Statism breeds corruption

Lord Acton observed that “power corrupts, and absolute power corrupts absolutely”. He was probably referring to political power. But it is obvious that the enormous concentration of political and economic power generated by massive government involvement in the economy is offering even greater opportunities for corruption. Israeli bureaucrats can enrich their cronies by selling them “privatized” assets at preferred terms; by changing the status of land, or by granting monopoly rights.

Israel has not invented Tammany Hall, of course, nor have its elites been involved, so far, in outrageous corruption such as that of the AIDS contaminated blood in France. But Israel suffers from a lack of respect for the law and for property rights in particular, and from enormous economic powers in the hands of an unaccountable bureaucracy – who really knows what is going on in The Israel Lands Authority, where decisions can mean billions for some? – which create a fertile ground for corruption.

In Israel, as in all former socialist turned Statist regimes, power is not absolute, but it is extremely concentrated, more so than in other Western democracies. Show us another country where government regulation and control are so pervasive, where government decides how much jam goes into Hanukah doughnuts or who gets land and what use he might make of it; who gets airways rights, or who is permitted to conduct this or that business, or who can import goods and under what conditions. In short, show me a country where pulling the right strings at government ministries can get you very or extremely rich – and it is a sure bet that like in Israel, most assets are concentrated in the hands of those few who know best how to manipulate government control, and receive government largesse; and that at least some of this manipulation will involve corruption.

Show me another country with such a distorted real estate market, where government owns about 93% of the land, and where a bank duopoly inflates the price of the little land that is tradable and I predict that it reward with great wealth and political power people who know how to finesse the system. All over the world, real estate operators manipulate zoning laws and make fortunes, but even more so in Israel. It seems to be more profitable to manipulate its non-competitive, highly controlled and distorted market. Those who habitually finesse the law will inevitably develop contempt for it, and their ambition will know no bounds, neither moral nor legal. One of the wealthiest persons in Israel is a billionaire real estate lawyer who specializes in getting deals through the Lands Authority. Apparently those who wanted to emulate his success must have decided that they could do better by bending the law through political pressure, perhaps bribes, as David Appel is accused of doing.

Most corruption does not create the headlines generated by the recent cases involving the high and the mighty, because bribes are not always big or sensational. Huge bribes get a lot of attention, but the more common cases of officials who get smaller sums as “Baksheesh” are generally ignored. In the recent strike by government workers, “fixers” worked with some strikers who were willing to provide essential services for the right price. And of course, the politicians’ eagerness to grant benefits to ever-wider groups, from grants to the unemployed to bonuses for employees who acquire higher education has created a whole industry of corruption designed to “qualify” people for such benefits.

Some corruption is also only implicit. The Bejsky Commission recommendations on breaking the banking monopoly were endorsed by government but never implemented. The reason the banks were successful in nixing these strong recommendations, some claim, is that until recently the two big parties were in hock to the banks.

Some businessmen always knew how to oil the wheels of commerce by bribing authorities to remove barriers, or to build and keep barriers that inhibit their competitors. Cynics argue that like pornography, corruption may also have its redeeming social value. Given the fact that Israel is a bureaucratic heaven corruption is invaluable, they say, in getting things done and overcoming bureaucratic foot dragging and arbitrariness.

More recently, the increasing stress put on environmental concerns and on equality and lack of discrimination has required the employment of complicated, costly and time consuming bureaucratic procedures. So businesses, for which time (and the cost of capital) means money, find it cheaper to pay bribes and have these procedures shortened.

Furthermore, the oversight of bureaucratic procedures by increasingly assertive legal watchdogs, either in house or external, has further prolonged the time taken by bureaucrats to reach decisions. Indeed it is often politically “safer” for bureaucrats not to act at all. No one can sue you for inaction. This can cause enormous economic damage. So some businessmen will try to motivate the bureaucrats to act by offering as incentives lucrative bribes. In over-regulated economies such as Israel’s bribes are a form of risk premiums, or profit sharing necessary to motivate bureaucrats to take risks and act (in favor of the bribe-giver, of course) even when any decision they take may be controversial and risky to their careers.

It is likely that with growing wealth and the increasing ability of government to determine who gets what corruption is on the rise, but to understand its endemic nature we should examine its more humble beginnings.

Ever since Zionism was taken over by radical Socialism in the twenties, and property rights were held in contempt or abolished, publicly held assets were used in a corrupt fashion. It was mostly institutional corruption. Public assets were exploited to enhance the fortunes of a party or a movement. Since such corruption was ostensibly for the common good and not for private benefit, it was accepted. Often lines were crossed, but even then corruption was excused as long as the party and the movement benefited too. Already in the twenties, widespread corruption and embezzlement were discovered in the Tel Aviv Labor’s Council, but Ben Gurion advised his fellow leaders to hush matters up because those guilty were useful for the building Mapai’s strength.

Other national institutions were not immune either. The founder of Bank Le’umi (then The Anglo-Palestine Bank), Zalman David Livontin documented in the his memoirs the habit of some of the bank’s highest officials to grant unsecured loans to friends for businesses abroad, and to generally have their hands in the till, even providing their mistresses with posh residences at the bank’s expense.
So corruption was always rife in the public sector, except that then fewer knew about it then. Also, because the Jewish community and its national institutions were not so wealthy then, the opportunities for grand scale corruption were much more limited.

Socialist-derived contempt for property rights encouraged corrupting behavior even among the rank and file. In the Hagganah’s elite unit, the socialist inspired Palmach, stealing chickens and other party provisions was the macho thing to do. It was not called stealing, but Le’fale’ach, an Arab euphemism or “Li’schov” (to drag away) or “le’harim” (to lift). This “liberal” attitude represented, however, a growing disregard for normative behavior similar to that which inflicts large segments of the Israeli public that are subjected to draconian taxes, and are forced to cheat if they want to make ends meet.

It is Statism then that breeds widespread corruption. It might take some time to overcome entrenched past habits, the ruinous Socialist contempt for property rights, and its dangerous concentration of political and economic power. Until then prepare for more sensational headlines about corruption.