Monopolies eat us up

Some of the study’s findings were so outrageous – especially the huge salaries and perks that workers in the public sector managed to extract – that the media paid attention for a while. Even media pundits who were unsympathetic toward Finance Minister’s Netanyahu’s courageous attempt to break the monopolies, had to admit that monopoly abuses had to be curbed. The media played up the stories of the Jaguar-driving director of a marine museum, not yet in existence, that earns 60,000 Shekels monthly, as well as similar salaries union bosses earn for no-show jobs. Still, the far greater damage the monopolies cause was generally ignored because it is difficult to quantify.

Monopolies are like lumbering elephants. It is impossible to turn them into competitive racehorses. Their dominance inhibits competition by limiting access to markets. Their monopoly rents raise the cost of labor (in the public sector) and of doing business. This makes our export-oriented industries non-competitive.

Productivity in the ports is very low. Israel pays 108 million dollars annually to ships that are kept waiting unnecessarily. Other monopoly rents impose high costs on exporters, damaging their competitiveness. By raising the cost of imports the ports also reduce competition with local monopolies, badly harming consumers, especially the low-income strata who spend more of their income on consumption. The monopoly rent that port-workers – who earn three times the average wage and have very cushy work arrangements – exact, is about 384 million shekels annually. So much for the Histadrut claim that by protecting the extraordinary privileges of such unions it protects all workers.

The Israel Electric Corporation monopoly costs the economy an estimated 524 million dollars annually. The corporation employs 3,000 unnecessary workers who earn twice the average wage. Workers get free electricity and extraordinary pension benefits that will cost the Corporation an extra 1.3 billion dollars to meet. The Corporation’s return on capital fell from 3.1% in the nineties to 1.7% in 2000 and is now negative.

“The structure of the electric monopoly causes a grave distortion in the allocation of resources,” the Treasury’s study concludes.

Inefficiency in the refineries monopoly costs the economy at least 150 to 200 million dollars annually. Again this is the result of poor use of capital investment, a highly-paid bloated workforce, etc. The consumer pays the bill, of course.

“The non-competitive structure of the milk industry distorts the allocation of resources and the distribution of income, creates grave inefficiencies and inhibits the growth of the industry,” the Treasury study points out. It costs the economy about 110 million dollars annually.

Mekorot, the water monopoly, is government owned, but like most entities that government owns, “government control over it is very loose,” the report avers. “Since it faces no competition Mekorot has no incentive to become efficient, to cut costs or the inflated number of employees.” As a result the price of water in Israel is higher than in many comparable countries. Still, it does not cover real production costs. The government continuously subsidizes Mekorot and pays its debts.

It is claimed that Israel suffers an acute water shortage. But this is due to the low cost of water for agriculture and to enormous waste because of poor infrastructure. Instead of letting true costs allocate water through a market pricing system, and so eliminate artificial shortages, Israel is about to invest heavily in desalination, thus further subsidizing its water wasting practices.

What is true for milk and water is essentially true for most consumer items in Israel. An older estimate by our monopoly regulator stated that monopoly rents in Israel were about 30 to 50% of the price of most consumer goods. It is likely that consumers pay a similar surcharge also on education, health, credit – you name it.

This is highway robbery sanctioned by the government. It is a hidden tax transferring literally billions of shekels from the low and middle income earners to the pockets of the few rich, the dozen to sixteen families that own most assets in Israel, and that pillage the Israeli consumer without shame. Yet you do not hear a word of protest against this iniquity from the so-called social lobby of populist politicians and advocates of the welfare industry or from Israel’s TV self styled protector of the weak, Oded Shahar; nor from the Histadrut.

The treasury study also points to another major sector, financial markets, where lack of competition causes very heavy economic damage.

The five major bank groups – but especially the two giants, Ha’poalim, by far the greatest and Le’umi – control more than 90% of commercial bank assets and bank branches and employ 85% of financial market employees. Four groups, the Arison, Dankner and Offer families plus Bank Le’umi control over 40% of all assets in Israel. This concentration is among the highest in the world. It creates, the study notes, “oligopolistic and even monopolistic powers that enable the banks to make unusual profits,” namely to bilk the public. Concentration is positively correlated, several studies point out, to the wider-than-usual gap between the interests the banks receive and what they pay. This high gap means a transfer of billions annually from savers, usually lower and middle income strata, to the few oligarchs owning Israeli banks and to their allies in the nationalized banks (such as Le’umi).

But the damage concentration inflicts is much greater. Unfortunately the Treasury study does not reveal it all. The banks are the one factor most responsible for Israel’s economic retardation because of their continued misallocation of credit. They especially harm the so-called periphery regions, the Negev and the Galilee (a joke really, considering their small distance from the center) by their continual discrimination against small “peripheral” (namely far from the Protekzia centers) businesses, the true engine of growth in any economy. Our Bank oligarchy prefers to do more risky business with its cronies, Israel’s very rich. 70% of all credit goes to 1% of lenders. Cronies get almost unlimited credit with few safeguards. This led to the banks’ present predicament. They cannot collect most of the debts they so generously gave their friends. They therefore cannot extend normal credit, causing a very damaging credit crunch with dire consequences.

The Treasury, and especially Netanyahu, should be congratulated on their politically bold move against powerful monopolies. However, they must have the courage to deal with private monopolies as well, especially the Banks. Since it is the government that sanctions monopolies, it could break them up. Otherwise the Israeli economy will stay mired in recession, and growth will not happen.