The Israel Center
for Social & Economic Progress
an independent pro-market
public policy think tank since 1984
Winner of the 2005 Award for Institutional Excellence and the 2006 Templeton Award for Student Outreach
Log in or Register
The Jerusalem Post7 May ’12
financial markets • reform
With the Knesset disbanding, it is hard to imagine them pushing a reform that the tycoons and their powerful lobbyists are bound to resist.
The decision to hold elections in September does not leave much time for Netanyahu to implement the vital recommendation of the anti-concentration commission he endorsed. With the Knesset disbanding and its members busy electioneering it is hard to imagine them pushing a reform that the tycoons and their powerful lobbyists are bound to resist with all their considerable might.
With a small population of about seven-and-a-half million people, Israel has an extraordinary concentration of human capital and more start-ups than all of Europe. It should be one of the richest countries in the world. But Israel is also a model of the problems afflicting all distributive democracies, especially those with socialist pasts. Socialism’s legacy and a phony privatization program that consisted of selling former government and labor union assets to cronies, left behind in Israel a strong statist system, an extensive entitlement system and an unholy alliance between powerful political elites, crony tycoons and monopoly labor unions that impoverish the country.
These groups wield an extraordinary concentration of political and economic power. Government bureaucracies make the cost of doing business in Israel forbidding while the tycoons’ monopolies exact huge monopoly rents, doubling or even tripling prices of most consumer goods and services.
They curb competition and efficiency so that the productivity of the capable Israeli worker is only two thirds that of the American worker.
Low salaries of about $2,400 a month on average, and prices that are higher than in New York City make it impossible for hundreds of thousands of Israeli families to make ends meet.
Unfortunately Netanyahu’s appointed “anti-concentration” commission was chiefly composed of regulators who failed in the past to curb concentration, and of academicians who were denying the problem since it did not neatly fit their mathematical models.
Consequently, despite the recommendations of Prof. Lucian Babchuk, the world renown expert, they did not forbid, as the US does, pyramid-structured holding companies in which owners control third-tier subsidiaries with only 16 percent of capital (the rest being provided by pension funds with no voice in management). Rather, they allowed existing pyramids to keep their three-tier structure but limited new ones to only two tiers. They did call, however, for improvements in the governance of these businesses in the not-so-realistic hope that this way they could protect the public’s investment.
They also called for a separation of ownership between non-financial and financial firms, although they fixed too high a threshold for such a separation. Still, even their tepid recommendations could do much to improve Israeli credit allocation and competitiveness.
Netanyahu’s government subsequently appointed a legal group to legislate their implementation.
Again, this group is composed mostly of regulators who are half-hearted about the reform. Since the recommendations will also face a tough battle in the Knesset where the tycoons and their powerful lobbyists will do their best to annul or erode them, it is not clear how effectively the reform will be implemented.
THE PROBLEM of rapacious elites blocking progress is of course neither new nor unique to Israel. Elites manage to secure for themselves privileges that erect entry barriers to new enterprises, curb competition and efficiency and lower productivity. They create wide income gaps with negative social and political consequences.
Recently, in Why Nations Fail, Daron Acemoglu and James Robinson defined the power of what they described as “inclusive” political institutions as opposed to “extractive” ones to determine a country’s sustained economic growth. Generally impoverished Islamic countries are extreme examples of the ravages caused by such “extractive” elites.
In Israel, “the existence of small, concentrated elites of politicians and tycoons wields enormous power and control monopolies, cartels and privileges creating a tough economic problem. It not only increases the already high cost of living and reduces political equality but also inhibits growth and economic development,” lamented Guy Rolnik, editor of The Marker, Israel’s foremost business publication.
Israel recently celebrated its 64th birthday. It has had to fight seven wars and two revolts, face the militant animosity of hundreds of millions of Muslims and has received little empathy from the rest of the world. It has absorbed five times the number of its original population, including close to a million-and-a-half Jews who were expelled from Arab countries with only the shirts on their backs, over a million from the former Soviet Union, and close to a million from impoverished cultures such as South America or Ethiopia. It is not surprising that the struggle against its powerful statist heritage was not a top priority.
Netanyahu, who has been facing the tough challenges from a nuclear-armed Iran, from a less than friendly American administration and from a nearly ungovernable Israeli political system, has nevertheless seized several opportunities to boldly reform Israel’s anti-productive economic, and especially financial system, with spectacular results: five years of high growth.
With elections coming up in September, he will have to overcome the lack of zeal and the inertia of his own bureaucracy and the resistance of several of his own coalition’s members who are pressured by powerful vested interests. Still because of the coming elections few Knesset members will dare oppose his reforms. So this is Netanyahu’s historic chance to convene a special Knesset session before the elections and institute some of the reforms he deems so vital. We are confident he will not miss it.
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 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 Wall Street Journal8 Oct ’10
Economic concentration hurts the country’s viability and the chances for peace.
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.
Recognized by the IRS as a charitable organization pursuant to Section 501(c)(3) of the Internal Revenue Code.
Tax ID # 13-3129249
Copyright © 2001-2017
The Israel Center for Social & Economic Progress
“Where there is no bread,
there is no Torah.”
Pirkei Avot (Ethics of the Fathers)
Contributions made out to Friends of ICSEP can be mailed to:
Fox Associates, 100 Front St., West Conshohocken, PA 19428, USA