One on One: Market values

ICSEP director Daniel Doron says the country's survival depends on breaking bank duopoly.

March 28, 2007 21:12
One on One: Market values

daniel doron 298.88. (photo credit: Ariel Jerozolimski)

'To talk about the free market in those days," reminisces Daniel Doron about the period, nearly Center for Social and Economic Progress, "was 25 years ago, when he established the Israel like showing a pork chop to the Lubavitcher Rebbe and asking him to eat it." Doron - whose regular columns in these pages and other publications recently won him the first Singer Prize for Quality Economic Journalism from Israel Media Watch - comes by his capitalism curiously. A third-generation sabra, who served in Air Force Intelligence during the War of Independence and studied sociology and economics at the Hebrew University, has the inherent makings of an old-school socialist. But, America left its mark. In 1960, after serving as a special consultant to the US Embassy in Tel Aviv (a function delegated to him by the late Teddy Kollek, who was then the director-general of the Prime Minister's Office), Doron actually took up residence in the US, becoming a fellow at the University of Chicago's Committee on Social Thought, and subsequently - in 1964 - a visiting scholar at Columbia University in New York. In 1973, Doron was among the founders of the Shinui Party, formed by academics and businesspeople disillusioned by the Mapai stronghold in general, and its failures surrounding the Yom Kippur War in particular. But it was in 1983 that Doron returned permanently to Israel - with an American wife in tow - and proceeded to devote all of his time and energy to economic and political reform. Which, for Doron, means minimal government intervention. And which, for his think tank's agenda, means an uphill battle. "Despite the constant, systematic failure of all Israeli governments, people have a mystical belief in government goodness," he explains with frustration. "As if government is not a political entity serving first and foremost the interests of politicians, but a parent, whose sole interest is to protect and benefit the citizen." Doron also bemoans what he considers a major misconception about the economy. "People talk about privatization in Israel, but it never really happened," he asserts, describing today's situation as "our bureaucracy and our oligarchy washing each other's hands" - the source, he says, of rampant corruption. He does acknowledge, however, that his ideas have become far more mainstream in recent years - which he hopes is due largely to his center's efforts... to educate people. There seems to be some confusion about Israel's economy. On the one hand, assessments are that it is blossoming. On the other, there are a growing number of soup kitchens and critics saying that free-market capitalism has failed. But is this a free-market economy? It is easy to gauge whether an economy is free by the diffusion of ownership and by the prevalence of competition. In Israel, on both those scores, the verdict is that we have one of the most concentrated economies in the Western world. We have 16 families owning most of the country's assets; in fact, 40 percent of all assets are owned by two families and two banks. This is unparalleled. Where competition is concerned, Israel is rife with monopolies and restraints on trade, both declared and undeclared. Look at prices here. Compare the price of yoghurt in Israel to that in America. Believe me, the cows in America don't go hungry, and yet the price of yoghurt in America - where salaries on average are double those in Israel - is not as high as the price of yoghurt here. And you have variations in price, of course. How is it that in Israel you have Strauss and Tnuva ostensibly competing, yet their prices are the same? How is it that you have two banks, yet their commissions and fees are identical? By inspiration from the Almighty? Why does a dishwasher cost $1,000 here? Because of trade restraints not so much in the form of taxes on imports, but restraints on who imports and how. Until recently, there were exclusive importers. If you were a car dealer who wanted to import Ford cars that you bought on the second-hand market in Europe for half the price, you couldn't do it. You would have had to be a certified Ford importer. Then why do Israelis think there's a free-market economy? Because Israelis have never experienced a market economy, and we have journalists who want to push a statist and socialist agenda, so they try to discredit the market by blaming it for the socialist distortions of the Israeli economy. They're nostalgic for the halcyon days of Mapai, when everybody was equally miserable, and nobody was worth envying. They also try to defame America by claiming that its market economy is the reason it has many "homeless people," not caring to understand what the problem really is. Still, you can't deny that the economy has completely changed in the last few decades. Indeed, there were great changes made. Foreign exchange has been liberated, and that's already a totally different ball game. Furthermore, there were very dramatic and revolutionary reforms in financial markets. It used to be that you had three people - three people! - deciding on the allocation of credit in Israel. People not worthy of the name of bankers, because the job of a banker is to take the public's savings and turn it into productive investment. Our so-called bankers turned most of the public's savings into loss, by making loans to cronies. Seventy percent of all loans went to 1% of borrowers [the families]. The loss of so much savings is the reason we had a recession for the last 20 years. The perverse allocation of credit only to big businesses is also responsible for the lack of development of Galilee and the Negev that are credit-starved and therefore cannot develop. People talk about privatization in Israel, but it never really happened. What did happen was the selling of government assets to cronies who haven't brought a penny into the process; they paid for their purchases of government assets with loans from government-owned banks. Our bureaucracy and our oligarchy washed each other's hands. Credit was extended by the government-controlled banks to the same group of people - the same families - and they bought up all the "privatized" companies. In return, top government officials, when they retired, got top positions and fantastic salaries in those "privatized" companies. Talk about corruption... A major goal of privatization is the diffusion of power and ownership and the enhancement of competition. That's what Margaret Thatcher did. In Israel, we see a reverse process. Most ownership is concentrated among a few families, who naturally see to it that there won't be any real competition. Can you compare this phenomenon of "our bureaucracy and our oligarchy washing each other's hands" to what is going on in the former Soviet Union today? Yes indeed. It's a very similar process, with the same spread of corruption and penetration of criminal elements. If a government bureaucrat, by the stroke of a pen, can make you a billionaire, naturally you'll want to offer him something so that he'll give the "benefit" to you and not to the other fellow. And, naturally, he'll be tempted to take it. He'd have to be a saint not to. So, what you're saying is that the Israeli public is right to be unhappy with the economy, but for the wrong reasons? Correct. Why is the automatic response to disillusionment with the economy to think that socialism is the solution? It's not called "socialism" any more. It's called "state responsibility" or "society's responsibility." And who represents society? The government, of course. Despite the constant, systematic failure of all Israeli governments, people have a mystical belief in government goodness. As if government is not a political entity serving first and foremost the interests of politicians, but a parent, whose sole interest is to protect and benefit the citizen. It's a rather immature fantasy. This childish worship of government is why many consider private charity as obscene. You saw what happened with all those soup kitchens - how the social lobby was outraged by private groups taking over the function that the government is supposed to be handling. God forbid that people, out of the goodness of their hearts, should help the poor. That's bad [he sneers sarcastically]. Only a government bureaucrat can do it, because he does it so empathically and efficiently. If you stop someone in the street and ask him how the government is functioning, he would probably say it functions badly. Yet, the same person in the same breath is likely to say that the government should be taking on more functions. Is there some kind of collective cognitive dissonance going on? Perhaps this has to do with the fact that for so long we yearned for independence and to have a government. Also because this is a nation that was molded by governments. So it became natural to look at government as a paternalistic organization. People often complain, "Look at that! So and so is acting like a politician." To which I ask, "Tell me, do you expect your butcher to be a vegetarian? How do you expect politicians to act - like saints?" Simply reduce their power, cut the size of government and you will get a better society. Big government and an extensive welfare system always spawn cheating and corruption. In most countries it is taken for granted that you have to watch politicians like hawks and limit their powers, because otherwise - in no time - they'll abuse their power and have their hands in your pocket. Only here, people somehow expect politicians to be saints - to take care of all their needs. Let's talk about the phrase "social gap" - the buzz word used in every mention of the economy. Is it true that the rich are getting richer and the poor getting poorer? Poverty is too serious and excruciating a state to be exploited rhetorically for political means, which it is by our "welfare industry" - you know, all those politicians and apparatchiks who call themselves the "social lobby" and boast about how concerned they are about the poor, yet preserve them in their state of misery. I do not believe that there is serious hunger poverty in Israel. Jews would not tolerate it. There is, however, massive impoverishment. Most Israelis earn about NIS 7,000 per month, and I do not know how they can make ends meet. This is a most serious problem. And precisely because it's so serious, one should finally reject with contempt the manipulation on the part of Bituah Leumi [the National Insurance Institute] and its huge bureaucracy in order to get more and more budget allocations to squander. They are living off the poverty line - a statistical lie. The poverty line means nothing. It's based on a very questionable survey of income that nobody takes seriously. It's based on a relativistic notion of a median income which creates the absurdity that if Bill Gates were to settle in Israel, another say 50,000 Israelis would automatically fall below the poverty line. For years, the Bank of Israel and the Treasury were asked to determine a basket of goods and services that could measure an elementary standard of living. Then, for those who do not have enough for such a basket, you can provide a negative income tax. But the negative income tax is not very popular, because it would do away with the huge welfare bureaucracy. It would be automatic, which means that poor people would no longer be the clients of a paternalistic, exploitative bureaucracy. Can the NII really be abolished? Why not? Take pensions. Do you trust the government to take care of your pension? It's enough that we trusted the Histadrut - and we see what happened there. The pension funds it managed were despoiled - most of them almost went bankrupt - until [Likud leader and former finance minister] Binyamin Netanyahu saved them. Look, when you travel from Tel Aviv to Jerusalem, a big mound suddenly appears on the plain. It's called the Hiriya garbage dump, but it is also a monument to the capabilities of Israeli governments. For 50 years, they've been trying to move this garbage, and they cannot do it. Do you believe that a government bureaucracy that can't even move a mound of garbage can manage your pension? Maybe we need a minimum compulsory insurance. Everybody should have to buy it, and those who cannot afford to do so should have theirs subsidized by government. But the insurance itself should be private, with competition keeping prices down and performance up. You mention the Histadrut and that "we saw what happened." But we also see what happens to public-sector workers when nobody looks out for them. Municipal employees and teachers, for example, weren't paid for months, or their labor agreements weren't upheld, which forced them to go on strike. There is a law in this country against withholding salaries. You don't need the Histadrut to handle that. You need somebody to sue the employers - the municipal heads whose salaries are always guaranteed - and make them pay or go to jail. Make these irresponsible bosses criminally liable, and watch how fast this all straightens out. When Netanyahu was finance minister, he fired a large portion of the public sector. Now what? Fired? No, he couldn't fire anyone. He cut their number by attrition, by not hiring new employees. Three percent of the public sector retires every year, and usually more than 3% are hired. He stopped that. Did it make a difference? Oh yes. Three percent is quite a bit. Even people who are not his fans seem to grudgingly attribute the strengthening of the economy to him. Did he really strengthen the economy? Can a single finance minister make a difference? Whether you like him or not, he is the greatest economic reformer Israel has ever had. This is a man who saved Israel from a terrible Argentina-like collapse. Can anybody imagine what such a collapse would mean? Because of the continued recession, firms could not repay bank loans. Banks couldn't extend credit, which means more and more enterprises would have no turnover money. They would have to close down. This would cause more defaults on loans and bank bankruptcy. A bank that folds creates a domino effect in the banking system and it collapses. People cannot get cash from ATM machines. People lose all their savings. Factories close. Many are unemployed. They go hungry because the government doesn't collect taxes to pay them unemployment benefits. And Israel was on the verge of this situation? A step away from it. And Netanyahu courageously prevented it. Credit must also be given to the American government for extending conditional loan guarantees. Why did Israel need loans? Because the government couldn't pay its bills. The government, the biggest purchaser in the economy, wasn't paying its suppliers, or was paying them a year in arrears. This started a process of faster contraction in the economy. On top of that, the government didn't have two months' worth of money to pay salaries. And, remember, the government and the public sector employ every third worker. Which means that every third worker in Israel wouldn't have received his salary. Not a few thousand in the municipalities. But hundreds of thousands of people. So much for the big lie - perpetrated by some in the media - that Netanyahu was hurting the poor. If he had wanted to screw the poor, he would have done what his predecessors did. What did they do? They preserved all benefits. And since the government couldn't finance this, it printed money. This caused inflation, which meant that NIS 2,000 in benefits was worth less than NIS 1,000 in terms of purchasing power. Netanyahu refused to cheat the poor, and by making effective cuts, he saved them - knowingly paying a high political price. The other lie perpetrated by a number of commentators is that Netanyahu is for the rich. But who, actually, is the biggest supporter of the rich? The bank duopoly. Through the banks, which don't pay real interest on our savings, the rich manage to bilk hundreds of billions of shekels from the public. There is something called a financial spread: the difference between the interest the bank pays you on your savings and the interest it charges you on your loans. In Israel, it's twice that of America for small clients. In other words, middle Israel is not getting paid true interest on its savings, and it subsidizes cheap loans for the rich. This is a huge amount of money. This is the where the real robbery takes place in terms of social welfare in this country. But I haven't heard a single complaint about it from the social lobbyists, even after it was pointed out to them. They refuse to take on the banks, because parties and politicians are financed by bank loans, and welfare advocates get contributions. Who will take on the banks then? Competition will. Privatizing the Postal Bank and establishing an Internet bank could create real competition. But past bank comptrollers have been dragging their feet and not permitting it. Now, under [Bank of Israel] Governor Stanley Fischer, competition will finally be encouraged, I'm sure. Opponents of privatization always say that privatization and competition will result in thousands of people losing their jobs and salaries going down. "There'll be cut-throat competition," they scream. But consider what happened when competition finally broke the Bezeq monopoly. The telecommunication sector has undergone partial privatization, but even halfway competition works wonders. Once, only 300,000 rich or protektzia-blessed people had cellphones in Israel; now there are six million cellphones. Because once you had competition, prices went down and demand increased. More people had to be employed and paid better salaries, because the greater the need for workers, the more they are paid. This is another thing Israelis don't understand. The wages of labor are a function of supply and demand, not of the size of the mustache of a union leader. Speaking of supply and demand, can Israeli companies really succeed, with such a small consumer population? And can they really compete internationally? Of course. The size of your enterprise is determined by the size of the international market you serve, not the size of your country. Look at Hong Kong and Singapore - both small. Israelis are great competitors when given half a chance, and not only in hi-tech. Look at the wine and cheese and jewelry industries, to name but a few. Is Israel's system of government in any way responsible for the problems you describe? I was one of the founders of Shinui, because I believed then that the problem was the electoral system. But when we devised in Shinui the perfect electoral system for our internal elections, two minor factions broke the code and won. So, every electoral system can be manipulated. There is no such thing as a perfect system. What you need is a small government that nobody will want to corrupt - a government that stays out of the economy the way it should stay out of religion. When you first returned to Israel in the early '80s, your ideas weren't taken seriously. Now they're considered mainstream. What changed? Not taken seriously? In those days, to talk about the free market was like showing a pork chop to the Lubavitcher Rebbe and asking him to eat it. Our center's efforts over the last 25 years to educate people had a lot to do with the change, I believe, but let others judge. Maybe this is all an issue of Israel's coming of age. Yes, and I wouldn't worry about the time it takes - except for one thing: For Israel, economic reform is not only about a better standard of living; it's about survival. We will not be able to keep our young here at a salary of NIS 7,000. They are too good, and many will leave. The future of the country is in their hands. Furthermore, even if next week Yossi Beilin delivers a peace agreement signed by all the factions of global jihad, it will have to be an armed peace, if we don't want to commit suicide. Since the United States is not about to significantly increase military aid, the need for Israel to raise its GNP to finance its growing defense costs is a prime national task. So economic reform in Israel is about survival, and we must never forget it.

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