As social protest grows, country’s richest people became focus of sort of media attention normally given to politics, homeland security
It took a two week-long cottage cheese rebellion to get Israelis to question the power of the country’s tycoons.
Angry about high prices, consumers boycotted the beloved dairy product last month. As containers of cheese piled up on supermarket shelves, the country’s richest people became the focus of the sort of media attention normally given to politics and homeland security.
Newspapers and television stations, which civic groups have long criticized for ignoring the massive concentration of corporate power in a small group of Israeli business groups and families, made the boycott a top story for days.
“I woke up this morning smeared in cottage cheese,” Muzi Wertheim, a business magnate who controls one of the country’s largest dairy producers, said during a speech at a Tel Aviv university at the peak of the protest.
Cottage cheese might be just the beginning. Last October the Israeli government set up a committee to explore the level of competition in the economy. The committee is expected to present its findings in several weeks.
The Bank of Israel already says the country has one of the highest concentrations of corporate power in the developed world. A scathing parliamentary report from June last year found that 10 large business groups control 30% of the market value of public companies, while 16 control half the money in the entire country.
That’s far more than in western economies such as the UK, Spain or Germany. The Organisation for Economic Cooperation and Development, which last year admitted Israel as a member, said Israel’s level of corporate concentration is problematic.
If the government committee agrees with those assessments it could recommend breaking up the biggest oligopolies and opening Israel’s market to new competition and investment, both foreign and local. Though nothing has been decided, change looks increasingly likely.
“These large business groups may have helped Israel’s economy when it was younger, but it’s now a developed market, and it will be hard to keep up the current rate of growth in this situation,” said one official familiar with the deliberations. “The committee members are aware of this. Breaking them up will help competition and growth.”
Such a move would have huge implications for tycoons such as Wertheim, whose dairy business is just one part of an empire that includes the country’s fourth-largest bank, Coca Cola bottling company and a primary share in one of its largest real estate firms. Like many of Israel’s other magnates Wertheim also owns a large stake in a popular media organization.
A number of the larger holding companies have fought back, arguing to the commission, Reuters has learned, that regulations are already so strict that they have forced Israel Inc. to invest abroad rather than locally.
In a rare public comment Nochi Dankner, chairman and controlling shareholder of IDB Holding which owns everything from a mobile phone operator to an insurance firm, told Reuters that Israel’s “robust financial system” was a result of “clever and strict” regulation.
“I cannot find any rationale to shake it,” Dankner said in his emailed comments. “The most important mission of the regulation is to keep and augment the stability, beyond any other consideration. Separation of financial holdings and real holdings definitely rocks the financial system, not stabilizes it.”
Israel’s pyramids
Concentration in Hebrew is often called “hon v’shilton”, which means “fortune and governance”, but refers more to the close relationship between the two.
“We see the ‘fortune’ walking through the halls of parliament,” parliamentary speaker Reuben Rivlin said in a radio interview last month. “‘Fortune’ is more and more taking control of the judgment of the people sent by the public to safeguard the state of Israel and its interests.”
One of the problems, according to the OECD, is that Israel’s big business houses exert control through “cascading ownerships, pyramidal structures and cross-holdings”.
In a pyramid structure, a holding company controls a subsidiary, which then controls its own subsidiaries, and so on until the top of the pyramid can technically control a company at the bottom with less than 10% of the capital.
Dankner’s IDB is a classic pyramid, though he and his partners have stakes of at least 30% in all of the company’s major holdings. At the top sits IDB Holding which controls IDB Development which in turn controls several other holding companies. Consumers may not know it but they come into contact with the bottom of the pyramid when they do something as simple as walking into a shopping mall. They might visit Super-Sol, Israel’s largest supermarket chain, shop at Golf and Co., one of the biggest fashion and homeware chains, or buy a mobile phone from Cellcom, Israel’s largest mobile operator.
After that, they might visit an Internet café and go online using one of Israel’s top Internet providers Netvision, or stop by a branch of travel agency Diesenhaus to book a flight on Israir. The floor they walk on is likely to be built with cement from Nesher, Israel’s only cement producer.
Every one of those companies and products are ultimately controlled by IDB.
And IDB is not the only such company. The Delek Group, controlled by billionaire Yitzhak Tshuva, boasts an impressive array of assets from several giant natural gas fields to automotive, cable TV, biochemical and insurance companies.
Israel’s richest family, the Ofers, control through their holding firm Israel Corp the world’s sixth-largest potash firm, Israel’s largest shipping company and oil refinery. They are also the biggest investor in the Better Place electric car venture.
Israel’s richest woman, Shari Arison, through the Arison group controls the country’s second largest bank and largest construction company, which is in talks to buy geothermal energy producer Ormat Industries.
Besides IDB’s Dankner, none of these groups agreed to talk to Reuters.
‘People make mistakes’
Last year’s parliamentary report pointed out that most of Israel’s banks are also controlled by such groups, offering the conglomerates access to easy credit, often at the expense of smaller businesses. This is a recipe for risky decision-making, the Bank of Israel said in its 2009 annual report, and because it is difficult to regulate these powerful groups with their complex structures, they pose a systemic risk.
A survey by the Calcalist financial news website showed that 10 of the biggest tycoons will have to pay back bondholders 24 billion shekels ($6.9 billion) in the next two years, raising concern that they may not be able to meet all of their obligations.
“People make mistakes, and if you don’t create a distribution of power and you allow one person to make mistakes for all of us, the likelihood is that when a mistake occurs it will be huge and very costly,” said Daniel Doron, founder of the Israel Center for Social and Economic Progress (ICSEP).
That could now change. According to one source with knowledge of the competition committee’s deliberations, the committee is likely to take aim at both the pyramid structures as well as the close links between financial institutions – banks and insurance companies – and “real” businesses such as supermarkets or refineries.
Independent media?
Israel is well known for its raucous free press. Its newspapers and news broadcasts swing freely and mercilessly at politicians, and no one, not even the prime minister, is spared. But in the past decade newspapers and television news channels have become a popular investment for the country’s business elite, despite, or perhaps because of, the media industry’s financial woes.
Most Israeli media companies are now controlled on some level by one of the large business houses. Has that stifled debate about the concentration of power in the Israeli economy?
In a rare interview last September, Dankner dismissed the issue as part of the “populist agenda”. Asked by newspaper Yedioth Ahronoth whether he, as head of one of Israel’s largest holding companies, had too much power, Dankner replied: “Unequivocally no. There are dozens of other people in Israel with more power.”
Nine months later, Dankner bought one of Israel’s largest-circulating newspapers, Maariv. To assuage concerns about potential conflicts of interest in coverage, he wrote a letter to the paper’s staff urging them to, “please maintain your integrity, professionalism, independence and freedom of expression – including critical coverage of the IDB group, its subsidiaries and its managers, including myself.”
Just a few weeks after that, Russian oil tycoon Leonid Nevzlin bought a 20% stake in Haaretz, another leading newspaper. The two new media magnates joined Eliezer Fishman, who made his fortune in real estate and runs the financial newspaper Globes, and American casino mogul Sheldon Adelson, who founded the popular, free daily Yisrael Hayom.
Some of Israel’s main television stations are also controlled in one form or other by the business elite. Yossi Maimon, primary shareholder of energy companies Ampal and Merhav, is chairman of Channel 10 television. Its main competitor Channel 2 is partly owned by dairy king Wertheim, the Tshuva family, and the Ofers. Israel’s Russian-language TV station is run by billionaire Lev Leviev, owner of holding company Africa Israel Investments.
While it is not unusual in other parts of the world for media companies to be part of much bigger conglomerates, critics in Israel say the tremendous influence wielded by a handful of business groups has weakened the country’s media in recent years.
“Israel needs today, more than ever, an independent, professional press that will protect the free market and meritocracy, and will not bow to the interests of a handful of groups,” said Guy Rolnik, founder and editor in chief of TheMarker, one of Israel’s most influential financial newspapers, and a leading critic of the concentration of economic power. “Without an independent press, Israel will become a sad version of the crony-capitalism that we see in many lagging countries in the world.”
Well-known Israeli reporter Micky Rosenthal said he faced intimidation and harassment while working on a 2008 documentary “The Shakshuka System” that investigated the connection between money, governance and media in Israel.
“The commercial television stations, which are controlled by the business magnates, refused to broadcast the movie,” the filmmakers wrote on their website. The documentary was eventually aired on a less popular state-run channel.
The major newspapers and television stations all argue that their news operations are unaffected by corporate stakeholders, old or new. Maariv said its editorial staff is “independent and enjoys total journalistic freedom”. Haaretz, Channel 2 and Channel 10 offered similar comments.
Not every Israeli company is part of a pyramid or conglomerate, of course. Pharmaceutical giant Teva, Israel’s most actively traded company, has no controlling shareholder and is not connected to any holding company. Much of Israel’s fast-growing high-tech and biotech sectors are backed by foreign and Israeli venture capital rather than local tycoons.
And some see benefits in Israel’s top-heavy economy. Colin Mayer, a professor at Said Business School at the University of Oxford, says that a concentration of power in a few holding companies can lead to poor corporate governance. But he also believes that such groups emphasize long-term goals and encourage economic stability, in contrast to the focus on short-term gains in places such as the United States and Britain.
For their part, Israel’s big holding companies argue that regulations already discourage investment in the country and hope any reform is minimal.
Dankner told Reuters that the government should “look abroad” before it breaks up Israel’s holding companies. “There is no such separation in Europe, and also the US leading business groups – such as Berkshire Hathaway and GE – hold financial and real holdings side by side,” he said.
The government has hinted that it will take such facts into account. Finance Minister Yuval Steinitz told Reuters earlier this month that while the government wants to increase competition, “we have to be very careful, very calculated, in order not to cause any damage in this process. Not every proposal that seems rational at the outset is really positive.”
If there is a move to break up some companies, there could be opportunities for foreign investors wary of the complex structure of holding companies, according to Deutsche Bank analyst Richard Gussow.
And if not, expect more consumer boycotts. In late June, aware that public opinion was moving against them, Israel’s three big dairy companies simultaneously dropped the price of cottage cheese. But rather than appease consumers, the move fueled public distrust that the prices had been bloated.
A popular public advocacy group called the Civic Action Forum is now running a campaign against concentration in the economy. Its slogan: “It’s not the cheese, it’s the system!”
The pundits at MSNBC were talking about the U.S. stock market this morning and bemoaning that it has been down for days now. They blame the political situation in Washington and the brutal events that took place over the debt ceiling. Those same right wing Republicans left town without voting on FAA (Federal Aviation) issues, leaving thousands of persons out of work and stopping all construction at airports in mid-air, so to say. There is a meanness to these Republicans that no one has ever seen in Washington before. Apple Computer has more cash on hand than the U.S. government, the housing market is flat, unemployment high, and this scenario is repeated in Europe. Will we make it?
I can’t believe in all these comments EVERYONE missed the most obvious flaw in this article.
OK, first my caveats:
– I don’t live there. I only visited once so far in 2007.
– No doubt, Israel ain’t perfect (somebody please show me someplace that is….???)
That said, C’MON, PEOPLE!!!!!!!!!!
Look at where this article came from. Reuters. I get their e-mail newsfeed for general headlines and business news every day. That’s just to generally stay informed, but they bash Israel EVERY CHANCE THEY GET.
Now, think about this piece.
They compare the concentration of wealth in Israel to Spain, the UK, and Germany (only one of whom has an economy worth more than a pot of piss in the first place). All three of these examples have MUCH LARGER populations than Israel!!!!
Wouldn’t a more realistic comparison in this regard be made between Israel and other SMALL, liberal democratic industrialized first-world countries? Such as any of the Scandinavian countries? Wonder how many families in Sweden or Finland or Norway control X amount of wealth, how many big local corporate concerns in those countries controal a disproportionate share of their respective economies?
Would Israel look exceptional then? I really don’t know. But the authors of the above piece never bothered with finding out, with basic common sense, did they?
And you all missed this.
Amazing.
@ yamit82:
World’s most accurate economist: US to grow 3% in 2011, BUT…. I still expect long-term DOOOOM
Dr. Sherry Cooper, BMO Capital Markets Chief Economist, today released her top ten economic predictions for 2011, forecasting that “the U.S. economy will grow by at least three per cent.”
Dr. Sherry Cooper’s Economic Forecast, Ten Predictions in 2011:
* U.S. growth in 2011 will be at least three per cent, boosted by the stimulus of the compromise tax bill and quantitative easing by the Fed.
* The tax bill, which allows companies to fully expense the cost of equipment purchased in 2011, which will boost business investment, increase productivity and further stimulate job creation.
* The unemployment rate will finally edge downward to just nine per cent as inflation remains muted and interest rates rise only moderately by year end.
* The Fed will be on hold throughout 2011, marking the third straight year of no interest rate changes by the U.S. central bank, and three straight years of zero interest rates.
* The three-decade bull market in bonds will finally end and stocks will perform well. The savings rate will inch upward to around six per cent (triple the level before the recession).
* Despite reports of its imminent demise, the U.S. dollar will hold its own next year, weakening only slightly against a basket of major currencies.
* Trade tensions with China could heat up as the U.S. trade deficit continues to widen and the Chinese currency rises (only moderately).
* Commodity prices will rise solidly, despite moderate growth in G-7 countries (Canada, France, Germany, Italy, Japan, United Kingdom, and United States), as the emerging market recovery forges ahead at a robust pace.
* Oil could test the $100/barrel threshold for the first time since the financial crisis in the fall of 2008.
* Even with widespread concerns over the Fed “printing money” and stronger oil prices, inflation will be barely above one per cent.
Dr. Cooper heads the North American economics team at BMO. Her team was recognized for providing the ‘most accurate forecasts’ among 50 other top North American economic forecasters, as part of the Blue Chip Economic Indicators survey from 2006 to 2009, which spanned the years of the financial crisis. For this, Dr. Cooper received the 2010 Lawrence R. Klein Award for Economic Forecasting Accuracy.
‘Her predictions are not only wrong but they don’t compute according to any economic theory I am familiar with’. Yamit82
Dr. Cooper has repeatedly been called one of the most influential women in Canada. She has an MA and PhD in economics from the University of Pittsburgh and began her career at the Federal Reserve Board in Washington, D.C. Following five years at the Fed, she joined the Federal National Mortgage Association (Fannie Mae) as Director of Financial Economics and moved to Canada in 1983 to become Chief Economist at BMO Capital Markets. She has since taken on the additional role as Global Economic Strategist at BMO Financial Group. She is a popular speaker, frequently quoted by the media, and has published three books. Dr. Cooper’s third book, The New Retirement: How It Will Change Our Future, was released in January 2008.
@ Ted Belman:
Good point, maybe we should hire some of the economists who said in consensus that America’s June jobs numbers would be six times higher than they were? That almost all in consensus predicted a recovery in 2011, that advocated increasing the debt burden by pumping more trillions into the money supply etc. etc.
One economist who got it mostly right said this:
Clip from 2008
Peter Schiff Schools Another Harvard Grad on Austrian Economics And Calls The Housing Bubble in 2006
The only economists worth the name are those who called it right. As you can see most didn’t.
yamit82 Said:
Yes we do but that doesn’t negate that there are also good people in America as suggested. Why would anyone challenge what Howard said. So we have good people in Israel, so what?yamit82 Said:
Are you suggesting that Jews are infallible.
Your comments here go to nothing. you are being defensive and petulant.
@ yamit82:
yamit82,
At some point, some products and or services, for some variety of reasons become indispensable, essential, necessary.
The “emptor” no longer has a choice.
That is when the moral provider must think of the “emptor” to whom he owes his success and remove the “caveat”.
And that is when the immoral provider will take advantage of the need its product has created to gouge the customers.
That is when excessive profits become illegitimate and cause suffering and grief and must be controlled.
@ LT COL HOWARD:
LT COL HOWARD Said:
I don’t mean to be contrarian, but I believe we have very capable economists and financial advisers in Israel. I have been following many of the so called top American economists over the past years and from a point of hindsight most have been proven wrong, not all but most. If you archive Israpundit archives you will see that the current world economic depression was predicted by me 4 years ago and I also predicted the collapse of the EU beginning with the Euro, and I’m not an economist just a plain masters in Business Admin.
Note: Do you know what are the two fastest Jewish communities outside of Israel? Bejing and Shanghai!
Trivia: The Jews built classical Shanghai
The Jews were responsible for the Russian defeat by the Japanese.
Advice: Never underestimate the Jews or form conclusions about us using rational terms of references.
As you can see what one Iraqi Sephardic Jewish family and one German Jewish family can achieve.
@ Mickey Oberman:
Mickey Oberman Said:
What ever happened to Caveat emptor “Let the buyer beware?”
Caveat emptor was first laid down as a principle in United States law in 1817, in a decision written by Chief Justice John Marshall for Laidlaw v. Organ.
America has become a nation of children who have abrogated their own responsibilities to government. You are adults, start acting like adults.
I strongly believe in and support free enterprise. I believe that businesses exist to make a profit for its owners/investors. There is nothing immortal or illegal about legitimate profits.
But when a business achieves the power to unintentionally or through sheer greed or stupidity inflict harm and suffering on those who must use its products or services it must be curbed. If it cannot or will not regulate itself then governments must step in and exercise the necessary controls to protect those who have come to rely upon what it provides.
Re reports this weekend of protests regarding housing prices in Israel. The little guy always gets stepped on. Here are some things that happened in the U.S. over the past couple of decades that have stuck in my mind.
As Santa Fe, New Mexico grew and turned into an art mecca, Spanish/Mexican families who had lived on their land for hundreds of years because of Spanish Land Grants were forced to give up the land because they could not afford the taxes.
Twenty years or so ago, there were many small “ghost” towns in Nebraska and other mid-west states. “Hippies” moved in and took some of them over, rehabilitating the buildings and turning them into destination places with arts, food, etc., all on their own nickel, only to have investors come in and take over.
We think San Francisco is nuts? It must be the Yuppies who moved in, bought low rent buildings to turn into lofts for their homes and chased out the old timers who had built San Francisco culture. Maybe they are the ones who made San Francisco nuts.
Old family homes on the bays around San Francisco were sold by long time residents because they could no longer afford the taxes. Proposition 13, which went into effect in the 70’s, lowered taxes so some could keep their homes but it finally caused the state to go broke.
I don’t know what can be done about this…
Ted I wrote a comment got an internal server error resubmitted it and got a notification that it was a duplicate comment.
See if you received it and post if you have thanks.
@ Ted Belman:
In his short but too long for me first term as PM BB brought in Livni to handle and administer his economic privatization vision for the Israeli economy which was then and still is heavily weighted by our past socialist statist economy. Problem was that they sold off valuable government assets well below the real market price, robbing the people of the real asset values. The real tragedy was that they sold most of the assets to many of the names mentioned in the above article. How much was kicked back to the politicians in the form of campaign contributions or jobs for friends of the politicians one can only speculate. How much continued influence these same oligarchs have on our politicians can be seen in the policies both economic/social and political that are enacted or enforced. One area I have always been curious is how some of our politicians are today multi millionaires when they never held a job outside of government service and didn’t inherit the dough. nobody talks about it here. it’s like Taboo.
Israel because of it’s small size is ideal for concentration of economic and political power but is it healthy? In an ideal world maybe but we are far from being an ideal country. We know our system and politicians are corrupted and all seem to be corruptible and for most it is a bargain basement sale real cheap so cheap that an NGO from a foreign country can influence everything from decisions of going to war to building a patio in an undesirable location ( undesirable for the foreign government)!
There must be separation between the press and media from all other corporate and privater ownerships ownerships. The same with the banks because we are all dependent on the banks and we only have a few here. If one goes under the rest may follow and it’s almost impossible to regulate anything in Israel because the the regulators are probably corrupted as well as is the underlying corruption, which is so easy and so endemic here.
Even the IDF top echelon is corrupted by careerists and yes men and some of the evidence is their performance in 2006, and their readiness to come to terms almost any terms with the PA, Syria and their sabotage of the political echelon in blocking any plans and execution of attacking Iran. part of this is the close relationships with the American military. How many have been promised high paying jobs with Lockheed, Boeing and others is open for investigation and speculation but I for one would like to see the results of one.
Israel has an old boys club that would put to shame it’s equivalent in Texas and Washington. Funny how Rabin the Hawk went to Washington as an Ambassador, could hardly speak English came back a dove and an American acolyte, and as the leader of the socialist labor party and then PM. What happened in his years in Washington? Clinton sent his campaign strategy team to help Barak beat BB in the 2000 elections. Who ever heard of such blatant interference unless you think of the banana republics. To this day BB is tight lipped about it. They are all part of the same club and run by the same outside influences. Today they share the same government and are a tandem duo. The likud accepts it all and that shows how deep the rot is here.
I suggest demanding as much public transparency as possible in all things especially the political and military decision making, if that happens it will carry over to the economic and social areas of our society. The best way to accomplish this is to have a strong opposition that can threaten the government and PM at any given moment.
I don’t see it happening soon unless BB totally lose it and does something unthinkably stupid.
I thought this article presented a cautious picture on the problem and its solution. Thus I found no quarrel with Howard.
Generally I thought that oligarchs and monopolies had to be broken up. Too much power corrupts. Competition serves the market best.
This is a very thought-provoking article. Thank you Ted for posting it. I have nothing to offer personally. However, there are others much brighter and more skilled than I am who should be called upon to help engineer those changes that promote Israeli economic and social development. As cautioned, changes that may sound good may have unintended and extremely negative consequences.
I quote from the posting: (1)Colin Mayer, a professor at Said Business School at the University of Oxford, says that a concentration of power in a few holding companies can lead to poor corporate governance. But he also believes that such groups emphasize long-term goals and encourage economic stability, in contrast to the focus on short-term gains in places such as the United States and Britain. (2)Finance Minister Yuval Steinitz told Reuters earlier this month that while the government wants to increase competition, “we have to be very careful, very calculated, in order not to cause any damage in this process. Not every proposal that seems rational at the outset is really positive.”
Immediately, Dr. David Sternlight comes to mind. He is very experienced and skilled in dealing with complex systems and multiple competing objectives. Further, so much economic talent in the United States are Jews who are probably very well motivated to Israel. Robert Solow of MIT comes to mind. Also, Kenneth Arrow of Stanford. I’m sure that Dr. Sternlight could name others who would be outstanding advisers.
Ted: you could take a lead in making something positive happen. Certainly how to assure economic growth and social progress are key issues. I always believed that you have to fatten the cow and keep it healthy to get the milk from which you skim some of the cream. Currently ,there is a great deal of social unrest in Israel. However, problems will always exceed the economic capability to “solve them”. Thus, priorities and allocations and intermediate objectives are necessary. Also, patience and understanding are necessary if a population is not to have unduly overoptimistic ambitions. When I helped plan the North Carolina developments when Luther Hodges was governor we determined that the state had “champagne tastes and a beer pocketbook”. Thus, dampening expectations of all the factions was a necessary element for the state to make economic and social progress.
Thank you for giving me the opportunity to share some of my views with you.
If these companies continue to make big bucks which are distributed throughout Israel and other worldly markets, so be it. The tycoons are and were much smarter than I so leave them be. I can only hope that they love Israel and will protect her. Their power keeps foriegn leaders off of us.