When David Ben-Gurion, Israel's first Prime Minister, would be asked what is needed to build a succesful business in Israel, he used to say: "To make a small fortune in Israel, you need a big fortune." Many things have changed in Israel since then, but many still remain the same. How is it possible that Jews can make large fortunes anywhere in the world, but not in Israel?
In the last few years Israel would seem to have left behind its socialist ideology to produce several millionaires, and even a few billionaires. But when you start looking at the way people are making their fortunes in Israel, it still looks disappointing. Israelis who have made millions of dollars fall mainly in one of three main categories: they are either involved in politics, they make their money outside of Israel, or they have profited from agricultural lands given to them in the past.
Political deals exist all over the world, and Israel is no exception. It is no secret that billions of dollars have been distributed to politicians in order to advance the peace process. Businessmen affiliated with these type of politicians have also enjoyed from this flow of money. Politicians can also profit in more traditional ways such as pocketing tax-payers money and, in Israel's case, overseas contributions to political and ideological causes whose only effect is to further inflate secret bank accounts.
The real problem is the high cost of Israeli Land. Most land is controlled by the government and they restrict their sale and its use by the Jewish People. Jews living in Israel can hardly buy land, usually they cannot afford the prices. The government tells the people that the reason they restrict the use of land is to protect it from falling in Arab hands. But this is such a ridiculous lie. Arabs have no problem building their homes in large plots of land without paying a cent to the Israeli government. Also, large plots of Jewish owned land were given for free to Arafat and his gang of terrorists in Judea, Samaria and Gaza.
The real reason Israel restricts land use is to raise the prices of the land controlled by politicians and their friends. For example, the leftist kibbutz movement who was given large plots of land to be used for agriculture, is now being allowed to use this agricultural land for commercial purposes. They can now build expensive apartments and single family homes for sale. They can also build shopping centers and industrial parks. All this without paying a cent to the government. All this while most other people are forced to pay huge amounts of money for land.
What should be done? The solution is very simple. The Israel Lands Administration should give free plots of land to any Jewish family who does not own a home yet. People should pay for land development costs and for the actual construction costs, but not for the land itself. Free land can be given in areas such as the Galil and Golan, the Negev, and Yesha. Also, free land should be allocated in those regions for apartment buildings, as well as for commercial and industrial structures.
Because demand in the central region is much higher, plots of land there should be auctioned to the best bidder, but land there should be developed to its full extent. This will cause pricing to drop about 50% or more, enabling many people to own their own home. At the same time, this program will diminish poverty levels in Israel, and significantly reduce many social problems.
Inexpensive commercial and industrial land will encourage greater economic development, increase exports and foreign investment, create thousands of new jobs, and raise the Israeli standard of living.
From 1995 to 2000, Israel enjoyed a fast-paced economic growth powered by venture capital and internet technologies. Expert say that Israelis developed between 25% to 35% of existing internet technologies. The economic rewards for Israel should have been much larger than they really were. Again, this wasted opportunity can be blamed on the outdated socialist policies of the Israeli government.
The Israeli establishment surfed this period of economic growth by paying subsidies to venture capitalists and major international corporations. At the same time, most Israeli entrepreneurs decided to base their corporations in foreign locations such as Delaware. Israeli entrepreneurs were thus able to receive huge grants, and pay little or no tax in Israel. They helped the U.S. economy much more than the Israeli economy.
Even a company such as Intel was given a $2 billion dollar gift from the Israeli government to build a factory in Kyriat Gat. The solution to this absurdity is really very simple, and it is not a secret. It was repeated endlessly by Israeli entrepreneurs and venture capitalists that cared about Israel, and wanted Israel to further strengthen its economy, and keep more of the economic rewards at home.
All the Israeli government had to do was to lower taxes. Low taxes would have enabled Israel to compete with offshore locations such as Delaware. Israel would have kept the tax profits. The proposals said Israel should lower corporate tax from 50% to 20%. The government responded too slow and spoke of lowering taxes to 25%, but only for certain companies.
While Israeli politicians were thinking how to make more money for themselves and exercise full control over all businesses, entrepreneurs and financiers could not wait any longer. Billions of dollars left the country to be invested elsewhere.
The Israel Export Development Company (IEDC) was formed in 1992 by leaders of the American Jewish business community. Their aim: to create a free-market business environment to liberate Israel from aid and from bureaucrats. The Free Processing Zones Law, was passed on June 20, 1994. On January 1996, four years and $8 million after the IEDC initiated the Free Processing Zones idea in Israel, the company closed down all operations in Israel and abroad.
Leftist bureaucrats succeeded in doing what they publicly threatened from the start: To kill the initiative. MKs Michael Eitan and MK David Magen from the Likud party said: "Those afraid of the Law are not afraid of its failure, because private money - not taxpayers' money - is at risk. Rather they are afraid it will succeed and then the bureaucrats will lose their power." If the IEDC would have made their effort under a Likud led government they may have succeded. But instead they discovered that leftists politicians' goal is to have total control over the economy.
Free zones have led economic reform in several countries around the world. The FPZ Law was designed, according to Article 1, to: "promote and encourage development and manufacturing in the State of Israel, create jobs, improve balance of payments, spur economic growth, increase competitiveness in world markets and attract new direct economic investment."
Israel has attractions for foreign investors: free trade agreements with the U.S. and Europe, strategic location, an inexpensive, skilled labor force, a developed infrastructure. But these haven't attracted direct foreign investment to Israel in the past. Why? Socialism, bureaucracy. Israel's Law for the Encouragement of Capital Investment (ECIL), which offers exceedingly generous terms for those who invest in Israel's "development areas" has failed. Why? Socialism, bureaucracy.
ECIL is so generous that David Brodet, the Finance Ministry's Director General in 1996, declared it was bankrupt. Bank Governor Frankel called it "absurd." ECIL has attracted Intel, Motorola, IBM, which are mostly showpieces. They make no serious contribution to the economy. Recipients of huge sums of money from the government, courtesy of American taxpayers, they also get "special deals," for example, permission to evade GATT and other international arrangements.
This is why IEDC and others thought the promise of 20,000 jobs and $750 million of investments - with no government aid - should have sounded attractive. It should have.
Israel's bureaucrats have a world-wide reputation of violating agreements and abusing the legal rights of businessmen
After the FPZ law was passed, leftist bureaucrats secretly re-wrote the law. They introduced 32 changes to the 67-article FPZ Law. These changes were designed to "restrict the concessionaire," as the Free Zones Council itself explains. In other words, the Council cut the reform element out of the FPZ Law to make it Israeli business-as-usual: bureaucracy rule in place of the rule of law. IEDC tried to show Israeli political leaders the bureaucrats were acting illegally, and making a laughing stock of Israel in the eyes of international businessmen, and members of the U.S. Congress and Senate who supported the zone law.
IEDC's board of directors met the late Prime Minister Yitzhak Rabin a week before his assassination. Rabin promised the Board there would be no changes. A month later, on December 12, 1995, Larry Silverstein, IEDC's President, met with Prime Minister Shimon Peres in Washington. Again, the Head of State promised no changes to the FPZ Law. Both the late Prime Minister Rabin and Prime Minister Peres acknowledged Israel's bureaucrats have a world-wide reputation of violating agreements and abusing the legal rights of businessmen, unacceptable conduct in Western democracies. On January 1, 1996, a broadly smiling Finance Minister Avraham Shohat submitted the changes to the Knesset. In response, IEDC closed its doors. The point IEDC made is clear: not IEDC or any concessionaire could market a zone based on the rule of no law but bureaucratic power.
One of the most shocking parts of the story was the protestations of politicians and ministers that it was "democratic" to change a law. Shohat, Beilin and others were asked: was there some confusion here between a parliamentary amendment to laws, openly made before an original law is supposed to go into effect (a rarity in itself), and what happened in this case? The answer: "Israel is a real democracy."
IEDC, in its years of promoting the Israeli Free Processing Zone, attracted more than 60 international hi-tech companies to the proposed zone. These companies are now on notice: relocate elsewhere. It is now quite plain, Israel is not interested.