Reforms, Politics, and Corruption

Economic policy entails decisions on many subjects. The two central components are (1) budget policy and (2) reforms in the structure of the economy and in the ways government authorities operate. Both require, foremost, thorough groundwork—analysis and diagnosis of the problem at hand, study of the experiences of other countries, and analysis of the policy alternatives and their cost-benefit implications for all of the economic units. Three different models can be used to prepare an economic plan: internal work in the government ministries, headed by the Ministry of Finance; a government committee; or a public committee. The approval of proposals requires a government decision and, subsequently, the Knesset’s approval.

In each of the models of action, many players are involved. When the preparatory work is internal, the range of players is relatively small and usually includes the workers in the ministry responsible for the subject. In Israel, the Ministry of Finance has disproportionate power relative to the ministries dependent upon it for budget allocations, and it usually plays a much larger role in all planning stages than the other ministries. However, when the task is assigned to a government committee, the circle of participants is much wider and includes representatives of all of the ministries responsible for the subject. Moreover, if the committee is public, its members will include experts from academia and sometimes from other sectors. Extra-governmental entities—whether non-profit institutions or stakeholders—are usually not partners in the preparation and decision-making process, but there are various ways for them to influence the outcome of the process, including presentation of their case to the planners and decision makers, and public and media activity.

A larger array of partners enriches the discussion and facilitates an examination of the matter at hand from a range of perspectives. Naturally, however, this entails disagreements and sometimes even contradictory objectives. During debate on the state budget, the funded ministries will lobby to enlarge the pie, and especially their piece of it. On the other hand, they have less interest in the cost of the pie— that is, the taxes that need to be imposed on the citizens, or the budget deficit— because their success is measured by the scope of services they provide to the public. Representatives of the Ministry of Finance, on the other hand, are also concerned about the budget deficit and its repercussions on economic stability as well as the tax burden. When a structural issue is on the agenda, such as a reform aimed at creating competition in one of the branches of the economy, the disagreements can be even more complex. There may also be professional disagreements between the regulators responsible for the subject. For example, in the financial branch, regulators and a number of senior supervisors are involved; this may include, for instance, the five financial market supervisors, the director-general of the Ministry of Finance, and the deputy attorney general.

Moreover, groups with vested interests, which enjoy the status quo, will fight as hard as they can, and through various means, to undermine reforms that are unfavorable to them: preparing position papers, hiring lobbyists, besmirching the reputation of the reform’s planners, and disrupting economic activity in the branch that is targeted for reform. When the opponents of the reform are labor unions in government enterprises, they are also liable to shut down essential services such as ports and electricity and stir public unrest that deters the politicians. The biggest fear of all is that stakeholders may “buy” the decision makers through legal and illegal contributions to the politicians’ election campaigns, personal bribes, and promises of future jobs to regulators.

The fear that private contributions to politicians would corrupt the election process and government activity arose as early as the beginning of the twentieth century. Consequently, the United States prohibited commercial companies from contributing to election campaigns. The limitations were gradually expanded, and demands for reporting and transparency were added. The process of regulating political financing also spread to other countries. This trend continued to grow throughout nearly all of the twentieth century, and we have also witnessed changes in these laws in several countries in recent years.

Regulation has not prevented corruption, and in many countries—developing and developed—numerous political scandals involving election campaign financing have occurred. The list of scandals also includes Israel. A few countries attempted to confront the problem by amending the regulation of funding of political activity; this may include allocating more public funding for political parties and candidates, on the one hand, and tightening the restrictions on private contributions, on the other. Public financing improves the equality of opportunities in the political system, enabling those who are not independently wealthy to compete for political positions. Yet, it intensifies the competition between the candidates because public funding is allocated according to uniform criteria and thus generates demand for private contributions. Limiting private contributions reduces both the scope of contributions and corruption, while at the same time increasing the demand for illegal contributions that entail even greater corruption. The question is what is the best mix of public and private financing of political activity?

This book focuses on two central issues described above: the first—the decision-making process for economic policy; and the second—the fear that this process will be corrupted by stakeholders who bribe the politicians via campaign contributions and are later rewarded by the politicians at the public’s expense. The first three chapters in the book discuss the nature of the decision-making process and the balance of power among the decision makers and between the decision makers and the stakeholders. The last three chapters focus on the regulation of political campaign financing in the world and in Israel, its benefits for democratic structure, and its impact on corruption.  

The first chapter analyzes the motives for structural reforms and the balance of power between the players operating in the arena—the politicians, the regulators, and the stakeholders. The unique contribution of this analysis is in examining the impact of the disagreements among the regulators and senior officials on the chances for implementing structural reform. The chapter examines 32 attempts to reform the financial market in Israel and finds that the extent of agreement between regulators and the intensity of opposition by interested parties have an important and significant impact on the likelihood of implementing structural reform. Due to the disagreements and the power of those with vested interests, repeated attempts were made to approve reforms, and it took about ten years on average to implement each reform.

The second chapter presents recommendations for advocates of reforms on how to improve the chances of implementing their proposals. The recommendations are based on the results of research conducted for implementing reforms in the financial market, as well as on the extensive experience of reform initiatives in other branches in Israel. The recommendations focus on the documents needed for starting the process, the best timing for advancing an initiative (while distinguishing between expected windows of opportunity, such as the first year of a new government), the date for submitting the budget, and ways to prepare for the chance opening of unforeseen windows of opportunity.

The third chapter examines the process of analyzing Ministry of Finance policies. The formulation of economic policy is based on three work models: an internal team, an inter-ministerial committee, and a public committee. The main weakness lies in the internal work of the Budgets Division, which does not always conduct an orderly cost-benefit analysis or a thorough assessment of the repercussions of the proposed policy. Deficiencies are also evident in the work of the committees—there is no uniform, organized methodology for analyzing the problems, and there is no assessment of alternative solutions. Thus, the quality of the reports is uneven and depends on the composition of the committee and its chairperson.

The fourth chapter presents a theoretical framework for analyzing how various ways of financing political activity affect corruption. The model’s assumptions were examined through data on the regulation of financing political parties and elections in 85 countries. Indexes were formulated to characterize the regulation vis-à-vis a range of public financing methods, the extent of restrictions and prohibitions on private contributions, and the transparency of the reports. An analysis of the indexes indicates that the greater the public financing, the lower the perceived extent of corruption. Conversely, the tightening of prohibitions and restrictions on private contributions increases perceived corruption. This analysis also found that the strengthening of restrictions on private contributions, together with an expansion of public funding—a common combination in political finance reforms—tends to increase perceived corruption.

The fifth chapter surveys the development of laws governing the finance of political activity in Israel and compares the laws and the actual funding to what is customary in other developed countries. Public financing of political activity in Israel is among the most generous of the developed countries. Israel is exceptional in the scope of funding allotted to elections—the public outlay relative to the number of voters is higher than in any other country. In contrast, Israel has adopted all of the prohibitions on private contributions that are customary in the world, and the scope of contributions it allows for individuals is the lowest. The chapter also examines the factors behind the differences in election finance regulations in various countries and finds that the principal explanation for the differences lies in the legal tradition applied in each country.

The sixth and final chapter presents our recommendations for changing the formula of financing political activity in Israel based on the aforementioned research:

1. We recommend reducing state financing for both elections and ongoing political activity.
2. On the other hand, we recommend raising the permitted ceiling for individual contributions.
3. We propose maintaining all of the existing legal prohibitions on contributing to political activity.

By Avi Ben-Bassat

This chapter presents an analysis of the motives for structural reforms as well as of the balance of power between the players who influence the implementation of these reforms—the politicians, the regulators, and the stakeholders. The unique contribution of the research discussed here is its focus on the impact of disagreements among regulators and senior officials over the implementation of reforms. Professional disagreements over a proposed reform indicate to the politicians that there is a high level of risk associated with its implementation; therefore, these disagreements weaken their confidence in the proposed reform. Disagreement also makes the work easier for parties with vested interests and strengthens their effectiveness vis-à-vis the politicians. This research analyzes 32 attempts to reform the financial market in Israel. It finds that the extent of agreement between regulators and the intensity of opposition by interested parties have an important, significant impact on the likelihood of implementing a structural reform. Due to the disagreements and the power of those with vested interests, repeated attempts had to be made to approve reforms, and it took about ten years on average to implement each reform.

By Avi Ben-Bassat

The implementation of reforms is a long process that requires perseverance and persistence. We should not be deterred by failures, but instead draw lessons from them for the next attempt.
Comprehensive research and the study of efforts by other countries are of primary importance for both formulating the reform and marketing it to the decision makers and the general public.

The timing of the proposal for a new initiative, or even an old one, is a key factor in winning its approval. We must always be ready for the window of opportunity that will make it easier to advance the idea. The window of opportunity is a critical factor in drawing the attention of decision makers and the public, and this slot is usually open for only a very short time. Sometimes the timing can be anticipated, such as the date for submitting the state budget or the first year of a new government, and sometimes it is random. Therefore, it is important to prepare in advance all of the input needed to promote the desirable solution.

The process of marketing the ideas must include the entire chain of decision makers—the professional officials, the ministers, and the Knesset—but it is also important to mobilize the support of the media. The political system is very attentive to the response of the media, both as a reflection of public support for the idea and as an indication of the benefits the decision maker will reap if he adopts it.

We should place personal success aside and adopt the most effective track for achieving the objective. Credit should be left primarily for the decision makers.

By Momi Dahan

The goal of this chapter is to study the process of policy analysis in the Ministry of Finance, which plays a central role in the initiation, design, and implementation of economic policy in Israel. Previous studies have shown that in comparison to the practice in most countries, the Ministry of Finance has disproportionate power relative to the ministries that are dependent on it for budget allocations. This article describes three models of policy analysis used by the Budgets Division or on its behalf: internal work, an inter-ministerial committee, and a public committee. An examination of the three models from the perspective of the “bounded rationality” theory of decision making, a theory that appears in textbooks on policy analysis, indicates that the main weaknesses of policy analysis are more salient in the internal work of the Budgets Division. The division is not thorough in assessing the anticipated impact of policy measures on costs and benefits. In practice, the division has not developed professional infrastructure that is proficient in the accepted techniques of assessing expected ramifications. The inter-ministerial committees and the public committees do not operate according to a set methodology, so the quality of their analysis work is uneven, as it depends on the particular people who lead those committees. All of the models studied also lack a tradition of presenting a menu of alternatives to the government; in any case, the rules for choosing the best alternative are also unclear.

By Avi Ben-Bassat and Momi Dahan

This article offers a theoretical framework for analyzing the impact of regulation, such as limits on contributions, public funding, and the level of transparency, on the financing of political activity. Theoretically, it is impossible to know how the tightening of regulation of political contributions and the boosting of public financing will affect the level of corruption. Imposing limits reduces the legal contributions and their potential for corruption, but at the same time is liable to encourage the collection of illegal contributions that are associated with even greater corruption.

Empirical analysis shows that the tightening of prohibitions and limitations on private contributions significantly increases the perceived corruption in a broad cross-section of over 80 countries. This result is still evident when using a country’s socialist past as an auxiliary variable for the level of regulation. Conversely, public financing reduces the extent of perceived corruption, but this impact is significant at the required level only when using an auxiliary variable.

It is interesting to note that the tightening of regulation together with the expansion of public financing, a common mix in proposals for reforming legislation on the financing of political activity, tends to increase perceived corruption. This study found that boosting the transparency of financing political activity lowers the extent of perceived corruption, as predicted by the theoretical framework, but this impact is only significant if using an auxiliary variable.

Avi Ben-Bassat and Momi Dahan

The first part of this chapter analyzes the laws of party financing in Israel in comparison to the laws in effect in developed countries. The policy of financing politics in Israel is very different from the policy adopted in most of the developed countries. Israel imposes severe limitations on private contributions and compensates for this by awarding very generous public funding. Total public expenditure on financing politics in Israel relative to the number of voters is seventh highest among the developed countries. In particular, Israel is exceptional in the scope of financing elections—public expenditure relative to the number of voters is higher than any other country. At the same time, Israel has adopted all of the world’s customary prohibitions on private contributions, and the sum it allows individuals to contribute is one of the lowest.

In the second part of the article, the authors examine the contribution of key factors that help explain the differences between the laws of financing politics in about 140 countries whose level of democracy is defined as “free” or “semi-free.” The main explanation for the differences lies in the legal framework that exists in the various countries. Public financing and the strength of prohibitions and limitations on private contributions are higher in countries associated with the French legal tradition and the socialist legal tradition in comparison to countries that belong to the English legal tradition. Thus, it was found that the level of democracy has a positive and significant impact only on the index of direct public financing, while per capita GDP has a positive impact on both the index of direct public financing and on the extent of prohibitions and limitations on private contributions, though the significance of this impact is marginal.

The combination of financing that Israel has adopted, which includes extremely generous public financing for political activity and severe limitations on private contributions, is also exceptional in comparison to countries that have similar characteristics in terms of per capita GDP, the strength of the democracy, and the legal tradition.

Note: The recommendations in this article do not refer to primary elections, since we lack full data on the regulation of these elections in various countries—data that is required for this research.

The main objective of financing politics is to ensure the regular, fair, and democratic operation of political parties. For the process of mediating between the public and the political institutions to be effective, the parties need funding to enable them to analyze national problems, formulate a policy platform, and effectively and continually communicate the results of these endeavors to the voters, including in-depth information about the candidates for the various positions. One of the central issues in financing political activity is achieving the desirable mix of public and private financing. Each type of financing has its advantages and disadvantages.

Relying solely on financing from private sources is liable to distort the democratic principle of “one man, one vote.” The unlimited use of private resources provides an advantage to parties that represent the views of the wealthy and is liable to create an incentive for other parties to also promote the interests of the wealthy in order to garner contributions. Moreover, private financing is liable to induce corruption—the politicians are likely to grant favors to contributors at the expense of the public coffers. Therefore, many countries have prohibited contributions that could be conditioned on receiving a benefit in return—for example, contributions from business corporations and labor unions—and some countries have also limited the sum contributable by those who are entitled to provide them. The more limitations and prohibitions are imposed, however, the more likely candidates are to resort to illegal contributions, which entail greater corruption.

The second measure that many countries have adopted for reducing inequality in opportunities is to allocate public funds for political activity. Some have designated public funding for elections only, while others also finance political activity between election races. Yet, providing funds from the state’s coffers is costly and stirs public opposition. Moreover, since public funding is allocated based on equal criteria for all candidates, it intensifies the competition between them and increases the need for private financing in order to win the election.

The research we conducted led to several conclusions:

1. Public financing reduces the level of perceived corruption.
2. Imposing additional prohibitions and severe limitations on private fund-raising significantly increases perceived corruption.
3. Some countries have tried to counter corruption by strengthening the prohibitions and limitations on contributions and by compensating the candidates through very generous public funding. Our research, however, shows that the combination of strengthening limitations on contributions and expanding public financing tends to actually increase perceived corruption.
4. In a previous study,* we found that financial resources have a limited impact on the results of local elections.

A study of the current mix of funding in Israel indicates that Israel has chosen a very extreme one. Public financing for elections in Israel is the highest among OECD countries relative to the number of voters. If we add up all of the public financing for elections and ongoing activity, Israel is in seventh place. On the other hand, Israel is one of the strictest countries in regard to prohibitions and limitations on private financing. In fact, Israel has adopted all of the prohibitions and limitations used in this area, including even those that are relatively uncommon. The permitted ceiling for an individual’s contribution in Israel, for both ongoing financing and election financing, is the lowest among OECD countries.

In light of the conclusions of the research cited above, it seems that the mix Israel has chosen is likely to generate considerable corruption, while its impact on election results is negligible.
Consequently, we recommend reducing the amount of public financing for both elections and ongoing activity. We do recommend, however, raising the ceiling of permitted contributions for individuals. We propose maintaining all of the existing legal prohibitions on contributing to political activity.

The public committee appointed by the minister of justice in 2000, chaired by Judge Dov Levin, to study ways of financing political processes in Israel reached the conclusion that both the limitations on private contributions and the scope of public financing should be reduced. However, the members of the committee were divided regarding the optimum scope of this reduction.

* Avi Ben-Bassat, Momi Dahan, Esteban Klor, “Does Campaign Spending Affect Electoral Outcomes?” in Representativeness and Efficiency in Local Government (Jerusalem: Israel Democracy Institute, 2013) [Hebrew].

Full Book (Hebrew)

Prof. Avi Ben-Bassat was a Senior Fellow at the Israel Democracy Institute at the time of the writing of this book. He is a member of the faculty of the Economics Department at the Hebrew University of Jerusalem.

Prof. Momi Dahan is a Senior Fellow at the Israel Democracy Institute. He is the head of the Federmann School of Public Policy and Government at the Hebrew University of Jerusalem.