Taking Stock / Down With Oligarchic Capitalism!

As the concentration committee prepares its final report, Benjamin Netanyahu and his associates must embrace competition and strangle monopolies.

The moment of truth is approaching. The concentration committee, appointed by the government to spur competition in the local economy, will publish its final report within days and present its findings to cabinet and the Knesset.

The issues at stake are highly complex, and have far-reaching implications for the economy and Israeli democracy. Their importance is highlighted by another report, that of the Trajtenberg Committee late last year.

Rad-Bynet group - David Bachar - 07022012
David Bachar

Headed by economic adviser Prof. Manuel Trajtenberg, that committee - convened by the government last summer as "social justice" protests rocked the land - ostensibly studied a simpler issue: how to lower the cost of living and improve equality. But the Trajtenberg report shows exactly why handling economic concentration is critical to resolving a host of fundamental economic ills.

As he learned more about the structure of the Israeli economy, Trajtenberg stepped up his Histadrut-esque rhetoric. In the Trajtenberg report, he said that some of the wealth accrued in recent years is perceived as not having been made through talent, competition and market economics, but thanks to economic concentration and monopolies. But last week he went further and called it by name, saying explicitly that Israel has a small group of nouveaux riches who made their money by dubious means.

That description belongs alongside another in his own report, which says a government cannot enforce regulation over powerful bodies which have raised prices, devastated competition and impaired efficiency in the public sector.

Back to the incoming competition report. Its first draft, published last October, focused on the problems of corporate governance in Israel in general, and pyramid-holding companies in particular. That in itself was a breakthrough, since - until a year ago - most regulators claimed that if there were problems with corporate governance and pyramid structures, they were minor.

As the concentration committee started its talks (well over a year ago ), Oded Sarig, the commissioner of capital markets at the Finance Ministry, even claimed that there was no reason to dissociate finance companies from nonfinance companies.

Happily, that is now history. Since the moment the dam broke and the fear of the great business groups got washed away, economists and public personalities have been lining up to pontificate on just how awful Israel's corporate governance and capital market structure are.

But corporate governance and the latter-day pyramids are just part of the problem. The final report from the concentration committee needs to include thorough analysis of economic concentration that crosses sectors. Put simply, it needs to prescribe how to handle the problem of a handful of business groups owning huge chunks of more than one sector and divvying up the markets between them, stifling competition and depressing innovation.

The strength and speed of the steps that the committee proposes in coming days will shape the Israeli economy for years. Will the economy become freer? Will it continue to deteriorate toward "oligarchic capitalism," where a handful of big business groups distribute the spoils among themselves, as happened in former communist countries?

The secret of Rad-Bynet

Research by Prof. Shmuel "Muli" Ellis, Israel Drori and Zur Shapira, in their paper "The Evolution of a New Industry: A Genealogical Approach," uncovered something amazing: Rad-Bynet, one of Israel's first technology groups, is responsible for the establishment of no less than 110 startups. Nobody else even comes close.

Why is Rad-Bynet different from all other tech groups? Simple. From day one, it has worked in competitive international markets. All its managers and workers had to contend with competition. They had to have the DNA to manage companies and compete, as it were.

Just imagine what Israel would be like if the retail, telecoms and finance sectors had to face competition like technology companies do.

Prime Minister Benjamin Netanyahu and his finance minister, Yuval Steinitz, keep saying that when dismantling the economic concentration, care must be taken not to whip up antibusiness sentiment or damage business. This proves that Netanyahu has forgotten his economics and that Steinitz - who is schooled in philosophy - never learned the most fundamental rule of business, which is that competition and diversification are the stuff of life.

The farther the economic concentration committee's recommendations reach, and the faster they do it, the stronger the platform Israel will build for the sake of future economic growth, creativity and innovation.

Netanyahu and Steinitz seem to have swallowed the nonsense that the big business groups have been pushing through their pet newspapers - that the mood on the street is turning antibusiness. Au contraire. Israelis admire free initiative, competition and Israeli chutzpah taken international.

Wakey wakey!

What has happened is that Israelis have learned about, and come to loathe, the concentration. They despise the crony capitalism that has taken root. They have woken up, albeit at a late hour, but wake they did and learned to distinguish between capitalism based on talent, and oligarchic capitalism based on contacts in government, the financial markets and the press.

This is not just an Israeli thing, it's a global one. Last week the UK Labor leader, Ed Miliband, wrote an op-ed in The New York Times describing the true enemies of capitalism. Prosperity does not trickle down as conservative theorists say it should, he wrote: what we have is a "gravity-defying reality in which wealth has flowed upward disproportionately and, too often, undeservedly."

Governments need to keep in mind that they're elected by the people for the people, not for the sake of people who can afford to keep pet lobbyists. All too often, the true enemies of the capitalist free market are the people who benefit most from the present model. They like cartels that gouge the people, Miliband explained.

The American and English economies had become overly dependent on artificial profits manufactured by the finance sector, wrote Miliband. But while the candy went to the top 1%, living standards for the majority deteriorated. The capitalist model rewarded short-term decisions designed to maximize quarterly profits, not designed to assure long-term health, he noted.

He also wrote about media barons - an oblique reference to Rupert Murdoch's News Corp., which ruled the British media roost for 30 years, striking fear into the hearts of Britain's politicians and public figures. Murdoch's fall from grace, over phone hacking, emboldened the British establishment (and press ) to openly talk about News Corp's violent tactics and sweetheart contacts in politics for the first time. In Israel, too, the public has come to see the dangers that lie in the direct and indirect control by tycoons over the business press.

We can only hope that Netanyahu and Steinitz - who still bandy about slogans about capitalism versus socialism - notice that the economic debate around the world has moved on. Nowhere, not even in Scandinavia, is anybody talking about a return to socialism.

All understand that a free market economy is the lesser evil, but they also know it needs fixing. Mainly, they understand that oligarchic capitalism is not a decree from on high. It is the child of government policy.

The power is now in the hands of Benjamin Netanyahu and the economic concentration committee, headed by Haim Shani. They will be the ones who either succumb to the pressure and maintain the status quo, or dilute the concentrated economy and liberate market forces, talent, opportunity and entrepreneurship.