Reforming Israel's Culture of Corruption

A couple of years ago, I came across a description of the British civil service's bureaucratic culture. The operative phrase was, "need to know." That is, give out as little information as possible to the public or other levels of the bureaucracy, or even limit information to politicians. Share information only on a "need to know" basis. Suddenly, I realized, many of the "Israeli evils" were in fa

Ariel Natan Pasko,

Pasko Think Tank
Pasko Think Tank
The daily newspaper headlines ring out, "Sharon Gets Questionable Loan." Israeli television news tells us, "Former Prime Minister Barak Investigated For Phony Organizations." The radio blasts, "Knesset Members Accused Of Double Voting." Israeli Internet sites let us know that, "Former Knesset Member investigated for bribery during primaries." Well they're politicians, so what do you expect?

Then, every so often, the Central Bureau of Statistics reminds us that the heads of companies in Israel - including state owned companies - are making gosh awful lots of money. But who cares?

The workers at the Electric and Water companies are the highest paid salaried workers in Israel - about twice the national average and three times the salary of teachers - and they are public regulated utilities. Don't forget that the workers at Israel Electric Corp. also get free, unlimited electricity to boot. Now you know why electricity prices keep rising in Israel.

But hey, they're unionized.

Speaking of unions, Israel's large trade union - the Histadrut - threatened a general strike for several months some time ago, due to the Israeli government's economic reform plan. Recently Finance Minister Binyamin Netanyahu proposed introducing legislation that would require any strike action be brought before the union membership for a vote before being initiated, as is standard in the US and elsewhere. Well, Histadrut head Amir Peretz, in typical demagogic fashion, went on television and screamed how Netanyahu was trying to break the union. It made a lot of news for a couple days. And then, on Israel TV's show, Politika, a Likud Knesset member read the Histadrut by-laws that clearly said that any strike action needs to be approved by the membership through a vote. Israel's trade union - for decades connected to the Labor Party - has never been observing its own rules.

Industrial democracy in Israel is a farce. A small clique of oligarchs have run the union from the start, making the decision to strike or not, to accept the terms of a new agreement or not, as if it was their private fiefdom, without the workers', i.e. members', permission. A general strike, by the way, would cause major damage to Israel's economy. Israel for decades has had one of the highest number of annual strike days in the world. It is estimated that a full general strike could cost the economy 2.5 billion shekels/day (that's about $550 million/day).

But who's counting?

Certainly not the Bank of Israel, according to a senior bank official's recent "leak" ahead of a Finance Ministry report on central bank wage practices. Details of payments and bonuses for central bank staffers are generally difficult to acquire due to the bank's practice of obfuscation over employment conditions. For example, it was learned the Governor of the Bank of Israel, David Klein, received an "efficiency bonus" of some 80,000 shekels in 2000, his first year heading the central bank, for his work as a senior official the previous year. The issue of "efficiency" bonuses has recently been a hot topic, and it has even reached the Labor Courts due to the annulment of the bonus, which was paid quarterly to bank workers, by the Finance Ministry's Wages Director Yuval Rachlevsky. Senior bank employees are among the best paid in the public sector; they received an average efficiency bonus of 64,000 shekels a year until mid-2002, when Rachlevsky put an end to the practice. Senior bank staffers also get a company car, which they are free to use for their personal use. However, they are also paid a monthly "car maintenance" fee for the vehicle's upkeep. Such a payment is usually made to civil servants who have to use their own vehicles for work purposes. It's just another perk at the Bank of Israel, I guess.

There isn't just scandal at the national political level in Israel, but in local politics as well. A new 22-page report, issued by the Finance Ministry, accuses the Jerusalem Municipality of overpaying at least 80 senior employees millions of shekels/month, in contravention of the law and past agreements with the Treasury. The newly elected mayor has appointed six deputies at the enormous monthly salary of 40,000 shekels each. Under public pressure, because of a growing budget deficit and a planned 3% property tax hike, the Jerusalem Municipality spokesman recently announced that a planned 5% cut in the salaries of the deputy mayors would be carried out. But a 5% wage cut leaves them with a monthly salary of 38,000 shekels, five-and-a-half times the average wage in Israel. This, at a time when there is near-record unemployment, a long recession, and serious national government budget cuts. Don't worry; later it was learned that the deputy mayors turned the proposal down.

All this is the "norm" in Israel. Distorted wage levels, massive perks, breaking rules; sounds to me like a third-world country. Israel, as I've said many times before, is not an information society. Although politically democratic, with a mixed economy leaning further and further toward free enterprise, Israel lacks a culture of transparency and accountability. This inability to find out information leads to cronyism - in Israel called protectzia - protection. For example, someone has a friend, who "knows" someone else that can get you a job. No public tender for the position in a local government office, no need to "apply" and take tests for civil service, just go meet Mr. X.

A couple of years ago, I came across a description of the British civil service's bureaucratic culture. The operative phrase was, "need to know." That is, give out as little information as possible to the public or other levels of the bureaucracy, or even limit information to politicians. Share information only on a "need to know" basis. Suddenly, I realized, many of the "Israeli evils" were in fact probably leftovers from the British Mandate days, that ubiquitous "Israeli mentality". Where else would Israel have learned bureaucratic culture, if not from the British Mandate Administration?

Oh yes, most immigrants to the Mandate or later Israel, until at least the 1960s, were either from Eastern Europe - Soviet Russia, Poland, Romania, etc. - or, the Arab Middle East and North Africa, also not great bastions of democracy and transparency. The culture of corruption in Israel is probably not due to some "genetic" weakness of Israelis, but has a lot to due with a lack of transparent institutions and accountability.

Now for the reason that I decided to write this article....

Breezing through the news recently, I read an article on "corruption" in the non-profit sector. What disappoints me is that these are the people who provide vital non-governmental health, education, and welfare services. These are the organizations that help the weak, but are getting fat by doing so. The article, based on a leaked Interior Ministry report, described the exaggerated salaries of the top officials in the non-profit sector. The Efrati Committee completed this report almost a year ago. And to make maters worse, it's been presented to Interior Minister Avraham Poraz - from the Shinui Party - whose free market and clean government election campaign seems a distant memory. Poraz hasn't done anything to implement the recommendations of the report yet. Surprised?

There are about 13,000 Non-Profit Organizations (NPOs) or Non Governmental Organizations (NGOs) in Israel. In some, salaries of the three top officials make up 50% of total expenditures. In the majority of organizations, the report said, salaries make up about 80% of expenses. Anyone familiar with business, the non-profit sector, and economy in modern Western democracies today should realize that this flagrant theft. People donate money to organizations to help the poor, to further social or ideological goals - like environmental protection or cancer research - not to line the pockets of top management. The Efrati Committee document recommended that organizational overheads should constitute only between 7 to 20 percent of total expenditures, thus the vast majority of donations would be to further the purposes of the organization. Public monies from tax revenue are also being misused, since some NPOs receive state funds in addition to private donations.

To better understand the next section, assume a shekel-dollar conversion rate of about 4.5 to 1:

While the average salary in Israel - now about 7,000 shekels/month - has been falling for at least a year due to the recession, the government, in its budget-balancing "cut-and-slash" reform plan, has been cutting social welfare transfer payments to the weakest sectors of society - who live on 1,500-3,500 shekels/month. At the same time, the top employees at hospitals, think-tanks, women's organizations, organizations to help the handicapped (soldiers and elderly), yeshivas - rabbinical seminaries - and Kibbutz educational centers are earning 35,000-130,000 shekels/month - an average of 50-70,000 shekels/month - or about 5 to 20 times the average wage in Israel, and as much as 20 to 90 times as much as the poor for whom they collect money to help (at least the corruption is universal). Something sounds desperately wrong.

Certainly, transparent reporting to the public would have helped prevent these outrages. Who would donate money to an organization when you know that the head person earns 63,000 shekels/month - that's over 750,000 shekels in a year - and the three top officials make up 50% of the organizations total expenses? I know I wouldn't.

In all fairness, this type of over-inflated salary issue occurs in other places also. Several years ago, the head of the United Way, a huge charitable organization in the US, had to step down after his excessively high salary was made public. And just recently, the top official of the New York Stock Exchange quit after his extortionately high salary was discovered. But in general, these are exceptions rather than the rule. By the way, none of the Israeli directors are quitting or apologizing or returning the money.

Israel, in this regard, is a good 30 years behind America in this element of non-profit management. High salaries and operating expenses that ate up most of the donor money were common in America in former days, but with the explosion of competition in the "social sector" in the last couple of decades, organizations have had to become more efficient in their delivery of services. Transparent accounting has contributed to this. Big donors today are more involved than ever with the organizations they contribute to and they don't want to "waste" their money. Non-profits in America today are run much more like a business, they "compete" for donor money, trying to prove how small a percentage is used for salaries, general office and running expenses. They've learned to use their resources more efficiently. Top non-profit organizations today in America claim to put upwards of 90% of their operating budget directly into providing the aid and services they exist for. Contrast that with Israeli NPOs, who spend 80% of their budget on salaries. Rather than provide services, they provide fat-cat jobs to the privileged few.

If Israel wants to enter the 21st century of developed nations ? democratic, freedom-loving, with free economies ? it has to reform itself.

Finance Minister Netanyahu is on track when he talks about legislation guaranteeing the democratization of the Histadrut. Imagine if Israel hadn't been shackled with strikes for decades, how much larger the economy would have grown. And Netanyahu's economic reform plan, that includes trimming social welfare benefits and the public sector, in general, is surely needed.

But when people are receiving less social welfare benefits from the government, the social sector, NPOs, need to pick up the slack. Israeli NPOs aren't doing anything wrong according to Israel's culture of corruption, but to meet the demands that will be put on them in the years to come, they will need to reform. Cutting fat-cat salaries and increasing the use of volunteer labor, to enable them to devote larger percentages to delivery of services, is just one element toward greater efficiency.

Israeli opinion leaders, whether in politics, business, sports, the arts, and yes, the non-profit sector, must change their behaviors. Trustfulness, not lies and deception; accountability, not flight from responsibility; openness and transparency, not secretiveness; maybe even modesty, rather than extravagance ? must become the norms of Israeli society. In areas like business, where new wealth is created, there is some room for higher salaries, but in the public and social sectors, where there is no economic productivity, how can they be justified?

It is true that the US and European business worlds have been shaken lately with financial accounting scandals, such as WorldCom, Enron, Vivendi, and Parmalat, but again these are exceptions. Look at how serious US President Bush, American legislators, academia and the media have criticized the situation. Attempts to root out that type of behavior have engulfed America. Political and financial scandals occur the world over, but why so often in Israel?

A couple sparks of light in the darkness....

As of January 1st, Israeli banks have to - by law - inform customers of most banking charges they will incur for an action before it is executed. That is, transparency in their service charges. Imagine, until now banks didn't legally have to provide customers with a list of charges for different transactions, or inform them of the reason for the cost, the exact sum, how it was calculated, and the date of their payment. It's a small victory for accountability and consumer protection.

And there is a small but growing trend in corporate Israel toward social responsibility. Israeli private companies are beginning to get into community and philanthropic activities. Hopefully, this trend will continue and grow. It might even eventually impact on how NPOs are managed.

Israel must reform itself until scandal and corruption are an exception, like elsewhere, not the way things are done. Lack of transparency and accountability, and rampant corruption in business and public life, must not be ignored, tolerated, or worse, quietly praised, for someone's ability "to get more for himself or herself".

Success in the modern global economy requires reform, stability in Israel's society necessitates reform, and Jewish ethics and tradition demand reforming Israel's "culture of corruption".

(c) 2004/5764 Pasko