Shimon Peres: If Economists Are So Good, How Did They Let the Economy Fail?

Economists warned, labor unions threatened and party members gave him the cold shoulder. But then-PM Shimon Peres stood firm and pressed ahead with his 1985 stability program, which burst Israel's 450% hyperinflation.

Then-Prime Minister Shimon Peres (center) during negotiations in 1985. Deputy prime minister Yitzhak Shamir is seated on the left.
Saar Yaacov / GPO

It’s fun to interview former President Shimon Peres. Even the location for the interview – the Peres Center for Peace in Jaffa – gives you a taste of being abroad. Security staff greet you; doors quietly swing open as you proceed. Office staff ask how you are doing. A few U.S. senators are on their way out of Peres’ office as you arrive, and the appointment after yours is a business delegation from Italy. It all gives the sense that we’re a world-class power and that everyone pays heed to our every utterance. But the truth is, it’s all because of the world power of just one individual – Peres himself.

It’s also a pleasure to interview someone who, at 92, remembers everything and has mastery of details without having to rely on notes. For a moment, it wasn’t clear who the youngster (relatively speaking) was between us.

One of the most difficult episodes in Peres’ long career was the national unity government he headed 30 years ago. His Labor Party failed to muster a majority coalition after the 1984 Knesset election, forcing him to split the prime minister’s post with Likud’s Yitzhak Shamir for two years. Why was it that this so-called rotation government he headed did so little at first?

“During these months there were accomplishments, although not public,” Peres recalls. “I made plans to solve the 450% inflation, when every day they went around the stores with price guns, attaching new price tags. I made plans to withdraw from Lebanon. I made plans to restore relations with Egypt, and there was also a plan to advance the peace process. I provided dates for all these plans. I said, for example, that within nine months we would solve the problem of inflation. All my colleagues said it was impossible to get out of inflation without getting into a huge fight that would lead to the government breaking up and a lack of confidence on the part of the public. Nevertheless, I decided to go ahead with it. Because I wasn’t an expert on the economy, I decided first of all to listen to the economics, but also to the experts who know how these steps affect the situation on the ground.”

Israel Kessar ran for leadership of the Histadrut labor federation in May 1985. Maybe you didn’t want to impose austerity measures on the public before those elections?

“No, no. That didn’t affect the situation at all. I was studying day and night, and there were also all-night meetings through this entire period.”

During those nine months, you developed two failed plans in an effort to stop the hyperinflation, led by Industry Minister Gad Yaacobi.

Peres interrupts. He doesn’t want to comment on Yaacobi, but other sources say Peres assumed responsibility for planning and carrying out the program.

“I knew that I needed to deal on the one hand with the political organization, the government, and on the other with the economic organizations, the Histadrut [labor federation] and the employers,” Peres says. “I learned that the Histadrut and employers didn’t believe the government. I also knew that with Israel Kessar as the Histadrut chairman, nothing would move forward. I began thinking what the government could do.” Peres says he considered a currency devaluation but was told it would also push unemployment up to 20%, which he found unacceptable.

Asked whether it’s true he wasn’t overly enamored with economists, Peres says he told himself, “If you economists are so good, how did you allow the economy to get into such a bad situation?” The economists, Peres adds, opposed everything he did in life – including, for example, his work as cofounder of Israel Aircraft Industries (now known as Israel Aerospace Industries). “Not a single economist believed in it,” Peres says. “I talked about high-tech and they didn’t accept it. And if economics professors are so smart, why aren’t they millionaires?

“I came to the conclusion I had to reduce government spending. There was no chance the Histadrut would support me or that the employers would agree unless the government acted first.” Peres says economists warned him that if the government cut spending, unemployment would increase and foreign capital would flee. “I decided to go to the United States to ask for economic cover,” he recalls.

He says he met with U.S. Secretary of State George Shultz, who enlisted two economics professors – [the late] Herbert Stein and Stanley Fischer, who was to become governor of the Bank of Israel 20 years later and is now vice chairman of the U.S. Federal Reserve. The two told him they’d had experience of Israel making promises it hadn’t kept. “What I promise, I keep,” Peres recounts telling them, adding that they presented him with a list of 10 demands, all of which he accepted.

They were stunned, Peres says. “There were points such budget cuts, stopping printing money, stopping subsidizing capital, and so on.” Peres says he was certain he would make good on his promises, because if he started making concessions, he would lose all credibility. “It was a clear case of take it or leave it, and then the Americans gave me the safety net – $1.5 billion, in addition to the regular $3 billion in aid.” He encountered resistance among his colleagues in the Alignment (the present-day Labor Party). “As usual, they wanted to get healthy without an operation,” he says.

On the eve of the fateful cabinet meeting over approval of the plan, didn’t the situation give you a stomach ache?

“I don’t have stomach aches, I just have headaches. I knew that if I gave into someone on something, I would need to cut more from something else. There are no games here.”

Why did the meeting in which the budget cuts were decided go on for more than a day?

“Because I decided to cut 100,000 [shekels] from every budget, and all the cabinet ministers nodded yes, cuts were necessary – everywhere but for them. There were also ministers who closed their eyes for a few minutes at the night meeting, and that cost them a bundle. Ultimately, we lowered government spending by 20%. I was the only one who didn’t fall asleep.”

How did you convince Labor Party ministers to agree to the cuts?

“They understood they had no choice. They understood I would resign if the plan didn’t pass.”

You threatened to issue emergency orders for the Histadrut to lower workers’ salaries.

“Right. I threatened – but I didn’t mean it. I don’t think the government needs to issue emergency orders against the Histadrut. There are also tactics involved in such things.”

It actually looked like you were serious.

“If there had been no choice, I would have done it.”

Asked about Likud Housing Minister David Levy’s fiery speech at the cabinet meeting, when Levy warned that everything would collapse and unemployment would rise, Peres says he listened, but that was all. “I was always calculating whether I had a majority. The moment I had a majority, I didn’t waste any time and we voted. I didn’t get upset about David Levy. He made something else possible for me: getting out of Lebanon – not partially but totally. We had a [security] cabinet, half of which was from the Alignment and half from Likud, and Levy gave me the necessary majority for the decision to withdraw.”

How did the media react to your economic plan?

“At first the reporters were hostile, but the public – contrary to my concerns – supported the plan. The stronger and clearer the austerity measures were, so the government’s prestige began to take off, as did mine.” Peres adds that his approval rating reached 80%.

And how was the plan received around the world?

“The plan has become a classic. They came to study it. Argentina tried and didn’t succeed. I didn’t invent the wheel, but there are very few people who have turned theory into practice. The big thing is, we took the harshest aspects of theory and put them into practice. The most important test is the execution – and we did what we promised. We really didn’t print money. We really did eliminate subsidies. We really did cut the budget, and inflation suddenly fell. Not a single dollar fled and, also, there was no unemployment. All the fearmongering was for nothing.”

Peres adds, “And that’s precisely why I don’t trust economists. They have turned the economy into an attribute, into pessimism. The more pessimistic an economist you are, the better you are regarded – and I am exactly the opposite. I can’t be a pessimist; I am always optimistic.”