Dan Singer - Start-up Nation

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.

“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.” 18In 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

The second-phase turnaround began after 1990. Up to that point, the economy had a limited capacity to capitalize on the entrepreneurial talent that the culture and the military had inculcated. And further stifling the private sector was the extended period of hyperinflation, which was not addressed until 1985, when then finance minister Shimon Peres led a stabilization plan developed by U.S. Secretary of State George Shultz and IMF economist Stanley Fischer. The plan dramatically cut public debt, limited spending, began privatizations, and reformed the government’s role in the capital markets. But this didn’t yet generate for Israel a private and dynamic entrepreneurial economy.

For the economy to truly take off, it required three additional factors: a new wave of immigration, a new war, and a new venture capital industry.

CHAPTER 7

Immigration

The Google Guys’ Challenge

Immigrants are not averse to starting over. They are, by definition, risk takers. A nation of immigrants is a nation of entrepreneurs.

—GIDI GRINSTEIN

IN 1984 SHLOMO (NEGUSE) MOLLA left his small village in northern Ethiopia with seventeen of his friends, determined to walk to Israel. He was sixteen years old. Macha, the remote village where Molla grew up, had virtually no connection to the modern world—no running water, no electricity, and no phone lines. In addition to the brutal famine that plagued the country, the Ethiopian Jews lived under a repressive anti-Semitic regime, a satellite of the former Soviet Union.

“We always dreamed of coming to Israel,” said Molla, who was raised in a Jewish and Zionist home. He and his friends planned to walk north—from Ethiopia to Sudan, Sudan to Egypt and through the Sinai Desert, and from Sinai to Israel’s southern metropolis, Beersheba; after that, they would continue on to Jerusalem. 1

Molla’s father sold a cow in order to pay a guide two dollars to show the boys the way on the first leg of their journey. They walked barefoot day and night, with few rest stops, trekking through the desert and into the jungle of northern Ethiopia. There they encountered wild tigers and snakes before being held up by a band of muggers, who took their food and money. Yet Molla and his friends continued, walking nearly five hundred miles in one week to Ethiopia’s northern border.

When they crossed into Sudan, they were chased by Sudanese border guards. Molla’s best friend was shot and killed, and the rest of the boys were bound, tortured, and thrown in jail. After ninety- one days, they were released to the Gedaref refugee camp in Sudan, where Molla was approached by a white man who spoke crypti-cally but clearly seemed well-informed. “I know who you are and I know where you want to go,” he told the teenager. “I am here to help.” This was only the second time in Molla’s life that he had seen a white person. The man returned the next day, loaded the boys onto a truck, and drove across the desert for five hours, until they reached a remote airstrip.

There, they were pushed inside an airplane along with hundreds of other Ethiopians. This was part of a secret Israeli government effort; the 1984 airlift mission, called Operation Moses, brought more than eight thousand Ethiopian Jews to Israel. 2Their average age was fourteen. The day after their arrival, they were all given full Israeli citizenship. The New Republic ’s Leon Wieseltier wrote at the time that Operation Moses clarified “a classic meaning of Zionism: there must exist a state for which Jews need no visas.” 3