Expert urges more, faster reforms for long-term growth

Finance Ministry must implement additional privatizations to ensure strong domestic market, says Prof. Glenn Yago.

The Finance Ministry must implement additional reforms and privatizations that will be felt immediately and not content itself with the reforms carried out to date to ensure a strong domestic market in the long-term, according to Milken Institute Professor and Senior Koret Fund Fellow Glenn Yago. "If Israel is to attract the foreign and local investment required for long-term economic growth and independence, the government must recognize that the reforms of 2005 will be slow to implement, and that immediate measures are not only possible but necessary or Israel risks falling further behind its competitors," Yago wrote in a study circulated at a recent conference on economic development, which he chaired, titled "Economic Development of the Galilee - Small businesses as an economic engine." The Acre conference was hosted jointly by the Koret Israel Economic Development Funds and the Western Galilee College in late October. Yago stressed that Israel should work to expand the value of its stock market by carrying out privatizations through public stock issues on the Tel Aviv bourse, and not by selling state assets to large single parties, which he warned "have a one-time positive impact upon the government budget [through revenues from the sale], but little long-term effect upon economic efficiencies and growth." Increasing the number and quality of new stock listings by issuing state stock for public trading, on the other hand, would "encourage a deeper capital market and facilitate both local and foreign investment to bridge the growth gap," he said. Yago argued that while Israel has been an "attractive advanced emerging market and has delivered excellent long-term performance for investors," failing to increase the size of the country's market capitalization would keep the bourse small and limit its effectiveness as a source for corporate finance, especially for smaller, second-tier entrepreneurial firms. "Dynamic global equity markets mean that Israel's relative weight in emerging market indexed funds ... will decline unless corrective capital market and financial policy measures are taken immediately," Yago stressed. "The role of global competition from other countries in these indexes (e.g., Russia, Taiwan, Korea, China) suggests that Israel's visibility problems to foreign investors will be compromised without immediate policy interventions to increase the viability of capital markets as a broader source of growth capital," he added. Furthermore, the Tel Aviv Stock Exchange's "extraordinarily low" turnover - with the volume traded equalling only about one-third of the total market capitalization, as opposed to 106.6% in London or 280.7% on NASDAQ - as a result of over-concentration and the "closely held nature of public company ownership" is also hurting the market's efficiency and competitiveness in attracting foreign investment, which is in turn stunting aggregate economic growth, Yago said. Failure to increase the liquidity of the market and deconcentrate stocks increases the risk of Israel becoming more of a "banana republic" in which more companies list abroad and eventually move abroad altogether, he said. Yago also lamented the tendency of Israeli companies to make initial public offerings on foreign stock exchanges like NASDAQ and London's AIM bourse as a "negative indication that these young and small [research and development] companies are not attracted to list primarily or even dual-list on the Tel Aviv Stock Exchange," even though he called these issuings a source of accomplishment. Israeli companies who list abroad should be required to list domestically, as well, he said, noting that doing so, alongside incentives to broaden popular ownership of stock through increased management and employee participation and options, as well as encouraging smaller cap listings, encourage smaller companies to list on the bourse. Of the 660 companies listed abroad, only 57 also are listed in Tel Aviv, while many major Israeli companies fail to list in the local market. "[Changes to make the Tel Aviv bourse more attractive for local companies are] necessary in order for the local capital market to become an effective engine of economic growth," Yago concluded.