The Jewish focus group
By Pinchas Landau | 14/10/2010
In Silicon Valley and midtown Manhattan, the two epicenters of the leveraged economy, young Jews became the main actors in all areas, and an alliance was easily formed between them and their Israeli cousins, who quickly internalized the new economic values, imported them to Israel and corrupted many of Israel's economic norms. Pinchas Landau follows the growth of Israel's economy and declares the death of the “exit” culture
Eons ago – sometime back in the 1970s – a meeting was held of the board of directors of the investors company of Clal Industries, which was itself a major pillar of the Clal group, one of Israel's most important conglomerates. The discussion focused on the annual financial reports, and in particular on the company's tax liability of the previous year. Finally, the CEO of the company, Zvi Zur, who had been the sixth Chief of Staff of the IDF, summed up the discussion by saying that the board ought to adopt the proposal that had been put forward, the goal of which was to reduce the company's taxes to a minimum. “But,” added Zur by way of consolation, “if it turns out that we end up paying more taxes, let's not forget who we are paying them to – the State of Israel.”
It is difficult to imagine a CEO, certainly not of a large public company, making a similar statement today. To the eyes and ears of Israelis living in this age, as the first decade of the twenty-first century draws to a close, this statement sounds a little naïve – to put it mildly. Even more significant is the fact that it runs counter to one of the most basic principles of the dominant management theory: that a company and its executives must place the requirement to maximize shareholder value at the top of their priorities at all times. In fact, their own personal compensation is a direct factor of their success in achieving this aim. The response of many directors today would be to write themselves a memo not to renew the contract of a CEO that would say such a thing.
This story was told to me (with pride, I might add) by the person who was the chairman of Clal Industries at that time and the chief representative of its shareholders, Aharon Dovrat. In those days, Dovrat was viewed by the public as the quintessential representative of the capitalistic approach, in contrast to the socialistic approaches that were dominant at the time. In time, he would be demonized and depicted as the inventor and promoter of corrupt business practices.
And if we have mentioned Dovrat, who was one of the most colorful figures on the Israeli business scene of the previous generation, we ought also to mention his political patron, Finance Minister Pinchas Sapir. Sapir brought the young Dovrat to Israel from South America and had him appointed to head a new business organization – Clal Investments – for which Sapir mobilized wealthy Jews from South America, as well as the Recanati family, which at the time was among the richest families in the new state, along with Bank Hapoalim, the financial stronghold of the Histadrut Labor Federation and Hevrat HaOvdim, the Histadrut's economic arm.
Clal, Dovrat and Sapir were great successes – each in his own way and in accordance with the rules of the game, criteria and norms of those days. Sapir, who lived a very modest personal life, was directly responsible for the financial growth of quite a number of companies and individuals. In fact, most of Israel's upper crust of the 1970s and 1980s owed its wealth to Sapir, Eshkol and the other ministers of finance and industry of the first generation after the establishment of the state. Some of them survived the vicissitudes of the business world, but most have been consigned to oblivion and their glory forgotten.
Who among the younger generation has ever heard of Avraham Shapira, who thanks to the help he received from Sapir and his methods (such as the levying of especially high protective quotas in the carpet industry, which Shapira controlled) became a “successful” industrialist, and later on, a Knesset member for Agudath Israel and finally, the “director-general of the state,” in his capacity as chairman of the Knesset Finance Committee. Notable among Shapria's achievements are his efforts to benefit the large banks – who were his creditors in his role as an industrialist – during the period of the bank shares crisis in 1983, an endeavor that increased the cost of the bank share arrangement with the state by about 1.5 billion dollars, which would be 10-15 billion dollars in today's terms.
But the purpose of this article is not to recount legends of days of yore. The central questions that need to be dealt with are systemic, not personal: Why did the Israeli business elite develop as it did, and why is the current generation, the third one of this elite according to our count, so different from its predecessors?
How Israel joined the West
Israel is one of the states that gained their independence after World War II, in most cases as part of a violent struggle waged both against the occupying colonial power as well as various population groups inside the country. The question that springs to mind is why Israel's political, social and especially economic development was so different from that of its “classmates,” e.g. India, Pakistan, Malaysia and Indonesia.
It is a historical fact that most of Israel's classmates, immediately upon or soon after receiving their independence, established authoritarian regimes and centralized economies. Many of them, who eventually formed the bloc of nonaligned states, looked more in the direction of Moscow and Marxism than to Washington and the liberal-capitalistic political-economic system. The fact is that Israel did not take that same route – notwithstanding that very real possibility that it might and the major political-social forces in the young country that pulled in that direction. How did it happen that Israel joined the West in all – political, social, cultural and economic – areas?
Israel is the only country that is Jewish. But the most significant aspect of this is not (only) due to the fact that Jews are energetic, clever and all the other complimentary adjectives we like to bestow upon ourselves. In my opinion, the answer lies in the makeup of the state in the making and the huge waves of immigration that inundated the state immediately after its establishment. All of the Jews that came to the land of Israel from 1881 to 1925, as well as all the Jewish refugees that came from 1945 on, had siblings, cousins, former neighbors and friends who had immigrated to Western countries. All this was also true for the Jews that came from Middle Eastern countries such as Iraq, Syria, Egypt and Lebanon, as well as for the Jews of North Africa. All had a single common denominator: Their reference group in their new life in Tel Aviv, Jerusalem and Haifa (and also in Ofrakim, Beit She'an and Or Akiva) was made up of those same relatives, friends and former neighbors that had ended up in New York, London, Paris and Milan, who in the decades following the war made their fortunes and later became exceedingly wealthy.
It should be noted that a similar phenomenon could be found among the Indians, Pakistanis and others, leading to cultural, political and economic change in those countries too. But there, the phenomenon occurred only in the last quarter of the twentieth century, and most intensely following the fall of the Soviet Union.
What do you want to be when you grow up?
From its inception, the Jewish state was designed by its people and leaders as a state that would be founded on the values of Western civilization. There is no contradiction between this determination and the difficult reality of the 1950s. Moreover, there is not even any contradiction between the centralized, semi-socialist economic regime pursued during the first four decades of the state and the fact that the state leaned towards the West. According to the economic development theories current at the time, there was no other way – at least no more effective way – to get things moving in the right direction here. In particular in the case of Israel, the combination of the constant threat from without and the need to absorb masses of immigrants from cultures so different from one another left no practical option – certainly not in the eyes of the Israeli leadership – other than a centralized regime, which inevitably was perceived as bureaucratic and patronizing.
However, throughout all the initial decades, the state strove to Westernize itself in all areas of life. If we could go back in time to the socialist decades of the 1950s, 1960s and 1970s and ask the Israeli businessman or one of the economic ministers, “What do you want to be when you grow up?” their immediate answer would be: “I want to be like my counterparts in the West.” Perhaps one of them might say, “like in America,” yet another “like in Switzerland,” and the philosopher type might respond “like in Sweden,” but these responses are indicative of a debate regarding which capitalistic model is most desirable rather than over the actual principle itself. With the exception of a handful of communists, no one in Israel wanted to emulate any of the countries of the Eastern bloc – Russia or any of the experimental models: Hungary in 1956, Czechoslovakia in 1968 or Poland in 1981.
Here are a number of milestones from the world as it was: Already in 1953, in the seriously depressed state of Israel's economy at that time, a group of German-Jewish brokers who had begun to trade in securities as early as the 1930s, joined forces and established the Tel Aviv Stock Exchange; in the late 1950s, the Mapai government carried out a kind of economic revolution, when it eased many of the bureaucratic restrictions on imports and marked the beginning of the march towards free trade as the basic policy of all Israeli governments; and in 1968, on the background of Israel's victory in the Six Day War, an economic conference was convened in Jerusalem to which numerous wealthy Jews from all over the world were invited with the clear aim of encouraging the investment of private capital – and this has remained the consistent policy of Israel's government's since the establishment of the state.
These are not random examples. The message is clear: Everything that was consolidated into the neo-liberal economic theory of the 1990s and of the current decade, and which was adopted by Israeli governments and Israeli society with such great enthusiasm in the last generations had been agreed upon in principle and acted on at least on the embryonic level beforehand. But in order for these Western aspirations to be fully realized, it was necessary to remove the centralized regime that still existed in Israel, along with the political-economic forces that supported and benefited from it. In fact, no great effort was needed to accomplish this goal because the old regime had committed suicide with its wretched running of the economy in the decade following the Yom Kippur War. The height of this process came with the great crisis in 1983-1985, which not only speeded up the demise of the existing economic structure, but also prepared the ground from a political-social perspective for the new structure, whose content was adapted to the new winds blowing in the world.
In Israel, things developed in such a way that the watershed came in 1985. The most outstanding event of that summer was the presentation of the grand economic program and its passage in the unity government at the time. It is a historical curiosity that this program, which marked the end of the age of the centralized regime in Israel's economy and heralded the beginning of the government's retreat from its dominance in the country's commercial activity, was passed in the cabinet thanks to the votes of the Labor ministers, while the majority of Likud ministers voted against it.
A few weeks later, a far less well-known event occurred, but it was one that bore huge symbolic significance for the future of the Israeli economy. Beit Shemesh Engines Ltd., which was owned by the government (don't ask how or why, it's a much too long story), could not meet its financial commitments. Simply put, its checks bounced. The company's indignant suppliers turned to the Ministry of Finance – as was the practice from time immemorial in cases of foundering government-owned companies – but to their complete and utter amazement, the answer they received was that the government had no intention of standing behind the company and that its creditors would have to weigh their options accordingly.
All the rest – including the fall of the Histadrut economic empire, the collapse of the kibbutzim and moshavim and the entire agricultural sector, the phasing out of “directed credit” (the method according to which treasury officials decided which industries would receive credit and under what conditions), the liberalization of the import policy, which deliberately wiped out numerous traditional industries, the onset of privatization in 1986 with its continuation after 2003, the liberalization of the capital market and foreign currency trade and much, much more – is history.
The result of this long-term revolution is that in macro-economic terms, Israel not only emerged relatively unscathed from the severe crisis of 1983-1985, but also became a huge success story, one that was suitable to the new age of the post-industrial economy. The high-tech industry began to boom and along with it, the state. Economic goals previously considered inconceivable, such as a surplus in the balance of payments and the reduction of inflation to a level lower than the average level in the West, were attained and maintained over years.
Within twenty years, the State of Israel had moved from being a country with a bankrupt, Third-World economy to a full-fledged member of the First World, and which has been persistently climbing up to a standard of living on par with that of the countries of Western Europe, and the sky's the limit.
Money is everything
But while Israel was undergoing dramatic changes, the Western world was not sitting on its laurels either. The process of rehabilitation that it experienced, which began after the Second World War, had exhausted itself by the early seventies. However, in the background, a far greater change was brewing: The industrial age, which had begun in the mid-eighteenth century, was about to make way for a new age.
The post-industrial revolution occurred mainly in California. It harnessed the American capital market through the creation of new funding systems and set out to conquer the world. Among its most amazing features was a unique ability to create private wealth in an amount and at a speed unseen before in human history. It is no coincidence that this economic revolution was accompanied by a political-social-economic revolution too.
Proposition 13, which received the support of California's voters in 1978, demanded lowered taxes even at the expense of a reduction in and undermining of public services. The victory of Margaret Thatcher in England in 1979 and of Ronald Reagan in the United States a year later led to a similar change in approach to the overall policy, making the right-wing economic-social policy into the leading force in world politics.
The ongoing recession from 1973 to 1982 prompted far-reaching changes in the structure of the capital and labor markets. The trade unions, whose power bases in heavy industry were destroyed in the recession, broke down in the private sector and were unable to gain a foothold in the branches of the new economy. In the strongholds of the new economy, professional advancement was based on higher education and a willingness to work hard. These characteristics, which by definition were typical of certain (young) sectors of the population, conflated with the new social and cultural zeitgeist, such as the need for self-fulfillment. Traditional values, such as identifying with one's company, loyalty of the employer to his worker and vice versa and long-term career planning, were shunted aside.
The rate of technological advancement grew increasingly more rapid, as did the worker's perspective of his own job, along with that of the investor regarding the holding of the stock of a particular company. But as the duration of the relationship between the worker or the investor and the company grew shorter, thus the expectation of the volume of the fruits that this period should yield grew. The concept of “making a killing,” which in the past was exclusively part of the lexicon of traders, became ubiquitous among all investors and even among workers. In fact, the entire economy, including the labor market, became traders.
We could expand the discussion on the changes that occurred in the economic-business sector during the past three decades – but one picture, or in fact one graph, is worth a thousand words. The graph presents the ratio between the total debt in the American economy – private and public of all kinds – and the size of the economy itself, as measured in terms of the gross domestic product.
The graph points to two stages: From 1953 to 1981, the ratio between debt to GDP grew from 1.30 to 1.59; in other words, throughout this entire period, one that saw rapid economic development, the debt gradually increased. In contrast, from 1981 to 2009, the ratio more than doubled itself and reached 3.75. This means that every dollar of production that the American economy produces today carries a debt of $3.75. The economic recovery programs of the past year involve transferring the private debt to the public sector, and also convincing the private sector to go back to the economic behavior that typified it until 2007. That is why the overall debt has not yet gone down, and even continues to grow. A final comment in this context: In 1929, the ratio was only 2.75 – and that explains the fear of a great crisis like the one in the 1930s, or perhaps one that is even worse.
The development of an economy driven by increasingly higher levels of credit created economic and especially financial distortions, which grew ever greater (and it should be borne in mind that a similar process occurred not only in the United States, but also throughout the entire Western world). But the greatest distortions occurred among the people themselves. The inundation of new money, its easy availability and low cost corrupted all the standards and norms upon which economic and financial activity had been based in the previous two decades. One could get rich quickly and easily through the clever use of other people's money, and many did, or at least tried to do exactly that. Today the result is known: the great economic crisis that began in 2007, and its end is not yet in sight.
As noted, Israel rebuilt its economic structure in order to adapt it to the global economic-financial system that developed in the 1980s and 1990s. Israel especially fostered its ties with the two centers of power of the new economic system: Silicon Valley in California and midtown Manhattan in New York City. In both centers, young Jews were major actors in all areas, and an alliance was easily formed between them and their Israeli cousins. On both sides, the actors were the children, or at most the grandchildren of the siblings, friends and neighbors of those Jews who had parted ways in the context of the great upheavals that the Jewish world underwent in the first half of the twentieth century.
The young Israelis, many of whom had studied in American universities and / or joined American financial and professional organizations (and to a lesser extent, European ones), quickly internalized the theories and values that drove the new financial-economic world. What followed was self-evident and is also well known: The corruption quickly spread to the Israeli economy, and the norms of the day, such as disproportionate rewards for senior executives, became widespread in the Israeli business sector.
The economic-financial age, or the leveraged economy, ended with the onset of the crisis in 2007. Those who believe that the efforts of the governments to stem the crisis have succeeded or will succeed are entitled to take the view that that economic model can be restored. Perhaps with the exception of the banks, brokers and portfolio managers, who have a clear interest in convincing themselves that all this will work out for the best, hardly anyone believes that it is indeed possible to go back to the world of pre-summer 2007.
That is why it may be assumed with a high degree of probability that the good times are over for the business elite that developed here in Israel in the last twenty years. Business empires that were based on credit collapsed without any ability to save or rebuild themselves. But the turning point is much greater than the financial structure of company X or group Y. The business culture that viewed a successful exit as the pinnacle of one's desires and aspirations will necessarily disappear if and when the stock market stops playing such a central role in the economy – and in the public mind. The situation in which Israeli citizens hear about the fluctuations in the stock markets of Tokyo and Shanghai on the morning news on the way to work is not self-evident, and may be viewed as something that is not quite normal.
However, there is still a long distance between this and the end of capitalism. The world needs to consider how and in what direction capitalism will develop. Israel needs to ask itself whether it is possible or desirable to continue to draw its economic-business inspiration from the West.
Together with clichés that “it's too early to tell” and “time will tell,” there is reason to assume that the result will be positive – and that is not just an empty hope, but rather an estimation based on solid facts. Just as Israel swallowed the Western economic-business approach hook, line and sinker in certain areas, there are also large and significant ones in which Israel has been almost completely unaffected. The most striking and crucial example regarding both the economy and perhaps also society is the surprisingly low level of consumer credit and debt in Israel's financial system, in stark contrast with the situation in the United States, the UK and many other countries.
It is difficult even in retrospect to explain this, but the debt level of Israeli households in all areas, and especially in the area of mortgages, is very low both in absolute terms as well as in comparison to other countries. This means that although we see ourselves as enslaved to the consumer shopping culture, a principal element of the enslavement mechanism is almost completely absent. And this means that somehow, in a mystifying, unexplainable way, in this area, Israeli society decided to go its own way, and was thus saved from a major economic and social catastrophe.
A society that had the sense to choose Western freedom and oppose communist enslavement, and which also knew how to withstand the enslavement of Western consumerism as it developed in the last generation, is a fundamentally healthy one. So there's hope.
Pinchas Landau is an economic advisor and financial commentator