“Reform in Israel”

The Financial Times
21 Jun ’12

A dynamic economy requires action against concentration and a separation of banks from non-banks.

A business oligarchy is not the same as a market economy.

Filed under:

fundamentals • reform

Concentrated ownership of business is common, particularly in emerging countries. The consequences are malign. This is why the effort to break up the oligarchies dominating the Israeli economy is important. A bill now going to the Knesset, Israel’s parliament, would, if amended, bring great benefit to Israel and should be of interest elsewhere.

Israel is celebrated for the dynamism of its high-tech industry. But another side exists to its economy. Using pyramidal ownership structures, fewer than 20 Israeli families control conglomerates incorporating half the value of Israel’s stock market. The result is monopoly power. This chokes competition. It also creates corrupting relationships among business, politicians, bureaucrats and the media. The connections between money and politics taint democracy, reinforce inequality and undermine the legitimacy of the market economy.

Perhaps the most dangerous aspect of all is the combination of financial institutions with non-financial businesses. To its credit, the respected Bank of Israel brought attention to the dangers posed by these linkages. The latter undermine competition: it will be in the interest of the groups to starve competitors of credit. They are dangerous for the allocation of credit: the stranglehold over finance has led to dreadful investments, notably in foreign real estate. Above all, such cross-holdings cause a conflict between prudent management of banks and the interests of connected borrowers.

Last Sunday, the cabinet approved a draft law on concentration. This makes progress, not least by limiting cross-holdings between banks and non-banks. Yet, alas, this proposed bill is inadequate in three important respects.

First, the tycoons will get six years, instead of the initially proposed four, to adjust their conglomerates: that is an eternity. Second, pyramidal ownership would, in future, be limited to two tiers, but no action is to be taken against existing three-tier pyramids. Finally, no action is to be taken against conglomerate ownership of the media, which gives their owners inordinate power to protect their commercial interests.

The Knesset should toughen the bill. If it does, other countries should take note: a dynamic economy requires action against concentration and, above all, a separation of banks from non-banks. A business oligarchy is not the same as a market economy. Confusing two such different things is lethal for a country’s political and economic health.

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