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Monday, April 03, 2006

Forbes Israel: 12 groups run economy

A lot has been made about how last week's election was about "the economy." But the truth is that Israel's economy - despite the weakening of the labor unions over the last fifteen years and the improved standard of living - has structural problems that are unique in the western world today. For four years (1994-97), I was a civil servant with one of the agencies that falls under the Ministry of Finance. I can recall once being in a meeting with representatives of NASDAQ at the Tel Aviv Stock Exchange, and someone asked the NASDAQ representative what their listing standards were for "included companies." The NASDAQ people had no clue what was being asked and it had to be explained to them that on the Tel Aviv Stock Exchange there are often listing applications for companies that are wholly - or almost wholly - owned subsidiaries of companies that are already listed. On NASDAQ, this simply does not exist, at least among American companies.

While there will be pressure on whichever government is formed to deal with rising poverty in Israel, the likely solution - increasing welfare payouts and raising taxes - will be band-aid solutions that may even kill whatever economic growth we have had over the last fifteen (and especially the last three and a half) years. The real structural problems - some of which are pointed out in this JPost article - are unlikely to be addressed:

Twelve business groups control the Israeli economy, making it one of the most concentrated in the world, Forbes Israel said in a report published Sunday.

The groups - controlled by Sami Ofer, Nochi Dankner, Shari Arison, the Cerberus-Gabriel consortium, Charles Bronfman, Yitzchak Tshuva, the Saban group, Lev Leviev, Matthew Bronfman, Tzadik Bino, the Borovich family, and Eliezer Fishman - have each put together empires of the largest companies in Israel, using organizational structures that have since been eliminated in other parts of the Western world, the report said.

"This is an economy in which the banks can control whole corporations and where the country is afraid of its capital holders," said Ben-Gurion University professor Daniel Maman.

These 12 groups own 60 percent of the aggregate market value of all Israeli public companies (when the exceptionally-large Teva Pharmaceutical Industries is excluded), with shares valued at some NIS 200 billion, Forbes Israel showed. [For years, Teva has been known as the only Israeli company that trades like an American listed company - no "controlling shareholders." CiJ]

The groups achieved their control by structuring their holdings like pyramids, such that the top-level holding company controls different groups of companies through descending layers of ownership.

The report noted that these types of organizations were eliminated in the US in the 1930s, through a series of restrictions on ownership, as well as double taxation of dividends paid by a company to its parent organization.

However, Maman noted that "In Israel, the issue is not economic, but political. In order to change this here, we would need a coalition to lead the way, and no such effort currently seems feasible." In lieu of that, regulators at the Israel Securities Authority or the Bank of Israel could lead a campaign, "but I don't see that happening either," Maman said.


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