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Peres imposed a 20% budget cut on the military. He slashed all food and transport subsidies, thus raising sharply prices, but also disabusing the government of a major expense. He then imposed on the unions a hiring freeze across the public sector while freezing wages and prices and abolishing the indexations that made salaries rise in tandem with inflation. He then passed a law forbidding the government to print money to finance deficits. Finally he made monetary policy the apolitical Bank of Israel’s exclusive responsibility, taking it away from the Treasury and its politicians.
Peres died on Wednesday at age 93. His funeral on Friday in Jerusalem will be attended by many world leaders, including President Barack Obama.
Most of Peres’s eulogists now say his deepest imprint on history was the Oslo Accords that sparked the Israeli-Palestinian peace process. The few who disagree say his deepest imprint was as the builder of Israel’s defense and aerospace industries and as the mastermind of Israel’s nuclear program.
They are wrong. Peres’s biggest legacy is his economic leadership in 1985.
From socialism to capitalism
The stabilization program soon proved a spectacular success.
Inflation plummeted to less than 20%, and then continued declining, until becoming in the following decade one of the world’s lowest. The shekel’s depreciation USDILS, +0.2712% was stemmed, soon allowing its reissuance with three of its zeroes deleted, and later emerging as one of the world’s strongest currencies.
The budget deficit became among the lowest in the world, the debt-to-GDP ratio is now lower than most of the richest economies’, including the U.S., Britain and France, the trade deficit has morphed into a surplus, foreign investments are among the world’s highest, and unemployment, now 4.6%, is among the world’s lowest.
Before all this maturation, Peres touched off Israel’s privatization process when he forced the unions to restructure their debt-ridden holding company, Koor, which at the time was Israel’s largest employer. Having fired 30% of its employees and sold a third of its assets the company soon repaid its debts, went public, and was later bought by American investors.
At the same time, Peres discontinued an expensive project to build an Israeli fighter jet. Thousands of engineers and technicians were fired amid much public outcry, but Peres insisted that what could not be financed will no longer be held.
The result of these mass layoffs, the largest Israel had known, was astonishing.
Rather than leave Israel, as many feared they would, the newly jobless engineers either found new jobs in the reprogrammed economy, or launched the high-tech startups that soon became the hallmark of Israeli society’s new entrepreneurial frenzy. Before long Israeli high-tech firms were selling shares abroad, and Israeli stocks became the most common non-U.S. shares on Wall Street after Canada’s.
Peres, the Labor leader and former kibbutz member who as a teenager read Karl Marx in awe, had thus shepherded Israel’s socialist economy to capitalist ambitions, methods, and stardom.
Monetarism’s finest hour
The economic journey Peres led was part of monetarism’s golden age. What began with Paul Volcker’s defeat of the Carter-era’s stagflation and then proceeded to Margaret Thatcher’s and Ronald Reagan’s defeats of the unions, happened in Israel as well, only more dramatically.
The monetarist dictum, that a government’s supreme economic duty was not to spend until everyone has a job — as the previous era’s Keynesian faith claimed — but to defeat inflation, had been tested in Israel and proven valid.
While at it, Peres also willed a lesson in political economics.
His program’s success was owed largely to its delivery as a bipartisan effort in which the finance minister belonged to Labor’s rival, Likud, while the defense minister who made the big cut in military spending was Peres’s rival within Labor, Yitzhak Rabin.
Having made his demand for public sacrifice while flanked by his own rivals, the people were inspired, and readily backed his struggle. It was this kind of political solidarity that Greece’s politicians failed to display this decade, while their economy arrived where it still remains unredeemed.
Then again, the monetarism that Peres improbably embraced and helped spread has since lost its shine, as the 2008 meltdown’s quantitative easing and slashed interest rates calmed the markets, but left unhealed structural ailments like income gaps, deflation, and industrial flight.
Having previously produced Keynes’ social democracy and then Milton Friedman’s monetarism, academia will hopefully soon produce the next great economic idea. Yet in itself the idea will not be enough. To impact, it will need political leaders with courage, wisdom and resolve; leaders like Shimon Peres.