Bank of Israel Researcher: Beware the 'Economic Octopus' of Concentration

The octopus - that's what Bank of Israel researcher Konstantin Kosenko called his report on the group of families that controls this country's economy and the economic concentration this entails. Every controlling family is like an octopus with limbs in multiple industries. Cross holdings between octopuses, meanwhile, increase the power of the concentration.

Kosenko's paper focuses on the business groups that control the economy and the effects on individual firms and the economy as a whole.

"The facts point to a very high level of concentration. We resemble Korea more than we do Western countries," Kosenko said.

The Israeli market has a relatively small number of interested parties in public companies - 1,700 interested parties for 650 publicly held companies. Twenty-two corporate groups control 50% of the economy, not including Teva. Ten major families control about 30% of the market. The big groups control 50% of the financial market and 70% of services and commerce.

All this creates pyramid-like structures: A plethora of companies controlled by bigger companies controlled by one person or party. The pyramid structure enables the controlling parties to "milk" the smaller, weaker companies near the bottom of the control chain.

In addition, it damages research and development because the groups tend not to invest - they don't want to create potential competitors. Their leaders pursue political power and hire lobbyists. They damage competition.

Kosenko called the concentration a real danger to democracy; the country's economic leaders are invited to meet with top government officials to help set policy. Prime Minister Benjamin Netanyahu's meeting with top businessmen shortly after taking office is one example, and these kinds of meetings pose real and present dangers, Kosenko said.

These big companies also have an influence on the economy's financial stability that goes beyond their operations. They're aware that they're "too big or too complicated to fail," so they're willing to take excessive risks because they know the government will back them if they lose.

"This is therefore a risk to the financial and macroeconomic stability of the economy," Kosenko said.