ABSTRACT

The extensive involvement of the government in Israel's capital market has meant significant deviations from the free market model, with important consequences for the economy. The public supplies funds to those who need credit through its deposits in the banks, savings schemes, mutual funds, and social and life insurance. Savings schemes are operated by the banks and are of varied duration; some are linked to the exchange rate for foreign currencies and others to the consumer price index. Social insurance funds, dominated by those of the Histadrut, cover sickness pay, convalescence, holiday leave, and old age pensions. The social insurance funds act as intermediaries, mobilizing resources, allocating a small share to themselves each year, and passing the balance on to other financial intermediaries. There are tax incentives designed to encourage employees to contribute to these programs. Most of the funds are ultimately invested in government bonds because only the state has been able to offer linkage to the consumer price index, which made the investment virtually risk free because there was no chance of a real fall in value. In 1990 the government required financial institutions to invest large proportions of their funds in bonds that it issued: Pension funds managers had to invest 93 percent of their resources in official bonds; compensation funds and advanced training funds, 72 percent.1 These quotas had been even higher in previous years. The government used the funds to cover its budget deficit and to finance its debt repayment program.