Israel Matzav

All's not perfect on the economic front

Israel Center for Social and Economic Progress President Daniel Doron writes that despite Israel's recent admission to the OECD, all is not perfect on the economic front (for those of you who cannot access the Wall Street Journal's full content, the full article is also here).

Despite its stunning technological prowess that has launched 2,500 startups in a nation of only 7.5 million, Israel was, and still is, inhibited by an anti-productive economic system. Its economy is dominated by about 20 families, who have been able to take advantage of a politicized privatization process and gain control of many of the major assets that once belonged to the government and trade unions. A recent Bank of Israel report noted that these pyramid-style conglomerates control more than half the market assets in Israel. This great concentration of economic and political power, according to the bank, is not only a great impediment to competition and efficiency but may actually expose Israel to extreme risk. A collapse of one of these groups (which was only narrowly avoided recently) might have devastating domino effects on Israeli markets.

The good news is that both the Israeli government and the Bank of Israel say they are prepared to take strong measures to rectify this dangerous situation. These will involve tightening some regulatory practices to make it more difficult for minority owners to gain control of a chain of firms through a highly leveraged pyramid structure. It will also require the abolition of some tax privileges that these pyramid groups enjoy, as well as moves to increase transparency and competition.

The oligarchs will naturally resist with all their considerable might, including help from academic and media "consultants" and from the monopolistic trade union federation. But reformers are determined to continue improving Israel's economy by further reducing government debt (already cut to 80% of GDP from over a 100% earlier this millennium), cutting taxes, and increasing competition in financial markets.

Joining the OECD will no doubt assist Israel's development. But it may also put additional burdens on its economy, which is already reeling under the heavy load of welfare costs and transfer payments that consume a third of its $70 billion budget. The powerful Israeli welfare lobby has already announced that it will use the OECD's comparative statistics to push for increased welfare expenditures.

But generous welfare systems have not worked well for the OECD's richer members, and have proven devastating for some of its poorer nations, as is evident in Greece. Should OECD "benchmarks" push Israel to increase its high welfare expenditures even more, it will impede the country's efforts to reduce the already extensive government interference in its economy. We can only hope that Israel's extraordinary vitality and creativity will again prevail, even in face of such new challenges.

Read the whole thing.

Doron, who generally knows his stuff (I believe he's a past President of the Association of Israeli Certified Public Accountants), puts things in some pretty black and white terms, so perhaps some nuance is appropriate. For example, he dismisses Kibbutzim entirely, yet some of the Kibbutz industries here have been quite commercially successful.

While I agree with Doron's decrying the over-concentration of the economy (and it's far worse than can be summarized in one paragraph), I suspect that one of the reasons we have been so innovative in high tech is the fact that we have a lot of very bright people looking for economic success and much of the country's basic economy has been closed to them because it is held by so few people and was previously held by the government. The result is that people who want to 'make it' financially here have to be more innovative.

On the welfare front, rumor has it that our true unemployment rate is somewhere around 30%, and the last thing the economic barons want is for the market to be flooded by Talmud-studying Haredim - the economy could not handle it. So maybe giving them welfare so that they can keep studying isn't such a bad thing after all.

Hmmm.

posted by Carl in Jerusalem @ 11:17 PM