How Encourage Investment in Israel?
Present Impediments and Proposed Remedies
Hal Lehrman here continues his analysis of the problem of private investment in Israel. In a previous article, “Israel and the Private Investor,” published in the March COMMENTARY, he discussed those factors impeding the flow of private capital to Israel which in general might be said to be beyond the immediate control of the state: problems arising from the world political situation, for example, or from inner economic hazards. In this second article, Mr. Lehrman weighs some of the criticism leveled by potential investors, as well as many Israelis, more directly at the government of Israel itself: charges of inefficiency, socialist bias, bureaucratic favoritism and inertia, and the like. Between them, these two articles endeavor to give a balanced and rounded picture of the factors, both favorable and unfavorable, relating to what is perhaps the most urgent economic problem of the new state.
The threat of socialism—nightmare of ultra-rugged individualists—ranks high among the discouragements blamed for dampened enthusiasm among potential foreign investors in Israel. How real is the threat—and the fear?
Certainly there has been socialist talk enough—and from high quarters. Shortly before the first birthday of Israel Prime Minister David Ben Gurion confided to a multitude of cheering followers his hope of seeing socialism, full-bodied and triumphant, settle upon the youthful Jewish state “in my lifetime.” This schedule, geared to the life-expectancy of a man with snow-white hair but sensational vitality and abundant health, was soon stepped up to dizzy velocity by Labor Minister Golda Myerson, who promised another congenial audience that socialism would be achieved “by next year.” And as late as last October, at the billion-dollar National Planning Conference in Washington, Mrs. Myerson again defiantly proclaimed in the teeth of a predominantly middle-class audience that her party, the Labor Zionist Mapai, was irrevocably dedicated to ultimate socialism.
However, when coolly analyzed, such florid predictions and challenges show themselves to be little more than inspirations of the oratorical moment, prompted by a desire to satisfy the yearnings of Mapai’s rank and file, for whom socialist aspirations are as natural as mother’s milk. Nobody need worry about them—and indeed, very few investors have, except an occasional timorous soul over-allergic to the slightest whiff of Marxist brimstone.
First of all, Israel has less socialism—in the sense of government ownership or management—than a good many countries whose regimes are far from Marxist in persuasion. Apart from some natural resources, ports, and such utilities as rails, telephones, and telegraph—all inherited from the Mandate—the State of Israel enjoys virtually no proprietary controls in any economic sector. There has not been a single act of nationalization thus far under this so-called “socialist” government.
True, the Jewish National Fund—which owns most of the cultivated soil—has close relations with the government; and the Labor Federation (Histadrut)—as the colossus of the over-all national economy—is so interlocked with government that Histadrut is often called the government by critics of both. But the Labor Federation’s power tends to make Israel’s economy, if anything, syndicalist, not socialist; while the JNF, as a corporation in the public interest, is in a position to act with much more than nominal independence of the government.
More significantly, the Mapai Prime Minister and the other Mapai ministers in the coalition government have been steadily making concessions to capitalism—perhaps inadequate, but decidedly non-socialist.
Are these concessions sincere or opportunist? According, to Mapai theoreticians, Israeli economic society is an entirely novel and wholesome evolutionary blend of coexisting private, cooperative, and “mixed” enterprises. Seen in this light, such invitations to capitalists as the Law for the Encouragement of Capital Investments are not “concessions” at all, but reflections of the increasing role which private enterprise will play—with Mapai’s full blessing—as one of the several dissimilar but harmonious elements in a developing Israel. To some other watchers in Israel, the favors and gifts to private enterprise look like poor expedients, jealously hedged to prevent any real shift of power from the cooperative to the private sector.
However, whatever the differences on present measures or ultimate aims, on one thing nearly everybody agrees: nothing must be done—either now or in the foreseeable future—to discourage private capital.
Being essentially practical Zionists rather than philosophical Marxists, the Mapai leaders know well that the stark facts of Israel’s crisis in production, investment, and foreign exchange make everything, including socialism, secondary to the problem of insuring Israel’s survival—hence their readiness to go on giving bits of ground on the right. If Ben Gurion today has become only an interim prime minister, risking new national elections, it is because he has declined to save himself by seeking a parliamentary majority with the really doctrinaire anti-capitalists in Israel, the fellow-traveling, pro-Kremlin Mapam. Only if the latter should unexpectedly win at the polls would there be some reason for investors to fear socialist experiment. And hard economic reality might deter even Mapam.
This does not mean, however, that the Mapai-led government of Israel these past two years has been entirely free of certain moods and manifestations usually attributed (by non-socialists) to socialist-minded regimes.
In surveying the obstacles to increased private foreign investment in Israel, the writer has previously described (COMMENTARY, March) low productivity, high wages, unbalanced currency, and the menace of Arab or world war as investment deterrents which exist above and beyond government’s power to remove them simply by changing a policy. But there are other impediments which—at least in the opinion of many observers on the right of Mapai—do exist solely because the socialist-oriented regime has created them or permitted them to remain.
These are: (1) inefficient bureaucracy; (2) excessive economic controls badly applied; (3) exorbitant privileges for Histadrut; (4) unfavorable treatment of private enterprise; and (5) government failure to provide sufficient attractions for the wary private foreign capital which Israel must somehow win over. Let us now examine these contentions.
Bureaucracy: During her three short years of troubled independence, Israel has, jt is said, shown positive genius for perfecting the kind of red-tape, slow-motion civil service so unhappily familiar in older countries around the globe. The circumstances were admittedly extenuating. In the tumult of birth, the provisional government had to scrape together administrative personnel from all over. There was little time for careful selection, let alone tests and examinations. Senior officials recruited whom they could or wanted; and usually they picked their own friends and adherents. The old Jewish Agency staff, with all its partisan political loyalties intact, went over virtually in toto. The mass transfer of Jewish officials from the Mandate administration did help to thin out the political character of the new civil service; but in the main, jobs were distributed on the basis of whom the applicant knew rather than what he knew. The need for improvisation left the door wide open to patronage and incompetents.
In Jewish Palestine, fierce allegiance had always been owed to one’s party, and it would have been astounding for things to become otherwise overnight in the new Israel. Today most ministries and bureaus of the Israeli civil service are composed, from clerks up, largely of members of the same party as the director. Even when—as in the Foreign Office and the Ministry of Trade—the uppermost levels have been filled by experts rather than by partisans, lower echelons are predominantly political. The opposition has charged in the Knesset, without successful contradiction, that some functionaries have been fired simply because they were ultimately revealed not to be party members.
An Israeli Institute of Public Administration exists, and an impeccably selected civil service board has been setting up procedures, grades, standards, training programs—and examinations, at least for new openings up to certain levels. But all this is very slow taking hold. Some departments—notably police, postal, and telephone—are understaffed; but others are already so crowded that one wonders how many of the new jobs, available strictly on merit, there will be. As for present staff, it is now encrusted in tenure and occupancy, and any sweeping housecleaning would encounter massive resistance.
There are numerous exceptions to the prevailingly dreary picture. The Israeli foreign service in Western countries, notably in the United States, is devoted and competent. The Israeli delegate to a twenty-nation public personnel seminar at Lake Success was unanimously elected its rapporteur-général; even the Egyptian representative voted for him! But normally the pakid (“civil servant,” a Hebrew word which has grown almost as notorious as protektzia, meaning “pull”) is inclined to be arrogant, a buckpasser, and a master of obfuscation. He is undoubtedly honest and bribe-proof (in honorable contrast to his like in some other Middle Eastern countries), despite low pay. But he is also majestically inefficient and exasperating.
Nowhere have these deficiencies been more noticed—and more damaging to the national interest—than in the agencies concerned with reception, encouragement, and accommodation of potential foreign investors.
In the first two years, Tel Aviv rang with the cries of irate inquirers lost in the bureaucratic maze. Sometimes it was their own fault, for expecting to learn all about a foreign country on an eight-day holiday, or for not knowing how to ask the proper questions. More often it was the sheer lack of organization, method, and final responsibility among the conflicting, confusing, and confused government bureaus. Chaos was complicated by the anarchy created by the British departure, when basic statistical records of costs, production, markets, and other data required by investors were misplaced or scattered around the country. Delay and waste were aggravated by official ignorance of the investor’s needs, and by instinctive distrust of his intentions. In the vital year of 1949-50 the Ministry of Trade and Industry—an obvious Mecca for any inquiring investor—was left without any minister at all, for internal political reasons. The result was the alienation of numerous Americans and other foreigners whose capital might have done much good.
Improvement has gradually been noted since the establishment, a year ago, of an Investment Center in Tel Aviv as the single authorized organ through which new economic projects are channeled. For a time after the center’s inauguration, cables from New York waited months for a reply, if they were not spurlos versenkt. The months have now shrunk to weeks. The accumulation of precedents, information, and general familiarity with routine has been facilitating the labors both of officials and clients. The inquiring investor now finds Israelis who understand their jobs, keep their appointments, and have some notion of the things which the investor considers important; and the Center boasts an impressive number of projects initiated, authorized, and launched, even the compiling of imaginative lists of desirable enterprises (with analyses of market, production, and required capital) for distribution abroad.
But performance continues admittedly far below what it should be. Yaacov Geri, industrialist and non-politician who finally took over the vacant Ministry of Trade late last year, came in with the optimistic slogan, “The Investor Is Always Right!” Heinz Gruenbaum, the Investment Center’s chief, is the head of a large privately owned electrical equipment concern and speaks the language of private enterprise. But too many of those below them are routine bureaucrats who cling doggedly to the habits of their trade.
Foreigners still are frustrated by lethargic methods. Small immigrant investors—whose individual sums can add up to a substantial total—are left to flounder almost entirely for themselves. The Investment Center still is not fully a “center”; it is compelled to resort too often in its turn to the various ministries. Towering paper-work and flagrant delays remain at least partly the order of the day—so much so that some analysts recommend a separate and distinct investment center in New York to handle American investment problems on the spot.
But who could staff such an office? The managers of an American center would need the full confidence of the Israeli authorities. And while the Israeli regime is happy to have the Economic Department of the Jewish Agency in New York operate to encourage investment by handling queries, routing them to Israel, and promoting interest through publications and itinerant missionary work, the Agency does not have the authority to make final decisions, and is not likely to get it. Even the government’s own representatives, were they sent here to set up an investment clearing house, would probably not command sufficient confidence. Administrative discipline is not so firm inside Israel that the government would be willing to grant carte blanche to delegates six thousand miles away. The economic counsellors at the Washington embassy and Israeli consulates in New York, Los Angeles, and Montreal manage to expedite a considerable amount of investment business, but they too feel seriously hampered by their own limited authority.
Indeed, the regime does not assign adequate power of decision to high subordinates even in Israel. The worst bottlenecks occur on the desks of a handful of Israeli officials—sometimes the single top man—who either will not allow competent officials, or cannot find officials competent enough, to write a final signature on major matters.
On lower levels there is equal room for improvement in procedures, from the way an official handles a prospect to the way a clerk files a document. I have been wistfully told by an American Zionist with extensive Israeli investments that “one hundred American secretaries would revolutionize the whole economy.” At least as important as stenographers, other observers say, would be a few dozen American or American-trained experts in office management, investments, and economics.
In principle, this need has been recognized by the Israelis. Their government, under the Point Four program, has requested a variety of American specialists in road construction, railways, irrigation, technical training, and allied fields. The American Technion Society is calling for “volunteer” engineers to help establish new industries in Israel. And Finance Minister Eliezer Kaplan has publicly affirmed his government’s intention to engage American experts for the Investment Center itself. But clearly the latter idea can be more vigorously pushed.
Privately, Israelis say that the relatively high salary which an American would require is an obstacle, and the further objection is heard that an American Jew getting better pay than his Israeli colleagues—or even brought in on equal pay to fix things up and then go grandly home—would be resented, hence ineffective. It would seem, however, that even at a high wage a competent American who could cut down waste or know where to find and how to negotiate with foreign investors in a manner that would increase investments would be a good investment himself. But a prerequisite would be full official support of his recommendations. There are also available some first-class American businessmen, with intimate knowledge of the Israeli economy, who might be willing to accept ranking administrative posts, particularly if, in the interests of efficient concentration, the Center were permitted the management of the government’s hitherto independent funds for industrial development. But that they would be given necessary broad authority is most unlikely.
Controls: Only the most hard-bitten free traders will argue against the need for strict and extensive economic controls in Israel. Where goods are scarce, production low, exports one-eighth the magnitude of imports, and foreign exchange intolerably short, close supervision of prices, supplies, hard currency, and raw materials is imperative. The objections one encounters in Israel are not so much that basic controls are unnecessary but that (1) controls have become a fetish and (2) controls are badly applied.
(1) The bureaucratic mind has a familiar passion for documents, forms, and official papers to be filled out by citizens who will return after a respectful interval and fill out some more; and it tends, it is often said, to install controls just for the sake of controls, no matter how small the reason for controlling or how great the disadvantages.
At this distance I have been unable to check the intrinsic desirability of the clothing rationing which threw Israel into a furore last fall. But one hears the clothing uproar cited as a prime sample of controls which defeat their purpose.
The intention seems to have been to reduce the expenditure of foreign exchange on raw materials by rationing the amount of clothing that an individual could purchase. But, it is pointed out, Israel has all the machinery and techniques for processing the materials that result in a finished suit or coat. All that is needed from abroad is the raw wool—say $2 to $5 per garment, and less for cotton. This meager saving in foreign exchange is already counterbalanced in part by the mere cost of the forest of paper (imported) required for the ration cards, applications, and records—to say nothing of the taxpayer’s loss in the salaries of a small army of ration enforcers, the loss of workers’ pay in the almost throttled domestic clothing industry, and the intangible loss of morale in a population required to wear its trousers threadbare.
Or consider the case of a small factory, working for the export market, which had to replace a wornout bearing in one of its machines. The machine stood idle five weeks while the owner, after neglecting his plant for days to queue up at various allocation bureaus, waited for an inspector to verify his petition on the spare part. During that time considerably more foreign exchange was lost through the idleness of the machine than the bearing was worth. Under the Mandate, the British also controlled such items. But they permitted suppliers to sell a limited monthly quota to recognized customers, reserving their inspection apparatus for large, unusual, or otherwise suspicious orders. The Israeli system seems intent on controlling every request, however trivial.
(2) Where controls are unquestionably needed, the manner of their implementation is of cardinal importance. In Israel, it is contended, controls quite correct in theory are often vitiated in practice. A chief sinner is administrative sluggishness. To cite a verified instance: It took one man fifty-one days—and innumerable trips to Jerusalem and the Kirya in Tel Aviv—to obtain a letter of credit against an approved order for a thousand barrels from the United States; during the interim the American price went up $1 per barrel, eating up an additional $1,000 of foreign exchange.
A major evil effect of this incompetence has been the decline of public and commercial morality. Poor administration of rationing caused wide consumer resentment. Clumsy strategy in the clothing ration scheme precipitated a wave of panic buying and an alarming breakdown in controls. A reliable private report describing conditions toward the end of 1950 estimated that seven out of every ten Israelis were habitually buying some food, clothing, or other commodities on the black market.
As for an honest merchant, if he knows that an item cannot be obtained because the Treasury lacks hard money or because the feeble supply of the item must be severely rationed, he may be content to be patient or do without. But when he sees that controls at dockside and frontier are slipshod, or that his urgent request is debonairly set aside, he will be provoked enough to go after what he needs at any price and from any source, no matter how shady and no matter how many inspectors keep tabs on him. A large element in the black market today is the legion of individual businessmen who have grown cynical in the antechambers of officialdom.
A further provocation has been the arbitrary, somewhat Balkan methods—later modified—of the drive against the black market: terrifying ultimatums, searches without warrants, raids in the night, confiscation of suspects’ property, mass arrests, indiscriminate jailing of accused persons awaiting trial, inadequate time to obtain legal counsel or prepare a defense, stiff fines and prison terms for picayune infractions.
Also, to the usual, universal worry of businessmen about price controls in all economies, the investor adds the fear of unreasonable controls which might leave him without adequate spare parts or raw materials supplies after he has sunk his money into a factory and used up his initial stock. And at the very outset he runs into a restrictive situation peculiar to Israel: the difficulty of acquiring ownership rights to the land on which he will build his plant.
Privately held land sells at fantastic prices, largely because there is so little of it, the Arab-abandoned properties having been sequestered by a government custodian, while the Jewish National Fund constantly extends its holdings. This JNF land is not for sale but only for lease, without the explicit right of sublease. The contract does run for ninety-nine years, easily renewable, and there is no reason to suppose the JNF would refuse to permit transfer of the lease to another Jew if an owner wished to sell his plant, unless it was for speculative purposes. National ownership of land is a principle deep-rooted in Zionism, honored by virtually all shades of Israeli political opinion. Some investors, particularly the smaller ones, may very well prefer this system which lets them off with a modest rental fee and permits them to spend more of their limited capital on plant instead of real estate. And, of course, the practice of leasing land instead of buying it is not uncommon in American and British industry. Nevertheless, many a businessman dislikes to feel himself dependent upon the good will of outsiders for disposal of land in which he has tied up his money on construction and equipment.
A welcome—but small—relaxation late last year freed some 25,000 acres of Arab-abandoned urban land to be sold by the custodian to a government development authority with the right of resale to private persons. (Prices of these lots are not far below black market rates, the government having arranged the matter less to increase the purchaseable land than to increase its own revenue.)
Around the same time the larger problem of general controls was confronted in a cabinet reorganization which brought in Mr. Geri as Minister of Trade. He and a new Minister of Agriculture, the energetic Pinchas Lavon, divided between them the control functions of the abolished Ministry of Rationing and Supplies. Enforcement was turned over to special police units. Geri organized his ministry into specialized departments: for commerce; for metals, machinery, and building materials; for textiles, footwear, and leather; for all other industries, including chemicals, and for coordination of exports. He appointed several Israeli industrialists to short-term top jobs at a salary of $1 per year. He proclaimed his intention of concentrating henceforth on expansion of the economy rather than on its restriction. He promised to investigate the possibility of relaxing or removing certain controls, and to speed up the granting of permits and licenses.
To a limited degree, the promise has been made good. Lavon empowered consulates to issue import licenses on the spot for certain categories of agricultural machinery. Geri authorized the Investment Center to handle licenses of approved enterprises, at least for the initial equipment and materials they need to get started. He secured the final liberation of gift food packages from tortuous formalities. He created a small revolution in rationing by permitting the consumer—previously bound hand and foot to a specific retailer—to transfer to another retailer if dissatisfied; and the same flexibility is now being granted the retailer against the wholesaler. But Geri’s enlightened energy has as yet not percolated down through the mass of each department, where the same personnel and pretty much the same attitude and procedures prevail as before.
There remains the charge of favoritism, even more serious, for it involves the entire economic climate of Israel: specifically the unique position of the so-called cooperative sector of the economy, the influence of organized labor on the government, and the extent of labor-capitalism’s competitive advantage over private enterprise.
Histadrut: By common consent a prime mover in the pioneering and colonizing era of Jewish Palestine, the Labor Federation today hears its opponents call it an overgrown giant that places its own self-perpetuating interests above the interests of the nation—almost a government within the government.
Histadrut, which “federates” all of labor’s far-flung enterprises—as trade union, industrialist, banker, exporter, importer, grower, builder, wholesaler, transporter, distributor, and retailer—is certainly big enough to justify the title of “giant.”
As labor union, Histadrut has a larger and more strongly organized membership in ratio to population than any comparable union in the Western world. Estimates last September gave it 311,000 members out of a total 425,000 wage-earners in Israel, or around 75 per cent.
Until midway through World War II, each trade union group in Palestine ran its own hiring halls, for which it sought an exclusive closed shop in any given plant. After a rash of jurisdictional strikes, an all-union system of “General Labor Exchanges” was created. These are Israel’s major employment agencies today—registering each worker, grading him on a point basis according to skill, number of dependents, length of unemployment and so forth, and assigning him his place in line for the next available job. The bureaus enjoy clear pre-eminence in the hiring of personnel for the bulk of the country’s plants. A 1949 survey revealed that 89.5 per cent of all workers in 258 representative factories were hired entirely through the Exchanges.
It is charged by critics that Histadrut, because of its overwhelming size, is the dominant element in these agencies, wielding a large measure of power through its omnipresent strength—though not through force of law—to decide whether or not a worker shall be hired, at what type and place of work, and for how long, with the additional power of transferring him elsewhere. This is denied by Histadrut, which contends that, although it has a strong majority on nearly all the governing councils of the Exchanges, a rule of unanimity on policy matters prevents it from manipulating the system in its own interest even if it wished to. This contention usually evokes a snort from anti-Histadrutniks, who point out that the prevalence of Histadrut officials on the Exchange staffs is already a potent factor for missionary work on an applicant who badly needs a job. In any case, no one contests the fact that most employers, who have long been vainly demanding representation in the Exchanges, have an extremely small voice in the selection of their own workers.
In its status of entrepreneur, Histadrut is uncontestably unique. No parallel for it exists anywhere else in the world. As early as the beginning of 1950, Histadrut employed over 100,000 workers in Histadrut-owned factories, farm settlements, building companies, and other enterprises. Its “cooperatives” encompass 70 per cent of Israel’s agriculture. It is the largest banker, insurance company, publisher, ship operator, purchasing agency, and retail food dealer. It has a practical monopoly over urban and intercity bus transportation. In some enterprises it has a partnership interest with private capital. In industry it owns or manages only some 14 per cent, employing about one-seventh of the 75,000 workers occupied with manufacturing and handicrafts—but it is the largest single industrial employer, entirely overshadowing any existing concentration of private industrial interests. It controls the labor force of its competitors. And it is absolutely dominant, as an owner, over certain key branches within, or allied to, the industrial field.
Solel Boneh, Histadrut’s building-contractor combine, is a choice example, linked to subsidiary iron foundries, cement and glass works, tile, earthenware, and steel pipe factories. In three years it has increased its turnover by nearly 600 per cent. In 1950 alone it invested the equivalent of 28 million dollars in expanded plant—about twice as much as the probable investment by the whole of American Jewry for the year. Hamashbir Hamerkazi, Histadrut’s “Central Consumers Cooperative,” is likewise a giant. It is currently adding or planning to add to its empire new plants for sugar, edible oils and margarine, animal feed, fish meal, textiles, flour, and ice.
Defenders of Histadrut argue that the self-sacrifice and devotion of the labor pioneers built the substantial economic foundations which have held the infant state erect through its first crucial years. Few will disagree with this tribute to Palestine Jewish labor’s past performance. It is only the rare, extreme partisan of “free trade” who would withhold glad and full acknowledgment of the gifts already bestowed on present-day Israel by the “cooperative” idea during the decades of its heroic application.1 But is it equally true that Histadrut today is the guarantor of economic democracy in Israel, functioning amicably and co-equally with private capitalism for combined achievement of Israeli prosperity and social justice? With this view of Histadrut’s present role there is widespread and impassioned disagreement.
The critics suggest that Histadrut, invaluable for the earlier and more limited economic community, may now have to revise its objectives and procedures or become an obstacle to the healthy growth of the new state. They ask whether the leaders who were perfectly equipped for development of a pioneer semi-rural system are able—or willing—to adapt themselves to the nuances and dimensions of an economy which demands maximum productivity, efficient business methods, and a world horizon of trade and commerce. Do not all institutions, even those conceived in self-sacrifice and humility, incur the mortal perils of pride and self-seeking as their power swells and their primeval zeal fades into a narrow desire to keep and multiply the positions they have won? And while it is true that Histadrut is a unique manifestation of the cooperative form, unmatched anywhere in place or time, is there not a danger here of making the cooperative idea a shibboleth?
For the reader the problem is less historico-philosophical than pragmatic. What, after all, is best for Israel in her present need and growing emergency? It is in this broad spirit—rather than in a mood of picayune fault-finding—that we should consider the arguments of Histadrut’s opponents which follow below.
Is histadrut a practitioner of economic democracy? It operates an extensive system of social security which provides benefits for accidents, sickness, hospitalization, and other contingencies. But should such functions be, under economic democracy, a nearmonopoly of a trade union rather than in government hands? What about working conditions and pay? Curiously, they are sometimes better in Histadrut enterprises than in private concerns, sometimes not so good. There have been strikes by Histadrut workers against Histadrut employers.
And distribution of dividends or profits of savings or production to members of the cooperatives? Virtually none at all, except for the extra meat, butter, eggs, and other produce consumed inside individual kibbutzim, the collectives whose internal economy uses practically no cash. In the non-agricultural production cooperatives, the worker is, it is said, merely a hired hand, with no share in profits. Net gains are ploughed back into acquisition of new plants, bigger inventories, larger capital reserves. This pattern certainly helps build up the general economy, thereby presumably benefiting the worker as citizen. But in a direct monetary way he gets no benefit whatever. On the other hand, it is contended, his organization, and Histadrut and its directors, tend to become more entrenched. As for the service cooperatives, such as that of the bus drivers, where dividends do get distributed lavishly, the original purpose of unity for mutual benefit and efficiency has allegedly degenerated into jealous defense against all outsiders.
Is Histadrut only co-equal with private capitalism? Critics maintain, to begin with, that Histadrut’s sheer size gives it massive advantages. A network of interlocking functions and properties makes it an autonomous economy inside the national economy. Characteristically, Solel Boneh controls so many exclusive sources of building materials that it has become a huge trust, able to freeze out private builders, who have no such channels of supply, and able for the same reasons to maintain a commanding position over public works assignments and acquisition of more materials. (In a company recently formed to exploit the mineral resources of the Negev, the government has a 51 per cent interest, Solel Boneh 49 per cent.)
By virtue of their size, if nothing else, Histadrut enterprises are also the natural major beneficiaries of external aid, such as the American Export-Import Bank loans. Furthermore, private enterprise is mainly dependent on government allocation of foreign exchange; but Histadrut has its own sources of hard currency abroad. There is a rich field of short and long-term credits for Histadrut in Ampal (American-Palestine Trading Corporation), relatively few of whose bourgeois shareholders realize or seem troubled by the paradox in their support of “socialist” institutions.
In addition, there are the worldwide philanthropic campaigns of Histadrut, which afford a further competitive advantage, it is asserted, since a Histadrut firm, if it does not pay its own way and show a profit, can still get along on cash contributions from abroad, a crutch on which private enterprise obviously cannot lean. Even where a private concern has been able to stand its ground competitively it has sometimes had to surrender itself to a purchasing bid from the colossus (as in the case, quite recently, of the Mandelblitt building firm or, in the pre-Israel period, the Nesher cement works).
Secondly, according to the critics, intimate ties with government give Histadrut the advantage in the hustle for scarce licenses, permits, and other official plums. In the present cabinet, seven of the thirteen ministers, including Ben Gurion, are members of Histadrut. Critics concede that, in varying degrees, these men have from time to time made decisions contrary to Histadrut’s particular interests. Notable examples are the licensing of two large private projects for paper and tire factories in preference to similar Histradrut-backed proposals. But in the Mapai-dominated ministries, the middle and lower echelons are packed with trade unionists who, it is said, function automatically in support of Histadrut. And it is with these echelons that the day-to-day power resides.
Private entrepreneurs are allegedly forced to accept in meager allocation, or buy on the black market, commodities which the administration distributes liberally to cooperatives—and which have now and then found their way from there into the same black market. One Histadrut affiliate suddenly received a monopoly on purchase of farm products from Arab villages in the Galilee, and private buyers were barred by army guards. On another occasion, without public auction the Abandoned Property Custodian sold to Histadrut’s Hamashbir, reportedly well below market price, valuable machines of a former Arab spinning works; private companies who applied previously to buy the equipment had been advised by the custodian that the machines were reserved for use in the Negev and were not for sale to the private sector. Hamashbir also received an exclusive license—and adequate allocation of cloth—to sell winter underwear and other apparel in the immigrant work camps. This froze out 92 private factories, who were instructed by the government to turn over their stocks to the Histadrut agency for sale in the camps. (After violent outcry from the competition, Hamashbir’s “concession” was reduced from all of the 50 camps to 21 of them, the others to be supplied by the free market.)
In recent months Solel Boneh has been allocated over half of the country’s cement, the Jewish Agency 15 per cent, Hamashbir 13 per cent, the army 12 per cent, and private contractors only 8 per cent, it is estimated. Of its share, allocated mainly for immigrant housing, Solel Boneh has been assertedly using two-thirds for Mapai clubs, official Histadrut buildings, and lucrative private orders, and only one-third for the immigrants—while blaming the inadequacy of its work for immigrants on the shortage of cement! Not content with its squeeze on local cement sources, Solel Boneh has also been absorbing the major share of imported cement, forcing private contractors to a near standstill. And although the Israeli government is officially treating Western Germany almost as if Adolf Hitler were still personally in power, it is common talk among insiders that Solel Boneh—along with the Jewish Agency—is allowed to do heavy importing from the German market with credits created by settlement of certain restitution claims. It is noteworthy, too, that until this March kibbutzim had been exempt from income tax, even though many of them operated plants competing squarely with private industry, which had always been taxed stiffly. (Revenue for the Treasury from this hitherto untapped source is conservatively anticipated at over one million Israeli pounds.)
Histadrut, the criticism continues, injures the interests of the total Israeli community by provoking a deep resentment in the private branch of the economy—a resentment which eventually communicates itself to foreign private investors and diminishes their zeal for making the investments which the country sorely needs.
The foreign businessman naturally seeks out his local counterpart. He wants to know how business is done, the conditions, the problems, the prospects. Inevitably, the answers he gets make him stop and think (even after adequately discounting the possible prejudice in his Israeli colleague’s views). The Law for the Encouragement of Capital Investments—and later administrative improvements—give him special privileges over long-established firms, such as reduced taxes and firm assurances of the licenses and allocations essential for continued production. But, he asks himself, for how long? Sooner or later, he reckons, he will cease being a new investor in Israel and become an old one. He sees himself today as the foreign investor being wooed, tomorrow the private businessman being pushed around.
But the investor does not have to rely entirely on Israeli complaints. He often, in very short order, acquires complaints of his own.
He is familiar with the evils of political “pull” back home, but in Israel—a very small country—the all-pervading Histadrut seems to stand out much more formidably. He is not officially told in so many words that, if he wants to be sure of his workers’ cooperation or of an easy time in government bureaus, he would be wise to get himself a Histadrut partner; nor is he bluntly warned that an independent private company may suddenly find a brand new Histadrut-supported outfit arising to compete with it—backed by Histadrut’s semi-philanthropic financial reserves. But he absorbs enough hints to make him acutely aware of the possibilities. And if he does negotiate with Histadrut, he invariably discovers that Histadrut will enter the project in exchange for a 50 per cent participation, and no less. He may then pack up and leave rather than accept.
The regime has several times challenged its critics to produce evidence of a single instance where the government tried to bully a private investor into association with Histadrut. To this the critics reply that the frustrated investor, being essentially pro-Israel no matter how deep his personal resentment, is not likely to issue any public blast against Zion. But, they say, the smoke is so thick there must be a fire somewhere. They cite the reliable story of an American concrete-block maker who could not get a guarantee of cement supply from Solel Boneh unless he tied up with a kibbutz. Instead of yielding, he returned home. So did an American investor who wanted to build a motion picture theater but had no assurances he would find film operators if he did not accept as partners several Histadrutniks who knew nothing about the cinema business. A leading Jewish businessman in Mexico, who headed a five-man delegation claiming to represent nearly 20 million dollars in eager Jewish capital from that country, has declared that the Israeli government turned him down flatly when he offered to launch an insurance company, a deposit bank, and other similar financial projects.
Is it not significant, the critics will ask, that in the approved enterprises involving Histadrut and private capital which have cleared the Investment Center, Histadrut rarely takes less than 50 per cent? (One outstanding exception is Hamashbir’s smallscale participation in a nitrogenous fertilizer and chemicals company—but this field has always been predominantly in the private sector.) And why is it that in a Histadrut area like cement, a desperately short commodity with presumably large potential profits, or like bus transportation, where expansion could profit the country considerably, no new private firm has emerged at all?
Against these allegations, Histadrut supporters enter an equally uncompromising denial of nearly all particulars, embellished by the general observation that the real trouble is merely private enterprise’s lack of enterprise.
In the first place, they say, there is nothing basically backward or unbusinesslike about Histadrut and its leadership to make them inadequate to the challenge of Israel’s current economic needs. Indeed, organizations like Solel Boneh are not even “cooperatives” in the sense of kibbutzim or other classically simple cooperatives of the pioneering era. Solel Boneh and the other large Histadrut enterprises were never intended to belong to the individual workers or members but to the collectivity of workers. The real purpose was and is to serve as independent contracting agencies devoted to the welfare of the general economy. If anything, they might be called “super-cooperatives”—all the more useful to the state because of their size and wide range of operations. As such, it is maintained, they are especially well suited to Israel’s present needs because they are in a position to employ all their skill and resources for the broad advancement of the national interest rather than merely for profit.
Nor is there any basis to the charge, say Histadrut’s defenders, that bigness gives it easier credit or other advantages. The industrial segment of the Export-Import loan is being used in substantial part by eligible private firms. In the agricultural segment, too, credits have gone to private groups in proportion to their activity, if not more—notably in citrus and fertilizers. Philanthropic funds raised by Histadrut abroad are employed, not to plug deficits caused by mismanagement, but as additional investments or to build schools, youth villages, clinics, and other social utilities which in no way compete with private enterprise. And if Ampal can raise more money among Americans for its “cooperative” projects than the Palestine Economic Corporation can raise among the same investors for private projects, might it not perhaps be simply because Histadrut and Ampal have more imagination and energy in the creation and promotion of enterprises?
Neither Histadrut nor private firms, the defense insists, can obtain a license for anything licensable unless the application for it is justified in the general economic interest. There is, for instance, no present distinction between Solel Boneh and any independent builder in the allocation of cement: priority is assigned rather to the type of building project, with immigrant housing at the top of the list and luxury apartments at the bottom. Further, no factory or firm anywhere in Israel seems to be going bankrupt, and no decline of private industry can be reported. On the contrary, plenty of private firms, by using good business methods, are positively thriving. Histadrutniks suggest that much of the bitterness over licenses and allocations is due solely to the shortages in Israel of pretty nearly everything: when a businessman knows he could do ten times his actual volume of business if only he had the supplies, it is natural for him to suspect discrimination and start shouting for help.
Moderate pleaders will concede that there have been occasional preferments for Histadrut and that officials at various levels sometimes go astray because of personal allegiances. But government policy calls for equal treatment of the cooperative and private sector—and when a violation is exposed it is corrected. Histadrut itself is constantly alert, its friends declare, to internal error. They cite as an instance of effective self-reform the case of Egged, the transport cooperative, which was compelled by Histadrut to cease employing garage labor, a violation of principle, and set up a separate service cooperative for the mechanics.
Passing to the counter-offensive, pro-Histadrut circles charge that private investors conjure up the cooperative bogey as a cloak over their own reluctance to take chances in Israel. If private enterprise believes in free competition, why does it fear the competition of Histadrut? Why does it demand the virtual reorganization of the whole Israeli economy as its price for participation? If Histadrut has the capital, resources, and know-how to make good its share, why shouldn’t it be permitted to have 50 per cent of any joint operation with private enterprise? Would the balance be any fairer if private capital secured 51 per cent?
And if Histadrut sinks more money each year into Israel’s future than private foreign investors do, is that a fault in Histadrut? Should Histadrut be condemned for its confidence in investment? Instead of calculating potential profits down to the last decimal and staying aloof unless profits are absolutely guaranteed, let private enterprise sometimes take the risks that Histadrut often takes, operating on shoestrings, hunches, and faith.
Such, in outline, is the brief presented for Histadrut. Some outside observers regard the case as persuasive, others as evasive. It may be relevant to note that, in Israel, the critics of Histadrut are not limited to opponents of the administration. Not long ago the Mapai Youth weekly, Asmoret, in a mixture of self-analysis and pert criticism of its elders, openly admitted unfair treatment of private enterprise, and cited: refusal to license a soap factory unless management formed a cooperative with persons lacking knowledge of the business; refusal to license certain private imports at a good low price unless half of the cargo went to Hamashbir at cost; the case of persons holding party cards who can “enter government offices freely ahead of long queues.” Mapai’s own non-socialist allies, when the four-party government coalition was still a working partnership, strenuously urged an end of alleged partiality toward Histadrut. A member of the pro-government Sephardic group in the Knesset publicly denounced “the system of controls tending to destroy private enterprise by canalizing all trade into the hands of Histadrut.” As for the non-socialist opposition, it has long been clamoring for an anti-trust law frankly designed to break Histadrut’s grip. And the liberal General Zionist chairman of a parliamentary committee to investigate alleged discrimination against private enterprise has accused the government of obstructing the committee’s work. (Certainly, defenders of Israeli institutions might insert parenthetically, there is no control, or sign of it, on criticism of government and Histadrut sins and omissions, real or imagined.)
Now it is not necessary for this reporter to make a categoric judgment on the merits of the Histadrut case. This article’s purpose is to expose to general public attention a basic problem which hitherto has been treated gingerly or overlooked entirely in objective American public discussion. Sooner or later that problem must be soberly confronted if Israel is to become a flourishing market for private foreign investment.
The first prerequisite will be clarification of the facts. Government spokesmen insist that the tumult against Histadrut in the Knesset is politically motivated and biased. This is often true—for both sides—in controversial issues. It would seem, however, that the government and Histadrut ought effectively to provide the facts and the figures to refute the allegations. If the Histadrut case is a strong one, the public—especially the Israeli public—should be persuaded by evidence rather than by turgid rhetoric or appeals to emotional Jewish “patriotism” and faith in miracles which are the traditional and outmoded methods of communication between Israeli leaders and world Jewry. There appears to be, at the very least, a grave ineptitude in Israeli public relations on the question of Histadrut Entirely apart from whether the charges against Histadrut are really true, there is not the slightest doubt that too many of the potential foreign investors in Israel, and most of the established private entrepreneurs in Israel, believe that the charges are true. It follows, I think, that the government of Israel must do two things: devise ways of encouraging investors to venture into Israel despite their misgivings; and devise ways of demonstrating beyond all possible doubt that Israel, not Histadrut, is the supreme end of governmental economic policy.
Added Attractions for Private Enterprise: We have previously noted, in addition to the existence of a labor Goliath in the Israeli economy, other deterrents to fresh risk capital. To soften the impact of this list of impediments, the Israeli government has offered substantial concessions. But results, in terms of volume of investment, have fallen far below the needs. What more can be done?
Some suggest going further with concessions in taxes. But taxes during the first five, seven, or ten years have already been cut to the bone for the new approved enterprises, and reduction would generally only mean turning over the difference saved to the investor’s own government. And how could the existing favorable tax rates be well extended beyond their present term? This would give new investors a permanent advantage over old investors, even when the former had ceased to be “new.” And to give all enterprises the same long-term concessions would deal a severe blow to the Israel Treasury.
There is another possible concession, however, which qualified observers regard as workable and desirable. This would be to raise the percentage each investor is permitted to get back on his capital annually in dollars or in any other hard currency he originally invested. Right now he is allowed 10 per cent by law. It has been announced that investors who really earn a solid amount of foreign exchange for Israel will be permitted a higher rate—but the rate has not been specified, no example of it has been disclosed, and it has failed to produce any substantial investment increase.
Opponents of a more generous arrangement say that Israel could not afford to permit more dollars out. But why not, if the offer of better terms will attract more foreign-exchange earners and there is a net gain in dollars left in Israel? Ten per cent—not in profit but merely in annual recovery of capital—is hardly a bonanza lure. If the investor were simply to sink his money into gilt-edge American securities or a new American enterprise which he could operate familiarly on his home grounds, the minimum return he could expect would be six per cent profit. An extra 4 per cent in Israel just of a man’s own capital is scarcely opulent in return for all the hazards of a foreign venture. There would seem to be no risk whatever in raising the rate to some higher percentage—provided that the repatriated dollars above 10 per cent of the original investment do not exceed, say, 40 per cent of the dollars actually earned for Israel before repatriation. In this way Israel would always have the dollars with which to pay off the investor—and come out ahead. There is no great likelihood, in any event, that many businesses will do very much better than 10 per cent. And any that did would probably be inclined to plough a good slice of the profit back into the enterprise again. But why not proclaim the investor’s right to take it out if he wishes to?
Ideally, there is another suggestion which might work wonders psychologically for the morale of reluctant investors.
Suppose the regime were to admit frankly that all its efforts to attract investment have fallen short. Suppose it were to indicate that Trade Minister Geri has been held back by a lack of real authority or real conviction that he could make fundamental changes. Suppose somebody new—someone with international reputation, liberal background, proved devotion to Israel, and high personal achievement in private enterprise—were to be given a competent staff (partly imported) and wide powers to make Israel attractive for investors. The effect might be sensational—and the results could be most happy for Israel’s solvency.
Sober controls—and an emphasis on large units of production moderately centralized in planning—would of course continue to be necessary. Even if its alleged political influence were reduced, the very real utility and strategic economic position of Histadrut would be a powerful brake on irrational, piecemeal exploitation of the country. There is an extensive middle ground, however, between the present system and irresponsible individualism. In that middle ground the development in Israel of a healthy, viable economy along Western lines might very well be charted.
The new direction need not lie in the narrow groove of private profit. After all, the essence of Western economic genius is not so much profit as production. If American economic potential has grown monumentally huge, it is because the American businessman has developed skills for making goods rather than merely for making money. He seems to have captured the secret of producing more things faster than anyone else and delivering them on time, with minimum waste of material. He has achieved this production know-how in an atmosphere of moderate freedom and adequate competition. Israel, within the limitations of her size, could strive for comparable results in a liberalized economy.
But is it likely that such a transformation will be permitted to occur under existing political circumstances?
Mapai government leaders have shown remarkable courage and flexibility. It is no mean achievement for them to have come out in favor of hiring immigrants to work in kibbutzim (which challenges the basic communal concept of “non-exploitation of labor”); in favor of selling some public land (which challenges the basic Zionist concept of land as a national heritage); in favor of taxes on cooperative settlements; in favor of a wage ceiling; in favor, finally, of any concession by a socialist-minded government to the traditional hobgoblin of the workers’ state, private enterprise.
All this has been done because Mapai leadership has understood the need for adapting theory to fact. Ben Gurion has proclaimed that without investments “the state will perish.” Foreign Minister Moshe Sharett has warned that “the ground is burning under our feet” and that private enterprise must be “a central pillar” of Israeli economy. Finance Minister Eliezer Kaplan has repeatedly affirmed similar convictions. But do not these men, people ask, still to a large extent have their hands tied by an unseasoned electorate and the traditions of powerful institutions which have placed them in office?
For the Mapai leadership to move forward resolutely toward a retreat from dogma, there must first be a recognition in the Mapai-Histadrut middle echelons and rank and file of certain ideologically and politically unpalatable facts: that it may be better for Israel, in the present emergency, to have the base of her economy more firmly anchored on competition, individual initiative, and private investment; that the urgent problem of Zionist pioneering today is no longer so much the financially unprofitable clearing of wilderness and desert by collective sweat and sacrifice, which was the historic mission of the labor pioneer, the halutz, as it is the creation of a briskly expanding society capable of absorbing and employing the immigration, which is primarily the task of capital, technical skills, and individual imagination; that the gains of social democracy are not necessarily jeopardized by the strengthening of private enterprise, and that the concentration of economic and political influence in the hands of a few labor-capitalist officials is no guarantee of social democracy either.
But such a wholesale rejection of lifelong precepts is too fundamental to be expected tomorrow. At the same time, there are grounds for the hope that a tolerable live-and-let-live compromise may come by action not of the Histadrut directorate but of the mass of the voters. The Jew in Israel—like the Jew everywhere else, particularly the Jew of European origins—is essentially an individualist, with little stomach for a collective diet. The zeal of his flight from Soviet-controlled areas when physically possible—as shown in the statistics of emigration from behind the Iron Curtain—testify to this prejudice in favor of personal initiative; and, having tasted the bitter fruits of Soviet collectivism, he is not slow to throw his influence in the direction of less regimented economic forms. The recent rise of General Zionism from near obscurity to the status of second largest party in the municipalities of Israel is further evidence of a growing resistance to excessive controls and “cooperative” paternalism. The coming national elections might underline this trend. Mapai-Histadrut may have to accommodate themselves to the changing times. It is quite possible that in the next elected parliament of Israel the socialist Mapai and the capitalist General Zionist parties will join in a working coalition.
The General Zionist chiefs in Israel are perhaps not a match for the top Mapai leaders in vigor and flair—possibly because the moderates have had less opportunity to develop such qualities in commanding positions. But if they get enough votes, they will certainly discover a new resonance in their own voices, and the various levels of Mapai—high, middle, and low—will have to listen.
At any rate, there is one satisfaction which all friends of Israel can amicably share. Jews abroad—and especially in the United States—are steadily becoming less prone to confuse a particular regime or institution inside Israel with Israel herself. Inside Israel there never was this confusion. The Israelis always distinguished forcefully between the national welfare and the welfare of any party, faction, or sect. Not so abroad, where for a long time Zionist Jewry labored under the delusion that criticism of anything in Israel was a stab in the back of the entire community. This attitude produced a whole menagerie of sacred cows.
Happily, however, world Jewish opinion has been maturing. Straight information is increasingly more welcome, constructive criticism no longer equated with “treason.” This writer, for example, does not expect to be denounced in New York or Beersheba for having tried to set down here the views of competent analysts whose frank opinions, until recently, would have been quite taboo in circles friendly to Israel. Such growing tolerance of candor is an asset in the enlightenment of American Jewry on the practical short-range and long-range difficulties of the struggling state. And, since the enlightened opinions of American Jewry are still of interest in Tel Aviv and Jerusalem, the new tolerance will also be an asset for Israel.
1 See Hal Lehrman, “The Economic Test Facing Israel,” COMMENTARY, June 1949.