Is 'social privatization' a solution for poverty in Israel?

Academics divided on radical proposal by country's richest lawyer, Shraga Biran.

By DAVID WAINER
Shraga Biran 88 224 (photo credit: Courtesy)
Shraga Biran 88 224
(photo credit: Courtesy)
Before the side effects of the US subprime bust began to be felt throughout global markets, the Israeli economy had never been as strong. In 2007, the economy grew at a 5.7 percent rate, out-pacing the Organization for Economic Cooperation and Development (OECD) average of 2.7%. GDP per capita in Israel rose in 2007 by 3.4%, reaching an all-time high. This year, the Bank of Israel expects the economy to grow by 3.3%-4.4%. But not all of the country's citizens have been reaping the benefits of such robust growth. According to the National Insurance Institute, one out of three Israeli children lives under the poverty line. As of 2007, Israel ranked second among developed nations in the table of inequality between rich and poor, trailing only the United States. In addition, since the 1980s, child poverty has grown about 50%. Shraga Biran, a shekel-billionaire and the country's richest lawyer, claims to have the solution for poverty in this country. His new book, In Praise of Opportunism, published in Hebrew, promotes what he calls a "social privatization" process that would transfer billions of dollars in government holdings to the general public. "I believe in social privatization," Biran said in an interview with The Jerusalem Post. "It means you are taking ownership of property from the government and putting it in private hands - to the public at large. Imagine if you could enlarge public wealth by distributing around $500 billion still in government hands." The implementation of "social privatization," Biran explained, would entail transferring stock ownership of government-controlled companies directly to its citizens. "Take Bank Hapoalim, for example. I would grant stock ownership to citizens rather than settling for a sale to the highest bidder," he said. Last Wednesday at the Hebrew University of Jerusalem, a conference entitled "Privatization and Society in Israel" convened some top-notch Israeli academics to discuss the subject matter of Biran's new book. While most of the experts lauded Biran's efforts to put "social privatization" on the map of academic and public policy circles, a wide array of opinions imparted both criticism and support for his proposal. According to Prof. Eitan Sheshinski, a member of HU's economics department and a participant at the conference, "Social privatization" can be a dangerous economic maneuver because it doesn't allow the free market to determine the asset's destiny. " The closest thing to social privatization took place after the fall of the Soviet Union within the emerging post-Soviet states. They tried to privatize certain state assets through voucher-based ownership... Even though it was planned by top-notch Western economists, privatization didn't work efficiently there because the market wasn't strong enough." Sheshinski's point is that corruption and crafty profit-seekers would still arise if measures toward "social privatization" were to be taken. During the '90s in Russia, for example, a form of "social privatization" was used as president Boris Yeltsin's government distributed free vouchers to the public to create wide political support for his reforms. But the attempt allowed intermediaries to buy those shares immediately in cash, thereby stripping the public of its ownership off-the-bat. Another conference participant, Prof. Haim Zandberg, a law professor at Michlala Leminhal, said it was important to discuss the subject of "social privatization." "Although 'social privatization' is problematic, it can work," he said. "The book has the potential to make an important impact on public policy. Academia isn't talking enough about privatization. Among the general public, its not a favorite topic either... But it's an important approach to examine." To understand Biran's plea for social privatization, it is imperative to have a general grasp of past privatization in Israel. Before the '80s, Israel's public sector exerted a lot more control than at present, through the government and its unions. Within the public sector, the government controlled electricity, telecommunications and all public infrastructure. The Histadrut, through its economic arm, Hevrat Haovdim, owned the country's largest industrial conglomerates and the country's largest bank, Bank Hapoalim. There was also, of course, Israel's private sector, which was not nearly as stalwart as it is today. At the time, Mapai (Labor Party) and the Histadrut controlled vast elements of the Israeli economy. After the inflation crisis of 1985, and especially after the Likud came to power, rampant privatization began to take place. Koor Industries, Israel's largest industrial conglomerate owned by the Histadrut, was privatized and is now owned by foreign investors and Israeli banks. Although the Histadrut still provides a comprehensive health care system and has the power to shut down the country, its role and size declined tremendously since the '80s. In the '90s, prime minister Binyamin Netanyahu began to promote further privatization of the public sector and executed his plan in this decade during his term as finance minister. Netanyahu's push for the privatization of major companies such as Bezeq and El Al further liberalized the local markets. The move was applauded by many as instrumental in restoring the economy during the outbreak of Palestinian terrorist attacks. But Biran said much of the privatization that occurred following the 1985 inflation crisis was not to be applauded. "This was a very sad episode in Israel's history because it took power from the hands of the people and put it in the hands of a few," he said. "The privatization that occurred in the 1980s was very elitist. The property that belonged to the government was sold to the highest bidder basically, so only those who had the money to acquire, participated in the process." Instead, when privatizing government wealth, shares of government-controlled property should be granted to the citizens, Biran said. Zandberg said Biran's book contained valuable social commentary. "While the book doesn't give a clear-cut prescription on how to actually materialize 'social privatization,' he said, "it delineates many theoretical views on division of wealth and criticizes the accumulation of wealth in Israel through privatization." According to Reem Segev, a law professor at HU, "social privatization" is not a sufficient remedy for poverty. "The extensive social problems will not disappear after 'social privatization.' Biran's argument that government wealth needs to be redistributed while private assets are off-limits is problematic. There's no such thing as complete protection from government. Taxes, for example, are a way in which private wealth is taken by the government." Some might find it surprising that a panel of academics came together to discuss the work of a non-academic, albeit a wealthy lawyer and businessman. But Biran is known as one of the country's most aggressive real estate lawyers. He has a reputation for acquiring property and construction rights for massive development projects in controversial areas. In the '70s, during a period of rapid expansion in Jerusalem, he was able to clear construction rights for new neighborhoods to be built in the area that is today Pisgat Ze'ev. A Holocaust survivor as a child, Biran immigrated to Palestine and served in the army during the War of Independence. As a young man he joined Kibbutz Mesilot but was expelled after affiliating with the Israeli Communist Party. Biran said his disenchantment with Communism occurred when he began to witness inefficiency and corruption within bureaucracy during his adulthood. A passionate speaker, Biran is emphatic about his raison d'être, which he defines as "opportunism." In his book, Biran makes the case for opportunism as the only way to transition the masses from "dead" philosophies of religion and populist demagoguery, to an era of creativity and individualism. And his solution to create better opportunities for all citizens is one that he says is a compromise between the Left and the Right. "'Social Privatization' adds to the general welfare, which is what the Left claims to want, while further privatizing government holdings is a demand of the Right," Biran said. But Avia Spivak, a professor of economics at Ben-Gurion University of the Negev and a former deputy governor of the Bank of Israel, said it was not so simple. "When there's an opportunity, there are always those who see it and come on top, and those who don't. Take the Microsoft case, for example," Spivak said, referring to early allegations that the software developed for the highly successful Windows operating system was based on models of competitors. "A lot of the people who were involved in the development process never saw a penny. The real problem is getting everyone in the same playing field."