Israel at 63: Where's the Optimism?

Taking the long-term perspective: The fundamentals, forces, structures and values that made us optimistic 18 years ago are weakening.

Haim's letter arrived just before Independence Day. Haim, a faithful reader of my column for 18 years, was upset. Bitter, even.

Haim even remembers how his wife would read the column aloud to him as they drove to work.

Indpendence Day
Michal Fattal

In recent years, Haim complained in his letter, this column has taken a critical turn, not to say - pessimistic. Each week this column takes the Israeli economy's structure to task, spotlighting its warps and weaknesses and the threats it faces. "Enough!" lamented Haim, in rather sharper language. He wanted the optimism back.

A faithful, unhappy reader who remembers columns and articles going back 18 years deserves a proper answer. Even though our readership has grown and diversified since the start of the 1990s, we feel we should share our answer to Haim with everyone, share our analysis of the state of the economy. Israel's 63rd anniversary is a good opportunity.

So first of all, Haim, we feel the same way. We miss the 1990s and maybe the five years that followed, too. Maybe it's because we were younger and had more (and darker ) hair, and were more naive. Let's look back.

In the first half of the 1990s, there were excellent reasons for optimism: reforms after the great stabilization plan of 1985, the Russian immigration, and the peace process created terrific momentum for business. Israel began the 1990s with a lackluster economy and ended with a dynamic economy fully integrated with the global one.

During the previous decade, the economy had been controlled by the big banks, imploding conglomerates and the government. During the next 15 years, the business scene changed beyond recognition. Globalization, the peace process, structural reforms, privatization and the high-tech boom led to the diversification of power and onset of competition. Industry was exposed to imports. Bezeq was confronted by upstart Cellcom and international long-distance phone companies. The capital market and venture capital provided an alternative to bank funding for business.

The Russian immigration, the venture capital boom, the maturation of military technologies and the fruits of excellent education in the 1960s and 1970s nurtured a technology boom. For the first time, Israel had an industry that relied entirely on talent and international competitiveness. Israelis turned into global businessmen and entrepreneurs in their thousands, jetting around the world. The mood was electrifying.

The threat takes shape

Successful reforms brought power and adulation to the regulators behind them. In late 1995, David Brodet, director-general at the Finance Ministry, aided by a host of economists and businessmen, published the Brodet Committee's recommendations. They wrote that economic concentration was a threat to economic growth: Aggressive action should be taken to dismantle the industrial-financial conglomerates.

The concentration of power in the hands of the few could impair economic stability, which is usually achieved by diversifying the foci of economic decisions. It impairs competition and causes prices to rise, the committee explained. It depresses economic activity, deters investors and achieves monopolistic profits for corporate owners. The worst are industrial-financial conglomerates, where economic concentration hurts the greater public interest and especially, consumers, the committee explained.

Yoram Turbowicz, then antitrust commissioner and adviser to the Brodet Committee, did not cavil at stating the economy's best-known secret loud and clear: Economic concentration imperils democracy and economic progress.

The press applauded the committee and Turbowicz. The bankers protested but the officials stood firm. They had the greater economic good in mind and were afire with the spirit of reform. They treated the bankers' scaremongering with the appropriate disdain.

The Brodet recommendations were accepted. The banks sold their industrial assets, the government brought new players into monopolistic markets, and new names such as Lev Leviev, Yitzhak Tshuva and Eliezer Fishman started to make the business press.

Israeli capitalism looked like a promising model, but cracks were showing. The education system began to deteriorate. Poverty spread and the income gap widened. However, the brisk pace of economic growth, dramatically increasing tax income, enabled the government to sweep these problems under the rug through welfare payments that doubled and tripled. High-tech's success and the jump in living standards distracted attention from the schools' problems and the public sector's growing ineffectiveness.

The euphoria peaked in 2000 at the height of the high-tech bubble. Companies were being sold and Wall Street was roaring. Israel looked like the next Silicon Valley.

Then the bubble burst, the second intifada erupted, and the economy sank into a recession. To avoid bankruptcy, the government slashed welfare spending, and the dirt under the rug started to show.

A caste is born

Yet while income gaps widened and education deteriorated, the business sector partied on. After 10 years of intensifying competition and power diversification, business groups formed and started colluding against the government instead of competing. They found that the best way to handle government was to hire former officials and regulators and pay them a fortune.

An ecosystem stuffed with former ex-regulators and bureaucrats rolling in clover assured that their power and profits would grow. A new caste was created in Israel, the club of 20 families and their armies of cronies - managers, workers, bankers and managers of institutional investment funds. The caste received control over trillions of shekels in public assets from pet politicians.

The danger of crudely done privatization gradually became clear. The state's income from the sale was meaningless - what mattered was competition, productivity, innovation and creativity. Without aggressive regulation, these ebbed and died, leaving us with privately owned monopolies that are much more brutal than their government-owned predecessors.

The global economic crisis erupted in late 2008. The lie of Wall Street screamed to the skies: trillions of dollars in value vanished but the executives, brokers and bankers kept their money. Suddenly it became clear that executive pay isn't a path to excellence, it's a problem. The rescue cost trillions more, in taxpayer money, giant debts piled up and Western governments hacked at their budgets to survive.

The facts about the decline of Israeli education and the spread of poverty had been known, but joining the OECD made them more glaring. Suddenly the figures appeared in tables and articles in English.

Years late, the prime minister realized that the Israeli economy had changed in the last decade, and that the challenges today aren't the ones he faced as finance minister in 2003. In October he stood tall and set up a committee to discuss economic concentration and competition. For the first time he admitted that Israeli competitiveness was declining, other than in high-tech and exports.

He quickly learned how much the culture and values have changed in Israeli business and media circles since the Brodet Committee. Today the drive for reform and the willingness to confront big money are facing off against an industrial-financial dictatorship and a tamed and toothless press.

Then there's the disintegration of solidarity; the erosion of the army's achievements; the criminal charges against ministers, prime ministers and the president; the dumbing-down forced on us by commercial television; the demographic time bomb; Israel's growing isolation in the world; and the heavy price we pay for whole population groups whose members don't work for a living.

Don't worry, be happy?

Attacked for changing his mind, John Maynard Keynes (1883-1946 ) rebutted, "When the facts change, I change my mind. What do you do, sir?"

They say that if you aren't a socialist by 18, you're heartless, and if you aren't a capitalist after 40, you're stupid. Perhaps "they" should add that anybody who doesn't understand that the "free market" is no such thing, that the most stable coalition in Israel is between the tycoons and the powerful unions, and that without government regulation this coalition can be destructive is apparently heartless and stupid.

Yes, Haim, there are grounds for optimism. We got through the financial crisis well. We have huge foreign-currency reserves. We found gas. We have entrepreneurial spirit and great people who do great things. We tell their stories, too. But taking the long-term perspective, the fundamentals, forces, structures and values that made us optimistic 18 years ago are weakening.

As for our critical bent, Haim, the economic and social forces around us impel the media and public debate to focus on the optimistic and positive, to compliment and praise. Unlike in politics, the opposition in economics tends to be weak, or nonexistent. Economic and social incentives impel the media to paint the world in pink, as far as possible. Warm and fuzzy is nice.

But it isn't the press' job to suck up to powerful forces. Change, improvement and reform are fueled by fearless criticism.

Ask yourself what country you want to live in, Haim, and ask where the country has been going in the last five years. Ask how it will look 20 years from now and what kind of newspaper you want to read. If you want a fuzzy, warm paper, fantasy in part or whole, that's fine. But I don't think we'll be changing.

Have a good year, Haim, and we can only hope to report a year from now that some of these bad trends have been changing. Then we can bring back some of that optimism you yearn for, as do we.