Privatization can transform and has transformed national economies virtually overnight. Chile and Argentina have transferred ownership of public firms and banks to private hands at almost breakneck speed, using proceeds of sales to pay down public debt. They have sold dozens of banks, and along with Mexico, over a thousand state owned enterprises. Several of the individual sales, including the Mexican Telephone Company and Argentina's state owned oil firm, exceeded $2 billion. Even Eastern European countries are privatizing at a relentless pace. Israel remains unique among privatizing nations because of the interminable foot dragging that characterizes the process here.
Privatization does not mean partial privatization; that merely reduces the share of state ownership and does not constitute genuine privatization, in the sense that a privately owned firm, with independent private management, has replaced a state owned enterprise. Only an immediate, massive and comprehensive privatization plan can effectively rid the economy of its state-control.
Until now, only about 10 of the approximately 170 state owned enterprises are put on the counter for privatization each year; about half these are, to begin with, designated for partial privatization only, and privatization of the other half is usually postponed for another year. How can we guarantee a change in the pace of privatization?
What needs to be done:
The Jubilee Plan will "sunset" most state owned enterprises within two years. A law will be passed automatically terminating the legal authorization of the funding for any state owned enterprise within two years after passage of the law. The government can exempt a company from this automatic "sunset" only by special decision. This will force the government to take a fresh look at all SOEs, deciding on an individual basis if they are truly necessary and need to be reauthorized, or if they should be reformed before being re-established, or if they have over the years become useless and do not deserve further infusions of taxpayer shekels. In this manner, companies which have accomplished their purposes, or which are filling functions the private sector can fill at less cost and more efficiently, can be easily eliminated at great savings to the government budget.
Further, a Scorecard on Privatization will be mandated by law and issued monthly, subjecting the government and all remaining SOEs to constant public scrutiny on this issue. If until now the symbol of Israeli privatization has been the snail, this will ensure that the new symbol will be the thoroughbred.
Privatization is healthy for the government and for taxpayers, because it rids the government of the budgetary drain of subsidizing money-losing, state-owned enterprises; and it is healthy for everyone in Israel because it will stop state-owned and government-favored business from competing with our own private businesses, and it will increase individual freedom.
The proceeds of privatization should be used for constructive purposes. What is after all public money should be returned to its legitimate owners, the taxpayers, perhaps by paying off the national debt, which reduces future tax liabilities, or in the form of tax cuts, as has been done in England.
A monopoly is not required to set prices on the basis of the demand that exists on the market for the goods or services it supplies, because it has no competitors. Monopolistic prices are therefore set at a level guaranteeing above-market wages to Histadrut employees (in Histadrut controlled monopolies) or, as in the case of agriculture, a fixed price for output based on the average wage regardless of world prices or production costs. As a result, prices set by monopolies are usually higher than in a competitive economy, and the consumer has no alternative, especially in areas like public transportation or telephone service.
The Israeli government not only sanctions these monopolies but even creates them by, for example, restricting competition from imports, which could lower prices of goods in Israel. A government protected monopoly or cartel means that entire areas of industrial output are closed to private sector competition which would provide better goods and services at lower prices. Nothing short of drastic elimination will bring genuine competition for the benefit of all Israelis, in place of monopolies which benefit a few privileged groups.
The state monopoly on television and radio broadcasting is another example of suppression of economic freedom, and in this case, also of freedom of speech. The only legitimate task of a communications authority should be to allocate communications frequencies and make coordinations with neighboring countries.
What needs to be done:
Private entrepreneurs will supply broadcasting on the basis of consumer demand. Private owners may be required to provide the government with emergency access to airwaves. All development expenditures should be borne by the entrepreneurs. The Israel Broadcasting Authority can therefore be eliminated and the taxpayer saved more money.
TRANSPORTATION
Price control by the government and the attendant subsidies, which basically free recipients from the need for efficiency or real profitability, make for neither competitive nor efficient passenger service. The government's role should be limited to setting and enforcing safety standards, providing appropriate transportation routes and ensuring delivery of services not economically justifiable but considered socially vital.
What needs to be done: Modern and diverse transport services are required to serve the needs of Israel's citizens. The sector will be opened to entrepreneurs who are willing to provide services currently lacking, such as an "intermediate service" between special taxis and bus lines, with large vehicles and fixed routes and stops.
No longer will those able to provide bus service and other forms of transportation be barred from doing so. New competition in this field will improve the available services and save the taxpayer the subsidies he currently donates to companies which, even without facing competition, are constantly in need of infusions of taxpayer money to stay afloat (or to provide higher than market wages to their employees).
Service should be provided in the most economically efficient manner. No line, not even in a distant area, should be unprofitable. Every line and service should be operated on the basis of individual cost-accounting, which will secure its profitability. Fares will be determined accordingly, and if the government decides certain population groups cannot stand the burden of competitive fares, support should be channeled directly to them through consumer subsidies.
Private Transportation
No one disputes the importance of a private car in any advanced economic system. A car enhances the mobility and speed of employers and employees alike, allows schedules to be met and more transactions to take place in a given period of time. Private cars also expand individual freedom of movement and choice as to living and leisure options and save precious time. The taxes and restrictions imposed on automobiles in Israel put this freedom out of reach of many average Israelis, unless they are getting their cars as part of their government jobs, at taxpayer expense.
What needs to be done:
Abolishing the automobile purchase tax (now 95%, and customers must pay VAT, too) would lower prices to U.S. and European levels, reduce the cost of living and enable lower income groups to benefit from increased mobility. These taxes should be eliminated over two years. Fuel taxes should be earmarked to improve road infrastructure. (Good roads will also facilitate the settlement and absorption of new immigrants and reduce traffic fatalities and injuries) The fuel market should be exposed to competition, as should the garage industry. Finally, the car-expense wage item in collective agreements needs to be eliminated.
About one-third of the value of Israeli agriculture is comprised of direct taxpayer subsidies granted by the government to farmers, and by the time the anticompetitive measures, including marketing boards, marketing restrictions, licensing restrictions, output quotas and import bans, which serve to increase costs and prices at the expense of taxpayers and consumers, are brought into the equation, a fair guess would be that half the value of Israeli agriculture is artificially subsidized by already overtaxed Israelis. These subsidies must be stopped.
What needs to be done:
To achieve a sharp rise in the productivity of agriculture, the following steps should be taken:
Marketing boards can no longer enjoy unfair protection from competition, nor should they be given exclusive control—to the detriment of other Israelis who are in the same business—of marketing and exporting, and they certainly cannot be subsidized at the expense of the taxpayer and their competitors.
When agricultural marketing boards are abrogated the only real losers will be the Marketing Board itself and the politicians who will lose control over another sector of the Israeli economy.
All anticompetitive regulations and restrictions of domestic commodity markets should end. It is unconscionable that a farmer needs permission from the government to decide what to grow on his own land, and it is unconscionable that Israeli housewives and the elderly must pay exorbitant prices for the vegetables they need, just because the government wants to guarantee other Israelis a high profit. Farmers should be given the freedom to grow anything and sell to anyone at any price.
Another reason the elderly along with all Israelis are forced to pay high prices for their fruits and vegetables is the monopolistic control of grains, meats and other foodstuffs. Protectionist quotas and prohibitions and tariffs on imported food should be reduced over a period of three years until they are eliminated altogether.
Farm leases and sales of farm land should be commercialized and allocated through free and open competitive tenders.
Commodities futures trading should be permitted by law and encouraged. This will provide stability to the market and allow farmers to plan their investments and crop planting.
The dairy industry may serve as an example of the implementation of the reforms which will bring freedom to the farmers and consumers of Israel; The unique feature of the Israeli dairy industry is the complete price control over finished products. No Western economy other than Israel’s would advocate such a system. The most important reform in the dairy sector will be the immediate elimination of price control over all dairy products.
Antimonopoly regulations must be more faithfully enforced. And smaller dairy companies should be allowed to purchase surplus milk at surplus prices, a privilege currently granted only Tnuva. These other dairies must be given the freedom to import basic milk raw materials; certainly for export production, giving them the opportunity to operate in free market conditions at least in the field of exports, but also for local sales. And import restrictions on finished products should be eliminated even before Israel is forced to do so by GATT; why should the Israeli consumer have to wait for his freedom?
When Israel's inflation rate is above that of its trading partners, with local costs rising more rapidly than abroad, while Israeli exporters are limited by global competition in the prices they can charge, then these exporters are able to buy fewer shekels with the dollars they are earning abroad. Exports lose profitability. A devaluation would give these exporters more shekels for the same amount of dollars, and if the devaluation is greater than the inflation rate, even create profits. It is no surprise then that Israeli exporters clamor for big devaluations. Stable prices would force them to hold the line on wage increases that exceed gains in productivity, the linkage of wages to cost of living increases would have to be overturned, and the Histadrut would have to be confronted. The easier path to profitability is periodic devaluation, even at the cost of higher inflation and overall economic instability. For devaluations have negative effects; they result in higher import prices, meaning a higher cost of living.
Further, the unpredictability of devaluations means that it is never the right time for a foreign investor to put his money into Israel, for he will always be guessing at whether he might be able to get more shekels for his money if he holds off. Inflation is public enemy number one, but devaluation is not the way to fight it.
What needs to be done:
Under the current system in Israel, an independent Governor of the Bank of Israel is far more desirable than having the country's monetary policy set by an advisory board beholden to—or comprised of—representatives of big business and big government. Thought should be given to establishment of a Currency Board.
A Currency Board is an institution that issues notes and coins convertible into a foreign "reserve" currency (say the $), or commodity (precious metal), at a fixed rate and on demand. It does not accept deposits. It typically operates as a monopoly issuer of currency. As reserves, it holds high quality interest bearing securities denominated in the reserve currency. Its reserves are equal to 100% or more of the value of its notes in circulation. The board generates profits from the difference between the interest earned on its reserve assets and the expense of maintaining its note and coin circulation. All profits beyond what it takes to cover its expenses are remitted to the government. The Currency Board has no discretion in monetary policy; market forces alone determine the money supply. It functions in the same manner as a gold standard or balance of payments monetary system. A positive balance of payments results in surplus foreign exchange being converted into local currency; a negative balance requires local currency to be exchanged for foreign currency to meet overseas payments. The level of credit and economic activity adjust automatically to the balance of payments.
Currency Boards have maintained fixed exchange rates, and most have accommodated money supply growth reflecting favorable balance of payments and strong non-inflationary economic growth. Monetary policy under a board is simple: Exchange notes on demand at a fixed rate into or from the reserve currency at its offices and hold reserves in bonds or assets in a safe-haven country. The board must be independent of the government, will probably employ fewer than a dozen people and will contract clerical and investment functions to outside parties, using large commercial banks in the countries where assets are deposited as agents.
There is no reason why a Currency Board cannot be established in independent Israel. It would, as shown in Hong Kong and Singapore, end the devaluation/inflation cycle, ensure a relatively stable price regime, and encourage foreign investment through convertibility and a fixed exchange rate.
In addition, of course, all restrictions on capital movements into and out of Israel and all restrictions on the buying and selling of foreign currencies must end. Foreigners should be allowed to trade in Israel's capital markets. A free capital market is required in order for the Israeli economy to exploit its relative advantages in international competition in trade and services.
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