It’s the oligopoly, stupid!

by Michael Freund, The Jerusalem Post

Be the first of your friends to like this.Israel’s tentative revolution took its first step out of the tent encampments and into the corridors of power this week. On Tuesday afternoon, the so-called “Rothschild Team” established by the government to tackle the protesters’ demands convened for the first time.

Chaired by Prof. Manuel Trajtenberg, the committee will hold a series of discussions before presenting concrete proposals to the socio-economic cabinet headed by Finance Minister Yuval Steinitz. In the coming days we will likely be hearing a wide variety of ideas in the media, ranging from demands for more public housing to hikes in the minimum wage. Various interest groups and political movements won’t hesitate to seize the moment and attempt to advance their agendas.

But amid all the noise and clutter to which we are about to be subjected, let’s not lose sight of the primary and fundamental change that needs to come about: the breaking up of the cartels that are strangling Israel’s economy. Or, to paraphrase Bill Clinton’s 1992 presidential campaign slogan: It’s the oligopoly, stupid! As has been widely noted, Israel has one of the highest concentrations of corporate and economic power in the Western world. In April 2010 the Bank of Israel released a study which found that “some 20 business groups, nearly all of a family nature and structured in a pronounced pyramid form, continue to control a large proportion of public firms [some 25% of those listed for trading] and about half of market share.”

And last year, a Knesset report revealed that 16 large business groups control half the money in the entire country.

So much power in the hands of so few is a sure-fire recipe for trouble, and that is exactly what the Jewish state is facing.
On July 29, Reuters published a special report entitled, “Is Israel Inc. too powerful?” which highlighted the extent to which corporate behemoths have extended their control into all aspects of our lives, including the banks and the media.

This gives them easier access to credit (which often squeezes out smaller competitors), and shields them from public scrutiny and criticism by the press because, well, they own that too. These pyramids, as they are known, wield an inordinate amount of social, economic and political power, making them virtually untouchable.
The cost of all this to the consumer and the economy is enormous. It squashes competition, thereby raising prices, increasing inflation and exacerbating poverty. Innovation is stifled and mediocrity prevails, leaving all of us with fewer and shoddier choices in the marketplace.

Worse yet, as frequently happens in the case of an oligopolistic system, the temptation to form outright cartels is enormous. And Israel, as we know, has no shortage of those.

In the past 18 months alone, the government’s Israel Antitrust Authority (IAA) has launched investigations into a variety of industrial giants, from bread manufacturers to housing contractors, on charges such as pricefixing and bid-rigging, as well as other illicit efforts to restrict competition.

Collusion has become so endemic that even some public officials have allegedly gotten into the act. In May, the police said they had uncovered a cartel of landscaping companies that was not only fixing prices but bribing officials of the Jewish National Fund, the Israel Electric Corporation and even the IDF for insider information.
The companies are accused of having then coordinated their bids on public tenders, as well as deciding who would win each one. By thus colluding among themselves, they were able to raise prices steeply over the years,, bilking the taxpayer of hundreds of millions of shekels.

THESE KINDS of shenanigans have got to stop. Cartels not only cost us more, but they create an environment that is rife with corruption. This is not a failure of capitalism, as some would have us believe. It is a failure of government to ensure a level playing field and enforce the law. As a first step, Israel needs to implement a robust and consistent antitrust policy, one that is not afraid to take on corporate hulks and tycoons.

To do so, Israel will have to enlarge the IAA, whose budget for 2011 is a paltry NIS 24 million. Its total staff numbers just 83, which includes 21 investigators, 13 economists and 29 lawyers. Nonetheless, they are tasked with overseeing every industry and market in the country.

The government must give the IAA the tools it needs to investigate cartels and enforce the law. A change in attitude is also warranted. Cartel activity needs to be treated no differently than property crime. When companies collude illegally to boost profits, they rob consumers no less than pick-pockets or muggers do. Those who engage in such collusion should be made to face not only civil penalties, but jail time. Send a couple of high-profile cartel criminals to prison, and you can be sure it will deter others. As for the large holding companies which dominate the economy, steps will have to be taken to break them up and impose limits on their influence.

There is, of course, nothing wrong when people or companies succeed. An open and free society means the sky is the limit when an individual or a firm reaches for the stars.But when those at the summit seek to keep the rest of us from reaching the peak, they are crossing a red line which cannot be tolerated.

The fact is that societies and companies, like great athletes, need continuous competition to bring out their best otherwise, they grow soft and fat, and begin to fall behind. In recent years, Israel has surged ahead thanks to deregulation and privatization. What a shame if we now allow the oligopolists and cartels to keep us from moving forward.