How Shimon Peres laid the foundation for Start-up Nation

Though Israel's economy needed further structural reforms, the plan Peres pushed through was a major turning point in turning it from having a third-world basket case to a market economy.

September 29, 2016 01:45
3 minute read.

"Be My Friend For Peace"

"Be My Friend For Peace"

In his twilight years, Israel's elder statesman Shimon Peres became a fierce advocate of technology. In 2012, during a four-day tour through Silicon Valley, he got a helping hand for launching his own Facebook page--from none other than Facebook CEO Mark Zuckerberg.

He wanted to use the social network as a platform for dialogue, and even had a snazzy video made asking people to "be my friend for peace." And, of course, he was happy to sing the technological advances of his own country.

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But the techno-philic President had a hand in laying the foundations for Israel's ascent to becoming the start-up nation. In one, 24-hour meeting in 1985, he helped implement a plan that broke the back of Israel's hyper-inflation, and set the stage for its transformation into a modern economy.

In 1985, Israel's economy was a mess, in part because prices were out of control. Whereas prices were rising at just 2% in 1967, by 1984 inflation had reached hyper levels, hitting some 500%. In some months, annualized inflation reached 950%.

Part of the reason that inflation went so high was indexation: most every Israeli financial product and many wages were linked to inflation, so if prices went up, people didn't worry too much. That, in turn, just spurred further price rises. The other reason was that a banking crisis in 1983 had set off a financial crisis, and kicked inflation into high gear.

In typical Israeli fashion, all that took place on the heals of an inconclusive election that saw a unity government come to power, giving Peres the seat as the first in a rotating premiership with Yitzhak Shamir.

His first attempts to tackle the problem fell short, in part because they completely ignored the massive budget deficits that kept adding pressure to Israel's currency. But by June 1985, Peres was ready to make hard decisions, and force his government to play along.

On June 30th, he convened a cabinet meeting to approve an economic stabilization plan whipped up by Michael Bruno, a Bank of Israel economist, and Yitzhak Moda'i, the Finance Minister from the Likud party. (Bruno would go on to become the central bank's governor).

According to minutes from the meeting released in 2015, Peres planned to shove the plan down the ministers' throats, giving them little time to review it in advance. Having the meeting last through the night was part of the plan. Peres retorted that making decisions was best in the middle of the night, when half the cabinet would be passed out.

Still, he faced tough opposition. Future President Moshe Katzav, at that time the Labor and Social Affairs Minister, decried the cuts to child allotments and welfare, painting a grim picture of quadriplegic children who would be unable to go to sleep due to lack of care. Peres shot back that the alternatives were worse.

In the end, his strong-arm tactics worked, and the painful plan was pushed through. It enacted broad spending cuts including subsidies worth some 7% of the gross national product, forced the Histadrut to accept new wage controls, including the elimination of provisions tying salaries to inflation. Price controls were enacted, and a currency board put in place.

The plan, which was seen by some as a gamble, worked. Inflation came tumbling down, and within a few months, the currency board replaced the hyperinflated shekel with a New Israeli Shekel, lopping three zeros off the end of the old currency.

In an academic review of the plan, Stanley Fischer, who would later become the BOI's governor himself, said the outcome was "impressive," noting that the results were not obvious ahead of time. One reason the plan came together and worked, he said, was the political will.

Though Israel's economy needed further structural reforms, the plan Peres pushed through was a major turning point in turning it from having a third-world basket case to a market economy, the likes of which now even boasts offices for Facebook.

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