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Were Tycoons Not to Blame for Israel's Problems, After All?

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Protest outside the Azrieli Towers in Tel Aviv, against the tycoons and their monopolies, May 25, 2013. Red & blue writing on white sign says: 'Israel, a nation for all its tycoons'. Other signs say, 'Officer, when the bank robs me, come save me'. The octopus bears the name of tycoon Nochi Dankner, with each arm leading to another of his many IDB Group companies, including the cement monopoly Nesher.
Protest outside Azrieli Towers,Tel Aviv, against the tycoons, May 25, 2013. he octopus bears the name of tycoon Nochi Dankner, with each arm leading to another of his many companies.Credit: Moti Milrod

One of Israel's formerly most powerful businessmen has been watching his business empire disintegrate under the weight of debt: this week, he's already lost control of his real estate holdings, and a court named administrators to sell Eliezer Fishman's stake in the financial daily Globes. Diamonds and property baron Lev Leviev is negotiating a second bailout for his vehicle, Africa Israel Investments, and had to buy back its debt-ridden Russian subsidiary AFI from shareholders. Nochi Dankner, who lost control of his IDB group years ago, was sentenced to prison in July for share manipulation.

Other former front-page names like Yossi Maimon and Ilan Ben-Dov have disappeared from the business scene altogether. Idan Ofer is struggling with businesses like Zim and his Chinese auto-making venture Chery; even Israel Chemicals turned in meager profit this year. Ofer sees his future outside of Israel. Yitzhak Tshuva is still standing but has decided to focus his resources on energy and shed the rest of his far-flung holdings. 

So, do you feel any better at the tycoons' collective implosion? Because you’re supposed to. It wasn’t more than a few years ago when these tycoons, and a handful of others, were masters of Israel’s small universe. Powerful and greedy – though as it turned out not quite the business geniuses they thought they, and their bankers, thought they were – they were blamed of being behind many of the economy’s ills, particularly the high cost of living.

In 2011 (when cost of living protests exploded in Israel), the tycoons were indeed powerful. A Bank of Israel study at the time found that just 24 business groups controlled 136 publicly traded companies, accounting for more than two thirds of the Tel Aviv Stock Exchange’s market capitalization (not including Teva Pharmaceuticals, which was not tycoon-owned). 

Tycoons controlled all the telecommunications companies, most of the insurance companies, all of the banks, all of the biggest property companies and nearly all of the oil and gas sector.

With so much already in their hands, Israel was quickly getting too small for them. So they started going abroad investing mainly in overseas real estate.

Where the tycoons didn't dare

You’ll notice a pattern here. The tycoons didn’t invest in high-tech, even though that is Israel’s key industry. They didn’t invest much in export-oriented companies either.

Their specialization was the domestic market, where, not coincidentally, competition was limited and their power and "protekzia" ensured friendly regulation and a steady stream of credit from the banks, for which they didn't even necessarily need to provide collateral.

As invincible as they seemed at the time, it turns out, tycoons were a passing phenomenon. Their overseas property investments went sour and cash cows like the cellphone companies turned dry when the market was forced open to competition. The 2013 Business Concentration Law is forcing the tycoons to do away with their favored means of control – the pyramid group, which enabled them to exercise control over companies to which they had relatively little investment exposure. it alsoforces them to choose between keeping their bank or insurance company, or their non-financial holdings.

These days, the headlines aren't about swaggering tycoons buying another company or Manhattan skyscraper but about ailing oligarchs being ordered to sell an asset to meet his debts.

Yet, the Israeli economy doesn’t show any sign of embarking on a grand new era of  heady economic growth, falling cost of living and efficient, well-run businesses providing a high standard of service spurred on by competition. How come? Were the tycoons not to blame for anything, after all?

A protest outside the home of energy and property magnate Yitzhak Tshuva, May 18 2013.Credit: David Bachar

Why we still pay more

One reason is lousy government. Israel has a poor record of regulation constraining the power of business, partly due to the power of lobbyists and business groups over government, though that problem exists all over the world. What distinguishes Israel from better-run economies is that government itself is inefficient, poorly managed and klutzy.

A key reason Israel managed to rank only 27th in the World Economic Forum’s latest Global Competitiveness Index is that its public sector scores so poorly – 60th in the ranking, well behind a lot of African countries. High-tech can thrive in Israel because it does so little business in the country; for the rest, red tape, waste, corruption and incompetence are an inescapable weight.

Powerful unions are one reason why the government is such a hulking monster. They stifle reform, creativity and initiative, leaving the best and brightest to look for career opportunities outside the public sector. Unions are also the force that keeps some of Israel’s most powerful monopolies intact, even though they should have gone the way of the cellphone cartel. The ports are gradually opening up to competition, but Israel's electricity and water utilities operate like lumbering government agencies.

If you want to know why Israel Aerospace and its portfolio of great technology is ailing, look to who owns and operates it – the government and the unions.

Another reason is that Israel is small, isolated market. We don’t benefit from open borders and geographical contiguity like small European nations do. Anything not made for the tiny Israeli market has to go through the complications of export – putting it aboard a ship, adjusting the labels and meeting local regulations, and negotiating with local suppliers.

It works in reverse, too. Nothing is trucked in from neighboring countries, not even farm products, so that everything not made at home is imported through the same obstacles.

In any case, with all the talk about competition, there’s an outer limit to how many players can realistically serve a small market efficiently.

Take cellphones: We’ve seen that with five major players in the market, no one can make any money at it. Good regulations could enable Israel to live with less-than-perfect competition, but given the government’s weaknesses, that doesn’t offer much of a solution.

Not quite like a Swiss watch

But first and foremost, Israelis aren’t very good at big organizations. The kind of workplace and management discipline that makes big American and Swiss companies so efficient and globally competitive is antithetical to Israeli culture. The commando style of team work, resistance to authority and rules-breaking that has made Startup Nation what it is, doesn’t work so well on the factory floor or in mid-level management. 

The problem is compounded by Israel’s poor schools, which haven’t created a broadly educated workforce that can cope in a knowledge-based economy. The best go to startups, the rest schlep along with an inferior education in science and math.

The tycoons are gone, or almost, but there are still 8.5 million other Israelis – call them the 99.99999% – and the sorry fact is, we’ve met the enemy and it isn’t just Nochi Dankner, it is us.