Taking Stock / The Privatization Shibboleth

The combination of rising home prices with the land-ownership reforms that Benjamin Netanyahu is touting has made real estate the hottest topic in Israel's economic discourse.

The premier and his advisers, headed by Uri Yogev and Eugene Kandel, wax confident that land and infrastructure reform will spur brisk economic growth.

Not all experts buy that charming scenario.

What is certain is that the government has little experience in reforming land and infrastructure. We don't know whether the reforms will stay on paper or take actual shape, and whether they will succeed or fail.

On the other hand, there are two areas in which the government is richly experienced: privatization and competition.

During the last couple of decades, the state has sold off many large and small companies, and has pried open many fields to competition. The most significant of these moves was the "exposure plan," which drastically reduced the duties and customs paid on the vast majority of goods and services imported into Israel.

Enough time has passed by now to draw some conclusions. With some exceptions, the results are quite clear: "Privatization" is a catchy and simple shibboleth but its contribution to the economy and the business world has been marginal.

Many of the sold companies remain as stagnant, inefficient and backward as they were before, when they were under government control.

The most salient example is the banks. It is hard to find any dramatic differences in management flexibility, in the quality of personnel or in the basic performance when one compares Bank Hapoalim and Bank Leumi - although the former was "privatized" 12 years ago and the latter is still in government hands.

At both banks, and also at Bank Discount, which was "privatized" five years ago, the prevalent organizational culture is still that of government corporations, with tough restrictions on management flexibility. Nor are there any essential differences between "privatized" and government-controlled banks when it comes to customer service and fees. El Al is another example. The airline was "privatized" five years ago, but remains a government corporation whose management enjoys only limited flexibility.

The chances are therefore nil for a CEO, board chairman or management - however able and ambitious - to shake up companies like El Al, the banks, Israel Electric Corporation, Israel Railways or the Ports Authority. A monopolistic, cartelistic culture has prevailed in them all from the moment they were established, and no trade union will ever voluntarily give it up.

On the other hand, the government's experience with competition has been very positive. Opening the economy up to imports changed its structure beyond recognition, from top to bottom. Industries that did not enjoy a relative advantage were either eliminated or they adapted themselves to new trends and their exports grew at an increasingly higher rate. The vocal opponents of the "exposure plan" in the 1990s now admit that it was one of the most significant reforms ever carried out in Israel.

It is competition that delivers the goods: growth, consumer satisfaction, productivity, efficiency and better goods and services. But the public relations surrounding it are poor. The reason is simple: Privatization threatens only the employees of the company that is due to be sold and they usually get hefty compensation or promises of job security. In contrast, competition threatens all of the strongest players in the market, and they have the ability to manipulate politicians and government officials, and even to influence the media to oppose competition.

The upshot is that it is Netanyahu of all people - one of the most inveterate free-market loyalists around - who is speaking less and less about competition and more and more about privatization, selling off companies and investment.

The nation's economy is crying out for competition, in almost every one of its sectors, but because of its small size and the fact that it is controlled by several powerful families, the job of introducing competition is complex and problematic. Netanyahu, in contrast to past prime ministers, is fully aware of the advantages of competition. But since taking office he has done very little to promote it. He has not brought about the required revolution in the standing, the powers and the willingness to take the initiative of the Antitrust Authority of the Ministry of Trade, Industry and Labor. He has not pushed for the creation of a strong fair trade agency and he has not been personally involved in any reforms likely to introduce competition in the many branches of the economy that are thirsting for it.

If Netanyahu and his economic team really want to get the economy moving and not merely to see out their terms without too many shocks, they have to do some serious reprogramming. They must drop the empty slogans of privatization, which has in most cases not brought the country any benefits and in some cases has even caused damage. There is no greater danger to the public than a big private monopoly in the hands of a local oligarch.

"Privatization" must be replaced by "competition." Only significant competition can lead to more efficient companies, lower prices and improved service. Only where competition reigns will true change occur.

Introducing a culture of competition into the economy will bring in its wake a culture of meritocracy. The winners won't be those who are connected to the hubs of power, government or monopolies, but managers who are innovative, enterprising, productive, skillful and technologically equipped. The creation of competition in monopolistic and oligopolistic markets is a knotty and arduous process. It requires regulation that must be aggressive, sophisticated, confident, consistent and bold. This is something that we do not have.

Instead of mouthing slogans about privatizating land, companies and services, the prime minister, the finance minister and the staff of the Budgets Division should prepare a strategic master plan to strengthen competition. It may sound less catchy. It may demand courage. But it is what will bring about change.