What's Wrong With Israel? Ask Its Most Outspoken Economist

The Bank of Israel. The Finance Ministry. Manuel Trajtenberg. And you too, if you think 'two demonstrations that managed to lower the price of cottage cheese for three days is a protest.' Yaron Zelekha is not satisfied.

Despite the summer of protests when hundreds of thousands of Israelis dragged themselves off the couch and onto the streets to cry out against the cost of living, and despite the formation of the Trajtenberg committee to consider how to help the middle class, Yaron Zelekha is not satisfied.

The professor, 41, has himself been crying out against Israel's economic policy, for some eight years, and he feels the Trajtenberg recommendations don't go far enough. He suspects that, despite the formation of a committee to study economic concentration, the powers that be are afraid to dismantle the corporate pyramids that are robbing the public and sabotaging our pensions. Worst of all, we're all getting poorer, Zelekha says.

Yaron Zelekha - Gil Cohen Magen - 03112011
Gil Cohen Magen

Zelekha doesn't think things will necessarily improve, but he does think there are solutions. If they are adopted, Israel's economic and social reality could change for the better, he thinks.

The root-canal treatment Zelekha suggests includes increasing competition in banking and credit cards, increasing competition in the pension savings industry, and moving tax policy in a more socially conscious direction. "If the public thinks two demonstrations that managed to lower the price of cottage cheese for three days is a protest, the public is wrong," says the famously outspoken professor.

Asked if he thinks the public fight to lower the cost of living will change anything, he demurs: "What I think isn't relevant. The facts speak for themselves." Then he answers: "The state of Israel is the poorest country in the west. There are all sorts of gauges that measure poverty in all sorts of ways, but by all criteria - GDP per capita, inequality, the absolute and relative poverty lines - Israel's is always in the worst place."

A quarter of Israelis live below the poverty line, Zelekha says, meaning they live on less than NIS 5,000 per household per month. "The problem is that the middle class is approaching the standard of living of the poor in the west. That is a worrying development," he says.

In his lectures, which have been viewed by many online, and in his books, Zelekha fires arrows in all directions. His bare-knuckled criticism of policy makers, including during his time as accountant general at the Finance Ministry from 2003 to 2007, have made him quite the controversial figure. Yet Zelekha, dean of Ono Academic College's business administration school, is also held in high esteem. He has been talking for years about the onerous cost of living in Israel and the lack of competition. While at the Finance Ministry, he fought bitterly against corruption and inefficiency in the economic system and the government, and acted to spur competition. He is unafraid of taking on the most powerful figures in the business scene and to criticize policy makers at the Bank of Israel and the Finance Ministry.

His voice has been heard all along, but since the summer of protest, his rating has gone through the roof.

Zelekha is deeply dissatisfied with the Trajtenberg committee, headed by Manuel Trajtenberg, economic adviser to the government.

TheMarker: Why aren't you satisfied with the Trajtenberg recommendations?

Zelekha: "Because they're crazy. A collection of bad recommendations that will continue to damage the economy, alongside a few good recommendations that were left vague, with the responsibility for execution placed on the shoulders of the elements who created the problems in the first place, while almost completely ignoring the roots of the problems in the Israeli economy."

Is there no part of the Trajtenberg report that you like?

"There are some sections I am satisfied with, but they are stated as declarations, and rely on execution by the very people who caused the problems," says the professor.

"The Trajtenberg committee dealt with some issues but every area has dozens of failures. For instance in the automotive sector, if there are dozens of failures and we handle just three of them, it won't help. Somebody comes along, shackles the market with ropes and handcuffs, and isolates it in a sealed cell. So we take off the ropes, but what about the handcuffs?"

Change has to start somewhere. What about you? Will you be doing anything to get those handcuffs off? It's easy to complain that everybody else is doing it all wrong.

"I am trying to do this for the automotive industry," Zelekha points out. He is chairing a committee formed by Transportation Minister Yisrael Katz to study competition in the automotive sector. "I decided to serve as an example for regulatory change," he says. Zelekha adds that he advocates changing the approach from "an ounce of prevention" to deconstruction of the sectoral structure.

It isn't just about preventing or limiting mergers: What's needed is thorough examination of the structure, and the size and strength of the existing players, he explains, adding, "Kudos to the minister who initiated the reform, and gave his unqualified support and clear instructions not to leave a single stone unturned."

The vision

What is the Zelekha committee's vision?

"We'll get the job done and then talk."

What about the finance minister?

"I respect him. I think the Finance Ministry's economic policy in recent years is completely wrong."

What are the root problems of the Israeli economy?

"One of the worst problems in Israel is the cost of housing, which soared because of flawed policy at the Bank of Israel. To pay the climbing cost of housing, households have to cut back on consumption, which drives economic growth, in order to save more. That process stifles growth and lowers the standard of living. This process will create our next recession," he says.

And what did the Trajtenberg committee do about this? Zelekha demands. "They wrote that 75,000 housing units should be erected. If macroeconomic change were to ensue based on somebody writing a line, we'd be world champions."

The way to subdue the high cost of living is to go from sector to sector and deconstruct it, says Zelekha. "Just recently the antitrust commissioner, David Gilo, agreed to let Shikun & Binui sell a mall to the Azrieli Group. As though Azrieli didn't already have a monopoly over malls. Now he's approved another merger in the automotive sector [Kamor Motors with Delek Automotive]," yet the public committee on economic concentration is still sitting.

"In Israel we have a commissioner for antitrust, not a commissioner against anticompetitive practices," Zelekha quips. "Until we adopt a policy of dismantling the monopolies, we won't get far. If anybody thinks all it takes is not allowing mergers, then we're perpetuating Israel's status quo as the least competitive country in the west."

Why Intel isn't complaining

The way inequality in the tax system is being tackled is also all wrong, Zelekha continues.

"The problem isn't people who earn NIS 40,000. It's the people who earn NIS 40 million," he says. "The Trajtenberg committee proposed raising tax for people earning more than NIS 40,000, from 44% to 48%. But [capital gains] tax on stock options remains at 25%. In other words, people who earn NIS 40,000 will pay almost double the tax compared with people who earn a million shekels.

"Corporate tax on the other hand is rising," Zelekha adds. It's presently 24%; a plan to lower it to 18% was canceled. "How is it the big companies - Intel, Israel Chemicals and Teva - aren't complaining? Because they don't pay it anyway. They have special tax reliefs, specific tax assessments as part of dozens of versions tailored for them by the [Finance Ministry's] budgets department over years, based on the investment encouragement law. They pay 4%, or maybe 8%, and sometimes don't pay at all. These companies don't care if the tax rate is raised to 60%. They don't pay anyway."

Where on earth did the budgets department at the treasury come up with a tax plan that calls for the highest indirect tax in the west, and the lowest corporate tax in the west as well? asks Zelekha. How is that combination supposed to stimulate economic growth and reduce inequality? It should be the other way around, he says.

You have been criticizing the budgets department for years.

"It has two structural problems," Zelekha answers, the first being that the officials don't have enough education. They sport a BA in economics and then some kid who studied macroeconomics at university for four hours a week is given the job of shaping the state of Israel's economic policy, he mocks.

"The second problem is that the budgets department reflects a structural conflict of interest. The department manages macroeconomic policy while preserving the budget, which means it makes sure the budget is balanced and doesn't get breached. But they're also responsible for sources, so they always want to increase taxes. That's in their interest. But it isn't in the interest of a macroeconomic policy that encourages growth. Taxes are a brake on economic activity. Also, they're a huge source of inequality."

Scared to do battle

Another fundamental problem, says Zelekha, is the kid-glove handling of corporate pyramids. The recommendations of the economic concentration committee may make it harder to build pyramids, but that isn't nearly enough, says the professor.

"When the body has a virus, we try to eradicate it, not weaken it," he says. "I cannot understand this moderate, enlightened and considered tack of weakening the pyramids. The pyramids should be dismantled. A pyramid is restriction, exploitation, abuse.

"You don't dwell in peace with people abusing you," he continues. "You hound them and wipe them out. The pyramids are sabotaging our pensions. Their public flotation should be banned and, as for the existing ones, their owners should buy back the public's holdings and be delisted.

"Why are we afraid to overdo the battle against the uncompetitive nature and monopolization of the economy?" Zelekha asks. "The monopolies exploit that fear of growing stronger. A welcome change, by the way, is the appointment of Shmuel Hauser as chairman of the Israel Securities Authority."

Your friend.

"My good, true friend. A refreshing change compared with the defeatist attitude that had prevailed there," says Zelekha. "I hope he gets support from his colleagues in regulation."