Macro economic reform in Israel:

1. Macro economic reform in Israel: The Trajtenberg Committee for Economic and Social Change and the Competitiveness Committee Professor Eugene Kandel January 2012

2. Trajtenberg Committee for social economic change: Conclusions and their Implications

3. The Protest’s Origins Source: CBS

4. Housing Prices Source: CBS

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

7. 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..

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

10. 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

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

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

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

16. 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

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

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

19. 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

20. 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

21. Competitiveness Committee Main Recommendations 21

22. 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

23. Committee'sWork 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

24. 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 Business sector Financial sector

25. Israel’s Large Groups Tend to Form Pyramidal Ownership Structures with a Controlling Shareholder International comparison:10 major groups as a percentage of market value of public companies International comparison- number of tiers • OECD • Non- OECD 41% The distribution of control of public companies in Israel Source: Economics Department, SEC with a controlling shareholder Source: Economics Department, the Securities Authority

26. Potential Problems with Pyramidal Ownership Structure Public • Tunneling • Inefficient allocation of resources • Excess risk-taking • Internal capital market (not effective) • Double leverage • Persistence 51% Public 51% Public 51% Controlling shareholder’s interest can be different than the companies he controls

27. Potential Macro-Level Problems • Impact on macro economic stability • Combined Influence in several markets • Deterring foreign investors • Inflation of indices • Underdeveloped capital markets

28. International benchmark- Number of “tiers” Source:Masulis et al. 2011- Family Business Groups around the World: Financing Advantages, Control Motivations and Organizational Choices

29. Key Recommendations • Separation of holdings in significant financial activity and non- financial activity • Prohibition of directors tenure in both financial and non-financial companies • Improvement of corporate governance and minority shareholder rights in pyramidalbusiness groups • Restrictions of expansion of pyramids and their control of existing companies • Empowering the Antitrust regulatory authority to deal with pyramidalbusiness groups • Competition considerations while allocating public assets

30. 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