Financial markets in Israel

Last Weds in our series of AACI lectures at Netanya College we had a talk by Ron Malka. Ron has a PhD in economics from Bar-Ilan University, and worked for many years in the IDF in the Budget Dept. of the Defense Ministry. When he left there he became a Director at the Tel Aviv Stock Exchange. His topic was “Financial markets in Israel”.

In a direct professorial way Ron explained for the uninitiated, what is a capital market? Basically it is like any other market, such as a food market, except the goods being bought and sold are monetary goods, not necessarily cash money, but bonds, currency and other financial instruments. Who uses the capital market? Ordinary people who have excess earnings, such as savings or pensions, who put this money into the market, often thru financial experts or advisors, in order to earn interest. On the other side are the investors who wish to use the money the savers put into the market. They may want a loan to support the development of a company or for construction of a building. The capital market mediates between these two groups of people.

In Israel until 2004 the Banks controlled about 80% of the capital market, but in 2004 the Government changed the regulations so that the Banks could not control so much, because it was seen that they had a conflict of interest, since they were both taking the money of the savers and were themselves managing financial products. So after the change, the Banks were required to divest themselves of instruments, such as pensions, and allow investment houses to take a greater share of the market. Now it is about 50:50 for the Banks and private sector. This made the markets more equitable, but it also allowed large private investors, the wealthy” top 1%” of the population to gain greater control, thru the operation of super-companies or pyramids. This is one of factors that triggered the social unrest in Israel last summer, because there is not enough real competition for prices.

So that is one reason why Israel has a strong economy, even though prices are high, because market forces were released. Also, basically Israelis are industrious, compared to some other countries In 1983 there was a Bank crash in Israel, that so frightened the Government and the Bank of Israel that they have become much more cautious and responsible. Thus, Israel’s debt is about 75% of its GDP, while that of the USA is about 100% and for most European countries it is higher than Israel. Also as a consequence the Banks did not give bad loans like the rest of the west in the recent economic crisis, and Israel depends far less on real estate. This partly explains why Israel was not so badly affected by that crisis.

Another factor is that Israel lives under conditions of war, and that makes industries more profitable, thus producing more wealth. Added to this is the high level of innovation in Israel and you have a total picture that results in a strong economy, that is growing at a good rate, nearly 5% last year.

About the Author
Jack Cohen was born in London and has a PhD in Chemistry from Cambridge University. He moved to the US and worked at the National Cancer Inst. and then Georgetown Medical School. In 1996, he Moved to Israel and became Chief Scientist of the Sheba Medical Center. He retired in 2001 and worked as a Visiting Professor at Hebrew University Medical School for 5 years.