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From crony capitalism to a free market

The only way to better the lot of Israel's beleaguered middle class is to put an end to anti-competitive government regulations

The heart of the unprecedented Israeli protest movement last summer was anger by the middle class at the difficulty it faces making ends meet. In a recent statement, Professor Manuel Trajtenberg made the common mistake of assuming that there has to be a conflict between “social justice” on one side and fiscal prudence and money for defense on the other. This falsely assumes that the only way the government can increase social justice is to spend more money for “social programs.” But the real best ways to increase social justice and to make Israelis better off do not require spending large amounts of money.

The main reason why it is so hard for Israelis to earn a decent living is that the Israeli economy is strangled by anti-competitive behavior by business in cooperation with government bureaucracy. It wouldn’t cost money for the government to stop doing the things it is doing that enable Israeli businesses to make undeserved profits while operating inefficiently and charging excessive prices.

Restrictions on competition raise Israeli prices by an average of at least 10% — and often much more. If the government’s actions supporting anti-competitive behavior were greatly reduced, the cost of living for all Israelis would be reduced by at least 10%. No conceivable government program of payments to people could do as much to help them as much as a 10% reduction in the prices they have to pay. In other words, the government can do more for people by making the economy more competitive than it can by giving them money.

Last summer's 'tent city' protest on Rothschild Avenue in Tel Aviv (photo credit: Liron Almog/Flash90)
Last summer's 'tent city' protest on Rothschild Avenue in Tel Aviv (photo credit: Liron Almog/Flash90)

While the government should often be giving money to some people, that approach, when extended too far, creates moral and political problems. It is much healthier for people, as well as for the economy and society, to help others by making it possible for them to help themselves — by becoming more productive, and being able to keep the benefits of their productivity. This requires making more of Israel’s economy open to effective competition.

No one thinks that Israel should be a socialist country where the government owns a major share of productive enterprises. Nor does anyone think that Israel should be a Darwinian society where the weak have to fend for themselves. The real choice Israel has is between the kind of economy it has now, much of which is non-competitive private enterprise (“crony capitalism”), and a genuine market economy combined with generous welfare benefits for the needy.

It is not the identity of businesses owners that tells you what kind of economy you have; it is the way businesses operate that determines the nature of the economy. The benefits of “capitalism” don’t come automatically from private ownership; they come from the force of competition. Crony capitalism is not a free-market system and doesn’t produce the benefits that come from a free market.

A free market doesn’t mean that there is no regulation by the government. Nor does it mean that the government doesn’t assist the needy. It means that most businesses are not protected by the government from the need to be efficient and the need to charge genuinely competitive prices.

Here is how things work in practice now in much of the Israeli economy. General regulations are enacted to “protect the public,” but the crucial details are written by the bureaucracy. The strongest influence on the bureaucracy are the businesses affected by the regulations. They are the only organizations that know and care about the details and have the money and incentive to work systematically and continuously to influence the bureaucracy. So the details of the regulations are written and enforced in such a way as to protect the business from competition – although the ostensible purpose is to protect the environment or the consumer or some other worthwhile cause.

For example: Ask foreign banks why they don’t open branches in Israel to compete with Israeli banks. A number of foreign banks have looked into opening in Israel. The reason they stay away is that they don’t believe that they can operate efficiently and profitably under the system of regulation here. But if the regulations are so onerous how can Israeli banks be successful under the same system? First, Israeli banks know how much of the regulations they can safely ignore. Second, Israeli banks have developed long-term relationships with the regulators that enable them to adapt to the regulatory regime at a cost they can afford.

Each of the bank regulations seems to have a sensible purpose, but the whole package, as it works in practice, has the effect of protecting the few Israeli banks from foreign competition; and as is often true, only foreign competition makes a genuinely competitive market. See the US auto industry.

In brief, Israel does not now have a free-market (capitalist) economy – except in a few areas like high-tech. The best way to help the Israeli public is to bring competitive markets to more of the Israeli economy, especially to the industries that provide our food.

About the Author
Max Singer is a senior fellow at the Begin-Sadat Center for Strategic Studies and a founder and Senior Fellow of the Hudson Institute. He is the author, most recently, of "History of the Future," Lexington, 2012