Government and ‘public’ ownership holding back the Israeli economy

It may be only a question of time until a long suffering Israeli majority will finally revolt again against their destructive political system.

FREE THE land from the shackles of socialism. (photo credit: REUTERS)
FREE THE land from the shackles of socialism.
(photo credit: REUTERS)
Israel is an exceptionally successful start-up nation with many world-class achievements to its credit. Yet Israel also faces daunting problems, among them a dysfunctional and toxic political system inherited from its decades of Marxian rule. It still generates bitter ideological struggles, over the putative “two state solution,” for example, or over religious objections to women serving in fighting units.
The Israeli economy is hamstrung by major misallocations of credit and resources, an anti-productive labor market, choking bureaucracies, limited economic freedom and a plethora of monopolies, growing corruption and widespread poverty, problems that when neglected become worse. While Israelis, still deeply patriotic, express satisfaction with their life in Israel, they also feel great anger and revulsion about their corrupt political-economic system. In the summer of 2014 they exploded in mass demonstrations protesting the high cost of living. The Left has undermined the protest by trying to exploit it to unseat Prime Minister Benjamin Netanyahu, but the rage is still simmering.
New dramatic revelations about the deep political and financial corruption in one of Israel’s leading and “successful” (sales $3.7 billion, net profit $9m.!) government enterprises, Israel Aircraft Industries (IAI), comes on the heels of so many other corruption scandals and evidence of malfeasance in government and public bodies that even the accustomed Israeli public was shocked.
It would take pages to list the many cases of monumental waste and corruption among government and “public” bodies that cause great damage to the Israeli economy, to its society and public morality. “Whenever we are called to investigate ‘irregularities’ in government offices we discover corruption,” a senior police officer attested.
Government and “public” entities are major players in the Israeli economy, so the harm they can do is immense. Political and personal nepotism puts in charge of these lumbering elephants well-connected incompetents, who employ even worse incompetents. They make governments unable to deliver on any of its undertakings, in defense and in education, in healthcare and in our legal system, in everything they touch. They also create a poisonous culture that infects the so called “private sector,” that is also afflicted by growing corruption, though on a smaller scale. The private sector, flooded by a tsunami of costly laws, decrees and regulations, is only private in name. Small wonder that in 2016 55,000 small businesses opened but 43,000 closed. Israel fell to 52nd place among 190 nations in the ease of opening a business.
The IAI became notorious since its erstwhile union boss, now Welfare and Social Services Minister Haim Katz (whose son is implicated in the widespread corruption, bribery and blackmail investigations involving scores of managers and workers and millions in graft), allegedly used coercion and “benefits” to goad 6,000 of his union members to register as Likud members and create a powerful bloc in Likud’s central committee. It crowned Katz a kingmaker that few dared defy. An essential law requiring arbitration before calling a strike in public services never reached the Knesset floor because few Likud MKs dared displease Katz, a staunch ally of the Histadrut Labor Federation, a political arch-enemy of Likud, that opposed the law. Through Katz, the Histadrut now controls the Likud, muttered a Likud leader.
Overshadowing the IAI scandal is a major dispute about the impending closure of Israel’s highly political public radio and TV, plagued by featherbedding, cronyism and corruption. These bankrupt services were to be reorganized in a new Public Broadcasting Corporation putatively modeled after the BBC. But it soon became evident that the new supposedly impartial management was recruited from the same leftist cliques that have dominated Israel’s media for decades. It promised to become just as biased as the old organization, only at a greater cost to the taxpayer.
After the recent war with Hamas, Prime Minister Netanyahu was free to study the public broadcasting issue and realized that its replacement by the new corporation was a mistake that will only make matters worse. So he reversed course and made do with a reform of the current Israel Broadcasting Authority, despite the media raising hell in defense of the “free speech” putatively practiced by this extremely biased and corrupt “public” entity.
Political chicanery was also behind the mega-bribery network allegedly run by former Knesset minister Faina Kirschenbaum, who is alleged to have distributed millions allocated to her party to support public-minded organizations favored by it (our political parties and Knesset members get scores of millions to dispense as they see fit for their participation in the coalition government) in return for hefty kickbacks.
Many corruption cases are discovered annually in municipalities and local councils, whether ruled by the Left or the Right, mostly involving huge bribes in return for the authorities permitting real estate zoning laws and regulations violations that have made many contractors very rich.
Major financial abuses, bribes and “irregularities” were also uncovered in the Israel Electric Corporation and in its workers union, in the National Roads Company, the government’s public works arm, in the Israel Land Authority (controlling about 93% of Israel’s land), the Keren Kayemeth LeIsrael-Jewish National Fund and in the national lottery, even in some branches of the IDF. The list goes on.
As in the US, labor unions are monopolies especially prone to corruption, as revealed in the gory case (that helped uncover corruption in the justice system) of the Ashdod Port Company’s workers’ union, that became a criminal enterprise. Mostly monopoly labor unions and their incendiary federation the Histadrut, that commands a billion-shekel, totally non-transparent budget, provide major opportunities for corruption (workers’ pension funds they controlled were plundered) and are the cause for the low productivity, poverty and misery of most Israeli workers (median salary, including the rich, is $1,700, while prices are far higher than in New York City!). By politicizing the workplace the Histadrut and its affiliates foment constant struggles and work stoppages that cut the productivity of Israeli workers to only 2/3 of that of Americans. They also cooperate with Israeli monopolies that inflate prices of goods and services two or three times above those in America, impoverishing most workers.
It is not that Israelis are exceptionally corrupt. It’s the structure of their largely statist, highly politicized economy that has been causing great inefficiencies and waste, and has been breeding corruption.
Captured in the 1920s by radical Marxists (not Socialists as most believe), the Zionist enterprise, financed by no-strings-attached Diaspora contributions, devoted most of its resources to the collectivist agricultural sector of the kibbutzim and moshavim. Extremely inefficient, they went bankrupt every decade. The Diaspora also financed the politically controlled “Workers Enterprises” that included a major bank, as well as trading and construction companies. The politically dominant Marxist “workers camp” exploited them to wage a violent, mean class warfare against private enterprise in the 1920s, destroying many private enterprises and creating the poisonous institutions, interests and environment that plague the Israeli economy to this day.
AFTER INDEPENDENCE in 1948 Israel became a radical leftist state where, as David Ben-Gurion boasted, 93% of land, all natural resources including water, labor and capital were nationalized. Labor was forced to organize in the politicized Histadrut monopoly and banks were forced to keep most of their deposits in government bonds and allocate credit only with government approval. Immigrants were forced to settle in rural communities controlled by political parties, to discard their religious practices and bourgeois skills and become secular “pioneers,” namely destitute farm hands in dysfunctional collectives.
Poverty, bad education, political coercion and lack of social mobility bred many social ills, like in other Communist countries. Dozens of totally inefficient, politicized government and Histadrut white-elephant enterprises were spawned and kept artificially alive for decades, like the repeatedly bankrupt kibbutzim, by granting them extensive monopoly rents plus billions in subsidies and tax privileges. They went finally bust only after the Likud took over in 1977 from corrupt Labor governments and cut some of their “benefits.”
But their control of the huge concentration of political and economic power remained intact when a chivalrous but politically naive and economically inept Menachem Begin decided to keep most top leftists in their high government positions, believing that like true professionals they would help him free the Israeli economy. When nevertheless the Labor-sector enterprises went broke their enormously concentrated structure was transferred intact to crony tycoons by the statist Likud, in a fake privatization process. Their monopolies were extended and forced Israelis to pay immensely inflated prices on all goods and services, tearing Israeli society apart between a majority that could barely make ends meet and the many privileged “connected” elites that lived off the fat of the land, serving the tycoons, at the expense of the low-income and politically weak strata.
Runaway inflation forced a Labor-Likud coalition to institute in 1985 some major economic reforms. In 2003 when Netanyahu became finance minister he courageously broke the bank cartel that trashed most Israelis’ savings by allocating billions to cronies while bilking Israelis of billions in inflated “commissions” and arresting growth by creating a credit crunch in the Negev and the Galilee, home of small enterprises. In the 2009 Moshe Kahlon telephony reforms deprived the monopoly pyramids of their cash cows, and they began disintegrating. The Israeli economy started becoming freer and more competitive.
But much more remains to be done. The ceaseless efforts to topple Netanyahu, the only serious patron of reform, have stalled reform. It is hard to generate political support for reform because most MKs, dependent on contributions for their primaries on tycoons and political contacts, are hostile to it. Israelis are too exhausted trying to make ends meet to create popular pressure and overthrow Israel’s iniquitous, destructive and corrupt political-economic system. Their “elites” who so benefit from the system do not help.
It may be only a question of time, however, until a long suffering Israeli majority will finally revolt again against their destructive political system and the elites who have kept it going for almost a century, a system that keeps them enslaved, pauperized and exhausted, that endangers their future, denies them a decent life, and their exceptionally talented children the opportunities they deserve, and not only in high-tech.
The author is founder and president of ICSEP, an independent public policy think tank (