Israel's radical economic reforms will bring neither the best of times nor the worst of times, according to informed observers here. Their initial conclusion is that the great gamble in removing currency restrictions has paid off in terms of public confidence in the Israeli pound.

Five days have passed since Israel dismantled its currency restrictions to let the pound "float" and loosened export-import limitations in what was seen here as the most radical shift toward a free market economy since the establishment of the state.

There has been no panic flight from the Israeli currency, as the pessimists had predicted, and in the last few days, 2.5 billion Israeli pounds have been invested in long-range saving schemes linked to the cost-of-living index. This has soaked up purchasing power and will allow the government to reduce deficit spending.

But wage demands by workers and powerful trade unions may drastically limit the economic gains that optimists hoped the reforms would bring.

The pound has been devalued by about 31 per cent and in the last days it has risen by a few points, in relation to the dollar.

The panic buying of commodities that cleared shop shelves during the first two days has died down. "It was the old ghetto mentality," one teacher joked. "In the old days we hoarded when we heard that the Cossacks were coming, now it happens when we hear that price rises are coming."

Indeed prices have begun to rise sharply already and will continue to climb. It looks now as if the government's average estimate of an across-the-board 12 per cent rise will prove to be too low.

The negative side of the "bold experiment to attack the roots of Israel's economic problems," as one newspaper put it, is that the government also seems to have underestimated the reaction of workers to the damage the reforms will do to their buying power, at least in the short run.

A political cartoon in the Jerusalem Post put this aspect of the problem into focus. "It's simple," one character says to another. "We let the Israeli pound fall in value, allow free exchange of dollars, Israeli exports become dirt cheap and in the long run the economy is strengthened."

"And in the short run?" the other character asks.

"We starve."

The government has also underestimated the opposition of the powerful labor federation Histadrut which is controlled by the opposition Labor Party and represents about 90 per cent of Israel's work force.

There have been strikes up and down the country in recent days to protest the new reforms, and workers may demand immediate wage compensation for rising prices.

If the government has to buy industrial peace with immediate wage hikes, the effect will be to reduce, if not eliminate, the benefits of the planned reallocation of resources.

Put in simple terms, the government hopes to build up industry and exports by making the industrial sector more profitable, luring workers from service industries into manufacturing. Service industries now account for approximately two-thirds of Israel's labor force. This reallocation of resources, if it works, would reduce subsidies and allow the economy to grow under a free market system. If it works, increased profits will bring higher wages for the workers.

But for this long-term gain to be achieved the government must slow the rise in cost of living over the short run. The question now is, will organized labor permit it? So far Histadrut is bitterly opposed and the current strikes are a show of force. The federation threatens more strikes and demonstrations while the government pleads for understanding and negotiations. Talks between the government and Histadrut are likely to begin next week.

The government will have its work cut out trying to persuade a country that a free economy is best for it after 30 years of a strictly controlled socialist system. But Finance Minister Simha Ehrlich has said he has staked his political career on the reforms and it is clear that Prime Minister Menahem Begin's neck is on the line as well. It was the lower-income workers who were largely reponsible for bringing Begin to power and they could just as easily bring him down.

The addition of the Democratic Movement for Change, which joined Begin's government last month, means that the threat of a no-confidence vote in Parliament is not to be taken seriously. The danger comes from the reactions of the unions.

In a broader international context, the government's new economic program could be as significant a symbol of an investment in peace as Egyptian President Anwar Sadat's decision to rebuild the destroyed cities along the Suez Canal was. The argument then was that Sadat would not make such a huge investment of resources if he was planning for war because his rebuilt cities were still in range of Israeli guns and would quickly be destroyed again.

By the same token, the Begin government's new economic plan depends on a long-term climate of confidence within the international business community or else, as one economist put it, "The dollar will quickly run away."

Some experts believe that, in a small country like Israel, the government could not afford to loosen strict economic controls if it intends to be on a war footing in the foreseeable future and therefore the new measures are an incentive to keep the peace.