Israel's Arduous Socialism to Capitalism Saga: IAI Baharav leaves

Israel started out as a socialist state. Without going too much into history, Israel, as it was first settled by European Zionists, was organized around independent organizations. From buying land, organizing settlements, providing medical services, to the general organization of the labor in the community, all were based or influenced by the socialist movements of Europe. At the early years of the immigration, from 1880s to the 1920s, the socialist organization structure worked well. It was also appreciated by many of the immigrants, mostly because it seemed to succeed. The community was growing and quickly evolving into a cohesive culture. But the socialist dream was not everyone's. While settlements in the kibbutz movements were pure socialist manifestation, Tel Aviv and other small settlements were growing as well. These were traditional western structured settlements. Some were cities (Haifa, Jerusalem) while others were agricultural settlements (moshavim). Essentially early on, Israel was built on two economic structures: socialism and capitalism.

Flash forward 120 years, and we have a story of IAI (Israel Aerospace Industries Ltd.) chairman Dov Baharav leaving his position for failing to “privatize Israel Aerospace Industries” (see Globes Story). Think of this as a small ripple in the storm of change. IAI is an old company evolved from a government (defense department) company (actually just a few projects.) For the most part, it still operates like a government department. This goes for the hiring of people done through “friend brings a friend” (read cronyism), all the way to budget deficits and sales standards (read bribes). Israel's senior managers at state owned companies have been torn between keeping these companies “as is”, reforming them and brining in some outside investment, or privatizing them with an outright sale. This dilemma runs across many industries like the sea ports, which suffer from almost paralysis in growth by the unions (which have sweeping powers legislated years ago.) There were state owned enterprises sold to individuals, usually family groups, which are now said to be worth billions. The same situation which occurred in Russia and their energy companies. There are still many state owned companies which are at the horns of the dilemma: private or public ownership. Should the electric and gas exploration companies, a strategic and vital service to the state, be private or public owned. Just recently, a private group, a gasoline retail company Delek, partnered with a foreign exploration company and succeeded in finding large gas fields just off the Israeli shores. A classic example of the state not taking an initiative yet private enterprise risking and succeeding.

The story of shifting between socialism (state owned) and capitalism (privately owned) resonates around the world. Russia (actually USSR) and China are two of the more prominent examples. Russia, with advice from western economists like Jeffrey Sachs, went fast and strong into privatizing. China did not. Israel is slowly moving, with sales of some companies happening in different sectors. Some state companies have turned out to be a pot of gold, while others have not. Yet, there are still remnants of the state ownership in many tiny crevices around the economy. Overall, the mix of socialism and capitalism is a little strange to handle. Foreigners may be a little confused, yet with a little bit of research in the business pages, the situation starts making sense. Stay tuned, there are lots of interesting stories in this dynamic Israeli economy.