Editorial: Promoting competition

While it is important to respect private business interests and limit government intervention, there are times when market failures need to be righted for the benefit of economic stability.

stanley fischer binyamin netanyahu bff 311 (photo credit: AP)
stanley fischer binyamin netanyahu bff 311
(photo credit: AP)
This week, Prime Minister Binyamin Netanyahu is slated to hold a special meeting with leading economic officials, including Bank of Israel Governor Stanley Fischer and Finance Minister Yuval Steinitz, to think of ways of reducing concentration in the Israeli economy and increasing competition.
“Some 20 business groups, nearly all of family nature and structured in a pronounced pyramid form, continue to control a large proportion of public firms (some 25 percent of firms listed for trading) and about half of market share,” wrote Bank of Israel economists in the central bank’s annual report, issued in April.
Families like Ofer, Arison and Tshuva own large swathes of our economy, from banks and construction firms to insurance companies and retail chains. Nochi Dankner, who split off from a family that made its fortune in the salt industry, now controls a vast array of about 60 companies. Nearly all Israelis are touched by this array, whether they use mobile phones provided by the largest cellular operator, Cellcom; shop at the largest supermarket chain, Shufersal; invest in mutual funds offered by Clal Finance; or are insured by Clal Insurance, one of the two largest insurance firms. They might also receive Internet service from 013 Netvision, live in a house built with concrete supplied by Nesher, which controls 90% of the market, and use paper towels or tissues produced by Hadera Paper.
Dankner, Tshuva and others who have proven to possess exceptional business acumen are entitled to improve their lot through entrepreneurship. However, our highly concentrated economy is also the result of an improperly supervised privatization process that put an end to decades of socialism but hastily handed over control of state-run firms to a small group of businessmen.
THIS CONCENTRATION can cause instability in times of crisis. Fischer and Bank of Israel economists have used the term “latent potential for systemic risk” to describe a scenario in which the collapse of one financial corporation cascades into a general economic meltdown. When Tshuva’s Phoenix Holdings raises money for his car import business, or Dankner’s Clal Finance extends credit to his supermarket chain, this creates the potential for one company’s failure to trigger a domino effect. And there is a temptation to misallocate unjustified credit to companies that belong to the conglomerate, further increasing risks.
Also, family businesses can be affected by complicated interpersonal relationships. Managerial appointments can be made for reasons other than merit.
More importantly, cross-sectoral, multi-layered conglomerates wield enormous clout. According to Bloomberg News, when importers wanted to buy cement from Turkey to compete with Dankner’s Nesher Israel Cement Enterprises, then-industry, trade and labor minister Ehud Olmert levied duties of almost $6 a ton on the imports, claiming that otherwise the cement would be dumped at rock-bottom prices.
Admittedly, the level of concentration in the Israeli economy is similar to that of other emerging markets such as Indonesia, Thailand, Korea and Hong Kong.
As Fischer put it, “in a small economy, there’s always a problem like this, and clearly it can cause damage. We will never manage to reach the same level of competition as there is in the US. That won’t happen.”
NEVERTHELESS, STEPS can be taken to improve the situation. MK Einat Wilf (Labor) has drafted legislation that would force tycoons to separate their financial firms’ operations from “real” companies. Another bill proposes expanding the powers of the Antitrust Authority so it can, for example, reduce or eliminate costs for consumers switching from one cellphone or cable service to another, or act against cross-ownership of companies that dampens competition. And Netanyahu is contemplating the creation of a public committee to address the problem of concentration in the economy.
While it is important to respect private business interests and limit government intervention, there are times when market failures need to be righted for the benefit of economic stability. The build-up of concentration in our economy appears to be precisely one of those times.