Start-up Nation

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.

Path to Recovery?

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.