arison - Moti Kimche - October 11 2010
Shari Arison Photo by Moti Kimche
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A few weeks ago, I had a non-professional encounter with the former chief of an Israeli bank. The relaxed atmosphere led to the banker saying, "The centralization of the economy is rampant. It has crossed every boundary; we must continue to fight against it." I quickly inquired why that same banker hadn't mentioned this in the past, perhaps when he was still at the bank. He had a logical response: "There are things that you can't say when you're in a senior position within the system."

The conspiracy of silence and denial that exists between the heads of the Israeli economy on the topic of economic centralization is only additional evidence of the need to address the issue.

The heads of the major corporations are the first to voice their opposition to changing the status quo, as they represent the epicenter of economic centralization in Israel. They control centralized industries like banking, security, cellular networks and energy. They have cross-ownership in corporations and financial organizations, which makes them both the biggest lenders and the biggest borrowers in Israel. In certain cases, they control huge companies by small, direct maintenance rates, thereby making the Israeli public their (largely silent) partners, with no representation at the decision table.

It is not only these business "tycoons" who oppose reducing economic centralization. The big banks and the people in charge of them are also against dealing with the problem. For one, they don't want to anger their biggest customers. The banks themselves want, by means of investment capital, to secure their own chunks of big business in Israel.

The Israeli economy is controlled by a small group of 20 mega-rich individuals and a few hundred salaried managers who work for them. These are the individuals at the apex of the Israeli economy, the elite business rulers, those who benefit the most from the existing order. They are smart, connected, aggressive, and enjoy a salary, bonuses, management fees, and high dividends. Their access to the public's savings as a source of funding is almost unlimited.

The need to reduce economic centralization is not the result of public jealousy of the elite. On the contrary, some of the people supporting de-centralization rose from the bottom and made fortunes with the kind of ambition that's worthy of imitation. But others among them have grown to a point where they've become a part of the problem, perhaps because their scope of activity is so great that they, in essence, become too big to fail. Or alternately, as a result of inefficient resource allocation, their financial needs are provided for at the expense of smaller companies

The Israeli economy is somewhat bigger than this exclusive club. It has strong and creative entrepreneurial forces, knowledge and education; it has rich cultural and human diversity, and ambitious people who want to succeed and need the opportunity. To succeed, they need sources of funding and access to information and resources. They need financial reforms that will create business opportunities. As long as the economy continues to be dominated by such a small group of individuals, much of this untapped Israeli ambition and initiative is stifled; these folks have no way of penetrating the market.

The tycoons are making out as though the ongoing effort to decentralize the economy is choking off the large corporations and pushing them to invest abroad. This is not necessarily true. Decentralization can push large corporations to ventures where the whole economy can benefit. Even today, some large companies engage in activities that contribute to, and can have a profound positive influence on, the economy. It's important to define the boundaries of the financial sector in such a way that big business can continue to operate, while simultaneously creating economic growth.

One way to do this is to invest in future growth industries, like electric cars, for example. This is an excellent opportunity for "tycoons" to invest in a new area, build infrastructure and production lines, all the while creating opportunities for others. We just have to make sure that Mr. Ofer and Mr. Agassi don't take over every single aspect of design and production, but rather that they leave some room for other entrepreneurs who want to enter the field. The same goes for the natural gas industry.

Shari Arison made an interesting move, which at this stage has been successful, when she invested in Israel's water industry. These are the types of steps that the large corporations need to take: invest in new businesses, jump-start production and develop proprietary knowledge and production methods for export.

The IDB Group was previously the most significant player in Israel's hi-tech industry, with the help of companies such as Elron, Discount Investments Corporation and others. However, in recent years, IDB has not set up any new plants. Rather, the corporation entrenched itself in its old investments: insurance, cellular networks, retail and cement, all of which are considered safe and profitable industries.

If the "tycoons" invest in new growth areas, instead of buying and selling existing companies, the economy as a whole will benefit. But their individual roles will have to evolve and be based less on cross-ownership, with fewer conflicts of interest and less exposure to the local banking system. Most importantly, the role of the "tycoons" should be to foster entrepreneurship and innovation with the creation of new businesses and jobs.

The government's role is to define and outline this new order. The Netanyahu government has yet to implement significant reforms since the beginning of its tenure. The time has come to make the big decisions that will sow the seeds for the next growth cycles.