Does populism have a price?

HFN’s Alan Sacks highlights the economic inequality issue.

Despite the obvious successes of the Israeli business sector – driven by Israel’s extraordinary achievements in the technology arena – there are clearly systemic problems in the economy. There are few who begrudge the sudden wealth of hi-tech entrepreneurs who secure an ‘exit’ for their technology and knowhow. The situation changes though when the disparity between rich and poor is highlighted, and when large sections of the public feel that a limited group of individuals is growing rich at their expense.

In 2011, many members of the public boycotted certain basic food items in protest against the high cost of living. The focus of the protest then turned to the small group of business ‘tycoons’ who had effectively acquired control over huge portions of the Israeli economy, largely on borrowed money. The result of this protest was the Anti-Business Concentration Law, which aims to break up multi-level corporate conglomerates, and ensure that significant financial and non-financial assets are not under common ownership. In parallel, to the undisguised joy of the financial press, a number of the tycoons have seen their empires collapse under the burden of debt.

The saga of Israel’s natural gas monopoly rumbles on. Israel’s huge offshore natural gas discoveries were heralded as a game-changer for the Israeli economy. Five years on, however, the public protest against the monopoly in the offshore gas reserves (the major discoveries are all held by the same exploration groups) continues. The government has shown unprecedented hesitancy and inconsistency in dealing with the situation, encouraging the suspicion that the government has some ulterior motive in supporting the monopoly. The final arrangement for exploiting and marketing the gas reserves was pushed through the Knesset (Israel’s parliament) by the Prime Minister, virtually single handed. The High Court of Justice has now determined that the Prime Minister’s action was unconstitutional and that the details of the ‘Gas Arrangement’ required the approval of the Knesset. Whatever the final arrangement, the uncertainty over the future of the exploration rights has delayed the exploitation of the natural gas reserves. Perhaps more significant will be the question of whether the government’s behaviour, and its lack of clarity on issues such as royalty levels, rates of taxation, export quotas and so on, will deter foreign players from entering the Israeli natural gas market.

‘Will the government’s behaviour deter foreign players from entering the Israeli natural gas market?’
Alan Sacks, HFN

Next in line for criticism were the Israeli banks and, in particular, the two major banks that dominate Israel’s highly concentrated financial sector. Finance Minister Moshe Kahlon (who made his political name by introducing competition into the mobile telephone sector) came into office promising to open up the finance sector to competition. At the time of writing, a committee established by the Minister is yet to publish its final recommendations for increasing competition in the finance sector. However, the interim recommendations of the committee (for example, forcing the banks out of the profitable credit card sector, and encouraging new sources of credit for the domestic and small business markets) were provocative enough to invite immediate criticism both from Kahlon and from the Governor of the Bank of Israel.

Early in March, the Ministry of Justice published its proposed Law for Insolvency and Financial Recovery. The declared goals of the proposed law include facilitating the financial rehabilitation of an insolvent obliger (whether individual or corporate), and ensuring a ‘fairer’ distribution of the assets of a debtor among secured and unsecured creditors. It is unclear whether the promoters of the draft law have considered the full economic and regulatory consequences of their proposals. The threshold question is though, whether this ‘fairer’ distribution of assets (for example, only 75% of assets covered by a security interest will be available to the secured creditor, with the remaining 25% being available for the general body of unsecured creditors), as well as the lengthier process that will be involved in realising any security interest, will result in banks being less willing to lend or raise the cost of borrowing, or both.

The latest episode in ‘populist’ economic legislation occurred at the end of March, when the Knesset approved legislation imposing a limit on salaries in the financial sector – as a multiple of the lowest-paid employee in the organisation, with a cap of NIS2.5m (approximately $640,000) per annum. Any salary above this limit will require special corporate approvals and will result in additional tax obligations on the employer. The chair of the Finance Committee of the Knesset announced the decision as ‘a historic move that will reduce the economic disparity in society’. Even if (as the legislators propose) the idea of a salary cap is extended to public companies in Israel, this will leave open the possibility of uncapped salaries for private companies and will inevitably encourage publicly-listed companies to de-list. Successful managers in the finance sector (and later on in public companies) will no doubt look for more profitable opportunities in private companies, hedge funds and in other unregulated areas.

The growing disparity between rich and poor in Israel is certainly a source of concern. The question is whether the recent measures introduced by the legislators will improve the lot of the weaker elements in society and reduce economic disparity, or whether the measures are merely popular measures aimed at punishing the financially strong, without furthering the true goals of fair wages and honest prices.