growth during this period was due to three factors:
  • Firstly, the increase in labor output, which contributed one third of the increase in the GNP;
  • Secondly, the high level of investment financed mainly from capital import; consequently the capital stock of equipment and infrastructure increasd rapidly.
  • Thirdly, productivity increased during this period at an annual rate of 3 - 4% per worker. Productivity represents the increase in output above and beyond the increase due to the additional inputs of labor and capital stock.
A third of the increase in output was due to increased economic efficiency. The increased efficiency during the Eshkol period, testified to the successful absorption of the immigrants.
During his term of office, Eshkol adopted a strictly pragmatic approach, expressed adoption of changing policies in accordance with changes in constrains and conditions.
The following are several samples of his pragmatic approach:
Despite his natural tendency towards expansion of agricultural settlement, Eshkol recognized the limitations of agriculture, in terms of sources of water and the limited capacity of the internal market to absorb agricultural products and to the difficulty to increase the export of the agricultural products that could be produced at the time. Eshkol reached the conclusion that industry could play a central role in the expansion of production and creation of employment. He therefore reasoned that the government should encourage industrial development by construction of infrastructure for new industrial plants in development towns, provision of government assistance through concessionary loans, and ecouragement of expansion of existing industrial plants. Eshkol initiated the aappointment of Pinhas Sapir to the post of Minister of Industry in 1955, and actively supported his activities for the encouragement of industry.
Eshkol was opposed to the continuous pressure exerted by the heads of the Histadrut to raise the real wages, fearing reduced competitiveness and inflationary pressures. He acceded to the payment of a cost-of-living allowance as compensation for inflation, but resolutely opposed demands for an increase in basic wages exceeding the increase in productivity. Despite the Labor Party's socialist approach, he supported Goverment encouragement of private initiative. He also greately encouraged private foreign investment, and supported additional incentives for foreign investors, based on the Law for the Encouragement of Investments adopted earlier in 1950.
The period towards the end of Eshkol's term as Minister of Finance was characterized by rapid growth and full employment. Significant improvement had also been attained in the balance of payments. Export of goods and services, which covered only 28% of imports in 1952 grew at a rapid rate, reaching approximately 50% of imports in 1961. Nevertheless one of the main objectives of the Economic Policy - reduced dependence on capital import (defined at the time as progress towards "Economic Independence") had not been reached.
In order to increase the competitiveness of the economy, the Government decided in February of 1962 to adopt a uniform rate of exchange of IL 3 to 1 US Dollar. It also decided to begin a process of gradual exposure of local production to competition from imported goods.
During Eshkol's term as Minister of Finance the supremacy of the Ministry was established bearing responsibility for formulation of economic policy and coordination of activities of all economic ministries. The Ministerial Committee for Economic Matters headed by the Minister of Finance became the "Ex Officio" Economic Cabinet, where important economic decisions were taken. Eshkol's strong personal standing in the Labor Party had a strong impact on the the decision making process. Eshkol had to compromise often, but this was necessary in order to obtain the support of the Knesset, and its Finance Committee for economic policy and for the laws under discussion.
Eshkol was not a professional economist; however a short time after his appointment as Minister of Finance, he appointed young economists, graduates of the Hebrew University in Jerusalem, to key posts in the Ministry of Finance. He listened attentively to their advice, but due to his excellent intuition he knew how to submit it to thorough examination. Eshkol was endowed with a genereous sense of humor, and a capability to convey a message to the public in a language understandable to laymen. For example, the phenomenon of inflation and erosion of value of non-linked loans he explained as: "borrowing a cow and returning a chicken".



Eshkol's humor -


Regarding youngsters that he planted in key positions in the treasury he said: "I am throwing a young man into the water. If he swims - great! And if he drowns - well, it's easy, we saved ourselves from an unqualified man."

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"….my son, who served in the paratroopers, returned one wintry morning after a tiring training drill, and waited for a ride on the highway to Haifa; thin rain soaked him, but the many drivers passed and did not notice his extended arm. Suddenly, a fancy shining car stopped, its door opened and a voice from within called: Enter, son, quickly. The boy was embarrassed for a second because his shoes were covered with mud, his uniforms wet and filthy, and his backpack dripping water. But the voice rushed him: Never mind, son, get in. Your father is paying for this...only when he sat cautiously on the velvet seat he recognized the driver. It was Levi Eshkol, the Minister of Treasury who turned his head toward the soldier and with a calm smile winked."

***

Visiting, as Minister of Finance, a base of the Israeli Airforce, he was shown the Mirage fighter planes. The price of every plane was one million dollars. Eshkol asked: "And how many people sit in one of them?" - "one", he was told. "Just one?" he asked, "would it be possible to have two people sit there , and the investment will be divided between the two of them…"