shuk - Nir Keidar - September 21 2011
Do the institutional investors identify with the public they represent? Not often enough. Photo by Nir Keidar
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The fight to reduce the level of economic concentration in Israel and to improve Israel's competitiveness will be long, it seems. It won't be a matter of months, during which powerful businessmen and their friends in Jerusalem try to dilute the recommendations of the economic concentration committee, which delivered its interim recommendations on Monday. Real change will take a great may decisions, enforcement of the decisions, expansion of the decisions and then another great many supplementary reforms.

Yet the people who have shared in the fight against economic concentration in Israel, and who fear its implications on competition, productivity, innovation, values and opportunity in the jobs market, were entitled to feel gratified on Monday night at the press conference held by the prime minister, Bank of Israel governor and Finance Ministry chiefs. At least three of them defined the occasion as the most historic and dramatic in the annals of Israeli economics.

We have made a giant baby step in the direction of creating a fairer, more advanced economy.

It is a giant step because on Monday night, the scenery collapsed. The members of the economic concentration club that rapidly seized control of vast and growing swathes of Israel's economy, capital market, media and government during the last seven years can no longer hide behind it.

For years the club has been telling the public what to think. It has been selling the public a gauzy picture of a free, capitalist, advanced economy. But that picture isn't the true one. It began to crack in the last two years and now the false picture they painted has shattered.

It is a giant step because on Monday night, the governor of the Bank of Israel, a man who chooses his words carefully, decided to say exactly one sentence about the committee's recommendations at the press conference: "Concentration will affect the distribution of power in the country ... and that will be a great achievement."

If we may translate Stanley Fischerish into English, what he meant is that the regime of intimidation and fear by a handful of tycoons, which I personally found myself up against in recent years, is ending. And that is a "great achievement."

But the praise and optimism need to be tempered by reservations, even warnings.

Very rich people control your money

The economic concentration's progress was a mere baby step because it didn't handle the onerous problem that a handful of people control a trillion shekels worth of the public's money. These few people are the ones controlling the financial institutions.

Haim Shani, the outgoing director-general of the Finance Ministry and head of the economic concentration committee, stressed the large discrepancy between the vast wealth of the people who head the great business pyramids, and the "other people's money" they manage. Faithful readers of TheMarker know all about this problem, but the economic concentration committee didn't address it. If the capital markets supervisory division at the Finance Ministry continues to ignore it, the legislators will have to take the lead and force true change of the control structures in Israel's capital market.

The economic concentration's progress was a mere baby step because much of the monitoring and control over the business pyramids has been handed over to minority shareholders, which usually means to institutional investors. The institutional investors are the provident and mutual funds, insurance companies and pension funds. But given the structure of the institutional market and its business model, the institutional investors have no true incentive to fight for the rights of their investors.

All too often the institutionals identify with the interests of the covetous controlling shareholders, not with the widows and orphans whose money they're supposed to protect. Israel's institutional investment market cries out for profound structural reform. Lessons need to be learned from the disaster on Wall Street, and from Israel's experiences in the 25 years since the government withdrew from the institutional investment market.

The economic concentration's progress was a mere baby step because the committee was infiltrated by Trojan horses, people who - before the committee was appointed - stated they didn't think Israel had any problem of economic concentration. The present structure of the economy is perfectly serviceable and competitive, they said. They had to change their tune as public pressure mounted, and as talented young economists with integrity - at the Finance Ministry, the Israel Securities Authority and the Bank of Israel - showed them the facts.

Yet the economic concentration doesn't have a majority of members with the energy and burning desire to spearhead historic change. Therefore, the committee remains dependent on its chairman, Haim Shani, who quit as director-general of the Finance Ministry. And on the prime minister, who hasn't delved into the details. And on the governor of the Bank of Israel, who'd rather leave spearheading battles to the experts. And on the Knesset members and other representatives of the public who do understand the problem.

In the absence of courageous public figures and businessmen, and politicians who understand the issues, to lead the battle to dismantle the concentrated economic structures and spur competitiveness over time - we need other forces.

The experiences of the last year since the committee was formed, and the energy it derived from the public protest, teach that only sustained involvement by the general public can assure that Israel will be returned to its people, and will stay there.