Israeli Economy Needs Innovation, KIEDF Koret Fellows Research Shows New Financial Tools Required to Alleviate Credit Crunch to Small Businesses and Improve Efficiency of Markets

Released jointly by the Milken Institute and Koret Foundation Funds

JERUSALEM (Nov. 8, 2005) - The growth of Israel's high-tech sector is a well-known success story, but a discerning analysis of Israel's economic performance suggests that victory laps are premature, Glenn Yago, Senior Koret Fellow and Director of Capital Studies at the Milken Institute said today.

"The ability of Israel to strengthen its economy and achieve national economic security is now directly linked to the country's ability to encourage enterprise, innovation and competitive, sustainable markets," Yago said in opening a conference, Financing Israel's Future: Policy Innovations for Economic Development, organized by Koret Israel Economic Development Funds (KIEDF) at the Israeli Knesset in Jerusalem. "This requires the democratization of capital in Israel. Israel unfortunately still lacks the effective and efficient financial institutions, capital markets and financial tools to realize these goals."

According to three new economic studies published today by KIEDF Koret Fellows, Israel must move more swiftly down the path of structural reforms that will enhance competitiveness and raise productivity. This requires reducing the dominant and distorting government role in budget and regulatory policies, which presents obstacles for entrepreneurs trying to open businesses, enter financial markets and compete across economic sectors.

KIEDF is a multi-faceted program - including economic policy research, small-business loan guarantees and interest subsidies, and micro-lending programs - that brings free-market solutions to expand the Israeli economy. KIEDF Koret Fellows are post-graduates selected to work with legislators and regulators to develop and implement economic policy reforms that enhance Israel's business climate, especially for small businesses in the private sector.

Especially vexing, researchers found, is Israel's extraordinarily high rate of concentration of credit, wealth and ownership, a factor that undermines its long-term growth objectives.

"Over 90 percent of listed companies are closely held by majority shareholders holding close to 70 percent of the shares," said Yago, who has supervised the work of the Fellows. "Only Finland and Switzerland have higher rates of banking concentration. The corporate bond market in Israel is only 3 percent of GDP compared with 70 percent in the U.S., 28 percent in the UK and 40 percent in Japan."

In the new studies, KIEDF Koret Fellows discussed policy issues related to urban revitalization, credit discrimination and securitization, asserting:

Small businesses make up more than 96 percent of Israeli firms, but receive less than one-quarter of local credit.

Less than 1 percent of all borrowers received more than 70 percent of all credit in 2003.

Securitization of assets reached 220 percent of GDP in the U.S. in 2004. By contrast, cumulative securitization in Israel from 2000 to 2004 accounts for just 4 percent of 2004 GDP.

Israel's inner cities are crumbling, distressed areas are defined by 10-year-old statistics, and local laws prevent private or philanthropic involvement in urban revitalization by means of business improvement districts or tax incentives.

View a PDF of the Fellows' studies. These texts are also available on the websites of the American Friends of Koret Israel Economic Development Funds ( and Milken Institute (


Susan Wolfe, Director of Communications
Koret Foundation
(415) 882-7740

Skip Rimer, Director of Communications
Milken Institute
(310) 570-4654