The overwhelming majority of big capitalists in Israel today emerged from a group of no more than 60,000 “veterans” of the Jewish settlement in Palestine who arrived before the creation of the state or are descendants of such veterans. Some, especially from Sephardic families who settled in Palestine without any connection to the European Zionist movement, already had prosperous businesses or land holdings in Jerusalem or Jaffa by the early twentieth century. Of the 160,000 immigrants to Palestine in the 1932-1935 period, many, especially those from Poland and Germany, brought significant amounts of capital with them. 41 million pounds, mainly in private capital, was imported into Palestine during this period. This injection fueled rapid industrial expansion which temporarily pulled Palestine out of the 1927-1932 depression. In 1933, there were 3,400 industrial enterprises in Palestine capitalized at 5.4 million Palestinian pounds and employing 20,000 workers. By 1937, when the effects of the worldwide depression once again asserted themselves in Palestine, the number of industrial enterprises had grown to 5,600.

Despite the rapid accumulation of private Jewish capital in Palestine in the mid-1930s, private enterprise has always been a secondary component of the economy there. Individual entrepreneurs were often reluctant to gamble on the future of the Zionist project and to undertake long-term high-risk programs, such as the construction of new agricultural settlements. The growth of the Israeli bourgeoisie was protected and encouraged by the political leadership of Labor Zionism. This was expressed by the long-term political alliance between the social-democratic Mapai Party (precursor of the Labor Party) and the bourgeois General Zionists (forerunner of the Liberal Party, the junior partner in the Likud). Since 1948 there has been increasingly more interpene- tration between collective and private capital, although collective capital, which is not analyzed here, remains the dominant element in this partnership.

In addition to the “old” private imported capital, Pinhas Sapir, Minister of Finance in several Mapai-led Israeli governments, created several new millionaires by lending capital at low rates and granting production monopolies and tax concessions to private investors who were often not Mapai supporters. This was done to encourage private Jewish capital investment in Israel, especially from abroad, and to cement political alliances between Mapai and its coalition partners — the General Zionists and the religious parties. Aggressive promotion of foreign capital and production for export were the hallmarks of Sapir’s economic strategy. But his zeal often led to major financial scandals. There are cases on record where investors received loans from the government without building a plant or carrying out any productive economic activity in Israel.

Banking and finance are the citadels of private capital in Israel today. Israeli economists have called the banks, both publicly and privately owned, “the oxygen of the state” because of their central role in the national economy. Banks hold shares in major industrial concerns and, until recently, played a dominant role in the stock market. Banks in particular have benefited from the accelerated concentration of capital since the recession of the mid-1960s. There are now monopolies on the production of instant coffee, sweets, pasta, cigarettes, carpets and drugs.

Profiles

The Recanatis were a politically powerful and wealthy merchant family in Salonika, Greece. The brothers Avraham and Leon Recanati emigrated to Palestine in 1934, after making preliminary visits to explore opportunities for investing their capital. Avraham had many political interests and had served as deputy mayor of Salonika before leaving for Palestine. Leon took charge of the family finances. In 1935 the Recanatis established Eretz-Israel Discount Bank. The spectacular success of Israel Discount Bank is due to the fact that, unlike the German Jewish families who established private banks in Palestine at about the same time — Yafet, Elran, Feuchtenberg — the Recanatis took on non-family partners and aggressively expanded their interests into all sectors of the economy. Starting with 60,000 pounds in 1935, Leon Recanati more than doubled the capital of the bank in the first year of operation alone. Today Israel Discount Bank represents the largest agglomeration of private capital in Israel. Its total assets amount to over 25 percent of the gross national product. In 1983 the Israeli stock market crashed after banks had run up the prices of shares in firms they controlled. A government report released in the summer of 1986 recommended that the heads of the four largest Israeli banks be removed. This may result in a loss of some of the Recanati family’s direct power in Israel Discount Bank.

Moshe Karso, another wealthy Salonika merchant, made his fortune by importing American army surplus clothing and blankets into Greece after World War I. He arrived in Palestine 10 years before Leon Recanati. In Salonika there had been political connections between the Recanati and Karso families. When Eretz-Israel Discount Bank was established, Karso became a partner. Today the Karso family is the third largest partner in Israel Discount Bank after the Recanati family and Moshe-Beno Giter. Moshe Karso settled in Tel Aviv and bought real estate in and around the growing city from the Nabulsi and Abu Khadra families. These parcels later became part of central Tel Aviv. The Karso family still owns major real estate holdings in Tel Aviv which were formerly in the possession of Palestinian families from Nablus. One of Karso’s real estate partners, Yehudah Muzes, later founded Yediot Aharonot, the largest circulation daily newspaper in Israel today. Karso himself also established a franchise for the distribution of General Motors vehicles in Palestine.

Dan Tolkovski joined the Israel Discount Bank family in 1961 when the Discount Bank Investment Company was established to direct the bank’s capital into industrial projects. Tolkovski came from a veteran family of citrus growers. Citrus production has historically been dominated by private capital and was an early stronghold of the Israeli agricultural bourgeoisie, Tolkovski’s grandfather had been a wealthy Zionist politician in Poland whose economic activities in Palestine were wide-ranging and included ownership of the daily newspaper Haaretz (which later passed to the Shocken family). In 1933 his father was one of the founders of the Rotary Club of Tel Aviv. After receiving an elite education at the Herzliya gymnasium in Tel Aviv and the Imperial College of Science and Technology in London, Dan Tolkovski served as an officer in the British Royal Air Force in World War II. In 1947 he joined a secret organization formed to procure aircraft for the future state of Israel. When the 1948 war began, Tolkovski returned to Israel and joined the air force. He advanced rapidly through the ranks due to Prime Minister David Ben Gurion’s preference for military commanders who did not have leftist views. From 1953 to 1958 he served as commander of the air force. When Tolkovski joined Israel Discount Bank, he put his wide-ranging contacts with the Israeli military establishment at the service of the bank. In the 1970s Tolkovski entered political life as a supporter of the Movement for Greater Israel, which advocated Israeli retention of the Arab territories conquered in 1967.

Yaakov Meridor was born in 1913 to a family of small merchants in Poland. In 1929, after hearing the news of the first widespread Arab rebellion in Palestine, he joined and received military training in the Betar Zionist youth movement. (Today Betar is the youth movement of the Herut Party, the senior faction in the Likud). Meridor emigrated to Palestine in 1932. He became deputy commander of the Irgun which was established in 1937 by dissidents who left the labor Zionist militia, the Haganah, because they opposed its official policy of engaging mainly in defensive actions and cooperating with the British against the Palestinian Arab rebellion then in progress. From 1940 to 1943 Meridor served as Irgun commander until he was succeeded by Menachem Begin. Meridor represented Herut, the political organization established by the Irgun after 1948, in Israel’s first Knesset. In 1951, after a less-than-outstanding parliamentary career, Meridor turned to business. He had been imprisoned by the British in Eritrea for his Irgun activities, and he tried his hand at raising cattle in Eritrea for export to Israel during the period of food shortages and rationing known as the tzerta. In 1953 the Israeli government entered into partnership with Meridor’s firm to save it from bankruptcy. This was only the first of Meridor’s business enterprises which received substantial aid from the Israeli government. His most ambitious venture is Maritime Fruit Carriers. Several key members of its board of directors are former Irgun members, and Moshe Dayan and Ezer Weizman were also at one time employed by the company. In 1962 the Israeli government, under orders from Minister of Finance Pinhas Sapir, deposited a sum reported to be $18 million in Norwegian banks to finance the construction of Maritime Fruit Carriers’ fleet. Most of the subsequent profits of the company resulted from buying and selling ships rather than operating them. When the Likud came to power in 1977 it decided to sell off many publicly owned concerns. The Rasco Construction Company, which was established to provide housing for new immigrants, fell under the supervision of David Levy, a political ally of Meridor, who was then Minister of Housing. In 1981 the Ministry of Housing arranged for Meridor and his partners to purchase Rasco from the Jewish Agency. In 1982 the Likud government, in which Meridor was a senior minister, furnished a $3.2 million loan on easy repayment terms which allowed Atlantic Fisheries — a subsidiary of Maritime Fruit Carriers — to acquire new fishing boats with on-board processing facilities. Thus Yaakov Meridor, who arrived in Palestine without significant capital of his own, was able to use his Irgun connections and assistance from both Mapai and Likud-led governments to establish a substantial private financial empire.

In David ha-Cohen we find a link between the major economic pillar of the Labor Zionist establishment — the Histadrut holding corporation — and the Meridor maritime empire. Ha-Cohen came to Palestine at age 10. After studying at the London School of Economics from 1919 to 1923, he returned as director of the Histadrut’s Office of Public Works and Construction (Solel Boneh). Thanks to ha-Cohen’s close contacts with the British colonial administration, Solel Boneh secured major public works contracts in Palestine and even built British oil infrastructure works in Iran, eventually becoming the largest corporation in Israel. During the Mandate, Solel Boneh specialized in constructing fortifications, air fields and government buildings. In the first decade of the state, it built new towns and urban centers as well as industrial plants. The company was reorganized in the late 1950s, with its industrial interests grouped together as Koor Corporation and its overseas commitments under the Overseas and Harbor Works Company. A second major reorganization in 1971 divided the enterprise into seven specialized sections. Ha-Cohen retired from Solel Boneh in 1970 when he became chairman of Atlantic Fisheries, a major subsidiary of Meridor’s Maritime Fruit Carriers. Ha-Cohen’s move could happen only after the gradual strategic and ideological convergence of Labor and Revisionist Zionism in the National Unity Government of 1967 to 1970.

The Frumchenko and Moshovitz families are the principal partners in the Elite Company which has a monopoly on the production of instant coffee and is the largest producer of sweets in Israel. Eliyahu Frumchenko, born in northwestern Russia, owned a confectionary factory there. He fled the Bolshevik revolution to Riga, capital of Latvia, where he reestablished his factory. In 1933, the Frumchenko family emigrated to Palestine. Shortly afterward, Eliyahu Frumchenko and his partners set up the first Elite factory in Ramat Gan, a suburb of Tel Aviv. Elite participated in the rapid industrial growth of the mid-1930s, which was led by the food manufacturing sector. Frumchenko’s Riga factory continued in operation until after World War II, providing him with profits which were surreptitiously transferred to Palestine and used to purchase real estate. Elite’s operations expanded dramatically during World War II when the British army became a major client for sweets and canned goods produced by an Elite subsidiary, the Priman company of Netanya. After 1948, Elite continued to acquire new subsidiaries on the way to establishing its commanding position in the food processing industry.

Yosef Peker was born in Palestine in 1924 to a wealthy and well-known family. His father opened a building materials supply store in Jerusalem in 1880 and was one of the founders of ha-Hevra ha-Merkazit construction company, which was later absorbed by the Klal industrial conglomerate. In the 1948 war, when Pinhas Sapir was responsible for military acquisitions, Peker supplied steel and gasoline to the Israeli army. In 1953, after the Israeli government signed an agreement to receive reparations from West Germany, Peker joined the corporation set up by Mapai to receive and direct these funds. (Because the reparations deal was considered questionable, several industrialists refused the government’s invitation to manage the funds; but Peker did not hesitate because of his established relationship with Pinhas Sapir.) In 1958 Peker established the Solpek steel company (subsequently renamed Peker Steel), after buying out its former foreign partners. Peker then invited the American Reyerson family (owners of Inland Steel) and the Dutch Van Leer family to acquire an 18 percent interest each in Peker Steel. This enabled Peker to receive substantial loans of capital and other benefits from the government as a reward for attracting new foreign investment. By the 1980s Peker’s holdings had expanded dramatically and included several subsidiaries in the metals industry. In 1981, after the Peker family manipulated stock options on its industrial enterprises and successfully evaded taxes on $3.8 million in profits, the Knesset passed an amendment to close this loophole in the income tax law.

Avraham Shapira is the carpet king of Israel. His father, Pinhas Shapira, owned a textile mill in Tel Aviv and was close to the ultra-orthodox Agudat Yisrael Party. Avraham received his education in the yeshiva of the religious kibbutz of Meor Chaim. There he first met Pinhas Sapir, who was impressed with Shapira’s economic talent. Thus in 1959 Shapira received a gift from Sapir — a fully operational carpet factory complete with a work force of new Sephardic immigrants in the development town of Or Akiva. (The enterprise had originally been established by someone who later proved incapable of carrying it through to fruition, a very common story in the Sapir era.) With government assistance, Shapira turned this gift into the flourishing concern of Carmel Rugs. Shapira later established additional enterprises in other development towns like Netivot and Natzeret Elit, which offered ample supplies of cheap labor and substantial loans of capital and tax concessions to industrial investors. Today Shapira operates seven factories employing 1,500 workers. As leader of the Agudat Yisrael Party in the Knesset he was able to block investigation into the reasons for the extremely high prices of his rugs (most probably an exaggerated level of profit). His monopoly on the production of rugs in Israel is protected by high tariffs which keep oriental rugs, one of the finest handicraft products of the Middle East, out of all but the wealthiest Israeli homes.

Arnon Milchan, 41, is the son of a wealthy family that has lived in Palestine and Israel for 10 generations. He made his first fortune in agricultural chemicals, but has since earned money and notoriety as an arms trader and film producer. In 1966, Milchan’s father died and left the deeply indebted family firm, Milchan Bros., in his hands. Milchan became involved in research on agricultural fertilizers. He developed a new citrus tree supplement which he boldly tried to sell to Irving Shapiro at Du Pont Corporation. Shapiro, later chairman of Du Pont, helped Milchan win a contract to represent Du Pont in Israel. Milchan soon added major Du Pont competitors — France’s Rhone-Poulenc, Switzerland’s Ciba-Geigi, and Germany’s Hoechst — to his list of clients. Milchan Brothers branched out into foreign operations as well: A farm-chemical plant in Pahlevi Iran was the first of 30 firms set up in 17 countries. In 1972, Milchan began a second career as an arms merchant. He represented Raytheon, North American Rockwell and Magnavox in Israel and "elsewhere." By 1975, Milchan Brothers was the import agent for several aeronautics firms, including Bell Helicopter and Beachcraft, and many of its employees were ex-military men. In the early 1970s, Milchan became involved with top South African politicians in a secret project to use a $160 million slush fund to promote a cleaner image of apartheid. Milchan’s role was to launder the money through Italian banks. When this “Muldergate” scandal blew up in 1979, Milchan claimed it was partly because he had refused to continue his involvement in a project that he had come to see as “totally immoral.” Milchan’s name hit the papers once again in 1985 when he was implicated in the illegal export of krytrons — electronic timing devices which can be used to trigger atomic weapons — from the US to Israel. Milchan shrugs off responsibility for “the unbelievable, stupid krytron story,” saying that it was a perfectly above-board deal, but that the US supplier applied for the wrong kind of export license. Milchan, a millionaire several times over, now plays at filmmaking. After several flops, he succeeded with the TV miniseries Masada, and most recently with Terry Gilliam's Orwellian comedy, Brazil.

Sources: Shlomo Frenkel and Shimshon Bichler, Ha-meyuchasim: atzulat ha-mamon shel yisrael (The Rich Families: Israel’s Moneyed Aristocracy) (Tel Aviv: Cadim, 1984); Uri Davis, Israel: Utopia, Inc. (London: Zed Books, 1977); Jerusalem Post, March 8, 1986.

How to cite this article:

Joel Beinin "Private Capital in Israel," Middle East Report 142 (September/October 1986).
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