Economics: Taking baby steps

Experts say government’s Committee on Market Competitiveness, which published interim findings this week, is step in the right direction.

By NADAV SHEMER
September 23, 2011 16:22
Binyamin Netanyahu and Stanley Fischer

Netanyahu and Fischer. (photo credit: Tal Cohen/ Pool)

It might be a typical example of Israeli skepticism. Or proof that the people expect more of their government now that the cost of living sits atop the national agenda. But regardless, the expert consensus is that the Committee on Market Competitiveness’s recommendations do not go far enough in tackling the power of the country’s business tycoons.

Since the release of the committee’s interim findings on Monday, national news and business dailies have been filled with criticism. Experts have argued that the committee omitted some issues altogether and that its suggested changes would do nothing to ease the economic burden on the Israeli public.

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“I think they went in the right direction, but they didn’t do enough through fear that they would go overboard,” Prof. Yaron Zelekha, director of the Ono Academic College MBA program, told The Jerusalem Post the day after the committee released its findings.

“But their fears were not necessary,” he continued, as “experience shows that reforms and expansion of competition in Israel could never go far enough and would always be too weak.”

Like many of his peers, Zelekha said the committee should be commended for the issues it did address, but added that its findings will only be sufficient if they are the beginning – rather than the end – of a process of breaking the stranglehold held on the market by a small minority of businesspeople.

Zelekha gave the example of the separation of financial and non-financial holdings, one of the key issues addressed in the committee’s report. The committee advocated prohibiting control of financial institutions by large non-financial corporations or by companies that control large non-financial corporations. It defined “large financial corporations” as companies with more than NIS 50 billion in assets under management, and “large non-financials” as companies with more than NIS 8 billion in sales.

“They should have gone all the way. You want to manage other people’s money? Then you can’t hold on to your non-financial corporations. It’s very simple,” Zelekha said, adding that the conflict of interest here is akin to that of a person holding on to his business interests while in public office.

“If I were the accountant-general, would they allow me to be the CEO of Shikun & Binui [real estate group]?” Zelekha, himself a former Finance Ministry accountant-general, asked.

In his opinion, there were several other major issues that the committee either did not address sufficiently or ignored altogether.

Firstly, he said, pyramid structures in holding companies should be outlawed altogether, rather than dealt with through the tools of corporate governance as suggested by the committee.

Then there are the private monopolies, which “are also part of the fabric of concentration in Israel,” and which Zelekha said should have been forced to comply with the Securities Law as if they were public companies.

The committee could also have gone further than just separating financial and non-financial holdings, and dealt with the problem of media cross-ownership as well, he said.

But more than all of this, Zelekha said he was most bothered by the fact that the government publishes recommendations to tackle market concentration on the one hand, while simultaneously turning a blind eye to increasing monopolization in all industries.

“Only a few days ago, Azrieli Group bought another mall in Bat Yam and the government didn’t say a word. Where is the government? Does it really want to weaken monopolistic concentration? Because in practice it is allowing them to strengthen right now. It’s a scandal,” Zelekha said.

The monopolization of shopping malls is one of the biggest problems facing small and medium businesses, he added. “Only those who have a store in a shopping mall know what I’m talking about.”

From a legal perspective, too, the committee met with plenty of criticism. Michal Rothschild, a specialist in antitrust and competition law at Tel Aviv-based law firm Erdinast, Ben Nathan and Co., said the recommendations “make things more complicated than before” and that instead of dealing with the law, it only adds ways to enforce it.

The increase of the Israel Antitrust Authority’s powers, a key recommendation made by the committee, is just one example of this, she said.

“Expansion of the director-general’s powers of enforcement, on the one hand, without focusing on and improving the structure of the law itself… is problematic. Instead of dealing with the law itself, they have given more power to the director-general to enforce a law that everyone says is flawed.

“This was the time to decide what is important…and how to make [the law] relevant to the year 2011 and to the current economic circumstances, rather than to the circumstances of 25 years ago.”

Rothschild added that the committee “needed to draw the distinction between criminal and non-criminal activity and to manufacture a real deterrent,” but instead “they threw around slogans but weren’t concerned about how it would all look in practice, how it would look the following day.”

Drawing on her own experience, Rothschild, a former lawyer of the Antitrust Authority, said: “The law is not focused and therefore the authority’s activities, to a degree, have been dictated by the scope of the law. There has always been a feeling that [the authority] deals with too many different issues.

“It’s important to remember that the authority isn’t a regulator that is supposed to solve problems of competition. I don’t think the authority has ever requested such a role,” she said, adding that it was the responsibility of the government to deal with such matters.

The government has placed a lot of importance on the role of this committee. Prime Minister Binyamin Netanyahu said at the release of its proposals that it would help address the high cost of living. Finance Minister Yuval Steinitz has said it forms one of a triad of committees that would change society for the better, the others being the Trajtenberg Committee on the cost of living and the Sheshinski Committee on the distribution of natural gas and oil revenue.

Prof. Meir Chet, an expert on competition law at Rishon Lezion’s College of Management and a former Bank of Israel banks supervisor, called the committee’s findings “a step in the right direction.” He said Israel stood well behind developed economies like the United States in separating control of financial and non-financial holdings, although he pointed out that Israel is a much smaller market and that it is therefore more difficult to protect against market concentration.

Nonetheless, he said, “It is obvious that what we have here isn’t healthy. When Zim, IDB or Delek Group have control of large financial corporations as well, it is not just that they manufacture a great deal of power, but it also creates discrimination against those who do not have the means.”


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