Concentration of Wealth in Israel: An Historical Perspective

The Hebrew University: Rothberg International School

Division of Graduate Studies

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

Course 01939

Year 2009-10

Dr. Simon Epstein

Seminar Paper

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

Kimberly Seifert

Student ID: 777030826

December 13, 2011

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

The State-led Concentration of Power in the Israeli Private Sector Seifert, 2

buyers were positioned to make such significant purchases. The damaging reality of an

economic oligarchy continues to endure today.

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

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

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,

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

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

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 Ibid., p. 151

5 “Industrialization of Palestine: Its Possibilities and Limitations,” (1933), Palestine Economic Bulletin no. 6-7.

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

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

innovation, which would have resulted from free trade. Also, he clearly follows the

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 Ruppin’s. 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 profit-

seeking 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

Gurion’s 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.7


7 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 Histadrut’s website for further information, http://www.histadrut.org.il/index.php?page_id=296.

http://www.histadrut.org.il/index.php?page_id=296




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 leadership’s

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]

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 Ha’poalim (the Workers’ Bank). As indicated by the name, the

bank’s express purpose was to extend credit to agricultural cooperatives. Bank Ha’poalim

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

10 Ibid., p. 170

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 manager’s 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 Granovsky’s 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


11 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

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 Organization’s 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

14 Aharoni, p. 151

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 Ze’ev Jabotinsky. Members of Jabotinsky’s 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

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 Manufacturer’s 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 MA’s strategic approach toward socialist leadership was the


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

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 MA officials repeatedly declared their

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


17 Manufacturers’ Association, “Memorandum Submitted to the Twenty-First Zionist Congress in Geneva,” 1939.

18 Ibid.

attempted to exclude all potential competition in exchange for considerable control of the

economy. Creating a monopolistic environment was aided by the country’s 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 MA’s 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 Ha’aretz” 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 Agency’s Executive,” August 3, 1936.

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,

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

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 couldn’t beat Yishuv authorities, they might as well join

them.

Their strategy was quite effective. At the MA’s 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 Plessner, p. 170

22 Ibid.

Moreover, the Jewish Agency required that new businesses limit their output to prevent the

crowding out of older, less efficient businesses.23 The MA had won the battle against

competition.

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 pre-

state era 24, it was unclear who would execute which services in the State of Israel.

“The early years of Israel’s 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 almost


23 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

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 continually


25 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

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 non-

political 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, p. 169

27 Ibid., p. 190

28 Ibid.

29 Plessner, p. 141

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. This law articulated the government’s policy toward cartels and

monopolies. 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 Israel’s economy;

3. Enhanced the efficiency of production or marketing or reduced the price

of a good or service;


30 See Plessner p. 141-142

31 Ibid., p. 143

4. Brought about an improvement in the country’s 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 government’s 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 Ibid.

34 Ibid., p. 145

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, pp. 188-189

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

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 state’s

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 state’s

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).

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 government’s

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, p. 165

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

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 to


40 Aharoni, p. 165

41 Aharoni, p. 165

42 Ibid., p. 221

running a “successful” business. This would remain true until the boom in defense-related

industries and the high-tech sector.

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 non-

indexed 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


Table 1: Cross-Holdings among “Approved” EntitiesTable 1: Cross-Holdings among “Approved” EntitiesTable 1: Cross-Holdings among “Approved” Entities

Holding Company Related Bank Controlling Parent

Koor Bank Hapoalim Histadrut

Clal IDB, Bank Hapoalim, Bank Leumi

Histadrut and IDB

IDB Holdings IDB Recanati Family

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

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 Maman, p. 749

44 Shalev, Michael (1999) “Have Globalization and Liberalization ʻNormalizedʼ Israelʼs Political Economy?” In D. Levi-Faur, G. Sheffer & D. Vogel (Eds.) Israel: The Dynamics of Change and Continuity. (London: Frank Cass) p. 125

45 Between 1956-61, most of Israel’s credit cooperatives were absorbed by Bank Hapoalim.

46 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. 67

47 Aharoni, p. 263

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 state’s 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 Israel’s

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 cost-

plus 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 sector’s excessive deficit spending, frequent recourse to corrective

devaluations, and government lending policies that favored borrowers at the state’s expense.


48 Ibid., p. 253, Table 6.1

49 Shalev, p. 125

50 Maman, p. 749

The result of these policies was to exacerbate Israel’s 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 of

significant expansion in both the defense and financial

sectors, each of which represented a central activity

for the business groups52. The profits of Koor, Clal

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 Shalev, p. 126

52 “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

54 Aharoni, p. 234

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

Table 2: Subsidy for investment resulting from grants and subsidized credit

Table 2: Subsidy for investment resulting from grants and subsidized credit

Years Estimated Subsidy

1965-69 5%

1970-74 19%

1975-79 31%

1980-84 20%

1985-88 16%

Source: Aharoni, p. 221Source: Aharoni, p. 221

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 government’s

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


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 policy57, 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, p. 235

57 see Plessner, pp. 221-223

58 Shalev, p. 125

59 See Kosenko, pp. 67-69

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

family-owned. By the early 2000s, this was true for all but Bank Leumi.62 The

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 Shalev, p. 126

61 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 paper

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

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

ability to raise capital on newly liberalized financial markets. Though business groups

purchased parts of the companies as part of their diversification strategy, their presence in hi-

tech remains to be quite minimal.

Konstantin Kosenko’s in-depth study64 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

massive company with very little actual ownership.66 This is consistent with the very

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 Economy”

65 Ibid., p. 77

66 Approximately 74 percent of firms in Israel are controlled by an individual or family.

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 state’s 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.

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 taxpayer’s 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, Israel’s 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 Kosenko’s 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.


APPENDIX I: Evolution of Business Groups in Israel

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

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


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n

Con

structio

n,

insu

rance, in

du

stry

Fin

an

ce, in

du

stry

Ho

tels, oil, tra

de,

ind

ustry

In

vestm

ent

Indu

stry,c

on

structio

n,

insu

rance

Priva

te

Priva

te

Priva

te

Priva

te

Priva

te

Priva

te

Priva

te

Priva

te

Ba

nk

Alra

n

Disco

un

t gro

up

Israel C

entra

l

Com

pan

y for

Tra

de a

nd

Investm

ent

Africa

Israel

Investm

ents

Na

chu

m Z

eev an

d

Willia

ns g

rou

p

Mia

mi g

rou

p

Meir g

rou

p

Sa

kh

aro

v gro

up

1950

and

1960

s

70 ISRAEL ECONOMIC REVIEW

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


IS

RA

EL E

CO

NO

MIC

RE

VIE

W

!"

!

Ta

ble

2 (c

on

t.)

Co

mm

ent

Sin

ce P

rincip

al com

pan

ies M

anag

em

ent

Activ

ity area

s S

ector

Gro

up

1

921

, Jew

s from

US

A

Ga

v Y

am

P

rofe

ssion

al m

anag

ers

Con

structio

n,

ind

ustry, tra

de

Priva

te

P

IC

Main

cong

lom

era

tes: C

lal, Isra

el C

orp

ora

tion, D

elek Israel, E

ilat T

ub

es w

as esta

blish

ed in

coo

pera

tion b

etween

the g

overn

men

t secto

r an

d b

usin

ess gro

up

s in th

e

priv

ate

secto

r. Th

ese

con

glo

mera

tes w

ere co

mp

rised o

f a la

rge n

um

ber o

f co

mp

an

ies, a

nd

were in

volv

ed in

all p

rincip

al in

du

stries a

nd

were e

ffective

ly ce

nters o

f

gra

vity

of th

e Isra

eli e

cono

my.

Perio

d

!"#$

!"%&

Ho

ldin

gs o

f Jew

ish

Ag

ency

, Ko

or, B

an

k

Ha

poa

lim

Sa

me a

s prev

iou

s yea

rs

Arm

y o

fficers, p

oliticia

ns

All in

du

stries

All in

du

stries

Go

vern

men

t

Go

vern

men

t

Israel G

overn

men

t

Hista

dru

t

A p

eriod

of a d

ual

econ

om

y: 5

0 larg

e

com

pan

ies were

“surro

un

ded

” by a

large n

um

ber o

f small

bu

sinesses. A

perio

d o

f

exten

sive (d

irect and

ind

irect) govern

men

t

supp

ort o

f existin

g+

gro

up

s. Bu

siness

gro

up

s increased

their

hold

ings in

the Isra

eli

econ

om

y d

ue to

the

rapid

gro

wth

of th

e

defen

se and fin

ance

sectors.

!"'&

!"($

PIC

, Ban

k Disco

unt,

Elb

it

Israel C

orp

ora

tion, Z

im,

Israel C

hem

icals

Fa

mily

mem

bers +

pro

fessio

na

l man

agers

Fa

mily

Exte

nsive

ind

ustry

div

ersifica

tion

Investm

ents, rea

l

esta

te, ship

pin

g

Priva

te

Priva

te

IDB

(Reca

nati a

nd

Ka

rseo fa

milies)

(form

er Disco

un

t

gro

up

)

Eisen

berg

gro

up

1960

s

and

1970

s

Eco

nom

ic crisis, hyp

erinflatio

n p

eriod

, ban

k sh

ares crisis – m

ost b

ank

s wen

t into

state ow

nersh

ip fo

llow

ing th

e stock

mark

et collap

se of 1

983

. Priv

atization

of th

e ban

kin

g

system

beg

an in

199

1. T

he stab

ilization

pro

gram

was fo

llow

ed b

y, th

e priv

atization o

f state ow

ned

com

panies, lib

eralization an

d m

ass imm

igratio

n fro

m th

e form

er Soviet

Un

ion –

all of w

hich

had

the effect o

f chan

gin

g th

e ow

nersh

ip m

ap in

Israel and

pro

vid

ing th

e gro

und

for th

e emerg

ence o

f new

gro

up

s.

A p

eriod

of eco

nom

ic

exp

ansio

n b

ased o

n

imm

igratio

n fro

m th

e

form

er So

viet U

nio

n

and

hig

h-tech

gro

wth

.

All th

e new

ow

ners o

f

!"'&)%&&*

!""(

Cla

l, Disc

oun

t

Investm

ent,K

oo

r

Afric

a Isra

el

Fa

mily

+p

rofe

ssiona

ls

Fa

mily

+p

rofe

ssiona

ls

Exte

nsive

ind

ustry

div

ersifica

tion

Real e

state

,

investm

ent

Priva

te

Priva

te+

IDB

(Da

nk

ner

gro

up

)

Africa

Israel

(Leva

ev gro

up

)

BUSINESS GROUPS IN ISRAEL: THEIR IMPACT AT THE LEVEL OF THE FIRM AND THE ECONOMY 71

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


BU

SIN

ES

S G

RO

UP

S IN

ISR

AE

L: T

HE

IR IM

PA

CT

AT

TH

E L

EV

EL

OF

TH

E F

IRM

AN

D T

HE

EC

ON

OM

Y

!"!

T

ab

le 2

(co

nt.)

Co

mm

ent

Sin

ce P

rincip

al com

pan

ies M

anag

em

ent

Activ

ity area

s S

ector

Gro

up

P

eriod

the b

usin

ess gro

up

s

are ind

epen

den

t

entrep

reneu

rs wh

o

man

aged

to tak

e over

the b

usin

esses by

mean

s of larg

e-scale

levered

transactio

ns.

Con

trollin

g fam

ilies

increased

their co

ntro

l

by m

eans o

f an

exten

sive n

etwo

rk o

f

social relatio

nsh

ips

and

con

trol o

f med

ia

centers.

!"""

!""!-!""#

!"$"

!""!-""

!"$"

!"""

!"$"-"%

Zim

, Israel C

hem

icals,

Ban

k M

izrah

i

Delek

Jeru

sale

m E

cono

mic

Co

rpo

ratio

n

Ban

k H

ap

oa

lim

Ban

k D

iscount, B

lue

Squa

re

Pa

z, FIB

I

ILD

C, M

aa

riv

Fa

mily

+p

rofe

ssiona

ls

Fa

mily

+p

rofe

ssiona

ls

Fa

mily

+p

rofe

ssiona

ls

Pro

fessio

nals

Fa

mily

+p

rofe

ssiona

ls

Pro

fessio

nals

Pro

fessio

nals+

fam

ily

Ban

kin

g, in

du

stry,

ship

pin

g, h

otels

Real e

state

, oil

Indu

stry, rea

l esta

te,

tele

com

Ban

kin

g a

nd

fina

nce,

real e

state

Ban

kin

g fo

od

Oil, rea

l esta

te,

ban

king

Real e

state

, media

,

hotels

Priva

te&

Priva

te&

Priva

te&

Priva

te&

Priva

te&

Priva

te&

Priva

te

Ofer g

rou

p

Delek

gro

up

Fish

man

gro

up

Arisso

n g

rou

p

Ilan

Bro

nfm

an

gro

up

Bin

o g

rou

p

Nim

rod

i gro

up

1990

s

Oth

er g

rou

ps: S

ab

an

, Ha

mb

urg

er, Boro

witz, Z

elkind

, Ka

tz – a

ll of th

em

priv

ate

, with

exte

nsive

indu

stry dive

rsificatio

n a

nd a

vertic

al o

wnersh

ip stru

cture.

72 ISRAEL ECONOMIC REVIEW

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 Agency’s Executive,” August 3, 1936.


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 ʻNormalizedʼ Israelʼs 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)


Concentration of Wealth in Israel: An Historical Perspective

Documents

maurice falk institute

schenkman publishing company

south korea compared

joint committee appointed

reduce domestic competition

prominent zionist leaders

jewish agencys executive

world war ii