|Photo by: Marc Israel Sellem/The Jerusalem Post|
Netanyahu’s tough challenge
By DANIEL DORON
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
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
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
They curb competition and efficiency so that the productivity
of the capable Israeli worker is only two thirds that of the American
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.
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
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
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
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
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 writer is founder and
director of The Israel Center for Social and Economic Progress and fellow of The
Middle East Forum.