From socialism to capitalism, with brio.(the Israeli Economist)(Israel)

TEL AVIV, ISRAEL--Grabbing his coat to leave a fashionable Jerusalem restaurant, Benjamin Netanyahu pauses to give a young supporter a piece of advice. "If you want to understand the way an economy works, there's one book you need to read: The Road to Serfdom."

Although he hasn't turned Israel into the kind of free-market paradise that Road to Serfdom author F. A. Hayek would enjoy, Netanyahu--a one-time prime minister who served as Israel's powerful economy minister until leaving the government last year--has helped drive a real transformation of Israeli society during his time in political power. Nearly all formerly state-owned companies now have shareholders. Taxes have been reduced dramatically. And the economy is growing at rates that lead the developed world--the GDP shot up more than 5 percent in 2005.

Israel's embrace of the free market is particularly notable because it is one of the only places on earth where socialism once had a degree of success. The country's religious mission and wartime footing right from its birth produced an unusual economic history. The small cohesive population created successful central plans for converting desert to agriculture, and building vital armament firms. Most early settlers worked either on collective farms called kibbutzim or in state-guaranteed jobs. The government controlled nearly all capital, and even private businesses typically needed to petition the government for resources.

For a time, the system worked. Motivated by the trauma of the Holocaust and some passionate idealism, early kibbutzniks actually achieved something close to the goal of collective ownership. Economic constraints and social problems, however, soon led second-generation Israelis to revive private property and convert most kibbutzim into fairly conventional worker-owned companies. Israeli socialism came crashing down in the early 1980s when hyper-inflation, aggressive unions, and massive inefficacies paralyzed the economy. A series of austerity measures combined with soaring interest rates stabilized the situation, but Israelis emerged with sky-high taxes and low living standards relative to other technologically advanced democracies.

In the 1990s, things began to change. Upon his ascension to the prime minister's post in 1996, Netanyahu ...