Israeli economic liberalization

The economic liberalization program presented by Finance Minister Simcha Ehrlich on October 29, 1977, began the process of Israeli economic liberalization. The program aimed to free the economy from excessive government intervention that had characterized it until then and transform Israel's economy into a liberal free market. Some view the turnaround as a central factor in the Israeli inflation of the 1980s, alongside the increase in national debt resulting from the Yom Kippur War and the oil crisis.

The principles of the program were eventually implemented, albeit with delays and gradually, in later stages of the economy's development.

Despite the inflation, Israel's Gross National Product (GNP) continued to grow after the turnaround. In 1980, Israeli Gross Domestic Product (GDP) was valued at 21 billion US dollars, less than a tenth of its nominal value in 2011, which was 258 billion US dollars, and a quarter of its real value

Events

The elections for the Ninth Knesset brought the Likud party, led by Menachem Begin, to power in May 1977, in what was termed "the upheaval" ("HaMahapakh"). Simcha Ehrlich was appointed Deputy Prime Minister and Minister of Finance in Begin's government. On October 29, Ehrlich presented his new economic plan, the liberalization program, which was termed by the government as "the Economic Revolution."

The plan aimed to reduce strict government control over the economy and initiate a new chapter in the Israeli economy based on free enterprise, intended to lead to economic prosperity in the spirit of Milton Friedman's philosophy. According to Ehrlich, his liberal economic policy was intended to transform Israel into "the Switzerland of the Middle East."

The program eliminated most subsidies, particularly for essential goods, which had been entrenched during the rule of left-wing governments and were an integral part of the Israeli economy. The plan advocated allowing market forces to determine prices, and providing limited support to those in need instead of broad subsidies, which also benefited those who were well-off.

A major aspect of the liberalization was in the realm of foreign currency. Most restrictions on holding foreign currency were lifted, Israelis were allowed to open foreign currency bank accounts, and the allocation of foreign currency for travelers abroad was significantly expanded. The travel tax was abolished, making travel abroad a "legitimate" activity that no longer appeared to contradict the economic interests of the country. Simultaneously, exchange rates were unified, eliminating the multiple exchange rates system (often referred to as "a hundred rates"). Additionally, a floating exchange rate was announced, meaning the exchange rate would fluctuate daily according to market forces based on supply and demand. The plan posited that market forces would achieve an equilibrium exchange rate where supply and demand for foreign currency would balance, thus preventing a deficit in the balance of payments.

Another step included in the plan was a significant increase in the value-added tax (VAT) from 8% to 12%, aiming to absorb excess money from the public, curb consumer spending following the liberalization, and reduce the government deficit.