Taking Stock / Brosh and the Bankers

"In retrospect, it was a terrible mistake. Naturally, I couldn't see it at the time, from the place I was at, but there's no doubt about it: We didn't see the big picture."

The speaker is Shraga Brosh, president of the Manufacturers Association, and the question we'd asked him last month was how he felt about his opposition to the biggest economic reform of the early 1990s. Namely, exposing the domestic marketplace to imports by abolishing protective customs tariffs that had frustrated the imports of many products.

At the time, Brosh's family ran a plant that made stoves. It had been vociferous in its opposition within the Manufacturers Association to the reform, which was pushed through by the nasty little bureaucrats at the treasury.

The association and the economists it hired bellowed that hundreds of plants would collapse, tens of thousands of Israelis would lose their jobs, and Israeli industry as a whole would slump.

The treasury economists predicted precisely the opposite: the reform would eradicate industries in which Israel had no relative advantage, reduce import prices, raise the standard of living, and free resources for investments in which Israel did have a relative edge.

"Those economists are theoreticians who never bought or sold a horse in their lives," lamented the industrialists. But in the end, they lost. The barriers came down and Israel was exposed to imports, mainly from the Far East.

New perspectives

Today, when asking Brosh how he sums up the reform, he sounds just like those nasty little treasury clerks of 15 years ago. It saved Israeli industry, he says. "We for instance closed down our stoves plant, which had no right to exist, and I set up an advanced textiles plant," he says.

Dov Lautman, the president of the Manufacturers Association at the time, fought bitterly to preserve protection of Israeli industry and government aid for exports. In an interview published in Haaretz yesterday, he said loud and clear: "The government should not aid exports. ... the name of the game is innovation and entrepeneurship, both in the product and in [production] processes."

Lautman's company Delta Galil Industries has flourished in the last decade precisely because it made itself competitive, instead of hanging around waiting for government handouts.

Stories like Brosh's and Lautman's have happened throughout Israel's industrial scene. Hundreds of unviable plants closed down, and hundreds more with a right to exist sprouted up. En route, thousands of workers lost their jobs, but tens of thousands of new jobs were created. The scope of industrial activity increased and Israel's exports doubled.

The reform also did, as promised, raise the standard of living. In the last decade the prices of commodities such as textiles, clothing, footwear, furniture and the like fell by tens of percent in real terms, helping mainly the poor.

My better life as a banker

It took Shraga Brosh ten years and more to understand that the reform that hurt him in the short run was crucial to the entire economy, and that if he handled it wisely, it could play to his advantage as well.

Our bankers, it would seem, will take rather less time to come to terms with the Bachar capital market reform, which is forcing them to sell their provident and mutual funds. It will take less time for them to realize that what annoys them in the short run will benefit the economy as a whole, and perhaps also the banks in the long-term.

In fact, some of them have already grasped the point. In October, senior officers at the two big banks admitted that the post-reform structure of the capital market is healthier and more sensible.

One top bank manager even went so far as to admit, "My life as a banker dramatically improved. Finally, our investment advisers can feel they're providing genuine service. Our lives when embroiled in conflicts of interest were more complicated and now they're simpler, more enjoyable."

In the case of the Bachar reform, it doesn't look like we'll have to wait 15 years to see how fatuous the bankers' arguments against it were.

1. The bankers claimed no buyers could be found for their provident and mutual funds, because they were giant businesses. Wonder of wonders! It took Leumi's Galia Maor and Hapoalim's Shlomo Nehama less than three months to find buyers for their two biggest capital market assets, the most established mutual fund management companies of them all - Leumi Pia and Poalim Mutual Funds. Now Bank Discount's Giora Offer has found a buyer - Clal Insurance - for his provident and mutual funds, which he bundled together.

Naturally, all the above are merely amusing anecdotes. The real contribution that severing the provident and mutual funds from the banks generated will only become apparent over the years. But the next time a major reform is on the table and interested parties start moaning about nasty little treasury clerks propelling dangerous changes, remember the story of Shraga Brosh and the bankers.