The Puddle Meets the Ocean

Every day, the business sections of the various papers run stories about reforms: done, to be done, and in process. Each successful one naturally has any number of people claiming the credit: the government officials who sat on the committee that recommended it, the Knesset members who voted for it, and sometimes a journalist who fought for it by stubbornly writing against powerful economic interests.

But the most important economic reform of the last decade has no proud father claiming paternity. Nor does it have a beaming mother or PR agent. Few even know it exists or recognize its power.

This reform has no pretty ribbon that can be cut on TV, or a story that can be boiled down to a sound bite. It does not involve a product or service whose price dropped. There are no good or bad guys, either.

But if you've been keeping track of events and reports in the economic arena, you may have noticed a common thread. Yes, it's a reform. Look:

*Prime ministerial candidate Amir Peretz, the firebrand trade unionist, suddenly reveals that he has always supported market economics. He names Prof Avishay Braverman his candidate for finance minister.

*Tycoon Nochi Dankner, who until how has invested pretty much exclusively in Israel, tells the stock exchange that he's bidding in a NIS 6 billion east European tender.

*Despite the almost unprecedented boom on the stock market in the last two years, it turns out that the public is walking away from mutual funds investing in Tel Aviv stocks.

Could there be some link between Amir Peretz, Nochi Dankner, and the withdrawals from stock-oriented mutual funds?

The swamp

There is, a tight one. It involves exposing the Israeli capital market to the big wide world, a reform completed a year ago, when tax parity on gains made in Israel and overseas was enacted.

The Israel Phoenix Assurance Company (TASE: PHOE) chairman Arie Ovadia warned last week that a bubble may be forming on the stock market, because of the tremendous surplus of money looking for places to go.

His fear is justified at the general, and personal, level as well. Financial bubbles have been blowing up and popping since cavemen traded fish for beads. Ovadia's specific worry, that the tremendous influx of capital to new capital market bodies has bubble-like elements, is not groundless.

But the probability of a bubble of the 1983 type (which popped with exposure of the manipulation of bank stocks), or of the 1994 type (pumped up by banks lending money for investment in mutual funds) - is much smaller.

Why? Because of that reform. Israel's capital market has gradually ceased to be a shallow little swamp that boils and cools down quickly, warping resource allocation, fluctuating between credit crunches and surplus, and leaving investors licking their burns.

Our shallow little swamp has been connected through a bi-directional pipeline to the great financial ocean. When billions of shekels pour in, they rush abroad and when money is sucked out, it can be restored from the global ocean.

That open pipeline to the ocean has tremendous ramifications for the government's economic policy, the business sector and the capital market. Stick a seashell to your ear and listen hard.

The government is less free to adopt awful economic policies for narrow interests. Israeli investors are no longer hostage to a corrupt system, short-sighted finance minister, or greedy Knesset. When foreign and local investors scent that the government is going astray, they can withdraw money in the hundreds of billions of shekels. They can dump Israeli government bonds, they can abandon stocks of domestically oriented companies, they can put there money into countries with more stable economics.

The more the public invests in open markets, the greater the collective pain when the bear arrives.


The open capital market is what forced Amir Peretz to "discover" market economics, and suddenly adopt it as elections near. His aides explained that unless he promises to adhere to international economic standards, he'll become the enemy of the investment community, domestic and foreign.

Peretz, like Silvan Shalom before him and the rest of the political echelon, is learning that when the markets are open, you can't ignore the investors.

The Israeli government may be partly protected by Washington against the violent responses of the investment community, for a couple if years (the guarantees, or U.S. military action in the region) but the business sector has no such period of grace.

Every company or entrepreneur raising money in the local market; any company or institutional managing public money; will come to be measured by international standards. A company will be measured against its peers in the U.S., Europe or Asia. Managers of provident and mutual funds will be measured against their brethren in London, Paris, Hong Kong and New York.

Nochi Dankner, owner of the giant IDB (TASE: IDBH) concern, likes his status as king of our little swamp. He has invested billions in Cellcom and contended for the controlling interest in Bank Leumi, though both had been priced high. Yet after all his moves he discovered that the public is not enamored of IDB stock. It prefers companies like Africa Israel (TASE: AFIL) and Delek Group (TASE: DLEKG, which have been investing mainly abroad.

The investment community spelled it out: they don't see much opportunity for the sprawling IDB giant in the local market. Dankner got the hint and is looking for opportunity abroad.

Over years, when discussing opening the market, people scoffed: Israelis like their warm home turf. But now they're waking up and smelling the foreign coffee and in recent months the public has put billions into mutual funds specializing in foreign stocks. The process has been tremendously fast: in the blink of an eye, these "foreign mutuals" have more assets under management than do funds specializing in the local market.

The Internet revolution brings information on the whole world to investors in real time. Coupled with tax parity, and the termination of government subsidies for pension funds, the walls separating the markets are coming down.

Consumers, investors and taxpayers have many more possibilities. They have more tools to punish anybody, any politician, who carelessly or maliciously impairs their livelihood and property.