The economic concentration committee, which was supposed to resolve the issue of Israeli monopolies and cartels that mark up the price of commodities and services by dozens of percentage points and impoverish thousands of Israelis, recently submitted its findings. Some of the committees conclusions are quite good, and potentially helpful in mitigating the problem of the concentration of wealth. Other conclusions indicate that the committee sought a middle ground between the extreme concentration that exists in Israel and a healthy competitive market. We must be careful that these compromises dont lead to a complete disintegration of the committees recommendations, or an all-out rejection of them, as many politicians and tycoons would probably like. Public interest in the issue of the concentration of wealth arose in April 2010 when the Bank of Israel published a study proving that extreme and dangerous concentration problems exist in the Israeli economy. A handful of individuals control massive conglomerates, responsible for both direct production and financial services. This concentration allows for the establishment of monopolies, which strike at competition and efficiency, exaggerate prices and lower productivity and salaries (except of course the salaries of executives and monopoly employees, which are inflated). On the coattails of the report, the prime minister vowed, long before the social justice protests last summer, and in the face of strong opposition from tycoons and their many collaborators, especially the media, to deal with this horrific problem. He established the economic concentration committee in efforts to promote healthy competition and find adequate solutions. The committee confirmed once again that the concentration of wealth is a serious problem and that there is concern of threats to the strength of the financial system and to the protection of individuals savings. The committee addressed two main issues. The first was the pyramidal structure of many business conglomerates, allowing owners to enforce ownership of subsidiary companies known as daughter companies, and granddaughter and even great granddaughter companies, with a very small personal investment (only 12 percent in the case of granddaughter companies). Most of the investment in these subsidiaries is essentially made by the public by way of pension funds, but the public isnt represented in the management of these companies. The second issue is that the same individual often owns both production and financial institutions, which creates discrimination in favor of the production companies when it comes to accessibility of capital. In Israel, some 64% of non-bank credit is granted to the big 25 conglomerates i.e. the tycoons and those same conglomerates control 60% of the stock market and also enjoy the majority of Israels bank credit. The committee did not call for the dissolution of these pyramids, but instead came up with a detrimental and complicated solution which will allow the existing pyramids to retain their problematic three-tier structures, while limiting new pyramids to two tiers. In efforts to prevent the abuse of power, the committee proposed the enactment of stringent corporate governance guidelines. If you believe that this can work, good for you. We already have examples of failed public representation on the boards of directors, indicating that these public representatives quickly become marionettes controlled by the conglomerate owners. The committee made a good recommendation to clearly separate between the ownership of production companies and financial institutions but set a very high bar: only companies listed on the stock market with a turnover or credit line of more than NIS 6 billion will be barred from simultaneously owning a financial institution. Why is this? Gal Hershkovitz, the head of the treasurys Budget Division, believes that the committee should have prohibited the existence of all pyramids, two-tier and up, and required the authorization of an economic court in order to undertake any transaction between two parties that are connected in some way. Finance Committee Chairman MK Moshe Gafni already vowed to be more stringent than the committees recommendations, and to prohibit wealthy conglomerate owners from also owning media outlets. In contrast, however, Capital Markets head Oded Sarig strangely decided to allow tycoons to continue to leverage their capital at very high rates which may, according to the Bank of Israel, endanger the stability of the economy. This is Prime Minister Benjamin Netanyahus big moment. Though he is occupied with existential external threats, he understands that Israel needs a stable economy to combat these threats. His past economic moves, including his fiscal restraint and the 2005 Bachar reform, which sought to reduce banking concentration in the capital market and opened the market to competition leading to impressive growth that enabled Israel to weather the global economic crisis, indicate that he knows how to heal the economy. The big question is whether Netanyahu, his Cabinet and the Knesset will take advantage of the current historic opportunity.
