by Shimon Peres
I had come to see innovation not only as a tool to solve problems but as an animating principle that required its own way of thinking. And so, as we worked to build the IDF, I kept one eye on the present crisis, and one toward the horizon. I knew that it was not just arms and alliances that we required, but scientific breakthroughs—the comparative advantages that could help us defend ourselves from the armies aligned against us.
It was this sense, that we could build something out of nothing—and that our future depended on it—that drove me to build an aviation industry in Israel. It’s what drove me to build the nuclear facility in Dimona, at a time when the country couldn’t yet feed itself. I couldn’t have known that from our early efforts to repair airplanes we would become a world leader in satellites and unmanned aerial vehicles, even send an Israeli astronaut, Ilan Ramon, into orbit. When I established RAFAEL, a weapons development program, I couldn’t have known that it would one day give us the protection of an Iron Dome. But what I did know is that we were laying a foundation for the future. What I did know is that by training thousands of scientists—in manufacturing and mechanical engineering; in particle physics and molecular sciences—we were cultivating knowledge, the most powerful tool for shaping the future.
Of course, there were sometimes skeptics, and not just of projects as ambitious as Dimona. When I was deputy defense minister, I spent a huge amount of my time trying to figure out what new technology could give us a comparative advantage. When I wasn’t in my office, I was often visiting Israel’s research institutions and universities, meeting with professors and practitioners, absorbing their work. In 1963, there was a buzz of excitement about an Israeli-designed computer that was being used at the Weizmann Institute. I was eager to see them in operation. What I found was extraordinary—a masterpiece of machinery that required a team to manage. This is what the army needs, I thought—one computer could replace one thousand soldiers and give us more data than they alone could gather. I spent many days and nights with the group that managed the computer, learning how it worked, and how it might work on behalf of the military. I returned to the ministry thoroughly convinced of its value, insisting that we purchase one of our own.
“Where are you going to put it?” one general said incredulously of the enormous machine.
“What would we do with it?” another asked. “Can you take a computer with a division into the field? Of course you can’t! We don’t even have enough tanks, and you’re talking about computers. A tank shoots. It fires. What on earth can a computer do?”
As I had already learned by then, even the brave and the bold can fall victim to pessimism. But it didn’t take long before the creative spirit of their fellow Israelis proved them wrong. We learned to use computers, first, to improve our battle readiness, but soon to develop advanced weapon systems. Technology built for one purpose often profoundly served others. The weapon systems’ technology would later be used in a medical imaging device that has saved lives all over the world.
By 1974, Intel, one of the world’s largest technology companies, chose Israel as a site for research and development, as we began earning a global reputation for talent and tenacity. But despite our potential, there was nothing inevitable about the path that led us to “Silicon Wadi”—quite the opposite. By the early 1980s, the old economic order under which we had organized started to collapse. I would soon have to confront one of the greatest challenges of my life and one of the greatest threats Israel had ever faced.
•••
Thinking back on the frightful days of the economic crisis, I am reminded that while people tend to be pessimistic, history is optimistic.
It was September 1984, in the waning days of summer, that I took my seat in the Old Man’s chair as prime minister of the State of Israel. The right-wing parties, led by the Likud, had been in power for seven years when the 1984 elections were held. In that time period, Israel had faced an increasingly deteriorating economic and security situation, and voters were eager for change. The Likud party bore the brunt of the backlash, losing seven seats. But the Ma’arach Party (the Labor Alignment that preceded the Labor Party) was not the beneficiary; a number of smaller parties were. As a result, the Ma’arach ended up with forty-four seats, only three more than the Likud. With the minor parties unwilling to join a coalition, we were left with only one way to form a governing majority: a unity government between Labor and Likud. Yitzhak Shamir and I negotiated an agreement that involved a rotation of leadership: For the first half of the four-year Knesset term, I would serve as prime minister and Shamir as foreign minister. At the conclusion of that period, we would switch positions. It was not the outcome I had hoped for, but there was no time for disappointment. My truncated tenure became its own call to action, demanding the most efficient and intensive period of work we could possibly muster.
I had an aggressive agenda: to withdraw our forces from Lebanon and to begin peace negotiations with Jordan and the Palestinians. But I had not taken office in a vacuum. I had done so during an economic collapse so severe, it threatened to destroy our state from within. On the day I took office, the annual inflation rate in Israel had reached a horrific 400 percent. After more than ten years of economic dysfunction, the shekel was on its way to becoming worthless. Tens of thousands of Israelis had already been left in financial ruin by the crisis and millions more were expected to follow. Grocery store clerks would go down the aisles, often once a day, stamping new price tags on goods as the value of the shekel continued to plummet. People began hoarding their phone tokens because they weren’t based on the shekel and didn’t lose value. There was a well-worn dark joke, told with a sense of foreboding, that it was cheaper for Israelis to take taxis than buses because you could pay for a taxi at the end of the ride.
Israel’s economy had not always been this way. Between 1948 and 1970, gross domestic product per capita nearly quadrupled, even as the population tripled in size. This was the result of massive government investments intended to build the state’s foundation, from housing to roads to electrical grids and ports. But in the 1970s, things began to change. Fending off the attack of the Yom Kippur War had required the military to call up thousands of reservists, temporarily disrupting the private sector. After the war, Israel increased its defense budget dramatically. That spending, along with a major new social program, created an enormous budget deficit. At the same time, Arab members of the Organization of the Petroleum Exporting Countries (OPEC) imposed an oil embargo on countries that had come to Israel’s aid during the Yom Kippur War, which created a global recession. The combination caused growth to slow, and then to cease, which led in turn to inflation. The cost of government-subsidized social programs increased, and with it, so did the deficit, worsening inflation considerably. Seemingly all at once, we were spiraling uncontrollably toward economic disaster.
At the time, our economy was organized far differently than it is today. It was a socialist system, one where the government played a role in nearly every aspect of economic life. It was the creator of industries, as well as their owner. It was the arbiter of economic and monetary policy, and dismissive of market forces, generally. That said, there were some sectors where the economy was mixed. The banks, for example, were privately owned, as were many businesses. We created the system to be uniquely Israeli, with the expectation that we could build an economy based on shared values and not simply supply and demand. But as commerce became more global and companies became multinational, we learned that there were limits to what we could control. The actions the government had undertaken to shield the population from the brunt of the slowdown—raising taxes on businesses to prop up salaries—were having the opposite effect. Instead of fending off the beast, they fed it, creating an inflationary spiral that would devastate the country. By 1979, inflation had risen to 111 percent. Within a decade, the floorboards of the economy began to buckle under the pressure. In 1983, the Tel Aviv Stock Exchange crashed, and four out of Israel’s five banks had to be nati
onalized to prevent them from failing.
The high-tech industry was not fully immune to these forces, but it remained resilient even as the rest of the economy began to collapse. The industry was export oriented, which meant its products were largely purchased in dollars. Its public companies did not trade on the Tel Aviv Stock Exchange. And despite the rising price of oil, the industry was producing software and miniaturized hardware, which could be delivered without concern for high shipping costs. Products were delivered on time, development projects carried out. In later years, one of the sector’s big selling points to investors was that, even in such dire times, it had always delivered.
But while the tech sector continued its forward motion, the rest of the economy came to a standstill. Economic pain sparked economic panic, and it seemed every day there were angry demonstrations and protests.
During my campaign for prime minister, I had asked a group of economic experts—Yoram Ben-Porath, Amnon Neubach, Michael Bruno, Eitan Berglas, Emmanuel Sharon, and Haim Ben-Shahar—to work on a plan to help stanch the bleeding. I was no expert in economics, but I knew that if I sought trusted advice and studied thoroughly, I could build the fluency I’d need if I were to prevail in the election. I had certainly done it before.
When I received their proposal, it was made immediately clear to me that I didn’t just face an economic challenge, but also a leadership challenge. The only road back to a stable economy would necessarily require pain, distributed across the entire economy, though not equally. I was thrust into the center of a web of competing interests: trade unionists, who rightfully feared the consequences for Israel’s workers; employers, who feared that a Labor prime minister would pass the burden to them; and my ministerial colleagues, who were in favor of cutting government spending—so long as the cuts didn’t come from their own budgets.
Though the details of a plan had yet to be determined, I knew with certainty that the deal I would be negotiating could not be incremental or piecemeal; nor could it come around after years of debate. It would have to be sweeping, dramatic, and swift—a structural transformation—indeed, an economic revolution. What we required was the kind of reform that is nearly impossible to pass, especially in the middle of a deeply uncertain political climate, with a country already suffering the devastating effects of a crisis.
The path was so fraught that I had friends urging me to decline the prime ministership, out of fear that I would shoulder the blame for a calamity I had not caused and could not solve. “Let Shamir own the consequences,” they urged. These friends meant well, but I had never been one to believe that the best course of action was to retreat from risk. And so I accepted the challenge, knowing I was being asked to perform major surgery with limited anesthetic.
As soon as I took office, I asked my economic team to provide a full briefing on the status of the plan. Though there was some disagreement among them about the more technical details, there was broad agreement about the approach. But consensus didn’t mean they weren’t concerned. One of their primary worries was that any major structural reform could send a shock through the system that would provoke foreign investment to flee the country. Such an outflow would undermine any plan we put in place, no matter how comprehensive. The only solution, my team explained, was to get a commitment from the United States (by then having succeeded France as our most important ally) to provide an umbrella loan—a guarantee of foreign assistance as a backstop for a worst-case scenario. I told them to continue refining policy options for me with the assumption that I could secure the loan, then had my staff begin immediate preparations for a trip to Washington, D.C.
Shortly after taking office, I was greeting Secretary of State George Shultz at the State Department. I was escorted into a meeting with Herb Stein, a well-respected former White House economic advisor, who, at Shultz’s direction, had spent more than a year working on solutions to the Israeli crisis. Stanley Fischer, a monetary policy expert from the Massachusetts Institute of Technology, was also a lead part of the effort, though he was unable to attend this first meeting. I thanked Shultz and Stein, agreeing we required swift action and informing them of the plan our own experts were ready to deploy. The Israeli economists had estimated that we would need a loan of $1.5 billion as part of the stabilization plan we sought to pursue. So naturally, when the discussion turned to the issue, I started by asking for $4 billion.
Stein listened closely but was noncommittal. Before agreeing to provide the loan, he and Fischer would want to help shape the details of our reform package. I agreed that this was essential, and proposed that we set up a task force between the United States and Israel, much in the way we would approach a joint military operation, with our best economists in place of generals. This struck me as the best way to build America’s confidence in our efforts—and it had the benefit of giving us access to more expertise.
I returned home after the meetings in Washington to manage the most challenging aspect of the crisis: getting the workers and employers to agree with—and participate in—the implementation of the plan. This was not something that could be managed through a political coalition alone; it required an economic coalition. I convened the leaders of the Histadrut trade union (which was both a more traditional union and, in concert with Israel’s long-standing socialist orientation, the owner of some of the country’s largest business enterprises) together with the Employers’ Association, the government’s most senior economists, and the minister of finance, Yitzhak Modai. The first meetings were tense. The room overflowed with objection as the government officials briefed the attendees on the plans we were considering. None of the parties were willing to accept the inescapable reality: that for the economy to survive, sacrifice would be required by all, and the cost would be severe. When I explained that the subsidies we’d been providing to prop up salaries and control the prices of basic staple foods were actually causing more economic pain than they were alleviating, the trade unionists became animated with anger.
“This is madness,” I recall one of them saying. “The economy is collapsing and you want to pull the rug out from under the workers? I never imagined I’d hear a Labor prime minister propose something so terribly draconian.” It was an understandable reaction. I, too, had never imagined myself in a position where I would need to pull back on the safety net I so strongly believed in. But I knew that without such cuts, hyperinflation would continue to ravage the lives of those very same workers, and in increasingly worse ways, with no end in sight.
The exchange was similarly intense with the Employers’ Association when we discussed the need for a nationwide freeze on prices. “That will drive us out of business!” one exclaimed. “You’re talking about saving the economy, but an action like that would destroy it!” Again I sympathized with their concerns, but here, too, I knew that failing to take such measures would lead to an economic situation that few businesses could survive.
Regular meetings with Histadrut, the Employers’ Association, and our economics team continued over the coming months. I wanted to be sure that they were fully briefed on our efforts, that they had a clear and constant understanding of the crisis, with the hope that they would eventually come to the same conclusion I had. I also wanted to be sure that they felt that their concerns were heard, to see me as a trusted broker, someone with their interests—and the country’s—at the very front of my mind. During the course of the negotiations I put forth a number of temporary package deals to address the most urgent concerns around the table. These deals were meant to provide us with the time—and a bridge to the more dramatic structural reforms—that we would need. But they were little more than half measures, and the relief they provided was both minimal and fleeting.
What became clear over time was that there was a path forward to an agreement—one that was conditioned on the very trust I was seeking to develop. Neither the employers nor the unions believed the government would have the courage to make its own major sacrifice—a dramatic decrease in spendin
g across every ministry and department. They had heard the speeches of my ministerial colleagues decrying the consequences of hyperinflation, but they expected strong resistance when it came time to enact cuts to their own ministerial budgets. I realized that if the government couldn’t prove its own commitment to making hard and painful choices, we could never expect the unions and employers to do the same. We would need to act first.
In between these trust-building sessions, I had returned to Washington to meet again with the American and Israeli economic teams, and to get assurances that we would receive the loan that our stabilization effort required. The response from Fischer was generally positive, but it, too, was conditional. He handed me a typed list—ten structural and budgetary reforms quite drastic in nature—and told me that the loan was contingent upon Israel enacting every last one.
I read over the list, took several minutes to consider it, then handed it back to Fischer.
“Okay,” I said calmly. “We will accept all of these conditions.”
The gentlemen in the room seemed stunned, having expected me to object and to negotiate aggressively, as is my nature. Yet my reasoning for accepting the terms was actually quite simple. Stanley Fischer is a brilliant economist, and I was in no position to argue with him on the merits of the costs and benefits of each demand he had made. I also trusted the American team. They had no incentive to add superfluous conditions to their list. And most of what was included was already a part of the plan the Israeli team had produced. There was a strategic consideration as well: by placing this pressure on me, the United States was actually alleviating some of the pressure at home. That is, I calculated that the plan was more likely to be palatable in my negotiations with business and labor if it were seen not as an Israeli proposal, but as an American demand that we would have to meet in order to secure the guarantee that both business and labor knew was required.
