Taking Stock / Pushing Ahead at All Costs

Dr. Yaron Zelekha won't give up.

With insistence, pugnacity, assertiveness, decisiveness and with all the power vested in him as accountant general, he is going to get his plan to distribute Bank Leumi shares to the general public ratified.

Zelekha, not yet two years in the Finance Ministry, has shaken up most of the areas of which he is in charge. He brought know-how from the business sector, a fighting spirit, a strong desire to streamline and improve financial controls - and he made his mark. More than anything else, he sends a clear message to businesspeople and senior economic figures: I want a fair and transparent relationship with the business sector, but don't expect me to steal the horses with you.

However, the flag Zelekha has borne the highest is unnecessary. The plan's failings far outweigh its fortes.

The idea is simple: After all efforts to sell the controlling stake in Bank Leumi to foreign investors failed, it was decided to sell the government stake in the bank to the public. But instead of selling the shares in packages to institutional investors via the stock exchange - as has been the norm to date - the plan is to "include the public," give every citizen shares worth NIS 1,000.

First, let's remember the basics of economics: there are no free lunches. The quick profit the public stands to make stems from the fact the government is selling them the asset for cheap. But it's a government asset, so the taxpayers are financing their own present.

The advantage of giving gifts to the public in this manner is that, from a national accounting perspective, the perk to citizens is not spending and does not boost the deficit. But economically, that has no real significance. If the state were to sell the shares on the exchange at full price, it could use the proceeds to pay down debt, which would reduce both interest payments and the deficit.

Zelekha claims the move will accelerate privatization. That's not a sure thing. The plan has been in the works for a year, enough time to already have completed the privatization process through the good old method of selling off packages via the exchange.

Zelekha claims the plan will reduce the domination of a few over the entire economy. It isn't clear what the advantage of a huge distribution of Bank Leumi shares would be, since it's already one of the most liquid shares on the exchange. In the end, all the shares will make their way into the portfolios of the big institutional investors, since most of the public is not interested in and shouldn't be dealing with direct investment in shares.

Deepening of the financial market can be achieved using all the conventional privatization methods. Zelekha's claim is that the plan will increase public involvement in the capital market - but it is highly unlikely that the little guy who finds Bank Leumi shares in his bank account one morning will suddenly become a market maven. Mostly, it is dubious if the government needs to push people into direct investment in stocks.

Zelekha claims the plan will accelerate growth. That's not a sure thing. According to accepted economic theory, this sort of one-time payment does not increase individual tendency to consume. Consumption and desire to invest are impacted by permanent, ongoing income or a change in the economic or security atmosphere - as has in fact occurred in the past year.

The best way to increase public involvement in the capital market is to decrease the government deficit by streamlining the public sector and stopping subsidized, nonnegotiable government bonds to institutional investors.

The Finance Ministry has been working on this successfully for two years. It would be better to keep going than to waste time and attention on plans that look cooperative, innovative and maybe even "social" - but their real contribution is doubtful.