Lord Kalms: It's a Black Day if Bachar Reforms Aren't Enacted

If the Knesset fails to enact the Bachar recommendations on reforming the capital markets, it will be "a black day for Israel's economy," British multimillionaire Lord Stanley Kalms warns.

If the Knesset fails to enact the Bachar recommendations on reforming the capital markets, it will be "a black day for Israel's economy," British multimillionaire Lord Stanley Kalms warned in an interview with Haaretz this week.

But while Kalms, founder of the Dixons retail electronics chain and a leading member of Britain's Conservative Party, strongly supports the Bachar reform, he was surprisingly critical of Finance Minister Benjamin Netanyahu's other efforts to reform Israel's economy.

Netanyahu, he charged, has failed to regulate newly privatized companies, thereby effectively replacing government monopolies with privately owned ones, and he has also gutted the country's social safety net - something, he insisted, that was not done by former British premier Margaret Thatcher, who is often touted as Netanyahu's role model.

The 73-year-old Kalms, who has no business interests in Israel, nevertheless stressed that Israel's economy has enormous potential, given its high-tech capabilities and its quality work force. The problem, he said, is that successive Israeli governments have prevented this potential from being realized through their iron grip on the economy.

"The history of all Western economies since World War II shows that economies in which there is a `market economy' grow much faster than economies such as Israel, which are controlled mainly by the government," he said. "Israel is still fundamentally a socialist economy - and that's the reason for its poor performance over the years."

Netanyahu, he continued, is the first Israeli politician who understands and is genuinely interested in economics, rather than focusing solely on security. Moreover, Netanyahu has begun the process of reform, and has taken some not insignificant steps. However, Kalms warned, the finance minister "is still at the beginning of the road" - and he has made some serious mistakes along the way.

In particular, Kalms said, while privatization is certainly one of the keys to reviving Israel's economy - along with breaking up monopolies, introducing competition and reforming the banking sector in order to make it easier to obtain business loans - Israel's privatization process is missing "the most important element: increasing the level of regulation and supervision over monopolies and large companies, including those that have been privatized."

Israel is moving from an economy controlled by the government to one controlled by private players, Kalms acknowledged, but without strong regulation to ensure that competition ensues. Moreover, rather than "true privatization," the government is essentially just handing its shares in government companies over to wealthy and well-connected individuals. The result, he said, is that government monopolies are being replaced by private monopolies, "which are even worse than government monopolies."

Furthermore, he said, Netanyahu has cut welfare budgets too steeply. "You cannot let people fall through the holes in the social [safety] net. Thatcher didn't do that." Under Thatcher, he explained, workers who lost jobs were retrained for new professions, and those who were too old were cared for by the welfare system.

Kalms acknowledged that Netanyahu had to cut the government budget, but said he should not have cut so drastically. "The situation in Israel, in which there is enormous wealth for a few, created by the workers, on one hand, and enormous suffering for others, on the other hand, is intolerable," he said. "This indicates a failure in Netanyahu's process."

As a corollary to this sentiment, Kalms also thinks that Netanyahu is going too far in cutting taxes. "I think he should think seriously about imposing additional taxes on the rich in general, and Israeli multimillionaires and billionaires in particular," he said. "It is unacceptable to have a situation in which a handful of wealthy people receive such a big slice of the pie."

In particular, he said, Israel should consider instituting a "windfall tax" on extraordinary profits. Nor does he believe that higher taxes would cause the rich to flee the country. "I don't believe that taxes are a key parameter in deciding where to set up companies," he said. "You invest where the action is, where things are happening - not where the taxes are low."

But with regard to the Bachar reforms, which would divest the banks of their mutual and provident funds, Kalms unequivocally supports the finance minister. Israel's uncompetitive banking system, he said, is one of its biggest economic problems, as it makes it very hard for companies to raise capital. The banks "charge high interest, pay low interest and 70 percent of their loans are made to a mere 1 percent of borrowers. Israeli banks have a miserable record in giving loans. They have become entangled in failed and speculative loans."

Kalms rejected the bankers' claim that European banks are allowed to own such funds, noting that in Britain, asset management is completely separate from banking. He also rejected the idea that, due to Israel's small size, certain industries are "natural monopolies." The same claim was made in Britain in the 1980s, he said - until Thatcher proved otherwise.

In addition to reforming the banks and breaking up monopolies, Kalms advocated selling off all the government's lands, which would lower land prices and spur the construction industry, and breaking the unions' stranglehold on the economy. Thatcher, he said, was able to confront the unions successfully because "she showed the British public that the unions don't care about the public or the consumers, but only about union members. She proved to everyone that introducing competition would improve everyone's situation."

Kalms stressed that Israel's economic problems will not go away, even if peace suddenly breaks out, because they are rooted in its centralized economy and lack of competition. Therefore, he said, the government must work to solve these problems in tandem with its efforts to solve its diplomatic problems.

Netanyahu, he added, "understands what needs to be done; the question is whether he is capable of doing it." He cited the Bachar reform as a perfect example of the problems the finance minister faces: "He is not getting any backing or support on this matter from the local business community, because it is afraid to fight the banks," due to their monopoly on business credit.

"It's not clear to me whether he can continue on his path, or whether he will be stymied by politics," Kalms concluded. "What is clear to me is that if he loses to the banks on the issue of reforming the banking system, it will be a black day for Israel's economy."