Start-up Nation (16 page)

Dan Yakir is a scientist at the Weizmann Institute who manages the FluxNet research station at Yatir. He says that the forest
not only demonstrates that trees can thrive in areas that most people would call desert, but that planting forests on just
12 percent of the world’s semi-arid lands could reduce atmospheric carbon by one gigaton a year—the annual CO
₂
output of about one thousand 500-megawatt coal plants. A gigaton of carbon would also amount to one of seven “stabilization
wedges” that scientists argue are necessary to stabilize atmospheric carbon at current levels.

In December 2008, Ben-Gurion University hosted a United Nations–sponsored conference on combating desertification, the world’s
largest ever. Experts from forty countries came, interested to see with their own eyes why Israel is the only country whose
desert is receding.
¹²

The kibbutz story is just a part of the overall trajectory of the Israeli economic revolution. Whether it was socialist, developmentalist,
or a hybrid, the economic track record of Israel’s first twenty years was impressive. From 1950 through 1955, Israel’s economy
grew by about 13 percent each year; it hovered just below 10 percent growth annually into the 1960s. Not only did Israel’s
economy expand, it experienced what Hausmann calls a “leapfrog,” which is when a developing country shrinks its per capita
wealth gap with rich first-world countries.
¹³

Whereas economic growth periods are common in most countries, leapfrogs are not. A third of the world’s economies have experienced
a growth period in the past fifty years, but fewer than 10 percent of them have had a leapfrog. The Israeli economy, however,
increased its per capita income relative to the United States’ from 25 percent in 1950 to 60 percent in 1970. That means Israel
more than doubled its living standard relative to that of the United States within twenty years.
¹⁴

During this period, the government made no effort to encourage private entrepreneurship and, if anything, was rhetorically
hostile to the notion of private profit. Though some of the government’s political opponents did begin to oppose its heavy
economic hand and anti–free market attitudes, these critics were a small minority. If the government had valued and sought
to ease the path for private initiative, the economy would have grown even faster.

In retrospect, however, it is clear that Israel’s economic performance occurred in part because of the government’s meddling,
and not just in spite of it. During the early stages of development in any primitive economy, there are easily identifiable
opportunities for large-scale investment: roads, water systems, factories, ports, electrical grids, and housing construction.
Israel’s massive investment in these projects—such as the National Water Carrier, which piped water from the Sea of Galilee
in the north to the parched Negev in the south—stimulated high-velocity growth. Rapid housing development on kibbutzim, for
example, generated growth in the construction and utilities industries. But it is important not to generalize: many developing
countries engaged in large infrastructure projects waste vast amounts of government funds due to corruption and government
inefficiencies. Israel was not a perfect exception.

Though infrastructure projects were perhaps the most visible element, even more striking was the deliberate creation of industries,
as entrepreneurial projects, from
within
the government. Shimon Peres and Al Schwimmer, an American who helped smuggle airplanes and weapons to Israel during the
War of Independence, together dreamed up the idea of creating an aeronautics industry in Israel. When they pitched the idea
within the Israeli government, in the 1950s, reactions ranged from skepticism to ridicule. At the time, staples like milk
and eggs were still scarce and thousands of just-arrived refugees were living in tents, so it is not surprising that most
of the ministers thought that Israel could neither afford nor be capable of succeeding in such an endeavor.

But Peres had David Ben-Gurion’s ear, and convinced him that Israel could start repairing surplus World War II aircraft. They
launched an enterprise that at one point was Israel’s largest employer. Bedek eventually became Israel Aircraft Industries,
a global leader in its field.

During this stage of Israel’s development, private entrepreneurs may not have been essential because the largest and most
pressing needs of the economy were obvious. But the system broke down as the economy became more complex. According to Israeli
economist Yakir Plessner, once the government saturated the economy with big infrastructure spending, only entrepreneurs could
be counted on to drive growth; only they could find “the niches of relative advantage.”
¹⁵

The transition from central development to a private entrepreneurial economy should have occurred in the mid-1960s. The twenty-year
period from 1946 through 1966, when most of the large-scale infrastructure investments had been made, was coming to an end.
In 1966, with no more frothy investment targets, Israel experienced for the first time nearly zero economic growth. This should
have convinced Israel’s government to open the economy to private enterprise. But instead, needed reforms were staved off
by the Six-Day War. Within one week of June 6, 1967, Israel had captured the West Bank, Gaza Strip, Sinai Peninsula, and Golan
Heights. Collectively, the territory was equal to more than three times the size of Israel.

Suddenly the Israeli government was once again busy with new large-scale infrastructure projects. And since the
IDF
needed to establish positions in the new territories, massive spending was necessary for defense installations, border security,
and other costly infrastructure. It was another giant economic “stimulus” program. As a result, from 1967 to 1968, investment
in construction equipment alone increased by 725 percent. The timing of the war reinforced the worst instincts of Israel’s
central planners.

Still, Israel’s economy was living on borrowed time. Another war six years later, the Yom Kippur War of 1973, did not yield
the same economic boost. Israel suffered heavy casualties (three thousand fatalities and many more wounded) and enormous damage
to its infrastructure. Forced to mobilize large numbers of reserves, the
IDF
pulled most of the labor force out of the economy for up to six months. The effect of such a massive and protracted call-up
was jarring, paralyzing companies and even entire industries. Business activity came to a halt.

In any normal economic environment, private incomes among domestic workers would have experienced a corresponding decline.
But in Israel they did not. Instead of allowing salaries to fall, the government artificially propped them up through a vehicle
that resulted in extremely high levels of public debt. In order to try to offset the ballooning debt, every tax rate—including
on capital investment—was raised. Short-term and high-priced debt was used to finance the deficit, which in turn increased
interest payments.

All this coincided with a decline in net immigration. New immigrants have always been a key source of Israel’s economic vitality.
There had been a net gain of nearly one hundred thousand new Israelis between 1972 and 1973. But the number was down to fourteen
thousand in 1974 and almost zero in 1975.

What made recovery especially unlikely—if not impossible—was the government’s monopoly of the capital market. As the Bank
of Israel itself described it at the time, “The government’s involvement transcends anything that is known in politically
free countries.” The government set the terms and interest rate for every loan and debt instrument for consumer and business
credit. Commercial banks and pensions were forced to use most of their deposits to purchase nonnegotiable government bonds
or to finance private-sector loans for projects that had been earmarked by the government.
¹⁶

This was the condition of Israel’s economy during what is often described by economists as Israel’s “lost decade,” from the
mid-1970s through the mid-1980s. Today, Intel’s decision to search for scarce engineers in Israel seems like an obvious move.
But the Israel that Intel found in 1974 was nothing like what it is today. While it may no longer have resembled an expanse
of sand, swamps, and malaria, visitors during the 1970s might have been excused for thinking they had landed in a third-world
country.

Israeli universities and Israel’s engineering talent were by this time fairly advanced, but much of the country’s infrastructure
was antiquated. The airport was small, quaint, and shabby. It had a Soviet-style utilitarian feel as one arrived and entered
immigration. There was no major road that could pass for a real highway. Television reception was shoddy, but it hardly mattered
since there was only a single government-owned station broadcasting in Hebrew, along with a couple of Arabic channels that,
with a powerful enough antenna, one could pick up from Jordan or Lebanon.

Not everyone had a telephone at home, and not because they all had cell phones, which didn’t exist yet. The reason was that
phone lines were still being slowly rationed out by a government ministry, and it took a long time to get one. Supermarkets,
unlike the small food marts common in neighborhoods, were a novelty, and they did not carry many international products. Major
international retail chains were nonexistent. If you needed something from abroad, you had to go yourself, or ask a visitor
to bring it back for you. High customs duties—many of them protectionist attempts to coddle local producers—made most imports
prohibitively expensive.

The cars on the road were a bland bunch—some produced in Israel (these became the butt of jokes, much like locally produced
Russian cars did in Russia) and a motley assortment of the cheapest models of mostly Subaru and Citroën, the two companies
brave or desperate enough to defy the Arab boycott. The banking system and the government’s financial regulations were as
antiquated as the auto industry. It was illegal to change dollars anywhere except at banks, which charged government-set exchange
rates. Even holding an overseas bank account was illegal.

The overall mood was dour. The euphoria that had come with the stunning 1967 victory—which some likened to first receiving
a death-row pardon and then winning the lottery—quickly dissipated after the 1973 Yom Kippur War and was replaced with a renewed
sense of insecurity, isolation, and, perhaps worst of all, tragic blunder. The mighty Israeli army had been utterly surprised
and badly bloodied. It was scarce consolation that, in military terms, Israel had won the war. Israelis felt that their political
and military leadership had badly failed them.

A public commission of inquiry was appointed; this led to the removal of the IDF’s chief of staff, its chief of intelligence,
and other senior security officials. Though the commission exonerated her, Prime Minister Golda Meir took responsibility for
what was seen as a fiasco and resigned a month after the release of the commission’s report. But her successor, Yitzhak Rabin,
was forced to resign from his first stint as prime minister when, in 1977, it was revealed that his wife had a foreign bank
account.

As late as the early 1980s, Israel also suffered from hyperinflation: going to the supermarket meant spending thousands of
almost worthless shekels. Inflation rose from 13 percent in 1971 to 111 percent in 1979. Some of this was due to rising oil
prices at this time. But Israeli inflation continued to skyrocket beyond other countries’, rising to 133 percent in 1980 and
to 445 percent in 1984, and appeared to be on its way to a four-digit figure within a year or two.
¹⁷

People would hoard phone tokens, since their value didn’t change as their price rose sharply, and would rush to buy basic
items in advance of expected price hikes. According to a joke of that time, it was better to take a taxi from Tel Aviv to
Jerusalem than a bus, since you could pay the taxi at the end of the ride, when the shekel would be worth less.

A main reason for the hyperinflation was, ironically, one of the measures the government had taken for years to cope with
inflation: indexing. Most of the economy—wages, prices, rents—were linked to the Consumer Price Index, a measure of inflation.
Indexing seemed to protect the public from feeling the effects of inflation, since their incomes rose with their expenses.
But indexing ultimately fed an inflationary spiral.

In this context, it is especially striking that Intel set up shop in Israel in the 1970s. An even greater mystery, however,
is how Israel transformed itself from this somewhat provincial and isolated state to a thriving and technologically sophisticated
country three decades later. Today, visitors to Israel arrive in an airport that is often far more slickly modern than the
one they departed from. Unlimited numbers of new phone lines can be set up with only a few hours’ notice, BlackBerrys never
lose reception, and wireless Internet is as close as the nearest coffee shop. Wireless access is so abundant that during the
2006 Lebanon war, Israelis were busy comparing what kind of Internet service worked best in their bomb shelters. Israelis
have more cell phones per capita than anywhere else in the world. Most kids above the age of ten have a cell phone, as well
as a computer in their bedroom. The streets are full of late-model cars, ranging from Hummers to European Smart cars that
take up less than half of a scarce parking spot.

“Looking for a few good programmers?” CNNMoney.com recently asked in a feature listing Tel Aviv among the “best places to
do business in the wired world.” “So are
IBM
, Intel, Texas Instruments, and other tech giants, which have flocked to Israel for its tech savvy. . . . The best place to
close a deal is at Yoezer Wine Bar, with its extensive selection of varietals and deliciously doused beef bourguignon.”
¹⁸
In 1990, though, there wasn’t a single chain of coffee shops, and probably not a single wine bar, decent sushi restaurant,
McDonald’s, Ikea, or major foreign fashion outlet in all of Israel. The first Israeli McDonald’s opened in 1993, three years
after the chain’s largest restaurant opened in Moscow, and twenty-two years after the first McDonald’s in Sydney, Australia.
Now McDonald’s has approximately 150 restaurants in Israel, about twice as many per capita as there are in Spain, Italy, or
South Korea.
¹⁹