The Truth Behind Israel's Economy, Encapsulated in a Tweet

Even Judy Shalom Nir-Mozes has said it: If you aren’t part of the clique controlling Israel’s financial institutions, newspapers and television networks, your chances of doing significant business in Israel is slim.

Eyal Toueg

In the spring of 2011 – two months before the social protests began, before Israelis came to learn exactly why living costs are so high here, when much of the media still concealed from the public the way a small gang had taken control of the state, when only a few people grasped the importance of introducing competition into Israel’s cellphone sector – Judy Shalom Nir-Mozes taught Israelis a lesson in the relationship between government, big business and the media.

Shalom Nir-Mozes, the wife of Energy and Water Resources Minister Silvan Shalom and a media personality in her own right, was connected at the time to Zaki Rakib, a Jewish, Egyptian-born and Israeli-educated high-tech millionaire whose entrepreneurial career was made in the United States. Rakib returned to Israel and tried to work his way into the top of the business scene, and learned the hard way how the system works.

If you aren’t part of the clique controlling Israel’s financial institutions, newspapers and television networks, or at least in one of the rings of machers that orbit around the clique, your chances of doing significant business in Israel is slim.

Rakib wanted to buy the controlling interest in long-distance carrier Smile. He discovered to his astonishment that oil baron Yosef Maiman, who also controlled Channel 10 television and who was bringing less of his own equity to the deal, received a huge bank loan and snatched up Smile from under Rakib’s nose. A year later Maiman sold Smile to the mobile operator Partner, having made about a quarter-billion shekels in profit (about $70 million).

“If you’re not one of the boys, you have no chance of doing business here,” Rakib told a friend. Then he met some people who found another idea for him: They pushed the newspaper group Maariv at him, organized press coverage that explained that he was the Steve Jobs of print and promised him it would be his entrance ticket into the club.

Not two months after he’d bought the failing paper, Rakib realized that the good fellows who had persuaded him to buy Maariv had actually screwed him over. There was no way Maariv could be revived; it had lost hundreds of millions of shekels and was laden with debt. The clique used Rakib as a sort of parking lot for Maariv, meant to “whitewash” the company drowning in red ink before it could be pushed (as the next stage) to pension funds controlled by businessman Nochi Dankner through the IDB group.

Within half a year Rakib exited Maariv by the skin of his teeth and with a loss of a few million dollars, blessed his stars that it hadn’t been tens of millions, sold his house with the view of the sea in Herzliya Pituah and waved goodbye to the clique.

Shalom Nir-Mozes had accompanied Rakib throughout this saga, so it isn’t surprising that she showed great interest in the next episode involving an outsider trying to elbow into the closed Israeli club.

That was when Israel’s cellphone sector was opened to competition. One of the contenders to launch a new provider was businessman Hezi Bezalel, like Rakib an outsider. But unable to secure a bank loan, Bezalel had to return the license to the Communications Ministry. On May 27, Shalom Nir-Mozes tweeted: “Hezi Bezalel didn’t deposit the money as a cellular carrier. Funny, didn’t Bezalel know that if you’re not one of the 18 families, there’s no way to get bank financing in Israel? Whatever his financial situation?”

Spectacular business debacles

Her tweet came to mind last week when it turned out how her husband, Silvan Shalom, had jumped to the defense of one of those 18 families, one with a bank that hadn’t had financing difficulties, though it did have some pretty spectacular business debacles in recent years and defaulted on billions in debt.

While serving as energy minister, Shalom suddenly decided to attack the conclusions of the second Sheshinski committee, which recommended slapping windfall profit tax on national resources being exploited by the Ofer family at the Dead Sea and in the Negev in southern Israel.

But just like his wife, whose ear is very sensitive to public opinion, the energy minister knew that in 2014 it had become very unpopular to defend the billionaire families that had bought Israel Chemicals from the state 15 years earlier and without lifting a finger, profited enormously from the global boom in commodities, which sent the prices of potash that ICL mines in the area skyrocketing by hundreds of percent.

Shalom wasn’t concerned about the Sheshinski II recommendations on profits by The Israel Corporation, through which the Ofers own ICL; nor was he worried about the declining value of shares owned by tycoon Idan Ofer. Of course not. Shalom, a man of southern Israel himself, is concerned only about the workers.

In a letter to committee chairman Prof. Eytan Sheshinski, Shalom wrote among other things that he had received missives “from local government leaders in the Negev about harm to employment likely to follow implementation of the committee’s recommendations, and what will happen if the state doesn’t encourage the companies operating in natural resources in the Negev – ICL.”

He quoted these leaders, who claimed that hundreds or even thousands of workers employed directly or indirectly by ICL could be fired. The minister added that the “anticipated harm to employment in the Negev following implementation of the Sheshinski II committee [recommendations] could cause a retreat by several steps in advancing and developing the Negev, just when significant attempts were being made to encourage additional communities to move to the region.”

Sheshinski replied to Shalom, saying the committee had taken development of the Negev and employment into account, and reminded the energy minister that the director-general of his own ministry hadn’t troubled to attend most of the committee meetings. But the truth is that there’s no need to expand on the dialog between Sheshinski and Shalom: The hidden story is much bigger.

Reds alert

The social-justice protests of 2011, the government’s approval of the economic concentration committee’s recommendations, reforms in the cellular industry that exposed part of the matrix in which millions of Israelis live and opened their eyes to just how badly they’re being robbed – all this caught most of Israel’s interest groups unprepared. Throughout a decade they’d hidden contentedly behind a smokescreen of security, and manipulated laws and regulations to their benefit. Any time somebody woke up and feebly inquired as to why the labor market has two or three castes with terrific differences in wages and employment terms, why everything seemed rotten to the core from the finance system to the municipalities to the Israel Lands Administration, and why everything is so expensive would be silenced, and the finger of blame would be pointed at the settlers, the left-wingers, Haredim and secular Israelis.

The tax militias’ first line of defense was simple: regulation over monopolies and shattering the concentration in the economy would frighten investors; it was nationalization, communism, what have you. They confused between bureaucracy and regulation and mainly, between regulation designed to create a competitive market and regulation designed to throw up entry barriers into the market. They tossed in “Zionism,” called themselves “economic leaders” and were confident this line of propaganda would work.

Yet the system collapsed. The public woke up and immediately the regulators came to their senses. They realized that this gang is the one that wanted, more than anything, an organized market, ringed by barriers, Bolshevik, noncompetitive. That the gang didn’t want entrepreneurship and a free market. That it is the enemy of the free market.

War, okay, but what about this electricity bill?

Now Round 2 is starting. The public didn’t get distracted by Operation Protective Edge in Gaza. The public wants to see somebody handling the cost of living; they want cheaper housing and an end to corruption. The interest groups have realized they can’t use their previous arsenal of arguments and they’d have to create a new narrative to explain why reforms shouldn’t be – nor competition – and why the members of the clique should get tax breaks.

They’re selling a new slogan, a new narrative to the press: “Protecting the workers.” Meaning, Shalom and the community leaders in the south aren’t serving the Ofer family. Heaven forbid. They’re not interested in the profits of the Ofers, who withdrew 20 billion shekels in dividends ($5.6 billion) from ICL over the last seven years. No, of course not. They want to torpedo the Sheshinski II recommendations just because they reached the conclusion that if ICL pays higher tax rates on its insane profits, it will immediately shut down plants and move them abroad. Maybe to London, where Idan Ofer moved two years ago.

“We learned our lesson,” a lobbyist for one of Israel’s big monopolies explained to me two years ago. “We won’t repeat the mistakes we made until the social-justice protests. From now on, only our labor unions will be on the front line. They photograph better than our CEO, who takes home 10 million shekels [a year].”

They not only photograph better, they also deliver the goods Shalom and the other politicians need to preserve the status quo, thwart reforms and look like they care, too.

This story isn’t about taking back natural resources from Big Business, it’s about economic policy and Israeli democracy in general. The only ones receiving consistent, clever representation are the interest groups, whose power is the mirror image of the unorganized public’s weakness.

Take ICL. The government erred when privatizing the company 18 years ago without considering the possibility that potash prices might leap and create a windfall for the company. A decade late, this year the company fixed the law to allow for windfall tax, which should bring the state some hundreds of millions in tax income a year, for the greater good of the Israeli public’s safety nets, which are weak, by international standards.

But in practice, the Israeli democratic and economic systems don’t recognize the concept of promoting economic efficiency and universally protecting the public, workers and taxpayers. It protects only the interest groups.

Hello, sailor

Israeli economic policy is often the reverse of market economics, which encourages entrepreneurship and creativity. It’s also the reverse of social-democratic policy. There is no system that sees the greater good and the total structure beyond the interest groups. The Swedes call it “protecting the sailors, not the ship.”

So Shalom and most politicians urge that the workers of the most powerful companies – the ones on the right ship – be protected; the rest of Israel is shark food floating around on rubber dinghies.

Several Knesset members have asked me about the Swedish and Danish models: free capitalist market economies that preserve competitiveness through the principle of social networks; places that protect all workers, not just certain jobs. Yet then they consult with their parties and strategic advisers, and drop it. It’s easier to protect a defined interest group than an amorphous ideal: Why make enemies? The public wouldn’t be grateful anyway. Interest groups on the other hand can return a favor.

This isn’t about a given party. When it comes to fighting the interest groups, Likud and Labor are much of a muchness. And the truth is now out there about the robbery of the public: We know where most of the money is.

If Stav Shaffir, fighter for the common man, wants to show that she’s made of other stuff than old-school Silvan Shalom, she has to take a position on the robbery of tens of billions of shekels by the government monopolies, the defense establishment and the banks. She hasn’t said a word about them yet, nor have her colleagues. They need to declare war on the interest groups for the sake of every man, lest they continue to suffer the threefold price: the billions they rake in at the expense of the taxpayer and the weak, their negative effect on the quality of services the state supplies to the public, and the entrenchment of a caste system.

You’d better not hold your breath waiting for that war to be declared, though. Change will have to come from bold ideas and moves born outside the system, and the biggest obstacle to change remains the smokescreen put up by the left, the right and the center, which just don’t want to deal with the interest groups.