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The end-of-year report published yesterday by the Tel Aviv Stock Exchange revealed a harsh reality in the capital market in Israel. In addition to the sharp falls in the value of stocks and bonds over the last 12 months, trading volume and the combined market value have also shrunk significantly.

Foreign investors, who since the onset of the intifada have cut down their activity in Israel, are slashing their local investments even further. Virtually no companies went public in 2002, but the growing government deficit led to more issues of government bonds, raising the price of capital. The data points to both a crisis in the business sector and a surge in activity in the public sector - a regression compared to the positive trends of the 1990s.

The year 2002 was rife with scandals that left their mark on the stock exchange by creating distrust and keeping investors at bay. The collapse of Trade Bank, Industrial Development Bank, the Peled-Givony Group and Noga, and the failure of Rogosin to make good on its bonds, are just a few examples.

The most optimistic explanation one could give for this state of affairs is that the stock exchange reflects the situation of the business sector. Yet this alone does not explain why the capital market is in such dire straits. With most of the substantial activity on the bourse attributed to major shareholders and with serious, even criminal affairs constantly coming to light, it is safe to say that the Tel Aviv Stock Exchange is sick. Perhaps there is a market failure here that the two entities responsible for supervising the market - market forces and the regulators - are unable to overcome on their own.

Proposals for strengthening the capital market abound, running the gamut from a plan to stop issuing special high-interest government bonds to the pension funds all the way to the privatization of large government corporations. The problem is that no serious agency has taken up the challenge of promoting any of these plans.

At the stock exchange, people say that the atmosphere that preceded the recent tax reform was of virulent hatred toward the capital market and the values that it represents. Politicians and decision makers may be influenced by this attitude when they discuss economic policy.

The Finance Ministry and the Prime Minister's Office must take the stock exchange and the role that it can play in renewing economic growth much more seriously. After a capital gains tax is imposed, which will not help to heal the bruised capital market, the leaders of the economy should compensate by changing their attitude and strengthening the capital market. U.S. President George W. Bush devotes quite a lot of his time to the American capital market, but in Israel the leaders invariably find Yasser Arafat's Christmas plans to be more important.