Taking Stock / Historic Opportunity Lurking in the Jungle

Finance Minister Yuval Steinitz was probably surprised. The public’s response to his idea of setting up a team of experts to review the royalties that petroleum producers pay the state for their exploitation of the resource was decidedly cool.

Yet that’s how it is. The public at large and the experts haven’t gone hoarse cheering the minister’s courageous position, which is that experts should reexamine the royalty rates in light of the fact that the recent gas discoveries could potentially generate billions upon billions of shekels for the state in the next decade.

Compare his situation to that of Communications Minister Moshe Kahlon, who won far broader support for his willingness to confront the cell phone oligarchs in order to increase competition among mobile service providers and as a result to cut costs for consumers.

We have an explanation for our perplexed finance minister:
The public understands the absence of competition in the cell phone sphere perfectly well. Much of the NIS 15 billion in dividends that these companies paid their shareholders in recent years was based on their monopolistic power to charge the sky for service.

But when the public hears that the recent natural gas finds could generate tens of billions of shekels for the state, they know intuitively that it won’t matter one shekel to them personally. All the money will sink into the state treasury and be divided up among the cronies of the political leadership or the coalition partners.

Now, let’s say that Steinitz came to the public with a new proposition: As a result of the global economic crisis, which improved Israel’s relative standing in the world, and as a result of the possible discovery of huge amounts of natural gas in Israel’s territorial waters, we have a one-time opportunity to completely change the public sector.

The Finance Ministry has an opportunity to build a new budgetary and administrative strategy, to abandon the belligerent, manipulative methods by which budgets and economic policy were shaped. It can strike a new, more professional path, one that takes the long view and is, above all, transparent.

Let’s say the Finance Ministry promises the following to the Israeli people, on behalf of the state:

To adopt internationally accepted criteria for measuring performance in education, health care and municipal services

To adopt accepted criteria for measuring the efficiency of various government systems, and above all the biggest one of all: the army and the Ministry of Defense.

• To draft long-term strategic action plans aimed at improving the quality of education, health care and other important services based on the performance measurement criteria.

Using the additional revenues from the petroleum royalties the government could, with a single payment, “buy” the support of the militant labor unions for a deep reform of the main public systems.

Within a decade Israel would have a more flexible and efficient state sector. Participation in the labor force would increase significantly and economic inequality would diminish. The state would then have greater resources to help the truly needy, not cronies with their noses in the trough.

It may sound naive, utopian, but change could happen. Most experts, however, would say that it’s impossible under the present system of government.

That may not be true, and it would be wrong to think that changing the system of government is the magic bullet that will solve all the ills. There are many administrative and political tools that could bring about significant change. The problem is that long-term planning and transparency are not encoded in the DNA and culture of the current government in general and those of the Finance Ministry in particular.

The ministry is good at demanding transparency from others, but prefers to conduct its own budgetary policy in a violent and manipulative manner, in the belief that it’s the only option in the jungle that is Israel.

The current system may have reached its expiration date. The behavior and the type of reforms that were appropriate in the past few decades don’t cut it any more. The relatively comfortable fiscal environment in Israel today creates a one-time opportunity for the Finance Ministry ‏(and the National Economic Council‏) to stop running Israel by arm-twisting and the Economic Arrangements Law, and to start formulating long-term plans based on more information and much more transparency, around which broader coalitions could be built.

Behind bars

Last week the Antitrust Authority came out with a daring, unprecedented campaign: “Imprisoned in a cartel?,” blared the text accompanying a cartoon image of a generic executive behind bars. The finer print advised, “The Antitrust Authority gives you a one-time chance for immunity! If you’re part of a cartel, you are committing a crime punishable by a long prison term.” The watchdog offers errant managers to ’fess up in full, on a first-come, first-served basis.

We have a news flash for you, Antitrust Commissioner Ronit Kan: Israel has cartels in its mobile communications, credit card, banking, gasoline retail, multichannel television and dozens of other sectors turning over tens of billions of shekels a year.

I’m not asking for immunity in exchange for that information. One can’t get immunity from the oligarchs controlling these industries anyway.

Of course, Kan knows these cartels perfectly well, as do millions of Israelis. But unhappily, she is relegated to dealing with the small cartels, like tile manufacturers and bread bakeries. The people behind these cartels are forced to hold midnight meetings in parking lots to collude on prices, and at the end of the year they don’t have much to show for it. For some, the cartel is the price of survival.

The partners in the really big cartels don’t have to meet in dark corners, or at all. One of them sets a price and sends a signal to the others, and they all stand to attention like soldiers. Why fight, why compete, if they can divvy up the market and earn hundreds of millions, or even billions, of shekels, at minimal risk?

In antitrust argot it’s called tacit collusion, and as Adam Smith, free market mentor and creator of the phrase “the invisible hand,” put it, when businesses collude, it’s almost always for one purpose: to conspire against the public.

Cartels and monopolies, like their managers and owners, don’t have an especially bad image in the public’s eyes. They are distinguished businessmen who operate rationally. The problem is with the politicians and the regulators who bow to them and neglect to pry open their markets to competition, or close supervision.

Less than a month after taking office, Britain’s new Chancellor of the Exchequer, George Osborne, announced a dramatic reform of the country’s financial system. He is abolishing the Financial Services Authority and handing over many of its powers to the Bank of England.

Israel’s regulators may argue for months about the merits of the makeover of England’s financial system. But we don’t need an Osborne to point out the problems of the Israeli regulator. No one − not the Bank of Israel, not the Capital Markets Division of at the Finance Ministry, not the Antitrust Authority − is responsible for looking out for the public’s interests.

The Bank of Israel’s job is to keep the banks stable. The Capital Markets Division is responsible for keeping the insurance companies and institutional investors stable. The Antitrust Authority’s achievements are pretty feeble.

Osborne concluded that the body responsible for financial stability can’t watch out for consumers and investors as well. The main thrust of his reform is to create a separate body to supervise consumer affairs. Over here, the regulators are preoccupied with territorial squabbling, while the prime minister, the only one positioned to see the big picture and cut through the knots, is preoccupied with global problems like Iranian nukes.

The discussion on the concentration of economic power in the hands of the few, an issue that the prime minister, the governor of the Bank of Israel and the finance minister have brought up, is directly connected with cartels and monopolies, most of which are controlled by families. The discussion suffers from the same problem of fixating on the long-term issue of financial stability, and not on the immediate damage: impaired competition, dearth of innovation and entrepreneurship, warped resource allocation and the creation of a business environment packed with cronies and machers. Ultimately, this kind of environment weakens democracy.

Reading last week about the aggressive lobby unleashed by the cellular pack and the Antitrust Authority’s campaign against the cartels, I suddenly remembered one of the great Hollywood stars of the 1930s and ‘40s, Rita Hayworth.

Why her? Leaving aside her personal charm, which leaves Israel’s oligarchs in the dust, what brought her to mind was her 1946 noir film, “Gilda.”

Gilda, played by Hayworth, is married to Ballin Mundson, the violent owner of an illegal casino in Buenos Aires. From the first scene to the last, Mundson seems quite an unpleasant character. But it’s only in mid-movie that we learn of his dark secret, the real reason he’s wanted by the police: he leads a cartel of raw materials, in his case tungsten.

Yes, way back in 1946 Hollywood knew all about one of the great crimes against society.

The term “cartel” may be rather obscure to laymen not learned in economics. But it turns out that with a little imagination and help from Rita Hayworth it can photograph really well.