Small businesses are the greatest generators of economic growth worldwide. Yet Israel, so desperate for growth, does all it can to suppress them.

The biggest purchaser in the country, the Israeli government, does not enable small businesses to participate in its tenders.

The huge behemoths, Elite, Strauss, and Osem, dominate supermarket shelf space. Their aggressive promotion campaigns and trade tactics crowd out the small businesses.

The banking duopoly that is intertwined with these monopolies denies small businesses access to credit.

The Israeli economy has many entry barriers: You need more capital to start a small business in Israel because of the high cost of doing business – due, again, to the prevalence of monopolies and the lack of competition.

Government and municipal bureaucrats sport an anti-business Marxian mentality, treating businessmen as “profit-driven” “exploiters.” Believing the bureaucracy must control “rapacious” businessmen at whatever cost, they constantly invent complicated, often contradictory, time-consuming and costly tasks and strictures to exhaust the entrepreneur.

Israel’s tax system, motivated by a similar anti-profit bias, erects additional barriers. It treats every entrepreneur as a potential cheat – a self-fulfilling prophecy, since to survive many must cheat – requiring him to keep complicated and expensive books on top of the costly duty of serving as the government’s collector of VAT and other taxes from customers and employees.

Tax rates climb precipitously at comparatively low income levels, making capital formation through profit accumulation virtually impossible.

Small wonder, then, that Israel has the lowest proportion of small businesses among Western economies, and that during the recent six-year recession over 100,000 of them – a full third – were liquidated.

Israeli governments have been aware of the problem, but their solutions usually make things worse.

Instead of removing government-created barriers, governments have established several inefficient bodies to “help” small businesses by offering loans and advice. These work at cross-purposes, competing for turf and budgets, and they politick. They achieve little, at great cost.

Altogether, it is like the government first breaking the entrepreneur’s legs, then offering him crutches to solve his “problems.”

=TWO RECENT studies commissioned by the Koret Foundation address the many woes of the small business community.

Koret has been involved with small businesses through its decade-long effort to give loans to those denied bank credit. Through its Koret Israel Economic Development Fund (http://www.kiedf.org) it has granted almost 2,000 loans, creating an estimated 11,500 jobs (financing facilitated – NIS 280 million).

The Koret loans achieved a very low (1%) default rate and can be credited with many successes (the unusually low default rate may indicate that the fund was too risk-averse and could have achieved even more had it been willing to take a bit more risk).

The fund’s success indicates that Israeli banks have missed a great business opportunity. Had they done their job, Koret would not have had to devote so many resources to compensate for their failure. It could have devoted more energy and resources to its 20-year pioneering effort to assist in the reform of the Israeli economy.

The first of the two Koret studies, done by David Boas Associates in cooperation with the Israel Center for Social and Economic progress, surveyed the status of small businesses, examined the government’s and the banks’ treatment of them, and offered suggestions for improvement.

The comprehensive study confirmed the devastating impact of the Israeli economy’s extremely concentrated structure on small businesses. It found that government policy has no coherent goals and is full of internal contradictions and political bias.

The banks, the study asserted, discriminated against small businesses, with the comptroller of the banks turning a blind eye.

Not even the Central Bureau of Statistics recognizes the significance of small businesses and does not collect data about them.

For small businesses to thrive, the study confirmed, Israel has first to become a competitive, free-market economy where their advantages in innovation, flexibility and specialization can be fully realized.

A free, competitive financial market will do much to overcome the credit problem small businesses now experience.

The study offers some interesting technical suggestions for addressing the special credit needs of small businesses, and for improving government efficiency in helping provide small businesses with know-how and market-penetration techniques.

An excellent study by Koret fellow Omer Ben-Zur on “Access of Small Businesses to Government Procurement in Israel” quantified the severity of the government’s bias.

In 2003, 70% of government contracts were won by 2% of enterprises, and 90% by less than 7% (total 2002 government purchases amounted to $9.7 billion a whopping 9.3% of GDP. With other public bodies such as the Jewish Agency and municipalities, the figure rises to 16% of GDP).

While the law mandates public tenders, in 2002, 4,220 contracts valued at $1.65 billion – half the total of the government’s civilian procurement – won “exemptions.” Moreover, tenders were putting up requirements that precluded small businesses from participating.

Small wonder, then, that the Israeli economy is perhaps the most concentrated in the Western world, that it suffers from a lack of competition, high costs, and no growth in productivity.

As a result most Israeli workers are paid a measly $1,200 monthly salary, and hundreds of thousands of families can barely make ends meet.

It’s a shame.

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