Sunday, August 28, 2011

Rebooting the Start-Up Nation

The now-legendary tent protestors of Rothschild and other boulevards of Tel Aviv purport to represent a broad sweep of Israeli middle-class society.

But although they count among them many economists, strategic consultants and philosophers, they have yet to coalesce around many coherent and practical solutions.

Not only that, but many are questioning how much this protest has led to true introspection on what society has become, and what it could be, as a result of our individual behaviour, whether as ordinary citizens on a daily basis, tycoons, small business owners, state employees or politicians.

Odd as it may seem, perhaps there is a direct link between the cause of the problems being protested, the lack of solutions, and the way people treat each other on a day-to-day basis. It also leads to a radical socio-economic solution involving those same groups; the state, large and small business, and we the public.

Israelis use the Yiddish word “freier” to define society’s sucker, the guy who spends a few shekels more than he absolutely needs to on shopping, the girl who didn’t negotiate on her rent, the fool who lets someone else into the traffic instead of shaving four more seconds off his own journey.

More pertinent to the many professionals among the protestors, who find themselves qualified as accountants and lawyers but still unable to do better than just cover their living expenses each month, nobody wants to be the “freier” who retained the best available legal advice when he could have just googled the answer, got some free help from his brother-in-law, or hired a cheap suit for the odd hour of really necessary work (and still haggled on the price).

Meanwhile, there is a well-reported concentration of wealth, with a handful of families unwilling to let go of their oligopolies, lest they too become “freierim”. And yet they may find that an efficient, streamlined business holding 40% of a competitive and growing marketplace, makes them more money than the unwieldy conglomerates they currently have controlling 80% of a marketplace half the size.

These factors are shown in economic statistics; whilst Israel is known as the “Start-Up Nation”, only 10% of its workforce are actually engaged in high-tech, and only 62% are employed in small and medium-sized enterprises (SMEs), the driving force of a high-value, sustainable middle-class economy. In the other OECD countries, the proportion is between 2/3 and over 3/4.

As SMEs are generally more efficient and therefore potentially more rewarding than public sector or conglomerate employers, this 5%-15% gap may well account for the almost total exclusion from the modern Israeli economy of Orthodox and Arab Israelis, and the poor ratio of earnings to outgoings of those middle class protestors.
However, even those who currently run SMEs are not immune to the “freier” syndrome. It is common for example to see restaurant staff whose minimum wage is paid out of the tip jar. This leads to bad staff retention, poor customer service, higher levels of dishonesty, and overall a negative effect on profits. But the restaurateur does not want to be the “freier” who pays wages up-front when his competitors are not, and when he can see the extra few thousand shekels in his pocket now. The idea of speculating to accumulate is reserved for one’s investment portfolio after exiting the business, not while running it.

The short-term mentality of Israel’s entrepreneurs and venture capital investors presents a vicious circle; funding is targeted at those seeking a quick exit, by those seeking a quick return. At the other end of the spectrum, the handful of powerful families who own the major institutions as well as the largest companies, protect their asset base judiciously and invest in only conservative assets outside their own empires.

Furthermore, when most Israeli funds do invest, they usually do not choose to do so collaboratively – they hope to exclude so-called competitors from the best deals, rather than risk-sharing for the common good, and often take an adversarial approach to the investee.

This leads to a shortage of genuine long-term growth capital, entrenching further the exit-orientated atmosphere, and failing to create stable Israeli-domiciled businesses with the solid employment that they bring.

So the “freier” mentality, cumulatively, clearly has a huge effect on our whole economy, not to mention our values. In a nutshell, we have no real sense of “paying it forward”, but instead retain a defensive, survivalistic approach to most daily interactions with each other.

The funny thing is that as soon as anyone is really in trouble here, and crosses that threshold of not wanting to appear the “freier” by asking for help, everyone gathers round and supports them unconditionally – the cliché of Israelis as “sabras” – hard and prickly on the outside, soft and sweet in the middle.

This is the legacy we have hard-wired into us from the pioneers, kibbutzniks and fighters that built and defended our state. They are our parents, grandparents, teachers and guides, and they still live among us.

Ponder how Israel will change the day Shimon Peres finally passes on. He embodies this link to the founding fathers, and transcends the political sphere. In fact he is the moral and constitutional link between the protestors and the government, and he holds enormous sway with the tycoons who are perceived to be part of the problem. His role in what happens next will be critical.

Somehow then, we have to translate the spirit of the protest, which are ultimately triggered by understandably inward-looking concerns such as paying the rent or affording child-care, into the New Society that Herzl envisaged for us.

How do we, in modern, built-up Tel Aviv, take the wave of unity and passion back from Rothschild to our apartments when this protest finally ends, and use it to become the urban pioneers and kibbutzniks?

How will those fortunate dozen families who have such wealth and power, be persuaded to step up and become the new Rothschilds and Montefiores that modern Zion needs, to make this transformation and be a part of the solution and not the problem?

This idea that the “oligarchs” are just (a large) part of the problem and not part of the solution, that economic growth is somehow bad, and that a redistribution of wealth is required, smacks much more of socialism than of social justice, the banner which is used by the protestors.

Social justice is about ensuring that growth is inclusive, that all levels of society are moving up, and that if gaps between them are growing, that somehow social cohesion is maintained. In economic terms, the measure is that we have a market where the playing field is transparently level for all participants.

Here are but a few suggestions on what can be done.

- As the protestors are calling for social justice and inclusion, the manpower to implement change has to be found, and the idea of “paying it forward” should be inculcated across all parts of society at a formative age. The single biggest expense in civic projects tends to be human capital rather than buildings or machinery. To address these issues, the state should make some form of National Service compulsory for all, be it the IDF, Magen David Adom, as a lifeguard or helper at a care centre. This has a huge effect on social cohesion, slows the rate of entry into the housing and job markets, and its cost is spread across the government and private sectors.

- Alongside this, introduce “social reserve duty” for those who did National Service, just as “miluim” already exists for the army, to maintain and reinforce the new connection between the state and its citizens. Using these two to four weeks of paid time away from work goes a long way to resolve some of the pinch-points highlighted by the protestors, and again spread the burden across the private sector who pay the salaries, the state who must organise the structure, and the people, who one would hope might actually commit time over and above the minimum, without considering themselves the “freier” for doing so.

Direct involvement in one’s own causes should be encouraged where possible. For example the pushchair protestors complain at the high cost of day care. The single biggest line item is staffing; but if the parents of twenty children in the class each had a fortnight a year acting as a classroom auxiliary, only one teacher per classroom would be needed alongside two different parents. This also might tackle a known issue of the lack of decorum and respect in Israeli classrooms, enhanced by parental behaviour in regard to their children and the teachers.

- Liberalise the banking system to encourage more credit for SMEs, and also open up the professional services markets to competition, so SMEs have some real choice on the support they need, and money to exercise it with.

SMEs lie at the heart of the economic revolution that is needed to make growth inclusive, provide jobs to the fringes of society, and increase disposable income for the middle classes. Tax legislation should also be amended to incentivise Israelis to grow their businesses beyond start-ups and into businesses which remain local at heart, even as they expand abroad. At the moment, the short-term mentality leads to early exits and no long-term value creation except for the handful at the top.

- Introduce legislation that includes carrots and sticks for the tycoons to streamline their conglomerates. There are genuine reasons for how they came to own so many disparate companies; in a developing country, especially one with low access to external capital and supplies due to the Arab boycott, it is common to see vertically and horizontally integrated businesses in this way. But those days are over and a whole string of SMEs could be spun off, to the benefit of the original owners in terms of gained capital and efficiency.

- Involve internationally-orientated, outward-looking Israeli investors and Diaspora Jewish donors who could be investors in the economy, by creating funds that give them appropriate tax benefits and protections and can be domiciled in Israel. The current situation actively encourages new immigrants and the wealthiest Israelis to keep their investments and earnings passive and offshore, instead of active and onshore where the best effect can be felt on the whole economy.

- We should finish the master-plan for Tel Aviv that Geddes started a hundred years ago, by beautifying the buildings and creating air passages to circulate the sea and mountain breezes better, whilst tackling the protestors’ single biggest issue of the cost of housing.

By allowing all buildings on the main east-west thoroughfares to extend to five floors, then the row behind to six, and behind that seven, then descending again, we would recreate the effect of mountains and valleys on air circulation, remove the hastily built concrete monstrosities of the 50s and 60s, refurbish the Bauhaus buildings, and add perhaps 30% to the housing stock, without affecting the street view or needing to add great infrastructure.

- Complete an overhaul of the municipalities of central Israel to allow much greater cohesion and efficiency on issues such as transport policy, town planning and service provision. It is farcical to have ten city councils for one metropolis. If Kiryat Ono, just 5km from Tel Aviv, was a more desirable place to live and was accessible from downtown in 10 minutes, 7 days a week (like the Shabbat lift, we would need unmanned trams and a free ride on Shabbat to make this work without offending the Orthodox, but it can be done), this alone would reduce pressure on housing costs.

- Finally, there should be a campaign to reclaim the word “freier”. As it stands, nobody wants to be one, because they know everyone else will take advantage of them. Such is the nature of a society where for so long it was enough to survive. Now we live in one where people can see the possibility to thrive, and the frustration we see on the streets is that some of us clearly are thriving whilst others are left behind.

If we all decided to be the “freier” at once, let people out at junctions, started sentences with “please may I have” instead of “bring me”, cleaned up dog mess, stopped littering on the beach, painted the outside of our apartments and boxed in the wires and aircon tubing, paid our staff a wage that motivated them, hired professional advisors as an insurance policy instead of a breakdown service, then we would have a society that started paying things forward, investing in its future, and moving from the mentality of survival to that of thriving.

Asking the government to hand us the solutions on a plate, by forcing a change from on high, so we can go back to our ordinary lives as before, is the language of survival; if we are to thrive, we have to change our own behaviour and be a part of the solution ourselves.

And of course this brings us full-circle. The protestors sit on Rothschild Boulevard, named after the most famous family of Zionist philanthropic tycoons, opposite Independence Hall, where the State was declared, and in the city that is named after an ancient mound (“tel”) and the season of renewal (“aviv”), the poetic translation by Nachum Sokolov of Herzl’s “Old-New Land”.

What better place could there be for the beginning of a new social compact between the public, the private sector and the state? In Herzl’s words, if we will it, it is no dream.

I will be in the UK, USA and Canada on our Asquith Israel Merchant Bank roadshow from this weekend onwards, and would be delighted to give talks on the subjects of "Beyond the Start-Up Nation", looking at the general economic structure in Israel, and "Rebooting the Start-Up Nation", looking at the specifics of the current protests and some potential solutions. Please contact me by email for a full itinerary and to schedule a talk if of interest to any community or business groups.