Macro economic reform in Israel:

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• Macro economic reform in Israel
• The Trajtenberg Committee for Economic and Social
  Change and the Competitiveness Committee

• Professor Eugene Kandel
• January 2012

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• Trajtenberg Committee for social economic change
  Conclusions and their Implications

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The Protests Origins
Source CBS
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Housing Prices
Source CBS
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Principles

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

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• 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..

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• Cancel excise tax increase on fuel
• Import duty exemption on a personal import
  through the Internet on goods up to 300

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• 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

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• Two tax credits to fathers of children ages 0-3
• Expansion in the earned income tax credit grants
  for working mothers

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• Stopping the declining path of direct taxation
• Raising the top tax bracket
• Raising the corporate tax rate and tax on capital
  gains

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• Encouragement of employment of ultra-Orthodox
• Encouragement of employment of minorities
• Integration of people with disabilities in the
  labor market
• Enforcement of labor laws

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• 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

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

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

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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

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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

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• Competitiveness Committee
• Main Recommendations

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Committee Mandate

• To 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
• Control of a public company through pyramidal
  ownership structure
• Financial companies owned by non-financial firms
• Measures to strengthen corporate governance in
  public companies
• Application of antitrust policy
• Special conditions for the allocation of
  government assets and obtaining licenses and
  franchises by business groups

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Committee's Work

• 3 working groups
• 1. Financial and non-financial holdings
• Headed by Prof. Eugene Kandel, head of the
  National Economic Council
• 2. Pyramidal business groups
• Headed 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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Financial and Non-Financial Holdings
Holder of controlling interest
Holder of controlling interest
Holder of controlling interest
Public funds
Pension fund
Bank
Infra-structure
Real estate
Bank
Provi-dent fund
Energy
Food
Pension fund
Bank
Communic-ation
Commerce
Financial sector
Business sector
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International comparison10 major groups as a
percentage of market value of public companies
Israels Large Groups Tend to Form Pyramidal
Ownership Structures with a Controlling
Shareholder
International comparison- number of tiers

• OECD
• Non- OECD

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The distribution of control of public companies
in Israel
Source Economics Department, SEC
with a controlling shareholder
Source Economics Department, the Securities
Authority
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Potential Problems with Pyramidal Ownership
Structure
Public

• Tunneling
• Inefficient allocation of resources
• Excess risk-taking
• Internal capital market (not effective)
• Double leverage
• Persistence

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Public
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Public
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Controlling shareholders interest can be
different than the companies he controls
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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
Source Masulis et al. 2011- Family Business
Groups around the World Financing Advantages,
Control Motivations and Organizational Choices
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Key Recommendations

1. Separation of holdings in significant financial
   activity and non- financial activity
2. Prohibition of directors tenure in both financial
   and non-financial companies
3. Improvement of corporate governance and minority
   shareholder rights in pyramidal business groups
4. Restrictions of expansion of pyramids and their
   control of existing companies
5. Empowering the Antitrust regulatory authority to
   deal with pyramidal business groups
6. Competition 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

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