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Macro economic reform in Israel:The Trajtenberg Committee for

Economic and Social Change and the Competitiveness Committee

Professor Eugene KandelJanuary 2012

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Trajtenberg Committee for social economic change: Conclusions

and their Implications

The Protest’s Origins

Source: CBS

Housing Prices

Source: CBS

Principles:• Reducing the cost of living in Israel• Reducing inequality• Emphasis on parents of young children• Maintaining fiscal responsibility

• Cancel purchase taxes and customs

• Limit the use of anti-dumping tariffs

• Adoption of European standards

• Limit monopolistic control of key industries - food, fuel, seaports, water, etc..

• Cancel excise tax increase on fuel

• Import duty exemption on a personal import through the

Internet on goods up to 300$

• Increasing the supply of day-care centers for children ages 0-3

• Free Education Act applied for ages 3-4

• Afternoon educational frameworks subsidy for ages 3-9

• Reducing excess burden of payments from parents

• Two tax credits to fathers of children ages 0-3

• Expansion in the earned income tax credit grants for

working mothers

• Stopping the declining path of direct taxation

• Raising the top tax bracket

• Raising the corporate tax rate and tax on capital gains

• Encouragement of employment of ultra-Orthodox

• Encouragement of employment of minorities

• Integration of people with disabilities in the labor market

• Enforcement of labor laws

• Setting clear objectives for planning and marketing of housing units

• Detailed government support and removal of planning barriers in large housing projects

• Lowering the minimum price in Israel Lands Administration auctions

• Reducing the concentration of land ownership

• Dealing with empty apartments, and creating incentives for reconstruction of unsuitable apartment

• Promoting an Urban Renewal Plan• Close guidance of selected compounds• Dealing with development costs• Establishment of decisive appraiser mechanism for

issues of urban renewal

• Create long-term rental market• Determining the affordable housing designation• Construction of small apartments requirements

The Committee's Conclusions

• Recommendations relate to a variety of problems

raised during the protests of last summer

• The report does not change the system, but improve

it from within

• The solution is not a complete one, but it deals with

many of the problems

Implications of the Report

• Immediate and significant relief of economic burden,

especially for young couples

• Reduction of inequality

• Creating a competitive and more efficient economy

• Improvement of decision making processes

Competitiveness Committee

Main Recommendations

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Committee MandateTo examine the impact of current economic structure on the

competitiveness in different market sectors and on current

financial stability and economic efficiency. To recommend

desirable policy measures, in particular in the following topics:

1. Control of a public company through pyramidal ownership structure2. Financial companies owned by non-financial firms 3. Measures to strengthen corporate governance in public companies4. Application of antitrust policy5. Special conditions for the allocation of government assets and obtaining

licenses and franchises by business groups22

Committee's Work3 working groups:

1 .Financial and non-financial holdings Headed by Prof. Eugene Kandel, head of the National

Economic Council

2 .Pyramidal business groupsHeaded by Prof. Shmuel Hauser, chairman of the SEC

3 .Allocation of public assets Headed by Prof. David Gilo, chairman of the Israeli antitrust

authority

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Public

funds

Financial sectorBusiness sector

Bank

Provi-

dent fund

Bank

Pension fund

Bank

Infra-structur

eReal

estate

Energy Food

Communic-ation

Commerce

Holder of controlling interest

Holder of controlling interest

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Financial and Non-Financial Holdings

Pension fund

Holder of controlling interest

International comparison:10 major groups as a percentage of market

value of public companies

0%

10%

20%

30%

40%

50%

60%

70%

ʺʥʩyʥʡʩʁʤ̋

ʥyʡʧ

ʤ̫ʥ́

ʩʥʥ́ʮʦ

ʥʧʠ

ʸ ʥ̫ʮʺ ʩʬʫʬʫʤʤ̫ ʬʧʮʤʪy ʲ ʺ ʥyʩʩh̋ ʥ́y

ʭʩhʥ̋ʰʤ̋ ʥyʥ̫ʮClaessens, Djankov & Lang Faccio & Lang ʺ ʩʬʫʬʫʤʤ̫ ʬʧ ʮʤʩʣʥʡʩ̡ʪy ʲ ʺ ʥyʩʩh̋ ʥ́ʸʩɹʬClaessens et al.ʫʬʲ ʣʮʥ̡ʤʩʣʥʥ́ʡʸ ʥ̡ʩ́ ʤ-ʩɹʬHogfeldtʺ ʹh ʡʮʤʥʡʢʤʩʤʤʦy ʥ̡ʩ́-

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41%

Source: Economics Department, the Securities Authority

The distribution of control of public companies in Israel

International comparison- number of tiers

Israel’s Large Groups Tend to Form Pyramidal Ownership Structures with a Controlling Shareholder

with a controlling shareholderSource: Economics Department, SEC

OECD Non- OECD

Potential Problems with Pyramidal Ownership Structure

Tunneling

Inefficient allocation of resources

Excess risk-taking

Internal capital market (not effective)

Double leverage

Persistence

Controlling shareholder’s interest can be different than the companies he controls

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51%

51%

51%

Public

Public

Public

Potential Macro-Level Problems

•Impact on macro economic stability

•Combined Influence in several markets

•Deterring foreign investors

•Inflation of indices•Underdeveloped capital

markets

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International benchmark- Number of “tiers”

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Source: Masulis et al. 2011- Family Business Groups around the World: Financing Advantages, Control Motivations and Organizational Choices

Key Recommendations

.1Separation of holdings in significant financial activity and non- financial activity

.2Prohibition of directors tenure in both financial and non-financial companies

.3 Improvement of corporate governance and minority shareholder rights in pyramidal

business groups

.4Restrictions of expansion of pyramids and their control of existing companies

.5Empowering the Antitrust regulatory authority to deal with pyramidal business groups

.6Competition considerations while allocating public assets

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Implication

•Increase in competition within the market and market

competitiveness

•Reduction of systemic risk

•Improvement of capital allocation in the market

•Continuance of the Israeli capital market development

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Full implementation will be carried out gradually and is expected to affect the economy in the medium and the long term