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Israel Should Fear Domestic Corruption More Than Foreign Boycotts

In Jerusalem, in May 2015.
In Jerusalem, in May 2015.
Tal Shavit*


JERUSALEM — The government regularly shares its fears about the politically motivated economic boycott of Israel, worried about the long-term damage to the country's economy and the specter of foreign investors running away.

Unfortunately, we don't see the same energy in battling the international boycott also put into fighting the rampant corruption in Israel, which poses no smaller threat for the Israeli economy.

The past years' corruption scandals have time and again rattled the country, breaking records with each passing month for the damage inflicted. Doing the accounting and calculating the money deprived of the public coffers, the public and the media mostly focus on the corrupt persons themselves and the economic damage to the country.

Surely, this money could have been put into more useful things such as additional hospital beds or reducing the number of students per classroom. But it is also necessary to consider the indirect long-term effects, which could ultimately be devastating for Israel's economy.

Far beyond the direct losses to the state coffers, corruption scandals cause a lasting damage to the country that with time becomes irreversible.

Corruption creates a culture that trickles into every corner and ultimately harms the economy's efficiency — from the job market to the capital market. One example of the lethal damage corruption can have for country can be found in Turkey. In 2013, a corruption scandal that involved, among others, the head of a governmental bank, led to the collapse of the stock exchange and the devaluation of the Turkish currency.

Measuring the impact of corruption on the economy thus requires deeper analysis. What's the cost of the public losing trust in a government that is supposed to determine economic policies? Trust is the basis for economic growth and the higher the trust, the lower the compensation investors demand for their investment (that is, a lower risk premium).

Nepotism trap

The more corruption grows in Israel the more domestic and foreign investors lose their trust in both the private and the public sector, and consequently shift their money elsewhere. Israel would gradually become an unattractive destination for investment, which would undercut the fundamentals of the economy. Foreign investors — an important ingredient for continued economic growth — would demand a very high return on their investments as a trade-off for the risk they take operating in a corrupt country.

One of the symptoms of corruption is the tendency for nepotism — that is, appointments guided by personal and familial contacts rather than skills — in the private sector and the public sector alike.

The higher the rate of nepotism, the lower the efficiency of the job market. Ultimately, instead of talented employees or executives leading the economy, it will be led by cronies without the required skills or capacities. Economic growth would plummet as a result.

Moreover, public corruption ultimately seeps into the broader culture, even beyond the business and public sector worlds. When people begin to believe that everything and everyone is corrupt, and others are getting rich at the expense of the state, each person starts to care only for themselves. The extent of tax evasion in Israel is but one example that the Israeli public has lost its trust in the state and its institutions, and deems tax evasion legitimate.

An economic boycott of Israel would be a very bad blow, which could severely harm many companies operating in Israel and employing hundreds of thousands of employees. Still, in the face of such big economic stakes, it's unlikely that so many foreign companies would rush to give up Israeli know-how and products. At the end of the day, when economic interests are involved politics is usually left behind.

But if we add in the corruption factor, the economic interests could begin to shift: companies that haven't boycotted Israel would start asking themselves whether their money is safe in a country that suffers such chronic corruption.

*Tal Shavit, Associate Dean at Israel's School of Business of the College of Management, is an expert on finance and investment psychology.

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