The Growing Power of Israel's Richest People

Public opinion may be turning against them, but inequality is growing faster than ever.

Moti Kimchi, Nir Keidar, Bloomberg and Reuters

Israel’s richest people are feeling the pressure – or at least that’s the impression they want to give.

In the United States, the past year was that of the “crybaby billionaires,” as many of the wealthiest Americans expressed their disgust at the mere thought of raising taxes on the rich and the social criticism that has been levelled against them.

Their complaints – and the way they have been received by an ever-growing proportion of the public – mark a change in attitudes toward the rich. Today, many ask whether the situation where a very large part of the world’s wealth is concentrated with a very small group is actually an economic necessity, and whether it is at all healthy for society and the economy.

Last year in Israel, the number of rich grew, and they got richer. This trend has been clear for a while, at least since TheMarker started compiling its list of the 500 richest Israelis 12 years ago. Since then, the aggregate wealth of the 500 has risen at an average annual rate of 11%. That means the 500 have tripled their wealth over the past dozen years, reaching some $110 billion in 2014.

The past year has been a particularly good one for plutocrats, who have seen their combined wealth increase by 18%, mostly due to the rising stock markets in Israel and around the world and because of a sharp rise in local real estate prices.

The number of billionaires also set a record this year, up from 68 to 74.

There are two clear trends in this year’s data. The first is the large gap between the billionaires who head the list and the mere millionaires hugging the bottom. As the billionaires get richer so quickly, even the millionaires are having a hard time keeping up with them. The second trend is the strengthening of the traditional “industrialists,” while the “tycoons” and those who control the big conglomerates have lost ground.

The trick of numerous leveraged buyouts has failed. In comparison, the old-school industrialists who have developed and invested in their businesses over the years – without expanding too far outside their core operations – have continued to grow richer.

The situation in Israel in terms of concentration of wealth is similar to the inequality found in the United States. But the pace of concentration is even higher here, likely due to the fact that Israel has had a higher rate of economic growth than Western nations for the past five years.

Is this growing concentration of wealth a problem? The surprise best-selling economics book of 2014, Thomas Piketty’s “Capital in the 21st Century,” claims the problem is not the billionaires in themselves, since there are so few of them.

Rather, it is the growing wealth and power of the top 1% that is dangerous because of their growing power to control political processes. In Israel, for example, the top 1% numbers some 80,000 people, making it a large enough interest group to have significant influence on our democracy – and possibly even enough power to use it for its own purposes. The undisputed starting point is that money can be translated into political power.

Who’s who?

One of the questions in Israel is whether Piketty’s opinion that we can ignore the billionaires applies to Israel. Let us take the first two names on the list of the 500 richest Israelis. The first is the Wertheimer family, for the seventh year in a row, with assets in 2014 of $7.8 billion to $8.5 billion, about $450 million more than in 2013. Next on the list, though quite a bit farther back, is Shari Arison, the controlling shareholder of Israel’s largest bank, Bank Hapoalim, with assets of $4.7 billion to 5.2 billion, up some $650 million from last year.

The third richest person on TheMarker’s list is Yitzhak Tshuva, who, not long after forcing investors to take a haircut on his Delek Real Estate, became a partner in controlling almost all of Israel’s natural gas resources. Tshuva has power, and he is using it to dictate energy and electricity prices. Instead of using the enormous gas reservoirs, which legally and morally belong to the public, to reduce electricity prices drastically, Tshuva is getting rich from them. Tshuva also looks to be in position to move up in the rankings if all goes according to plan with his gas and oil riches.

Next on the list comes Idan Ofer, who controls Israel Chemicals, a company that did not pay proper royalties on its exploitation of natural resources, at least according to the government’s Sheshinski committee on natural resource policy. Ofer is worth somewhere between $3.55 billion and $4.05 billion, though the value of his holdings actually fell over the past year due to the drop in value of ICL and the shipping company Zim Integrated Shipping Services. He is followed by Hollywood film producer Arnon Milchan, worth some $3.5 billion to $4 billion.

Many near the top of the list are in businesses where they enjoy protection from competition, often provided by government regulators. For example, Shlomo Eliahu, the owner of Migdal Insurance, and the Straus family, which owns one of the three dairy manufacturers that control much of the market. The Wertheim family owns the largest soft drinks and beverage company in Israel, Central Bottling Company, which includes the Coca Cola franchise. The family also owns part of the Channel 2 television franchisee Keshet, the most powerful television producer in the country.

Another billionaire, who fell the furthest on the list to eighth place, was Beny Steinmetz, whose fortunes dropped by $500 million to some $2.2 billion to $2.9 billion. Steinmetz ran into all sorts of troubles last year, even though the global diamond business picked up, having become embroiled in a huge case of suspected bribery in Africa and seeing the Swiss police raid his home there.

Despite all the hype about Israel being Startup Nation, the first high-tech billionaire comes in at just No. 9 on the list: Gil Shwed of Check Point Software Technologies, with a fortune estimated at between $2.5 billion and $2.6 billion. Two of his other cofounders are also in the top 15, Marius Nacht and Shlomo Kramer, while further down the list are others from high-tech, such as the founders of Waze, which was sold to Google for close to $1 billion.

Israeli high-tech firms had $7.6 billion in exits in 2013, some 16% more than in 2012, says accounting firm PwC Israel.

Others made their money in real estate, such as Rami Levy, of supermarket fame, who actually made most of his money investing in property. Car importers also have done quite well for themselves over the years; as for the public, that is a different question.

Apart from Steinmetz, other people of the list to suffer include the Sagol family, whose wealth declined by $100 million due to financial problems at their Keter Plastics business. Noam Lanir took a hit when his online translation company Babylon suffered a $40 million drop in value after losing a key contract with Google. The Agassi family saw its wealth decline $20 million against the backdrop of the collapse of Better Place, which was founded and led by Shai Agassi.

The billionaires and the rest

In general, the list can be divided into two categories: The “good” rich, who made their money by creating competition and new businesses, or bringing in investment from abroad, and the “bad” rich who made most of their fortunes at the expense of the public and consumers from monopolies, regulated businesses or exploiting natural resources.

What is clear from the list is that you don’t get to be very rich, or usually even regular rich, from working a salaried job. You must be a capitalist, put others to work for you, utilize debt and credit, and let your capital grow.

The big jump in wealth last year for the rich was not the result of wise investing necessarily, but stemmed from the overall rise in the real estate, stock and bond markets. The TA-100 index rose 17.5% for the year, much due to the 23% rise in the U.S. S&P 500 index. The 18% rise in the total wealth of the top 500 is no coincidence and reflects this clearly, as many own the publicly traded firms that made them rich.

The fall of Nochi Dankner after he lost control of the IDB group is the best example of the rebirth of traditional industry over the leveraged conglomerates. Another instance is the case of Ilan Ben-Dov and his loss of control of cellular operator Partner Communications. Others lost huge sums from their investments in European real estate, particularly in Eastern Europe, like Motti Zisser.

Researchers of economic inequality have found no reason to believe anything will rein in the trend of growing inequality and the rich getting much richer, especially the top 1% and even more especially the top 0.01%. The present trend dates back at least three decades and only seems to be worsening. The real question is whether left unchecked it is a threat to democracy.

Economists are not united on such an apocalyptic forecast and do not rule out the possibility that such factors as population growth, inflation and technological change and advancement could moderate the trend. But what they do emphasize is that without some sort of treatment of the problem, whether by higher and redistributive taxation or increasing economic growth and the overall size of the pie – the solution will not come by chance or luck.