As Populism Grows in Israel, Big Business Lands in the Crosshairs

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Over the summer, Israel’s regulatory agencies unveiled a number of new directives on their charges, telling them what to do, and, especially, what not to do. The policies, which target the financial sector and others, have emerged at a time when the population is becoming increasingly restive and critical of the scions of Israel’s big business community. Now, observers are debating who will be the winners and losers in this new environment.

David Zaken, supervisor of banks at the Bank of Israel, issued the latest set of restrictions regarding mortgage loans in an effort to stop homebuyers — especially young couples — from burying themselves in debt as they attempt to get a foot on the housing ladder. Next, the agency fired off a directive to banks on the controversial subject of remuneration packages for senior executives. Neither of these topics is new; on the contrary, Zaken has been trying to constrain the mortgage boom since 2010, so far with little success. The latest move on executive pay similarly reflects the failure of previous efforts.

Not to be outdone, Oded Sarig, then commissioner of capital markets, insurance and savings, who before stepping down in August headed the department of the ministry of finance charged with overseeing the pensions and insurance sector, told insurance companies to repay excess management fees they had collected on pensions savings in 2010-2011 before his department slashed fee levels by imposing caps on fund managers.

But the financial sector is by no means the only one impacted by this regulatory onslaught. Around the same time, the finance ministry, together with the economy ministry which oversees retail prices, approved the imposition of price controls on two popular dairy products, reversing a process of price decontrol stretching back, almost unbroken, to 1985.

The executive branch of the government is thus heavily involved in intervention in economic activity — but so is the legislature and, by extension, the judiciary. The latter two branches effectively close down for a prolonged summer break, but when they reconvene in October, the judges must decide whether the legislators will decide about an issue on which the executive branch has already reached a decision. The issue in question: Israel’s policy regarding exports of natural gas. The country is in the process of developing the massive offshore deposits discovered in recent years, which will far exceed its own needs even after its electricity-generating and other industries switch to using gas as their energy source.

Given the anti-business sentiment in public debate and policy, it is hardly surprising that some leading Israeli businessmen are warning that they will have to relocate.

In October 2011, the previous government appointed the Zemach Committee, chaired by Shaul Zemach, the director-general of the ministry of energy and water resources, to examine this issue. The committee proposed a formula that, subject to realization of the estimated quantities of gas available, would have allowed some 53% of the total to be exported, with the rest earmarked for domestic use. This recommendation was not formally adopted by the government before it stepped down in late 2012.

A Coalition of Contradictions

In the meantime, a strange yet powerful coalition sprang up to fight the proposal, observers note. It included environmentalists — some of whom oppose developing the gas fields at all, while others demand that all the gas be retained at home (one use: convert public transportation from oil to gas-powered engines). Others on their side were a large group of domestic industrialists, who demanded that their gas supply be guaranteed for decades to come, and nationalist political groups, who seek to keep the gas as a “strategic asset” that they say will ensure energy independence.

Their intense lobbying against the Zemach proposal persuaded the new government that took office in April this year to reconsider the issue. Under pressure from Silvan Shalom, the new minister for energy and water resources, Prime Minister Binyamin Netanyahu and Finance Minister Yair Lapid agreed to recast the formula, reducing the share of exports to 40%, and the three ministers won the approval of a large Cabinet majority for this proposal.

This decision marked a considerable victory for the anti-export lobby, but its radical wing was not satisfied. It rallied support from the opposition Labor party, some of whose Knesset members appealed to the High Court of Justice to order the government to place the issue before the entire Knesset, so that the energy exporting policy would be decided via primary legislation, rather than by a Cabinet decision.

The initial judicial hearing took place in August, and the judicial branch decided that the issue was of such import for the country’s economy and ecology that the case should be heard by an expanded bench of nine justices, rather than the usual three. This hearing will take place this month, when the court will decide whether the legislature should decide about what the executive has already decided.

Given the anti-business sentiment in public debate and policy, it is hardly surprising that some leading Israeli businessmen are warning that they will have to relocate themselves and their businesses. Indeed, Idan Ofer, part of the Ofer family that controls Israel Corporation, one of the country’s largest conglomerates, moved to London earlier this year. Nochi Dankner, the beleaguered head of the heavily indebted IDB group, is fighting to prevent his firm’s bondholders from gaining control of the group. Dankner used to be lauded as a shining example of aggressive capitalism, but now he serves as the butt of widespread criticism for reckless adventurism — the best-known and most reviled of the “tycoons,” the term applied by Israelis to the local businessmen who have built or acquired corporate empires.

Entrepreneurs Highly Rated

Yet the same public which pours scorn on the tycoons while demanding higher taxes on — and greater regulation of — big business, take a very different approach toward another sort of very successful businessman. When the media reports — as it does with increasing frequency — that another Israeli start-up has been acquired by a major technology company, and that the founders and early investors are set to make profits running into tens or hundreds of millions of dollars, the tone of the report is not one of envy or anger.

On the contrary, the typical response of both the media and the general public is to applaud and congratulate the new millionaires. This reaction was especially pronounced following the largest such deal announced this year — the purchase by Google of Waze, an app that guides users to their destinations and informs them about traffic conditions along the way. The price tag of some $1 billion surely made Waze’s founders very wealthy — but with wealth came not antipathy but a form of hero worship on the part of an admiring public, observers note.

How the public distinguishes between heroes and villains seems to stem primarily from how the wealth was created. Entrepreneurs — typically, but not always, from high-tech sectors — who turned their ideas into products and companies and, eventually, made lucrative exits, are accorded admiration. But if the riches come from exploiting companies’ monopoly or cartel status, or by leveraging a relatively small amount of the entrepreneurs’ own money with huge loans from ordinary bank depositors or pension savers, then the tycoon who owns the company in question is looked at askance, observers say. If he is successful, the feeling is “he ripped us off” and if he fails, the feeling by many is “he took our money and burnt it.”

Although some view this attitude toward business and entrepreneurship as strange and inconsistent, others — among them the Israeli public and media — argue that it has a coherent internal logic and, therefore, merit. But both views must answer a more fundamental question: Why has the antagonism toward the tycoons come to the fore now and, conversely, why was it absent five or ten years ago? The answer to that question should shed some light on an even more important one, namely what are the implications of this new attitude for the corporate sector and the Israeli economy as a whole?

Eytan Avriel is the managing editor of TheMarker Media, a leading Israeli financial online medium, and, in its print version, the business and financial section of the Ha’aretz newspaper. TheMarker, and Avriel personally in his columns and op-ed pieces, have been outspoken and aggressive in their campaign against the tycoons. The latter are seen as not merely hostile to competition and hence to the public good in the economic sense, but also — through their cultivation of connections with public figures and state organs — as potential threats to governmental probity and even to fundamental democratic values.

To Avriel, the question of “Why now?” is straightforward. “The public ‘awakening’ began after the initial shock of the financial crisis of 2008 wore off,” he says. “The public realized the extent of the losses taken by the pension funds in the crash. Of course, it was hit by the sharp recession of 2008-2009. It gradually absorbed the extent of the crisis in the U.S. and then in Europe — and their causes.

“The critical moment was the explosion of ‘the social protest’ movement in the summer of 2011. Tent cities sprang up all over the country and a demonstration in Tel Aviv attracted half a million people.” –Eytan Avriel

“But the critical moment in this process was the explosion of ‘the social protest’ movement in the summer of 2011,” Avriel continues. “The tent cities that sprang up all over the country and the demonstration in Tel Aviv that attracted half a million people, proved how widespread the disillusionment was. After the protests and mass demonstrations, the activists adopted a different modus operandi — organizing many small events, intensive use of social media, writing to government agencies and seeking to trigger legal and judicial intervention.”

Most observers would agree with Avriel’s conviction that the social protest movement determined the outcome of the January 2013 general election — in particular, the phenomenal success of Yesh Atid. This new party, established only a year before and headed by former media personality Yair Lapid, won 19 seats (out of 120) and effectively dictated the composition of the new coalition, although Netanyahu’s Likud remained the largest component.

Quest for Information

Avriel identifies three key factors as the driving forces behind the socio-political upheaval that is taking place in Israel. “The first is simply greater knowledge and understanding of what is going on.” Most people had not previously followed socio-economic developments, except insofar as these affected them personally. Now, spurred by the media campaigns (in which Avriel has played a prominent role), people became aware, interested and even involved, he notes. Suddenly, there was widespread public discussion about the budget, monetary policy, how the profits from offshore gas would be distributed, how the capital market works and how tycoons can impose “haircuts” on their bondholders.

But the demand for knowledge was hardly an abstract need. On the contrary, Avriel sees it as having very direct and practical roots. “The second factor was the sharp rise in house prices and the general rise in the cost of living, which was hitting a broad swath of people — especially youngsters,” he says. “People with good educational qualifications, holding full-time jobs, were finding it increasingly difficult to make ends meet and needed help from their parents — if this was available. This forced people to think about how the whole system works and who benefits from its current structure and they realized that they would be hard put to match their parents’ standard of living and to give their kids what they viewed as essential and obvious.”

Finally, and by consequence of the first two factors, Avriel says that the public began to focus on “the huge and growing gaps in incomes and wealth between 99% of the public and the top 1%. The latter includes not just tycoons and senior managers of large companies, and top-level professionals, but also employees and pensioners of public sector entities — the defense sector, electricity companies, ports, etc. The realization that Israel, like other Western countries, was witnessing the development of massive disparities in incomes and prospects pushed people in the 99% to try and stop, or even reverse, these trends.”

However, to Yakir Plessner, a professor of economics at the Hebrew University of Jerusalem and a former deputy-governor of the Bank of Israel, the public outrage and the demand for change that Avriel describes and is seeking to channel is, at best, naïve — and probably dangerous.

Plessner can be described as a diehard economic liberal, a staunch free-marketeer who still bears the scars from his battles in academe and government against an establishment that was, until the 1990s, overwhelmingly statist if not overtly Socialist. His perspective is therefore entirely different from that of today’s young generation, who came of age in a country that had embraced market-based policies — but still had the trappings, and some of the substance, of the old regime.

As a result, he sees even the more recent phenomenon of the tycoons from that perspective: “The tycoons generate envy through their excesses, but most of them have their roots in the economic system created and dominated by the Labor party, in which the government controlled resource allocation.”

But Plessner says his real beef is less with the tycoons, despite seeing them as the very antithesis of the deregulated economic structure he would like to see, than with the social protest movement. Specifically, he has a difference in view with the youngsters who are the movement’s rank-and-file, and with whom he spent many hours in discussions held in the tent cities that sprang up in the summer of 2011. Unlike Avriel and other journalists who were buoyed by the upsurge of interest on the part of the millennial generation, Plessner says he was dismayed.

“The [youngsters] want to have a western European-style welfare state, but they don’t realize that they have missed the bus on that, because that model is no longer available, neither in Western Europe nor in Israel,” he notes. “They aspire to recreate the level of social support that their parents had in the 1980s, but that proved unsupportable then and cannot be reestablished now.”

Going even further out on a limb — although he is not the only prominent Israeli economist to take this stance — Plessner says he takes issue with the protesters themselves, not just their agenda. “They are, in many cases, simply spoiled — they want to have it all given to them on a silver platter, without working hard. They have grown up in an affluent society and so they think that prosperity is the norm — but it isn’t.”

“The protestors are, in many cases, simply spoiled — they want to have it all given to them on a silver platter…. They have grown up in an affluent society and so they think that prosperity is the norm — but it isn’t.” –Yakir Plessner

The surge in regulatory activity — and the groundswell of support for it among the media and public — elicit similarly opposite responses from the two men and the viewpoints they represent. Avriel sees this as an intrinsic part of the protest and public awakening, and therefore views the phenomenon very favorably, citing the string of recent public committees to review policy on numerous issues, stretching from food prices to the structure of the banking system, as evidence of the impact of what he terms “the change on consciousness.”

Plessner, on the other hand, is far more ambivalent. He accepts that much of the new regulation in the financial sector is in response to the crash, but both there and certainly elsewhere, he says he detects a much deeper-rooted force at work, namely the remorseless expansion of the welfare state — which he views as a fundamentally negative phenomenon.

Two Roads to the Same End

Despite the major differences in their outlooks, analysis and conclusions, there is much the two agree on. Plessner subscribes to the view expressed by Avriel and his colleagues at TheMarker that much more could — and should — be done to break the power of the public sector unions that have consistently blocked reforms in key areas of the economy. He says he is opposed to the existence of de facto cartel structures in the financial services sector and elsewhere.

They differ less on their goals than on how to reach them. Plessner states that he does not believe that the social protest movement’s confused agenda can generate systemic change, whereas Avriel says that this is actually happening already. Plessner notes that he is concerned about the potential damage of the growing atmosphere of anti-business populism, but even he adds that he doesn’t view it as a threat to the entrepreneurial culture that has driven the Israeli “start-up nation” phenomenon.

In the best case scenario, the socio-political upheaval that is taking place will generate more benefits for the economy and the general population — by spurring the break-up of monopolies and cartels and by lowering or eliminating barriers to entry in protected sectors — than the costs it incurs along the way, observers say. But, like any bout of creative destruction, critics warn, these benefits will not come smoothly or by consensual politics.

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