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Monday, June 26, 2017

The Answer to Israel’s Revolving Door Problem

Translated from Hebrew to English, the term "hon-shilton" essentially means “capital-government.”

In Israel, the phrase hon-shilton is extremely popular. Translated from Hebrew to English, the term essentially means “capital-government” and is most often used to describe the relationships of common interest between big business and the Israeli government. A variant of this phrase, hon-shilton-iton (capital-government-newspaper) adds the media into this mix and works to promote political or business agendas.

The “revolving door” phenomenon is one of the most blatant displays of cronyism.

In a recent documentary made by one of Israel’s leading economic journalists and, ironically enough, aired on Israel’s brand new public broadcasting channel, both of these phrases are explored and explained in further detail.

By allowing corporations and media entities to become intertwined with the government, a vicious cycle has been created in which economic power provides political influence, which then makes it possible to influence legislation and regulation, which in turn makes it possible to make more money, which ultimately provides even more political influence, and so on.

The Revolving Door

One of the mechanisms that drives this dynamic is the “revolving door” phenomenon, where large corporations and financial institutions hire ex-regulators and civil servants to lucrative executive positions. In many cases, these ex-regulators once regulated the very firms that hire them. The common belief held by much of the Israeli public is that senior civil servants make allowances for corporations at the expense of the public interest in the hope and expectation of landing a lucrative job when they leave office. Therefore, in the hon-shilton relationship, the “capital” side is the one corrupting the “government” side. The supervised corrupts the supervisor.

The reality is that now businesses are so dependent on regulations and regulators.

This belief is superficially plausible, but why would firms pay lavish salaries for people with no practical commercial or financial experience? How does a person who never managed a grocery store get hired to run a supermarket chain? How does a person with zero knowledge, training, or experience in the insurance sector get hired to run the biggest insurance firm in Israel? In other words, why do firms and their owners value political and bureaucratic experience so much higher than practical experience when looking to hire executives?

Imagine you are the owner or manager of a large commercial or financial firm in Israel. You have a great responsibility towards your shareholders and probably towards your employees as well. If your firm manages pensions, and assuming you are not completely heartless, you feel responsible for your savers. Even if you only care about yourself – you still have a stake in your firm’s success and prosperity.

And in order for your firm to succeed, you need to work in the real Israeli business arena, which is swamped with dozens of types of tariffs, quotas, formalities, and regulations. An arena in which politicians meddle incessantly and which is managed from the top by regulators with almost no cost-benefit considerations and with almost no degree of personal accountability. And the bigger your firm is – the more political and bureaucratic impact it endures.

In such an environment, firms have to interpret and comply with numerous convoluted regulations, and managers have to know how to interact with the political players. This is their responsibility as managers – they have no choice.

True, “capital” corrupts government, but this doesn’t tell the whole story.

In such a reality, where businesses are so dependent on regulations and regulators, who are more suitable to run large firms if not former regulators and bureaucrats? In fact, a manager who does not try to recruit these former regulators does an injustice to his role and his shareholders and should be dismissed. In the business world, there is little room for sentiments and ideals, and a lot of competition.

Problem or Symptom?

The “revolving door” phenomenon is not a problem per se, but a symptom. It is a logical and required outcome of the warped business reality in Israel – a reality where regulation is a significant part of the business of doing business.

Therefore, the reality portrayed in the above-mentioned documentary, where “capital” corrupts government, is true but it doesn’t tell the whole story, rendering its explanation incomplete.

Government corrupts businesses. In fact, minimizing the potential for the creation of government-business relationships (erroneously called “crony capitalism”, since it has nothing to do with capitalism), will mostly benefit the economy and businesses at large, and therefore also us – the consumers. It will also benefit us as citizens by making it difficult for politicians and bureaucrats to exploit their positions.

How do we minimize government-business relationships? Mainly by reducing the degree and scope of political involvement in the civilian sphere – fewer laws, fewer regulations, less centralized management biased by political considerations, and more freedom for businesses, employers, and citizens.

  • Omer Grigg is a Deputy Director at the Israel Center for Social and Economic Progress.