You Ask: Why Do I Have to Fund Layoffs at Government Companies?

No, the state isn't run by money alone and not all politicians are rotten. But there is much work to do. TheMarker answers reader questions

My column last week on the mistakes made when privatizing Israel's government companies elicited a flood of reader responses. Here are extracts from some, with my remarks.

Reader: "I don't think I really understood the article. I always thought private ownership was motivated by a desire to get rich and that private business drives economic activity through streamlining, competition and innovation. If I'm not mistaken, Cellcom's... entry into the market lowered prices, stimulated competition, improved service and boosted economic growth. So what's the problem?"

Answer: You are right. The desire to get rich through private ownership may lead to streamlining, competition, innovation and economic growth. My point was that it doesn't always work that way.

Privatization aims, in theory, to better the economy as a whole: to make companies more efficient, to revitalize them, to improve service.

But history shows that when the regulator neglects to set rules on competition, customer service and corporate governance the management may narrow its focus to maximizing profit without considering the greater good.

Allow me to quote Harvard professors Jay Lorsch and Rakesh Khurana, from their article "The Pay Problem," which appeared in Harvard Magazine: "We need to change the terms of the conversation, to make room for a larger and more public discussion about the purpose of the corporation and larger moral and political considerations," they wrote.

Companies are an integral part of society. They benefit indirectly from taxpayer-driven public services such as education and R&D, explain the professors, and Americans in turn expect corporate managements to behave ethically and with restraint "in exchange for vesting an extraordinary amount of power that affects society's well-being in private, corporate hands."

Back to Cellcom. You are right, it is a stellar example of what happens when it works. Cellcom blasted into a monopolistic market controlled by the government companies Bezeq and its subsidiary Pelephone. Telecommunications prices fell dramatically, forcing Bezeq to improve its offerings.

Had Bezeq been privatized before the onset of competition, the public might have lost out three ways. First, it might have continued to pay through the nose for cell-phone service. Second, Bezeq could have eschewed streamlining. Third, introducing competition after the event would have been that much harder after some local tycoon got his hands on the monopoly.

Reader: "The greatest danger to the economy and to democracy is for the trade unions to take control of the political parties."

Answer: The unions' power to pull strings in the parties and to manipulate Knesset members does pose a threat to democracy, just as the fear of business figures can control the actions of politicians and regulators. If you have closely followed the economic reform process in Israel you could argue for the existence of a hidden collaboration between the most powerful business figures and the unions in the most powerful state monopolies. Indeed, why should the powerful families and unions come into conflict? It's better for them to secretly collaborate, each squeezing the most monopolistic profit from the public, which has no such powerful connections.

It is clear that the party primary system that empowers small, narrow-interest parties and a handful of rich families is a threat to democracy in Israel. The behavior of most cabinet ministers and MKs on issues affecting the general public attests that they have "clients" who are a tiny minority of the voting public.

Reader: "Why does the taxpayer have to fund layoffs at government companies? At private companies, the owner foots the bill. Why do the little taxpayers have to finance the failures of the great government companies, whose conduct is generally politically motivated?"

Answer: That is an interesting and important point, but the devil is in the details. Most of the state companies were privatized after the government paid "transition bonuses" - that is, bloated compensation.

The buyers of the government companies aren't fools. Either they bought companies in which the government had already paid compensation, or the price they paid reflects the cost of anticipated compensation agreements.

The taxpayer shouldn't have to foot the bill of the companies' failures, or accept political appointments.

Companies should only be privatized if they operate in competitive environments and can be supervised to ensure the quality of their corporate governance and of their public services. Ones that do not meet these criteria should be managed professionally, as government companies.

The government can appoint good managers. Big government companies do provide opportunity to good managers. Take Ami Erel, manager of Discount Investment Corporation, who 12 years ago led the government company Bezeq. He became highly sought after in the telecommunications market after he left.

Reader: "If Bezeq were a government company, the advanced NGN Internet network would long have been generally available, not some marketing gimmick aimed at wealthy city dwellers." Answer: Bezeq didn't have to be nationalized just so the entire state of Israel would get fast, low-cost Internet connectivity. The government has various tools for intervening in the market when it sees reason to supply good service to the public at low cost. The government can and should find ways to combine the advantages of private management with government policy that allows basic, or essential, services to the general public at low cost.

Reader: "Kudos to Likud voters, who continue to vote for a party that steps all over them yet continues to let them think they rule."

Answer: The failures in handling Israel's long-term economic problems aren't the purview of this or that party. The economic policies of the various parties are indistinguishable. Some Israeli politicians belong to the party of money, cynicism and short-term thinking. They brandish some extremist ideology or other, left or right, but are mainly engaged in advancing their own interests, and the public lets them do so.

Reader: "You can't just rest on your laurels. Good actions must continue. Selling Bank Hapoalim, Bezeq and other companies should have been followed by constant government supervision and regulatory adjustment. The problem wasn't with privatization, but with base politicians crowned by the media.

You demand close examination of the candidates for the new committee being created to address forming to handle the concentration of power in the economy. Why?

That concern wouldn't exist if not for the media. Our problem is above all the unholy alliance between big business and government. That alliance has birthed a corrupt media that led the public to elect base politicians who do what the media tells them but are in fact led by the oligarchs. Your very use of the term 'controlling families' and not 'economy concentrated within a group of oligarchs' is to collaborate with them."

Answer: One could argue vehemently against your view and sweeping generalizations, but there's no doubt that your words contain much truth.

The media and public debate have great influence on the politicians and the public. As for terminology, a quick Internet search reveals that in recent years Haaretz has increasingly used "oligarchy" to describe the powerful business groups that dramatically influence government and the media by virtue of their control of multiple businesses. We have a long way to go before descending to the level of Russia or Thailand or Turkey, but the direction is indeed worrying.

Reader: "Prime Minister Benjamin Netanyahu, like U.S. President Barack Obama, does nothing but talk. He's dependent on the rich. Our politicians, theirs, everyone's, depend on the people who control the equity markets. Yes, we've been had. Everyone's the same, make no mistake. We all have something to lose, and the people who control the state know it. it doesn't matter who 'runs' the state: It's run by money, not politicians."

Answer: Money does not run the entire country, and not all politicians are corrupt and cynical. In the months to come Netanyahu will have to prove whether he is dependent on a handful of powerful business interest or whether he can lead a reform that strengthens democracy and public service. At the moment it seems he prefers to avoid the issue by engaging in diplomatic and security matters. The public must shout, loud and clear, that economic and social issues cannot wait for Iran and that in any case we have far greater capacity to influence the local economy than to influence Iran.

Reader: "There should be a government inquiry to determine who ruined our beautiful country. Who took it all away without anybody noticing?"

Answer: Our beautiful country has achieved great things in many areas since its establishment. There were great achievements in the past decade, too, in macroeconomics and in high-tech.

Weighing against these achievements are question marks and dark shadows with regard to education, inequality, governance, corruption, public sector management and Israel's dissolution into three states - one of the Haredim, one of the Arabs and one of the rest.

But we don't need an inquiry. We need our politicians to present long-term plans for solving the economic and social problems. It won't happen without the involvement of the public, and without a new, committed elite that spearheads real change.