state-led concentration of power in the israeli private sector

Political and Social History of the State of Israel from 1948 to 2009

Year 2009-10

Seminar Paper The State-led Concentration of Power in the Israeli Private Sector December 13, 2011

The State-led Concentration of Power in the Israeli Private Sector

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INTRODUCTION The names Ofer, Dankner, Arison and Tshuva need no introduction among Israelis. It is widely known that these families are exorbitantly rich, have close political ties and control massive conglomerates. Moreover, they are benefactors of the highly concentrated power and wealth that exists in Israel today. How did the Zionist experiment, of which equality was a primary aim, lead to the emergence of an exclusive class of ultra-super wealthy? It was in fact the government itself that created the structural framework within which monopolists were able to flourish. Early Zionist leaders were intent on creating an ideal, protected nation for the battered Jewish people. Due to fear of the potential effects of free market planning (and obvious economic ignorance), they sought to implement their ideological goals through all-encompassing central planning. The leaders insisted on forcing their dreams into reality. Unfortunately this caused the ruling elite to encourage restrictions on trade, especially in the form of cartels and monopolies, as early as the pre-state Yishuv period. Particularly after World War II, the government was able to sustain the inefficient economy with funds from reparations and a rapidly growing population. Those who so

wished to protect the nascent Jewish nation ended up being protected themselves from having to determine how to create a prosperous economy. Government leaders funneled money to the few approved enterprises which profited marvelously. The enterprises took these

profits and diversified, concentrating power over almost all sectors of the Israeli economy within these firms. The conglomerates inevitable folly of falsely inflating their share prices forced the reluctant government to take them over. By this time, political leaders began to understand the harms of economic inefficiency and wasted no time re-privatizing the firms. Economic power and wealth was remained highly concentrated, as only a small number of


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buyers were positioned to make such significant purchases. economic oligarchy continues to endure today.

The damaging reality of an

I begin this historical discussion by focusing on the inefficient habits that developed during the Yishuv period. Next, I describe how these habits became entrenched in law after 1948 and were accompanied by several other measures used to manipulate the economy. The analysis then turns to the defense-led boom of the 1960s and 70s and the eventual bust following the 1983 Bank Shares Scandal. Though control over the private sector was quickly shifted back to private owners, a significant concentration of power in the Israeli economy remains. Control that once existed in the form of cartels and monopolies now takes the form of business groups. Precisely how these business groups persist is unclear, but there is no doubt that they continue to control a significant portion of the Israeli economy and that the Israeli government helped them get there.

I. PROTECTED UTOPIA In 1917, the issuance of the Balfour Declaration ostensibly provided international legitimacy for the creation of a Jewish State. This led to a great debate among world Zionist leaders regarding the appropriate development strategy for Eretz Israel. Both sides agreed that available land should be owned and administered by the state. The emphasis on

agricultural settlement was also widely accepted. Choosing the best development scheme, however, proved problematic. The American camp led, by Justice Louis Brandeis, advocated a free market system.1 According to his plan, the World Zionist Organization ought to encourage large-scale private

1

For a detailed discussion of the competing development policies culminating in the Brandeis-Weizmann showdown, see Baruch Kimmerling (1983) Zionism and Economy (Cambridge, Mass: Schenkman Publishing Company, Inc.), pp. 1-20


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investment in order to create a robust and profitable private sector.

Masses of Jewish

immigrants and capital would flow to the vibrant emerging economy and colonize the land. Brandeis held that too much public support of new settlement would undermine settler motivation and create adverse selection of enterprise. Market forces should lead the way to a sustainable and prosperous economy. In contrast to the Americans, European leadership adopted a socialist plan for development. This was partly due to the fact that they were more cynical about wealthy Jews willingness to immigrate, partly because many prominent Zionist leaders of the time came from centrally planned economies and were promoting what they knew. Speaking to the first point, European Zionists argued that it would be premature to plunge Eretz Israel into a market system, as a majority of immigrants would arrive destitute or nearly so. They

believed that the Zionist Organization should subsidize all new immigrants and support the establishment of communal settlements. Chaim Weizmann, a leader of European Zionists, held that subsidies should be heavily focused in the agricultural sector. He went so far as to assert that without a strong agriculture basis there would not be any Jewish culture or even Jewish economics.2 Eventually the European camp prevailed, as evidenced by a framework of development principles determined by the 1920 Zionist Congress. Yair Aharoni describes the framework as comprising of six central tenants:

...first, the belief that agricultural settlement was central for economic colonization and development. Second the conviction that only communal settlements could survive...and therefore that these settlements should be

2 Aharoni,

Yair (1991) The Israeli Economy: Dreams and Realities (London: Routledge) p. 62


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accorded the highest priority. Third, the neglect of industrial development and the urban infrastructure. Fourth, the assumption that trade and services were inferior professions that should be discouraged. Fifth, the creation of a

paternalistic central management of the agricultural settlement...a private individual should not be allowed to settle on the land without being part of a collective group that can be directed, regulated and managed. Finally, leaders learn to dictate the budget size through the magnitude of the expenditures, creating deficits and achieving a fait accompli while avoiding the need to decide on priorities by taking loans.

The clearly centralizing effects of these principles were compounded by the zeal with which early Zionists adhered to their utopian ideology. On a philosophical level, Zionism pursued a very specific goal: creating a homeland for the Jewish people marked by safety, prosperity and equality. Creation of such a society necessitates extensive planning, The now

protection and government intervention, leaving little room for a private sector.

formalized primacy of agriculture also strengthened anti-private sector sentiment. Private ventures tended to be industrial or trade-oriented, which could lead citizens away from focusing their efforts in the righteous realm of agriculture. Furthermore, private enterprise, with its inherent focus on maximizing profit, was considered to be both incompatible with the objectives of the Zionist effort and incapable of accomplishing these objectives.3 The prevailing belief was that settlement of Mandatory Palestine could not possibly yield a profit while accomplishing a nationalist agenda. The extent of this belief is confirmed by the fact

3

Plessner, Yakir (1994), The Political Economy of Israel: from Ideology to Stagnation (New York: State University of New York Press) p. 150


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that private funding from world Jewry was solicited on the grounds that Eretz Israel was a philanthropic enterprise. Arthur Ruppin was an articulate advocate of the socialist development program. Ruppin maintained the flawed stance that agriculture was more suitable than industry for absorbing the large amounts of immigrants expected to arrive in Eretz Israel. He argued that the investment required for settlement of a farm family was less than that required for new industrial workers. According to a very limited examination of four industrial firms, Ruppin concluded that agriculture cost approximately I 1,100 of investment per farm family, while industry cost approximately I 1,350.4 Ruppin was mistaken on two counts: (1) he did not realize his bias toward capital intensive industrial companies, and (2) his calculations were inaccurate. Proof can be found in a 1930 industrial census by the Jewish Agency, which had strikingly different findings. The survey of 2,276 firms revealed an average investment of I 306 per industrial worker, a sum considerably less than that required for an agricultural household.5 Moreover, new

immigrants showed a clear preference for urban settlement. Following the fourth Aliyah of 1925, 83 percent of Jewish immigrants lived in cities. Ruppin went on to support his position based on a clear misunderstanding of the gains from trade. He argued that Jews in Mandatory Palestine would not benefit from trade with non-Jews, as they had enjoyed outside of Eretz Israel. He assessed the Jewish community of Mandatory Palestine to be a self-contained economic entity surrounded by hostile nations not fit to be trading partners.6 He also believed that unregulated trade within Eretz Israel

4 5 6

Ibid., p. 151 Industrialization of Palestine: Its Possibilities and Limitations, (1933), Palestine Economic Bulletin no. 6-7.

Ruppin, Arthur (1976), The Agricultural Colonization of the Zionist Organization in Palestine, (Westport, Conn: Hyperion Press) p. 47, first published by Martin Hopkinson, 1926.


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would lead to individual profits and that profits earned by one Jewish settler would come at the direct expense of another. Essentially, Ruppin argued that the state should be involved in all transactions to guarantee equitable redistribution. Again, he was wrong for two primary reasons. Ruppin is wholly discounting economic efficiencies gained from competitive Also, he clearly follows the

innovation, which would have resulted from free trade.

assumption that the economy is zero-sum and that relative gains by one party necessarily mean losses by another. Unfortunately widespread economic incompetence was supplanted by ideological devotion among many prominent Zionist leaders. David Ben-Gurion himself offered an

argument similar to Ruppins. Ben-Gurion held that the goal of Zionism was to absorb a maximum number of Jewish immigrants and provide them with a means to live. Any

incorporation of non-Jews threatened this principle. Private industrialists with their profitseeking motives were likely to exploit more agriculturally skilled, less expensive Arab workers instead of employing Jewish labor. Thus a private sector worked against Zionist objectives. Recalling that private enterprise would likely have been concentrated in industry, Ben Gurions fear is at least partially wrong. The threat of Arab workers being engaged in

industrial positions was ideological canard as Arabs were generally not qualified for factory work. Nonetheless, certain essential industries were permitted during the 1920s and 30s. These included transportation, security, medical care, education and banking. Again, these services were not produced by market forces, but formed within cooperatives as part of the Histadrut.77

The Histadrut is the trade union for Jewish workers. Founded in 1920, by 1927 the Histadrut represented some 75% of the Jewish workforce. Like several similar non-state organizations, the Histadrut played a major role in state-building and eventually owned a number of enterprises, allowing it to be the largest employer in Israel for a period of years. See the Histadruts website for further information, http://www.histadrut.org.il/index.php? page_id=296.


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The primacy of Zionist ideology combined with economic short-sightedness created an economy rife with inefficiencies, vulnerable to poor governance. The Fourth Aliyah of 1924-25 presented a significant challenge to Zionist leaders ability to maintain their narrow ideological stance against the private sector. Unlike previous aliyot, this aliyah consisted primarily of middle-class Jews from Central Europe. These immigrants had not lived in the socialist regimes of Eastern Europe and did not share staunch Marxist beliefs. Jews of the Fourth Aliyah did not have a penchant for agriculture or bias against urban living or free trade. Indeed, many of them had been small business owners who maintained a modest

livelihood in Central Europe. They were much more skilled than previous immigrants and brought with them a desire to continue their capitalist ways. Plessner cites the Fourth Aliyah as a major turning point in the Zionist leaderships approach toward the private sector. These immigrants generally avoided agriculture, required very little public funding for smooth absorption and were accompanied by a boom in private investment. Early leaders were obliged to accept that agriculture was not the exclusive or necessarily best solution for immigrant absorption. Private initiatives began to be tolerated but were still denied public funds. As Plessner writes, the figures are very clear in this respect: in the post-World War I period up to 1937, the two official Zionist funds, the Jewish National Fund and the Foundation Fund, together spent 51 percent of their total outlays on agriculture, whereas trade, industry, urban settlement, and direct investment between them commanded less than 9 percent of the total.8 Remaining totals were allocated to essential services. Private initiatives, however, were only be tolerated if they promoted national goals. Profit potential was ignored and private businesses were assessed as either beneficial (i.e.,8

Plessner, p. 153; figures from A. Ulitzer (1959), The National Capital and the Upbuilding of the Land (Jerusalem: Foundation Fund), Table 38 [Hebrew]


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supporting national ideological goals) or non-beneficial (i.e., all else). To be considered beneficial, a business must (1) produce a product for export, (2) offer a new product to the market and (3) provide employment opportunities to Jewish immigrants.9 The first criterion reflects the fear of a trade imbalance and yet another attempt to reduce domestic competition. Israel, being a small and natural resource poor country, has historically had a very high level of imports. Zionist officials realized that this could create an enormous national deficit and responded with the remarkably clumsy solution of forcing private enterprise into producing exclusively exports. This economically ignorant plan was reinforced by the argument that private producers selling goods on the domestic market represented competition to Yishuv-sponsored conglomerates and cooperatives, therefore such goods must be directed outwards. At one point, Zionist leaders referred to domestic trade as internal dumping.10 The second criterion is an obviously arbitrary barrier to entry, again in an attempt to protect government initiatives. The emphasis on Jewish employment is a

repetition of the central Zionist objective of full employment. Again, devotion to ideology trumps efficiency and / or profitability. The Zionist Organization also flexed its muscle against private industry through the banking sector. Banking, considered an essential service, was largely administered through the Histadrut subsidiary Bank Hapoalim (the Workers Bank). As indicated by the name, the banks express purpose was to extend credit to agricultural cooperatives. Bank Hapoalim fulfilled this purpose quite sufficiently. However, no long-term credit was available to

finance new industry. In Eretz Israel of 1924, bank credit was extended for three month periods carrying a 9 percent interest rate, with the added condition that industrial borrowers

9

Plessner, p. 171 Ibid., p. 170

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provide collateral in the form of customers notes. Not only was the credit term far too short to assist a fledgling business, but 9 percent was very high compared to prevailing rates at the time.11 An investment bank that may have been better suited to provide long-term credit was absent in Mandatory Mandatory Palestine at the time. As the market-oriented Brandeis

development scheme had been largely ruled-out, such a bank was equally unlikely to arrive. Investment institutions tend to shy away from philanthropic pursuits. Additionally, private industrialists were also structurally deterred from obtaining an industrial mortgage due to the national ownership of the land. Interestingly, proponents of national land ownership were aware of this potential dilemma. For example, Abraham

Granovsky, in defense of the availability of industrial mortgages, argued that there existed no such issue because rights to a forty-nine year leasehold, as was frequently granted at the time, could be mortgaged in the same manner as normal ownership rights. Granovsky understood that the value of commercial property is dependent upon the managers ability to profitably exploit the asset. Still, he asserted that such good management skill was ordinary, thus a bank could assume that any manager would produce consistent and sufficient returns.12 Obviously Granovskys faith in the average manager exceeds that of the banks as they were unwilling to extend credit according to his logic. Granovsky and his counterparts were incorrect for another important reason: the Jewish National Fund (JNF), the Zionist organization which owned and administered land in Eretz Israel, could veto any attempted lease transfer. Plessner explains, Thus, consider a farmer who borrowed against the leasehold and defaulted. A decision to foreclose meant the bank had to look for a new owner. Naturally, it would look for a farmer who was likely to

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Ibid., p. 162; The author notes that in the United States in 1925, the rates on commercial paper and customer loans were 4 percent and 4.5 percent respectively.12

Granovsky, Abraham (1926), Land Problems in Palestine, (London: George Routledge & Sons), p. 60


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produce high income from the land. But the bank faced the risk that the JNF, which had in mind considerations other than profitability, might veto the deal. So its ability to recover at least part of the loss was at the mercy of the JNF.13 Essentially, potential industrialists had no guaranteed collateral to offer to banks in exchange for long-term credit. Long-term credit would not be available in Mandatory Palestine for more than a decade to come. A final very important note must be made about the Zionist Organizations ability to create and maintain the desired protected market in Eretz Israel. It goes without saying that creating a society that functions against market forces requires substantial cohesion and discipline. Before the formal declaration statehood in 1948, Zionist leaders lacked the

coercive powers that are generally required to enforce a national agenda. Without recognized sovereignty, a monopoly over power or definitive legitimacy as the governing authority, Yishuv leaders resorted to methods of persuasion to accomplish Zionist goals. This left the door wide open for political bargaining and patronage. Befitting their Marxist tendencies, Yishuv leaders concluded that the best route toward building legitimacy for themselves and obedience from settlers was to reach political decisions through consensus. Aharoni writes that consensus was partially achieved through the promotion of very high political involvement. Jews in Eretz Israel were expected to belong to a litany of organizations, associations, even political parties. In return, the groups

would provide public goods that under normal conditions would have been taken on by the government. The parties provided ideology, employment and health services. They also organized cultural and sporting events.14 Modern Israeli football teams frequently still go by the names they received in the Yishuv period.

13

Plessner, p. 164 p. 151

14 Aharoni,


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Moreover, leaders encouraged non-political organizations to participate in the political process. Their logic is sensible enough: Yishuv leaders wanted the organizations to have a dog in the fight so that they might be more committed to their nationalist causes. Groups were invited based on economic interest (for example the Manufacturers Association), ethnic (for example Sephardim or Yemenites), or on professional common denominator.15 Once consensus was reached, individuals were expected to cast aside

personal misgivings and submit to the will of the national organizations. Indeed, the pre-state economy of Israel was marked by substantial discipline and commitment to ideology (supported by the fact that the economy was run largely on foreign money transfers, thus avoiding difficult budget related questions). Occasionally the

consensus method would fail and new organizations would be established outside of the accepted norm. A notable example is the New Zionist Organization, better known as the Revisionist party, created in 1935 by Zeev Jabotinsky. Members of Jabotinskys party were ostracized by the mainstream due to their refusal to adhere to consensus views. The

Revisionists formed an accompanying militia, the Irgun Zvai Leumi, which often conflicted with the primary militia haHagana, the precursor to Israeli Defense Forces (IDF). These technically non-political but highly politically involved national institutions would become the bureaucracy for the Israeli state. Though many of the organizations did not set out with a political purpose, involvement in the political system and the culture of patronage promoted by Zionist leaders greatly politicized them. Subsequent Israeli

bureaucracy was founded on a culture of decisions being made according to preference and political considerations, rather than long-term objectives, such as prosperity and

15

Ibid., p. 152


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sustainability. When the business sector finally did begin to emerge, it is no wonder that business and government leaders ended up as bedfellows.

II. The Manufacturers Association: An Early Lobby that Set the Pace Undoubtedly the potential of an efficiently functioning economy was greatly stifled by design accompanied by poorly thought out solutions for structural deficiencies (e.g., a lack of sovereignty and legitimacy). In spite of indisputable policy measures taken against free trade and enterprise, a small community of aspiring entrepreneurs did exist in Eretz Israel. Many of those wishing to engage in private business activities were settlers from the Fourth and Fifth Aliyot, immigrating to Mandatory Palestine from Central Europe. These settlers left middle-class lives in Europe and wished to recreate their standard of living in their new home. Perhaps motivated by the fact that Eretz Israel was still a state in the making and convinced that they could carve out a piece of the economy for themselves, a small group of entrepreneurs forged a path for the private sector. Founded in 1923 with only 12 members, the Manufacturers Association (MA) claimed to represent 95 percent of Palestinian industrial capital by 1935.16 Though the MA was undoubtedly comprised of ambitious optimists, these men were not foolish enough to confront Zionist leaders with appeals for policy reform which would allow capitalism to take hold. They recognized that the leadership was strictly concerned with a very narrow set of Zionist ideals and that an environment rife with cronyism was taking shape. Thus the MA pursued their interests in a fashion suitable to the Zionist Organization. A primary element of the MAs strategic approach toward socialist leadership was the16

Manufacturers Association, Memorandum Submitted to the President of the Nineteenth Zionist Congress in Lucerne, 1935.


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adoption of rhetoric expressing their support of Zionist ideals.

The MA described its

overwhelming focus on maintaining full employment and the success with which Palestinian industry had absorbed new immigrants. MA president A. Shenkar explained how the MA took pains to convince its members not to idle their factories during downtimes as this would create the devastating outcome of unemployment. He noted that factory owners eventually obliged, choosing to ignore financial concerns in favor fulfilling national goals. Shenkar hoped that his emphasis on immigrant absorption by the industrial sector would turn into national funding for the private sector: The political state of the Zionist Movement at this juncture intensifies the Zionist value of industry, which achieved in recent years a level enabling it to absorb most of the immigrants for the purpose of arranging for them productive employment, and it thus behooves the Congress to resolve to provide full national support to industry and to the industrial movement.17 The MA also brought great attention to the very low rate of Arab labor employed in Palestinian industry. In reality, this was largely due to the fact that Arabs were generally not qualified to hold industrial jobs. Nonetheless, the MA did not miss the opportunity to state its undying commitment to the Zionist cause: [We maintain] complete loyalty to Jewish labor and to the interests of the national economy.18 devotion to Zionism and the welfare state. It is evident, however, that the MA wanted more than just a stake in the Israeli economy. Indeed, the MA began to promote policies that would enhance the monopolistic nature of the Palestinian economy with them as the sole producers. Already, Eretz Israel was a highly protected environment characterized by excessive central planning. Yishuv leaders MA officials repeatedly declared their

17

Manufacturers Association, Memorandum Submitted to the Twenty-First Zionist Congress in Geneva, 1939.18

Ibid.


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attempted to exclude all potential competition in exchange for considerable control of the economy. Creating a monopolistic environment was aided by the countrys very small size. The MA understood these constraints and decided that if the market was going to be monopolized, they might as well be the monopolists. This is particularly apparent in the MAs assurance that they would fight price increases on domestically produced items. In other words, the MA offered to help arbitrarily set prices. The logic behind the argument was that price rises were bad because they could attract foreign competition, which would destroy Palestinian industry.19 Additionally, the

MA assisted in launching a Totzeret Haaretz or Buy Local campaign. For example, a joint committee of the MA and the Jewish Agency decided that the Jewish Agency would impress upon mortgage banks to only provide credit to construction firms that used domestically produced goods.20 This environment was conducive to the emergence of cartels in the Israeli economy. Cartels were viewed as a reasonable measure for preventing cutthroat competition, with its presumed destructive and destabilizing effects. In the wake of the recession of 1936, the fostering of cartels was the chosen solution for protecting producers from the economic downturn. Leaders believed that cartels would act in coordinated groups, halt falling prices and thus prevent producers from falling into bankruptcy. If firms were allowed to fail,

catastrophic unemployment would result. As always, unemployment was to be avoided at all costs. The banking sector also supported cartel formation. Banks reasoned that credit taken by one firm in a cartel would be guaranteed by all remaining cartel members, thereby reducing risk to the lender.19

Plessner, p. 169; Minutes of a meeting between representatives of the Jewish Agency, the executive committee of the Histadrut and the MS, January 22, 1935.20

Resolutions of the Joint Committee Appointed by the Jewish Agency and the MA on the Basis of the Resolution of the Meeting Convened on July 28, 1936 by the Jewish Agencys Executive, August 3, 1936.


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Zionist leaders clearly did not realize that their emphasis on control was in fact undermining their very ability to maintain full employment, affordable prices and a trade surplus. Ceteris paribus a cartel will decrease supply in order to raise prices, implying higher unemployment. Moreover, removing goods from the domestic market provides more

opportunity for substitute imports to enter. Still, Yishuv leaders the MA assumed the duty of establishing branch-by-branch cartels with Yishuv support.21 The organization stated that it ensured fair relations among producers by implementing agreements designed to eliminate or limit unfair or ruinous competition.22 Soon a dedicated Cartels Department was created to tackle the job. Yishuv leaders believed that the concentration of power in the market, Limited

in the form of cartels, would provide them with tight control over the market.

centers of power would be easier to manage than a vibrant, competitive market with numerous, decentralized producers. MA members knew that they were most likely to

succeed if they fit themselves to the ideological zeitgeist instead of try to fight against it. As previously mentioned, the MA capitalized on the situation, positioning themselves for continued involvement. If the MA couldnt beat Yishuv authorities, they might as well join them. Their strategy was quite effective. At the MAs urging, the JA began supporting cartel formation both verbally and in policy initiatives. For example, the Jewish Agency set up the Fund for Industrial Recuperation and Encouragement in 1937. Unlike the previous sole

requirement of proving national value, new enterprises had the added burden of showing a reasonable profit potential. Meeting this new criterion was nearly impossible for potential market entrants due to the preferential treatment afforded to already existing enterprises.

21 22

Plessner, p. 170 Ibid.


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Moreover, the Jewish Agency required that new businesses limit their output to prevent the crowding out of older, less efficient businesses.23 competition. The MA had won the battle against

III.1948: Statehood, Intervention and Interest Groups On May 14, 1948, Ben-Gurion declared Israel to be a sovereign nation. By the end of the War of Independence in 1949, national leaders found themselves endowed with the luxuries of legitimacy and power they had not previously enjoyed. The new government chose to stay on the path of intensive central planning and began a slow process of entrenching the inefficient processes it had begun during the Yishuv period. Authorities no longer had to depend on informal tactics of persuasion to convince parties to fall in line. Rather, they had new avenues for intervention, such as licensing, legislation, taxation and monetary & fiscal policy. Given that many non-political bodies had provided public services during the prestate era 24, it was unclear who would execute which services in the State of Israel.

The early years of Israels existence can be characterized as a period of blurred areas of responsibility among the institutions and leadership of the ruling party, the state, national institutions and the Histadrut. The lack of

distinction between the state and the ruling leadership created a situation where government intervention on a massive scale was apparent in almost23

Plessner, p. 172, provides the example of a new bakery: ...sometime between 1937 and 1940, the Department of Labor of the Jewish Agency arranged that a newly constructed bakery, using modern equiptment, limit its output to allow the older, less modern bakeries to stay in business.24

The Histadrut is an excellent example of this. Though a trade union in name, the Histadrut was active in foreign relations, welfare, health, mutual aid, old age institutions, as well as many economic institutions. Aharoni, p. 173


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every area of economic activity, with a clear preference for control of national resources by the state -- which immediately created a highly concentrated system. Many firms and business enterprises at the time were established and controlled by three principle ownership groups -- the Israel Government, the Jewish Agency and the Histadrut (Labor Federation).25

Government intervention immediately creates a strong incentive for the formation of interest groups. Subsidized firms that may compete under free-market conditions choose instead to coordinate their efforts (e.g., as cartels) and apply unified pressure on the government to influence the size and form of the government handouts they are receiving. The fledgling Israeli government was especially vulnerable to this problem due to leaders strategy of heavily involving non-political actors in the political process during the pre-state period. Community leaders had learned the importance of informal relationships and had done their best to pander to the Zionist Organization. Yishuv leaders welcomed and encouraged collaboration. When the State of Israel finally emerged, leaders of approved enterprises that were technically left out of the administration were nonetheless not far from it. Non-political organizations suddenly became interest groups that were already woven into the political elite. The private sector had little chance of becoming market based during the early decades. The political system of proportional representation also increased the strength and prevalence of interest groups. Proportional representation necessarily creates a very high number of parties, as minority interests frequently win parliamentary seats. Consequently, coalition leaders must appeal to several parties to maintain power. The system is continually25

Kosenko, Konstantin (2007) Evolution of Business Groups in Israel: Their Impact and the Level fo the Firm and the Economy, Israel Economic Review 5:2, p. 64


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fracturing along party lines providing ample opportunity for interest groups to assert their will. Aharoni adds that the election process left individuals powerless to change the system. Instead, they looked to be part of those complacent large organizations enjoying governmental largesse. As the Revisionists had shown before, those that refused the

mainstream were often literally ostracized.26 The Manufacturers Association is a prime example of a heavily enmeshed nonpolitical organization turned interest group. They had undisputably found success through extensive involvement in the central planning process and wasted little time in beginning their campaign to urge government leaders to increase industrial planning activities. The private sector was very adamant in demanding, and the government very generous in helping to erect, a whole list of barriers to entry of new firms to the industry.27 Those firms that had already shown themselves to be in the national interest and established themselves in the Israeli economy focused all of their efforts towards maintaining their hard earned, protected status. Incumbent firms succeeded in entrenching their rights by helping to inflate the size of the new government. Laws were written and passed restricting entry into certain professions or blocking certain behaviors, such as opening stores at late hours.28 A profound example is the Commodities and Services (Control) Law of 1957, a version of which continues to be in effect. The law virtually empowers the government to take over the marketplace and rule production, prices and distribution by decree.29 Though never used to its full extent, parts of

26 Aharoni, 27 28 29

p. 169

Ibid., p. 190 Ibid. Plessner, p. 141


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the law have been employed several times to impose price fixes.30 For example, a producer can appeal for a price increase if he experienced increases in legitimate costs. Given the leeway available in managerial accounting, it is certain many a producer has taken advantage of this vague legal language. Another such law is the Restrictive Trade Practices Law of 1959 which remained in effect until 1988. monopolies. This law articulated the governments policy toward cartels and

Though appearing to outlaw restrictive trade practices, it was replete with

loopholes. Firstly, the definition of a cartel was very broad, including almost any business to business agreement that involved limits to trade. If a firm wished to join a cartel, it must register with the controller of restrictive trade practices within fifteen days of joining. The cartel itself must then apply to the Board for Restrictive Trade Practices to gain approval for their arrangement. Similar to the criteria established for gaining industrial credit during the Yishuv period, a cartel must show that it was acting in the national interest. A cartel was regarded as being in the public interest if it:31

1. Secured for the public a particular advantage that could not be obtained otherwise; 2. Protected the continued existence of an entire economic branch, considered to be advantageous to Israels economy; 3. Enhanced the efficiency of production or marketing or reduced the price of a good or service;

30 31

See Plessner p. 141-142 Ibid., p. 143


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4. Brought about an improvement in the countrys balance of payments, through reduced imports or increased exports.

The above guidelines are notable for their vague wording and economic ignorance. Cartels could be very creative in showing how they met the first two requirements. Moreover, basic economics shows that cartels, by definition, do not enhance efficiency, as required by the third criteria. Unfortunately for the Israeli market, many new producers were forced to export 100 percent of their output. As a continuation of pre-state practices, the government took several measures to promote the formation of industrial cartels in order to reduce domestic competition. When the edible oil industry applied for approval of

restrictive practices, the key witness for approval was the director-general of the Ministry of Trade and Industry.32 If a cartel could not meet these standards, they had another highly accessible loophole. If a restrictive arrangement was struck between corporations controlled by the government, it was exempt from the law, as was a restrictive arrangement between a corporation and its subsidiaries.33 The language regarding monopolies reveals further the governments goal in legislation regarding restrictive practices. The ruling elite was not trying to discourage

restrictive practices, rather they wanted to be sure that they maintained the upper had on the firms controlling the market. A monopoly was defined as existing in cases where the

provision or acquisition of any good or service was controlled by one agent to an extent that exceeds the extent designated by the minister of trade and industry as monopolistic.34 The

32

Ibid., p. 144; See Chaim Arlosoroff (1934), The Settlemet FInances of the Jewish Agency, Collected Writings of Chaim Arlosoroff, 2:2 (Tel Aviv: Stible) [ Hebrew]33 34

Ibid. Ibid., p. 145


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minister of trade was free to determine monopolistic market share at will and that level could vary by product or sector. Essentially, the government allowed itself full discretion to declare which firms were monopolies and which were not. Additionally, upon the identification of a monopoly, the Ministry of Trade was not necessarily compelled to do anything about it. In 1988, this law was replaced by a new version. Instead of approvals being

administrative in nature, the process was moved to the courts. The courts were, however, compelled to consider the public benefit of the proposed restricted arrangement according to criteria very similar to that specified in the original legislation. Yet the updated law did not preclude cartels or monopolies. On monopolies, the law is much more specific, defining a monopoly as a single entity that controls over half of the market share for a good or service. The law thus empowers the controller to place administrative controls on price, quality and output of a monopoly, if the controller chooses to do so. In 1989, nineteen approved cartels existed in a variety of sectors. As of 1991, the Israeli market had only one producer of tires, one producer of paper, one producer of Passover Matzot, one producer of salt, or of instant coffee, of cement, hollow glass, glucose, electric bulbs, aluminum tubes, beer and matches -to name just a few products.35 Monopolists were frequently the sole importers of the goods they sold, providing proof of intense government exclusion through licensing procedures. Government intervention also occurred through increased foreign trade restrictions, domestic price setting and the rationing of certain goods and services. First, the government established a system of multiple exchange rates.36 By 1952, there were three official

exchange rates. Unsurprisingly, the rate governing most import transactions was the least favorable for Israelis at I 1 per $1. Citrus exporters, the largest export market at the time,

35 Araroni, 36

pp. 188-189

Ibid., p. 173; See Michael Michaeli (1968), The System of Exchange Rates in Israel, (Jerusalem: Maurice Falk Institute) [Hebrew]


23

received I 0.714 for every $1. Tourists paid the highest premium, receiving a mere I 0.357 per $1. By comparison, black market exchange rates yielded a significantly weaker Israeli pound. The state also controlled foreign trade through its beloved licensing procedures.

Applicants for import licenses were evaluated according to their individual merits and approved or denied on a case-by-case basis. The procedure was not at all transparent and it is doubtful that selection criteria was applied uniformly. Finally, the government instituted the Austerity Plan (1950-51). Some services and approximately 600 goods relevant to both producers and consumers were placed under price control. To purchase foodstuffs, consumers were given ration cards redeemable at specific retailers. Typically, rationing occurs during times of shortage to ensure that all citizens

receive essential items. Perplexingly, these austerity measures were implemented to fight inflation. The plan was sure to fail. The government was printing money to finance national debt while simultaneously maintaining an overvalued pound. Consumers were earning

wages whose real value exceeded the supply of goods available, demanding an eventual increase in prices. Patkin highlights that the government-set prices were especially distorted given that they were set at official rates and did not account for the extensive black market.37 Government intervention in the capital market also significantly enhanced the states powers over market activities. Following World War II, Israel received a stunning level of unilateral transfers as a result of reparations payments from Germany and Jewish aid. Between 1953-1964, the country received approximately $800 million in reparations payments and millions more from world Jewry. Thus the state was uniquely positioned to determine to whom these funds would be dispersed. This power was bolstered by the states indirect control of banks. In order to finance operations, firms requested credit from the

37

Patkin, Don (1967) The Israeli Economy: The First Decade, (Jerusalem: Maurice Falk Institute).


24

banks. The credit was backed by state capital and the banks were forced to allocate credit according to the government directives. Taken together, these enhanced measures translated to seemingly insurmountable barriers to trade for new private enterprises.

IV. The 1950s through 1966 In the first decade, Israel experienced an impressive growth rate of just over 5 percent. This growth was largely generated by extremely high levels of unilateral transfers in addition to consistent immigration flows. The situation had a twofold effect. First, it allowed political elite to avert market forces for longer than would have otherwise been sustainable. Government officials were not forced to depend on gross national product or profit yielded by Israeli firms to finance desired initiatives. Accordingly, officials were able to avoid making the politically difficult decisions associated with budgetary cuts. A pragmatic actionable development agenda with goals more specific than Zionist ideals did not appear until years later. Non-profitable firms were kept open on subsidies or transfers from other businesses. Wages were increased when it made no financial sense to do so.38 Second, the funding and immigrant flows served to concentrate the governments control over the economy. As previously mentioned, banking credit was directed by the government thus went almost entirely to enterprises that had previosly established themselves as being in the public good, leading to significant concentration in the market. Already large and entrenched firms amassed huge amounts of capital, enabling them to diversify their activities.39 The approved enterprises, as government sanctioned preferred customers,

38 Aharoni, 39

p. 165

Maman, Daniel (2002) The Emergence of Business Groups: Israel and South Korea Compared, Organization Studies, 23:737, p. 749.


25

were privy to directed credit in the form of subsidized loans. At the time, interest rates on most loans were determined based on the Cost of Living Index (COL). Preferred customers were required to pay a fixed, nominal rate of four percent. In the instance that a rise in the COL index exceeded four percent, the government would pay the lender the differential. This arrangement was known as linkage insurance. In an environment of inflation, the

differential in some years reached more than 400 percent.40 With their seemingly unlimited access to capital, already massive firms founded new subsidiaries and acquired other businesses. For example, Koor, a Histadrut-owned holding company, owned 11 firms in 1948. By 1958, Koor owned 25.41 The government could not attain its economic goals without the large firms, and the firms could not succeed without government aid, licenses and approvals. It is not surprising, then, that managers of approved enterprises became more focused on extracting subsidies than attempting to run profitable businesses. The large firms operate with many interlocking directorates and informal ties. The government aids these firms by encouraging investment, providing import protection, refusing to allow competing firms to enter the market and through a system of price controls that is effectively a cost-plus system.42 Through the 50s and 60s, government subsidies were not allocated according to a declared set of rules, rather on an ad hoc basis. Thus, many ambitious entrepreneurs tried to tap government coffers through fraudulent schemes. As a result, civil servants developed a deep-seated mistrust toward private sector entrepreneurs and seemingly innovative ideas. This cycle fortified the already extant culture of distributing funds exclusively to mature firms. Close, personal relationships with those in power became the most important asset to40 Aharoni, 41 Aharoni, 42

p. 165 p. 165

Ibid., p. 221


26

running a successful business. This would remain true until the boom in defense-related industries and the high-tech sector.Table 1: Cross-Holdings among Approved Entities Holding Company Koor Clal Related Bank Bank Hapoalim IDB, Bank Hapoalim, Bank Leumi IDB Controlling Parent Histadrut Histadrut and IDB

IDB Holdings

Recanati Family

Source: Adam Hanieh (2003), From State-Led Growth to Gloablization: the Evolution of Israeli Capitalism, Journal of Palestine Studies, 32:4, pp. 5-21

Since the state came into formal existence, banking has experienced near continual concentration. Until the 1990s, banks could not raise funds in the capital markets, thus the Ministry of Finance made it virtually impossible for small banks to operate. More

importantly, the Ministry extended the right to issue bonds almost exclusively to the largest three banks -- Bank Leumi (of the Zionist Organization), Bank Hapoalim (of the Histadrut) and Discount Bank (of the Recanati family). Furthermore, the criteria by which it granted the authority to issue bonds were never published, leaving new banks little chance of gaining the privilege. Finally, as of 1962, preferred financial institutions were permitted to issue nonindexed loans yet sell indexed bonds. The government guaranteed this arrangement through the previously discussed linkage insurance. Of course, the banks were forced to extend credit according to government directives. The three largest banks accumulated huge profits in the 1950s and 60s. Like large firms, banks used their profits to expand operations into non-financial activities through the acquisition of insurance, manufacturing and construction firms. This initiated the movement toward bank-based groups. For example, in 1961, the Recanati family, who own Discount Bank, established the Discount Investment Corporation - a subsidiary of the bank - for the


27

purpose of investing in industrial, trade and real-estate firms. These two firms were the keystones of the IDB group.43 By 1966, the flow German reparations and immigrants had slowed substantially. After focusing intensely on immigrant absorption and full employment during a period of rapid growth, the government decided it was time to discipline both labor and capital. The state attempted to trim its presence in the economy and implement a mild recession.44 The downturn caused the collapse of several firms which were subsequently purchased by the diversifying banking groups. Several credit cooperatives were swallowed whole by the

largest banking three groups: Bank Leumi, Bank Hapoalim and Discount Bank.45 The result was a dual system in the economy whereby many small businesses [operating completely without the help of government aid] existed alongside a number of large and concentrated firms.46

V. The Six Day War through 1982 The defense industry unequivocally took center stage following the Six Day War. Security concerns are of paramount importance in Israel and funds are readily allocated for defense initiatives. Aharoni adds that in 1967, the country was responding to a French

embargo on arms sales to Israel. The sudden freeze on the supply of military equipment motivated the Israeli Defense Minister to pursue autarky in military supplies.47 Defense

43 44

Maman, p. 749

Shalev, Michael (1999) Have Globalization and Liberalization Normalized Israels Political Economy? In D. Levi-Faur, G. Sheffer & D. Vogel (Eds.) Israel: The Dynamics of Change and Continuity. (London: Frank Cass) p. 12545 46

Between 1956-61, most of Israels credit cooperatives were absorbed by Bank Hapoalim.

Kosenko, Konstantin (2007) Evolution of Business Groups in Israel: Their Impact at the Level of the Firm and the Economy, Israel Economic Review 5:2, p. 6747 Aharoni,

p. 263


28

expenditures as a percentage of GNP rose from a 15.6 percent in 1967 (already the high at the time) to 21.7 percent by 1972. Following the Yom Kippur War in 1973, the defense budget reached its historic peak of 32.8 percent.48 Additionally, the Ministry of Defense began

placing specific production and development requirements on non-Ministry owned firms. Shalev asserts that in spite of economically liberal rhetoric that had begun to emerge, there was no undermining of the states role as the central pivot of the economy. Instead, this pivot found a new axis in the military-industrial complex. The basis for this

development was a potent combination of government-subsidized local military procurement, the burgeoning world market for arms and (from 1970) US government financing of Israels foreign arms purchases.49 A bulk of the activity was occurring with the massive bank-

owned conglomerates, operating as they were with absurdly generous subsidies and lending terms. Military-industrial enterprises secured contracts with the government based on costplus pricing, guaranteeing themselves a profit. Firms producing weapons, the largest of

which were owned by the large conglomerates, enjoyed the preference and preferential treatment of the state.50 State authorities found themselves unable to compel the conglomerates to operate according to the national agenda. Particularly after the entrance of earmarked US aid, the Israeli government found itself increasingly losing control of the economy. Symptomatic of this was the public sectors excessive deficit spending, frequent recourse to corrective devaluations, and government lending policies that favored borrowers at the states expense.

48 49 50

Ibid., p. 253, Table 6.1 Shalev, p. 125 Maman, p. 749


29

The result of these policies was to exacerbate Israels immanent condition of stagflation after 1973, while paradoxically enriching its big banks and conglomerates.51 The Israeli government paid the price for its preferential lending schemes during the inflationary period of 1974-1984. The remarkably high rates of inflation during this period rendered a negative real interest rate. Additionally, this was a period ofTable 2: Subsidy for investment resulting from grants and subsidized credit Years 1965-69 1970-74 1975-79 Estimated Subsidy 5% 19% 31% 20% 16%

significant expansion in both the defense and financial sectors, each of which represented a central activity for the business groups 52. The profits of Koor, Clal

1980-84 1985-88Source: Aharoni, p. 221

and IDB Holdings very closely follow national defense expenditures throughout this period.53 By the mid-1970s, Banks Leumi, Hapoalim and Discount had 93 percent market share.54 Between 1975-80, these groups nearly doubled their share of GNP and quadrupled their profits. Because the most powerful groups in the Israeli economy were experiencing a

veritable golden age, a political constituency arguing for structural reform did not emerge.55

51 52

Shalev, p. 126

Business group is the contemporary term for a cartel. Though nearly impossible to distinguish between a business group and a cartel, business groups are legal while cartels frequently are not, explaining preference for the former. For further discussion, see Buyer Cartels Versus Buying Groups: Legal Distinctions, Competitive Realities and Anti-Trust Policy, by Peter Carstensen.53

Shalev, Michael (1992) Labor and the Political Economy in Israel. (Oxford: Oxford University Press) p. 301 p. 234

54 Aharoni, 55

Kosenko, p. 67; see Plessner, p. 219-225


30

VI. 1983-85: Nationalization followed by Privatization During the troublesome 1970s, the Israeli government reluctantly began to accept that omnipotence over the economy was impossible and perhaps not a reasonable objective. Moreover, leadership of the conglomerates and in the government had been replaced.

Zionist founders who had previously led the government and the banking groups were replaced by ex-army generals. While the founding generation was wholly committed to

idealistic goals, the generals had some managerial training and were more accepting of a profit motive. The most important replacement of leadership occurred in the Knesset itself. In 1977, the Likud party, accompanied by campaign promises of economic liberalization, replaced the socialist Labor party. These events were evidence of a nation-wide ideological shift away from the founding utopian principles toward more market determined policies. Given that entrenched, mature business groups dictated the small Israeli economy, and the fact that interest groups hold massive sway over parliamentarians trying to maintain a coalition, trade barriers and protectionist policies were not immediately abolished. After decades in the making, Israeli enterprises were subsidy-addicted and could not survive abrupt exposure market pressures. The transition to a market economy would take decades.

Entrenched business groups had little to fear. The bank-shares scandal of 1983 provides indisputable evidence of the governments recognition and continued protection of a concentration of economic dominance within the big three banking groups. Aware of their privileged status, banks began making brazen

decisions to increase their already astounding (and guaranteed) profits. Financial institutions correctly felt that their shares could not compete with the terms offered on government bonds. This led an increasing number of banks to join Bank Hapoalim in

regulating (falsely inflating) their share prices. The groups set up foreign subsidiaries to


31

create artificial demand for their shares, thereby driving up the prices on a daily basis. By October 1983, the bubble burst, inciting a massive public sell-off of the shekel. The

government closed the stock exchange and guaranteed the bank shares, passing on an $8 billion bill to taxpayers. Additionally, the central bank attempted to ensure the banks higher profitability so that the public would be willing to continue holding the banks shares.56 The three banking groups had become so huge that the government clearly thought they were too big to fail. The situation effectively turned the government into the owner of all Israeli Banks and their associated subsidiaries. In an environment of hyperinflation and nearly out of

control monetary policy 57, political leaders pursued an aggressive plan of privatization, known as the Emergency Stabilization Plan (ESP) of 1985. The plan was a sweeping attempt by the Israeli government to free itself from the chains of big business.58 The economic

situation had gotten so bad that the legitimacy of the government was in dubious standing. This called for dramatic measures. Government ownership in the private sector fell from 27 percent in 1985 to 6 percent in 1995. Privatization was carried out so quickly that it led to further concentration in the private sector. Controlling business groups gained ownership of nearly all of the newly privatized public companies.59

56 Aharoni, 57 58 59

p. 235

see Plessner, pp. 221-223 Shalev, p. 125 See Kosenko, pp. 67-69


32

VII.The Post-ESP Environment Shalev describes the ESP and its associated structural reforms as a frontal attack on protective measures that existed at the expense of the state.60 The measures included

cessation of wage indexation and several investment incentives, as well as significant liberalization of capital controls. The share of directed credit in total bank credit fell from 60.5 percent in 1985 to 4.0 percent in 2000.61 As a result controlling stakes in the largest banking and holding companies were passed from the government, the Jewish Agency and the Histadrut to a number investment groups. Only an esoteric group of the wealthiest

Israelis were positioned to acquire state holdings. Many within this exclusive club reached their status due to historic relationships with the established banking groups and decades of preferential treatment by the state. Nonetheless, business groups represented a much smaller proportion of the GDP than they had in the 1960s and 70s. Maman notes that from the mid-1970s to the mid-1990s, seven business groups dominated the Israeli economy. By 2000, however, this number decreased to only five

(Hapoalim, Koor, IDB, Leumi and Ofer groups). Throughout the 90s, the groups became highly diversified, without exception. The period also marked a clear shift toward family ownership. As late as the mid-1990s, only two of the prominent business groups were By the early 2000s, this was true for all but Bank Leumi.62 The

family-owned.

pervasiveness of now family-owned business groups fostered a new trend of close cooperation between the groups. The inter-relatedness is supported by the very small size of

60 61

Shalev, p. 126

Eckstein, Zvi and Tamar Ramot-Nyska (2008), Twenty years of financial liberalization in Israel: 1987-2007, BIS Papers No 44, Prepared for the 2008 BIS Deputy Governors meeting; originally in Bassat, Ben (2007) Conflict, Interest Groups and Politics in Structural Reforms, unpublished working paper62

See the appendix for a table describing the shift in ownership.


33

the Israeli market as well as benefits granted by the state encouraging joint ventures between the large firms, particularly in military-related industries. The ESP contributed significantly toward the boom in the hi-tech sector, a sector which was until that time dominated by government-owned monopolies. Initial growth in

the hi-tech industry was spurred by government investment in industrial R&D and a wave of highly educated, scientifically-trained immigrants from the former Soviet Union. Significant growth continued given the uniquely low barriers to entry into the hi-tech sector and record high flows of foreign direct investment.63 Moreover, hi-tech startups benefited from the Though business groups

ability to raise capital on newly liberalized financial markets.

purchased parts of the companies as part of their diversification strategy, their presence in hitech remains to be quite minimal. Konstantin Kosenkos in-depth study 64 of the current status of business groups in Israel reveals some very clear and striking realities. Since the liberalization of financial

markets that began with the ESP, control of a firm which commands a meaningful percentage of the market no longer requires full or even majority ownership of the firm. Indeed, a unique owner achieves full control of that company with a personal holding of three percent of its equity.65 That is, an individual, family or group can yield effective control over a This is consistent with the very

massive company with very little actual ownership.66

hierarchical structure common among companies affiliated with business groups.

63

See Eckstein, Zvi and Tamar Ramot-Nyska (2008), Twenty years of financial liberalization in Israel: 1987-2007 for FDI figures.64

Kosenko, Konstantin, Evolution of Business Groups in Israel: Their Impact at the Level of the Firm and the Economy65

Ibid., p. 77 74 percent of firms in Israel are controlled by an individual or family.

66 Approximately


34

Approximately 21 percent of all companies traded in Israel adhere to a pyramidal organizational structure, while this is true for 80 percent of business groups.67 Upon an examination of the economy by sector, Kosenko found business group affiliation to be applicable in all principal industries, with the exception of hi-tech. Moreover, business groups show a bias toward the financial sector. This is unsurprising given the

preferential treatment that banks have historically received. Of the banks, mortgage banks and insurance companies in Israel, 51 percent, 47 percent and 50 percent, respectively, can be considered as affiliated to business groups. Overall, companies associated with business

groups tend to be mature and display low levels of growth relative to unaffiliated companies. An estimated 20 percent of business groups, of which nearly all are family-owned, control 160 publicly-traded companies and approximately 40 percent market share. The ten largest groups command 30 percent of the market. Sweden is the only western economy to show more highly concentrated market control. An average of 52 percent of companies listed on the TA 100 index belong to business groups. Companies listed with the TA 25, which represents 75 precent of stock exchange tradability, are also mostly controlled by business groups.

CONCLUSION Needless to say, the cartel culture that began with the states founders has yet to disappear. Zionist leaders insistence on control of the economy created an environment of excessive intervention in which only the chosen among the chosen ones were permitted to establish semi-private enterprises. When Mandatory Palestine became the State of Israel, the government immediately found itself surrounded by interest groups of monopolists and did

67

Ibid.


35

much to satiate the monopolists demands for increased protectionism.

The overlap that

existed between the regulators and the regulated had little chance of being sustainable, and in 1983 the government was forced to nationalize major players in the market (the largest banking conglomerates) at the taxpayers expense. In its hasty sell-off of these same

enterprises, state officials paved the way for power over the market to yet again be concentrated among very few. Today Israel is the second most concentrated market among Western nations. Over the decades Israel has suffered from significant economic inefficiencies resulting in higher prices and fewer options for consumers. More importantly, countless

potential entrepreneurs were crowded out by monstrous conglomerates and structurally deterred by the government itself. Today, the hi-tech sector is a notable exception to this rule. Impressively, Israels hi-tech industry is renowned for its consistent innovation, much of which can be contributed to market forces. Unlike most other sectors of the modern Israeli economy, hi-tech in Israel is characterized by very low barriers to entry which has fostered the several thousand hi-tech start-ups the nation now boasts. The same cannot be said about finance and commodities. As Kosenkos report shows, concentrated power (and wealth)

continues to plague the country. The government led the way to this reality and they are the only ones who can lead the way out.

(Source: Kosenko, Konstantin (2007) Evolution of Business Groups in Israel: Their Impact

! Israel Economic Review Vol. 5 No. 2 (2007), 5593

70

and the Level of the Firm and the Economy, Israel Economic Review 5:2, pp. 70-2.)

36

Table 2 Evolution of Business Groups in IsraelPeriod GroupIsrael Government Jewish Agency Histadrut Bank Alran Discount group 1950 and 1960s Israel Central Company for Trade and Investment Africa Israel Investments Nachum Zeev and Willians group Miami group Meir group Sakharov group Private Private Government All industries Banking and finance Banking and finance Government All industries Government All industries

Sector

Activity areas

ManagementParty members Senior organization members Senior organization members Family members Family members + professional managers

Principal companies

Since

Comment

El Al , Israel Railways, Bezeq, Israel Electric Corporation, Bank Leumi, Rasco, Zim, Mekorot, Koor, Bank Hapoalim, Solel Boneh, Tnuva, Hamshbir Bank Alran Bank Discount, Mercantile Discount Bank

!"#$

Large ownership groups

!"%&

Part of the global Zionist movement

ISRAEL ECONOMIC REVIEW

!"%&


APPENDIX I: Evolution of Business Groups in Israel

1934, immigrants from Germany 1935, immigrants from Greece 1944, Industry, trade, banking and finance, construction Family members + professional managers Urdan, Swiss-Israel Bank

2,000 group-owned companies, 8.4% of the labor force Period of: Direct and indirect government intervention in the Israeli economy

Private

partnership

Rapid growth and development of main conglomerates Private Private Private Private Private Construction, insurance, industry Finance, industry Hotels, oil, trade, industry Investment Industry,construction, insurance Professional managers Family members + professional managers Professional managers Family Family Migdal Britain-Israel Bank

1934, immigrants from South Africa

1937, immigrants from Britain

Close network of relationships between the government and the business groups by means of transverse holdings

King David Hotel Tubes

1949, partnership

1921, immigrants

Meir Holdings group, Shalom Tower Saar

1904

!" ISRAEL ECONOMIC REVIEW

BUSINESS GROUPS IN ISRAEL: THEIR IMPACT AT THE LEVEL OF THE FIRM AND THE ECONOMY

!

Table 2 (cont.)37

Period Group

Sector

Activity areas

Management

Principal companies

Since

Comment

Appendix I: Evolution of Business Groups in Israel (cont.)


Private Construction, Professional managers Gav Yam 1921, Jews from PIC industry, trade USA Main conglomerates: Clal, Israel Corporation, Delek Israel, Eilat Tubes was established in cooperation between the government sector and business groups in the private sector. These conglomerates were comprised of a large number of companies, and were involved in all principal industries and were effectively centers of gravity of the Israeli economy. All industries Same as previous years Holdings of Jewish !"#$ A period of a dual Israel Government Government Agency, Koor, Bank economy: 50 large Hapoalim companies were surrounded by a large number of small Government All industries Army officers, politicians !"%& businesses. A period of Histadrut 1960s extensive (direct and Extensive industry Family members + PIC, Bank Discount, !"'& IDB indirect) government and Private diversification professional managers Elbit (Recanati and support of existing+ 1970s Karseo families) groups. Business (former Discount groups increased their group) holdings in the Israeli economy due to the Private Investments, real Family Israel Corporation, Zim, !"($ Eisenberg group rapid growth of the estate, shipping Israel Chemicals defense and finance sectors. Economic crisis, hyperinflation period, bank shares crisis most banks went into state ownership following the stock market collapse of 1983. Privatization of the banking system began in 1991. The stabilization program was followed by, the privatization of state owned companies, liberalization and mass immigration from the former Soviet Union all of which had the effect of changing the ownership map in Israel and providing the ground for the emergence of new groups. Private Extensive industry Family+professionals Clal, Discount !"'&)%&&* IDB (Dankner diversification Investment,Koor group) Africa Israel (Levaev group) Private+ Real estate, investment Family+professionals Africa Israel

!""(

A period of economic expansion based on immigration from the former Soviet Union and high-tech growth. All the new owners of

71

38

BUSINESS GROUPS IN ISRAEL: THEIR IMPACT AT THE LEVEL OF THE FIRM AND THE ECONOMY

!"

72

! Table 2 (cont.)Period GroupOfer group Delek group Fishman group Arisson group 1990s Ilan Bronfman group Bino group Private& Private& Banking food Oil, real estate, banking Family+professionals Professionals Bank Discount, Blue Square Paz, FIBI Private& Private& Private& Real estate, oil Industry, real estate, telecom Banking and finance, real estate Private& Banking, industry, shipping, hotels

Sector

Activity areas

ManagementFamily+professionals Family+professionals Family+professionals Professionals

Principal companiesZim, Israel Chemicals, Bank Mizrahi Delek Jerusalem Economic Corporation Bank Hapoalim

Since

Comment

!"""

!""!-!""#

Appendix I: Evolution of Business Groups in Israel (cont.)


!"$"

!""!-""

!"$"

!"""

the business groups are independent entrepreneurs who managed to take over the businesses by means of large-scale levered transactions. Controlling families increased their control by means of an extensive network of social relationships and control of media centers.

ISRAEL ECONOMIC REVIEW

Private Real estate, media, Professionals+family ILDC, Maariv !"$"-"% Nimrodi group hotels Other groups: Saban, Hamburger, Borowitz, Zelkind, Katz all of them private, with extensive industry diversification and a vertical ownership structure.


39

B I B L I O G R A P H Y A. Ulitzer (1959), The National Capital and the Upbuilding of the Land (Jerusalem: Foundation Fund) [Hebrew] Aharoni, Yair (1991) The Israeli Economy: Dreams and Realities (London: Routledge) Carstensen, Peter C. (2010) Buyer Cartels versus Buying Groups: Legal Distinctions, Competitive Realities and Anti-Trust Policy, William & Mary Business Law Review (1:1) Chaim Arlosoroff (1934), The Settlemet FInances of the Jewish Agency, Collected Writings of Chaim Arlosoroff, 2:2 (Tel Aviv: Stible) [ Hebrew] Eckstein, Zvi and Tamar Ramot-Nyska (2008), Twenty years of financial liberalization in Israel: 1987-2007, BIS Papers No 44, Prepared for the 2008 BIS Deputy Governors meeting Granovsky, Abraham (1926), Land Problems in Palestine, (London: George Routledge & Sons) Industrialization of Palestine: Its Possibilities and Limitations, (1933), Palestine Economic Bulletin no. 6-7. Kimmerling, Baruch (1983) Zionism and Economy (Cambridge, Mass: Schenkman Publishing Company, Inc.) Kosenko, Konstantin (2007) Evolution of Business Groups in Israel: Their Impact at the Level of the Firm and the Economy, Israel Economic Review 5:2 Maman, Daniel (2002) The Emergence of Business Groups: Israel and South Korea Compared, Organization Studies, 23:737 Manufacturers Association, Memorandum Submitted to the President of the Nineteenth Zionist Congress in Lucerne, 1935. Manufacturers Association, Memorandum Submitted to the Twenty-First Zionist Congress in Geneva, 1939 Michaeli, Michael (1968), The System of Exchange Rates in Israel, (Jerusalem: Maurice Falk Institute) [Hebrew] Resolutions of the Joint Committee Appointed by the Jewish Agency and the MA on the Basis of the Resolution of the Meeting Convened on July 28, 1936 by the Jewish Agencys Executive, August 3, 1936.


40

Patkin, Don (1967) The Israeli Economy: The First Decade, (Jerusalem: Maurice Falk Institute). Plessner, Yakir (1994), The Political Economy of Israel: from Ideology to Stagnation (New York: State University of New York Press) p. 150 Ruppin, Arthur (1976), The Agricultural Colonization of the Zionist Organization in Palestine, (Westport, Conn: Hyperion Press), first published by Martin Hopkinson, 1926. Shalev, Michael (1999) Have Globalization and Liberalization Normalized Israels Political Economy? In D. Levi-Faur, G. Sheffer & D. Vogel (Eds.) Israel: The Dynamics of Change and Continuity. (London: Frank Cass) Shalev, Michael (1992) Labor and the Political Economy in Israel (Oxford: Oxford University Press)

state-led concentration of power in the israeli private sector

Documents

maurice falk

schenkman

south korea

joint committee

reduce domestic

prominent

jewish agencys

world war