All in the (Economic) Family

By Sam Siegel
Friday, October 15, 2010

"PM Orders Panel to Attack Economic Concentration," read the headline of a news story in the October 14 Haaretz. The high-level body, appointed by Israel's Prime Minister Benjamin Netanyahu, is tasked with proposing legislation to increase competition, restrict "large-scale pyramid-type holdings in public companies," and take other steps to improve stability and efficiency in the country's economy. Some worry that the move will fail, or that the hour is already too late. And thereby hangs a tale. 

Throughout its 62-year history, Israel and free-market capitalism have been uncomfortable bedfellows.  Though socialism per se never fully took hold in the country, the government long held dominance over the economy, with state-owned industries monopolizing key sectors and high tax rates imposed on entrepreneurs.  Socialist values, in the form of a ritualized disdain for the free market, permeated intellectual and cultural discourse; to the Hebrew-reading public, the ideas (and even the names) of Friedrich Hayek and Milton Friedman remained essentially unknown.

Only in the 1980s did stagnation and hyperinflation prompt a halting move toward liberalization and the initial steps in Israel's subsequent march to economic prosperity.

The past five years have been especially dynamic, thanks in large part to 2005 reforms, shepherded by then-Finance Minister Netanyahu, aimed at liberalizing the banking sector and capital markets. The results were celebrated in last year's best-selling Start-Up Nation, which painted a picture of a vibrant economy that welcomes and rewards entrepreneurship. This year, Israel was invited to join the OECD. The country has also weathered the global financial crisis better than most other Western nations, with Israeli investors even repatriating capital from elsewhere in a reverse flight to safety.

Yet, for all of its recent dynamism, the Israeli economy faces a very big problem:  a heavy concentration of wealth in a tiny slice of the population. Due to an ineffectual antitrust and regulatory framework, companies dominating large industries have expanded and absorbed the competition, to the point where many have developed into de-facto monopolies.  To make matters worse, the monopolies are owned by a very small number of individuals and families.  As a result, the Jewish state—home to the kibbutz movement and the Left-dominated Labor party—has essentially developed an impermeable economic oligarchy: the bane of free marketeers and socialists alike.

Just how stratified is the Israeli economy?  An unlikely combination of sources has been enabling us to find out. One is the Bank of Israel, the equivalent of America's Federal Reserve. Now headed by Stanley Fischer, a former IMF and World Bank economist (and Ben Bernanke's dissertation adviser at MIT), the Bank has devoted parts of its most recent annual report to the risks posed by a concentrated economic system. Netanyahu has repeatedly emphasized his own eagerness to address and resolve the issue: "I want the tycoons to profit," Netanyahu said at a business conference in June, "but with competition." The sentiment has been resoundingly endorsed by the otherwise reliably left-wing newspaper Haaretz, which is also the majority owner of TheMarker.com, Israel's leading business and technology website.

According to the Bank of Israel report, twenty families in Israel control roughly one quarter of the firms on the Tel Aviv Stock Exchange and half of the market share.  These families—they include such Forbes 400 names as Nochi Dankner, Yitzhak Tshuva, Shari Arison, Lev Leviev, and Sammy Ofer—own or direct large corporations in major industries like banking, insurance, telecommunications, and real estate. In this respect, the report notes with asperity, Israel resembles a developing country more than a developed one.

A July 21 story in Haaretz supplied further details: in the early 1990's, Israel had 25 major banks and 25 major insurance companies.  Today, through consolidation, the respective numbers have been whittled to seven and ten.  The cell-phone industry, with three main servicers, and the power industry, with essentially one, offer two more examples of family or individual ownership that has pushed aside or swallowed the competition.

The matter of greatest concern, as the Bank of Israel noted in its report, is the huge systemic risk created by the high leverage made possible by cozy relations between banks and their largest borrowers, together with the pervasive lack of transparency. If unchecked, the situation could reach a point where Israel is one family feud or bank failure away from a catastrophic economic implosion.  

From one perspective, it is remarkable that, even with these anti-competitive conditions in place, the Israeli economy has been capable of such impressive growth—another confirming sign of just how enterprising Israelis are as a people, and how much more enterprising they could yet become.  With Netanyahu in charge of the government, and the global financial crisis acting as a catalyst, now would seem the best moment to institute new transparency measures, risk-management rules, and walls between certain types of companies and financial institutions. 

Yet the governing coalition is fragmented, and the country is distracted by major external threats—and the oligarchs constitute a powerfully tough nut to crack. The appointment of the new committee is a positive sign, but whether sweeping reforms are likely any time soon remains an open question; one can only hope they will not be put off until it has indeed become too late.

Sam Siegel, a recent graduate of Princeton University, has written about politics and public policy for Commentary and FrumForum.


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