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for Social & Economic Progress
an independent pro-market
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Winner of the 2005 Award for Institutional Excellence and the 2006 Templeton Award for Student Outreach
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The Wall Street Journal8 Oct ’10
Economic concentration hurts the country’s viability and the chances for peace.
financial markets • reform • peace process
While the world focuses on yet another putative “peace process,” Israel’s internal struggle to break up its concentrated economy receives scant attention. The Bank of Israel’s annual report on the economy published in April included a study showing that “some twenty business groups, nearly all of family nature and structured in a pronounced pyramid form, continue to control a large proportion of public firms (some 25% of firms listed for trading) and about half of market share.” These business groups, the bank warned, show “higher levels of financial leverage#8212;and therefore also of risk,” than stand-alone companies.
Reforming this unproductive economic structure, inherited from the socialists that ruled the country for decades, will have a great impact on Israel’s capacity to initiate peace through economic development. As events in Europe and elsewhere have shown, prosperity can mitigate conflicts and facilitate their resolution. Before the first intifada in 1987, an informal economic peace process had done wonders to reconcile Jews and Arabs.
Given the Israeli economy’s remarkable resilience, some may question the urgency for unraveling these conglomerates. Since a 2005 financial reform liberated Israel from some of its statist rigidities, it has grown by almost 5% annually, despite the world financial crisis. The country boasts more than 3,000 start-ups, more than in all of Europe and almost as many as in the U.S.
But this growth may not be sustainable as long as Israel’s economy remains dominated by about 20 politically connected families that own so much of the country’s traded assets, which they acquired from the government and labor unions in a privatization process with credit provided by the nationalized banks. These cross-sectoral, multi-layered conglomerates have evolved into monopolies that inhibit competition, efficiency, and growth, and choke Israel’s hapless consumers. Israeli citizens#8212;overtaxed and underpaid, and shouldering three years of service in the regular army and a month to 45 days yearly in reserve duty#8212;must also pay monopoly rents of between 20% and 30% on everything they consume, as researchers at Israel’s ministry of finance calculated. All that makes Israelis poorer.
These vertically integrated groups have cross-holdings in both industrial and service companies, and in financial firms. The result is a misallocation of credit to companies owned by these tycoons. Consider that until the 2005 financial market reform, 70% of credit was granted to just 1% of lenders. Meanwhile, Israel’s small and medium-sized businesses#8212;the chief engines of Israel’s economic growth#8212;have been squeezed. Particularly in Israel’s “periphery,” the Negev and the Galilee, smaller firms suffer from a permanent credit crunch.
The largest of these pyramid-style conglomerates is also one of the most powerful and complex. Through his IDB Holdings, Nochi Dankner controls 60 companies through several layers of ownership. Among these companies are Israel’s cement and paper monopolies (Nesher and Hadera Paper), one of Israel’s two largest insurance companies (Clal Insurance), its largest grocery retail chain (Shufersal), its largest cellular-phone operator (Cellcom), one of its largest real-estate groups (PBC), a leading internet company (013 Netvision)#8212;you get the idea. Mr. Dankner controls all these companies, with consolidated assets of $35 billion, through an equity position of around $300 million, or less than 1% of those assets.
Faced with similar pyramidal groups, economists in the Roosevelt Administration in the 1930s convinced the U.S. Congress that this sort of economic concentration causes moral hazard, problems of corporate governance, tax avoidance, and excessive political influence. The U.S. government’s response#8212;effective or not#8212;was to tax intercorporate dividends, exempt the liquidations of controlled subsidiaries from capital gains taxes, and to restrict the ability of business groups to file consolidated returns. Later, in 1957, Congress passed the Bank Holding Company Act to prevent investment companies from controlling banks.
Too big to fail but big enough to dominate, Israel’s large, multi-layered conglomerates have acquired huge political clout, enabling them to obtain monopoly privileges and other benefits worth billions of shekels from the government. And that’s even before considering the fact that as the country’s biggest employer and buyer in the Israeli economy, the government naturally tends to favor big business.
This clout also enables the conglomerates to erect a thicket of entry barriers and keep their would-be competitors out. This lack of rivalry, combined with so-called “progressive” labor laws, have contributed to low per-capita productivity (about half that of the U.S.) and in the dismally low wages of Israeli workers.
Despite his understandable focus on foreign challenges, Prime Minister Benjamin Netanyahu, together with his Finance Minister Yuval Steinitz, has publicly expressed his determination to address this complex problem. Mr. Netanyahu did not flinch from fierce media attacks demanding that he should focus instead on issues like poverty; as if it were not clear that poverty is in large part a result of consumer exploitation by the monopolies.
Reason demands that Israel’s reformers will proceed with their reforms without delay. But reason does not always influence political developments, not even in Israel. Let us hope for the sake of Israel’s future viability, and for the sake of peace, that this time it does.
The Jerusalem Post30 Jun ’15
Israel’s last elections proved how right David Ben-Gurion was when he said that, in Israel, whoever does not believe in miracles is not a realist.
PJ Media20 Jun ’15
The security challenges facing Israel obscure other deep concerns about the viability of Israel’s economic system.
The Jerusalem Post7 Jun ’14
Unless the laggard Israeli economy is reformed soon, its problems—including its morally debilitating corruption—may threaten its future.
Israel Hayom15 May ’14
What does it say about Israeli society and the system of government when a prime minister is convicted of taking bribes?
Israel Hayom23 Feb ’14
What kind of education should it offer and at what cost?
The Jerusalem Post9 Jan ’14
The productivity of Israeli workers is only two-thirds that of Americans, and their salaries are much lower.
The Jerusalem Post11 Jul ’13
As he completes an exceptionally difficult 8-year tour of duty during a worldwide financial crisis, Stanley Fischer has achieved a unique status.
The Weekly Standard7 Jun ’13
When Israel finally discovered a bonanza of natural gas about five years ago everyone was happy. But then fierce arguments broke out—and rightly so.
The Weekly Standard22 Apr ’13
The economic future of Israel now rests in the hands Netanyahu, Lapid and Bennet. will they succeed in fulfilling the most difficult and complex mission of liberating Israel’s economy?
Israel Hayom2 Jan ’13
The Israeli government could eradicate poverty by breaking the monopolies and spurring competition.
The Jerusalem Post7 Dec ’12
Our socialist and statist heritage bred our inefficient system. But foreign aid and remittances were serious enablers. The struggle against political and economic concentration could finally permit Israelis to overcome this destructive heritage.
Israel Hayom8 Nov ’12
The time to prepare the reforms is now, so that after the Israeli elections, the prime minister can immediately devote his time to moving them forward.
The Financial Times21 Jun ’12
Israel Hayom6 Jun ’12
To grapple with the impending crisis, Israel’s government must improve the nation’s competitiveness.
The Jerusalem Post7 May ’12
The Wall Street Journal3 May ’12
Reform-minded Prime Minister Benjamin Netanyahu is stymied by bureaucrats and monopoly tycoons.
Middle East Quarterly30 Mar ’12
As the high hopes for a brave new Middle East fade rapidly, Western policymakers must recognize that promoting market economics and its inevitable cultural changes are far more critical to the region’s well-being than encouraging free elections or resolving the Arab-Israeli conflict.
The Jerusalem Post17 Feb ’12
The choice is between an efficient, growth-inducing market economy or a welfare state, meaning a huge government that actually harms the poor and inhibits prosperity.
The Jerusalem Post25 Oct ’11
Aversion toward the rich has had strong roots in Zionism since its early leaders embraced Marxist practices.
Is capitalism in crisis? Of course.
The Jerusalem Post10 Aug ’11
The tent-dwellers’ revolt calls for the enforcement of ‘the will of the people’ (like all autocrats). It refuses to rely on Democracy.
The Jerusalem Post9 Aug ’11
David Lewis, the exceptional entrepreneur and philanthropist, and head of the Isrotel Group dies at 87
The Jerusalem Post20 Jul ’11
Although MKs appear concerned over rising costs, it was they who allowed this injustice to occur in the first place.
The Jerusalem Post28 Jun ’11
Who is to blame for the shameful situation in which millions of Israeli workers – who earn about half what American workers earn – have to pay double for goods?
The New Republic19 May ’11
A Middle East peace strategy that could actually work.
The Jerusalem Post15 Mar ’11
Israel needs to slash its state budget by as much as possible if it wants a chance at fighting waste and corruption.
The Jerusalem Post9 Mar ’11
Too little attention has been paid to how Egypt’s socialist past and welfare-state present shaped the current rebellion.
The Jerusalem Post7 Feb ’11
The Herzliya Conference has become an important international event, but one central issue is absent: Israel’s debilitating economic concentration.
The Jerusalem Post22 Jan ’11
It’s highly unlikely that government can ever learn to make long-term plans and execute them efficiently.
The Jerusalem Post23 Dec ’10
How can one dare compare narrow-minded religion with the all-embracing faith of universality and equality that is socialism?
The Jerusalem Post1 Dec ’10
Many of the social and economic troubles we are experiencing are due to the public’s lack of understanding of the need for economic literacy.
The Jerusalem Post17 Oct ’10
The PM’s courageous decision to tackle economic concentration was misrepresented by several of our media publications—owned of course by tycoons.
The Jerusalem Post4 Oct ’10
A damaging ethos of ‘welfarism’ and distributive politics has come to dominate not only academia but our cultural, military and even our business elites.
The Jerusalem Post19 Aug ’10
The reformers must know the importance of the reform’s success both for Israel and for their careers, and what damage they will incur if it fails.
The Jerusalem Post13 Jul ’10
Kagan’s admiration for Justice Aharon Barak’s philosophy may have revealed her own predilection for radical judicial activism.
The Jerusalem Post30 May ’10
We must dismantle the oligarch-owned monopolies that impoverish the Israeli consumer and choke our economy.
The Wall Street Journal18 May ’10
The OECD’s invitation to Israel is a “seal of approval” but the country still needs more reforms.
The Jerusalem Post10 Feb ’10
The world’s astonishment at Israel’s response to the Haiti disaster is insulting. What we saw there was Israel’s true face.
The Jerusalem Post10 Jan ’10
Individual initiative and freedom are essential for creativity—in hi-tech as in all other spheres.
The Jerusalem Post14 Oct ’09
As far as Rose Friedman was concerned, public kudos did not matter that much. She persisted in being a rose, no matter what.
The Jerusalem Post22 Sep ’09
Lasting peace must grow from the bottom up, from an “economic peace process” that proves what advantages peace has to offer on a daily basis. It cannot come from signing peace agreements with radical and corrupt entities propped up by corrupting Western handouts.
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