Taking Stock / Cronyism Economics

Who is Israel's finance minister? Easy one, you snort.

Who is Israel's finance minister? Easy one, you snort.

Hah. A few days ago we ran into Ran. He owns a company worth tens of millions of shekels and knows his way not only in commerce, but in politics, too. As we chatted, the subject of the Finance Ministry came up. Ran furrowed his brow and asked with discomfiture: "The finance minister, who is it? I forget."

"You're kidding. You must know."

His unease demonstrably grew as he wracked his brains. At a loss, he turned to his wife, a lawyer: "Hon, who's the finance minister?"

"Olmert," she replied without missing a beat, but then added after a few seconds: "No, not Olmert. It was Hirchson, but then he appointed Sheetrit. No, not Sheetrit, what's-his-name. No... no... it's Olmert."

Finally, after sweating blood, it came to them. It's Roni Bar-On.

Ran and wife are not representative; they are mere anecdotal evidence. But the anecdotes build up. And don't blame Bar-On if Israel's market players can't think who the finance minister is.

Most know perfectly well who Nochi Dankner, Lev Leviev and Yitzhak Tshuva are. They also mostly know which companies these tycoons own and can list their latest major transactions, too. But they can't recall the names of the finance minister or the chiefs of other governmental economic institutions - not because they are new to the job, but simply because over the years, the people in these positions have ceased to lead, so the public's attention wandered to Israel's brightest businessmen.

Roni Bar-On is a very smart lawyer. Finance Ministry officials say that unlike his predecessor, he has a quick grasp of economic issues. If he wanted to, he could easily raise his public profile. When you are finance minister, you have plenty of opportunities to call press conferences, explain your economic decisions or claim credit for reforms that your people are promoting.

But Bar-On may not want to do that. The prime minister who appointed him, along with most of his colleagues in the Kadima Party, have a single goal: not to lead, but to survive.

People whose goal is survival do not take big risks; they mainly try not to make big mistakes. That is a major reason for the feeling that the economy is being shaped by the dynamic moneyed class, not the government.

Israel's gross domestic product is projected to grow by 6 percent in 2007, one of the highest growth rates in ten years. But hold onto your hat. If we examine the multiannual growth of GDP per capita, we find ourselves languishing behind the economies that we would love to emulate.

We have plenty of excuses for our sluggishness. For some reason, Israel has a gigantic proportion of adults who don't work; we have heavy military costs; we are surrounded by enemies and suffer the disadvantages of small size.

Yet not all of these are inevitable. The main problem afflicting Israel's economy may be a simple one: It lacks leadership, vision, strategy, direction, coalition, teamwork.

There is no prize for excellence, no penalty for error.

We also have assets: great talent, an eager entrepreneurial spirit, great improvisational and recovery skills, daring, backing by the Diaspora.

Yet the economic debate in Israel is like one between two camps that are not only deaf but hostile: Some argue that we're capitalists who leave the poor behind, and some say we're socialists who are strangling the economy and the entrepreneurial spirit.

The reality isn't in the middle, but a combination of the two. We lack many of the good things that characterize socialism: strong social support networks, help for the needy, an advanced education system.

Also, capitalist economics are cruel: Their only advantage is that no better system has been found. But, like our socialism, our capitalism lacks some essentials: full equality of opportunity, a free labor market, intense competition and aggressive regulation.

What do we have? A bit of capitalist economics, a bit of socialist economics and a ton of cronyism economics.

The cabinet and Knesset are supposed to lay the foundations for efficient resource distribution, but they mainly spend their time maneuvering between the powerful interest groups: (1) the billionaires and the giant companies, which demand - and receive - the quashing of competition, lower taxes and mainly, feebler regulation, so that they can milk consumers more easily; (2) the public institutions, monopolies and government agencies fighting to preserve their clout, so that they can milk taxpayers more easily.

Many err in thinking that Israeli tax rates are similar to the norm elsewhere. That's because some Western countries have strong social networks - advanced pension, healthcare, education systems - and therefore have high tax rates, too. But Israelis who retire discover that their National Insurance Institute stipend is way below the poverty line.

Lord Stanley Kalms, a millionaire and one of the leaders of the British conservative party, put it well a year ago. Kalms, a Thatcherite who has been watching the Israeli economy, found the adjectives "conservative" and "socialist," when applied to Israel, amusing.

Israel, he said, is far from being a socialist economy, because it caters mainly to the big unions and cronies of government. But it isn't capitalist, either, because the government isn't driving consistently toward true competition in most sectors.

Maybe we needed the bird's-eye view from the United Kingdom to find somebody who can simply state what every Israeli who isn't a darling of the government or a tycoon feels all too keenly: He's crushed at both ends. The government squeezes the people for income, i.e. tax revenues, and the monopolies milk the people in costs.

Yes, Israel has a successful free market, and there are areas where the government doesn't trample the taxpayer. But vast swathes of the economy are ruled by cronyism economics.

The global boom drove Israel's economic growth to 6 percent this year, but a sizable portion of the people languish in the rear. Very little has been done to improve infrastructure to maintain Israel's competitiveness - a failure that will haunt us when the economic cycle reverses.

The question is when, and if, a leadership will arise that will admit as much. Or perhaps we should ask how grave an economic or social crisis has to become in order for leadership to arise.

Ehud Olmert produced one signal achievement that no prime minister before him can match: He invented a revolutionary leadership/management concept under which bad managers don't resign, they pledge to "fix" things.

Last week, he marked another achievement. He became the first Israeli prime minister to appoint a buddy to the Finance Ministry, Abraham Hirchson, only to have the police recommend less than two years later that he be indicted for embezzlement, fraud and breach of trust.