Post 14: Priorities: Focus on Government and Market Failures

[eJP note: This post, by Gidi Grinstein, was originally published on May 13, 2008, as part of a series on Philanthropy in Israel. With this year’s Jewish Funders Network conference taking place in Israel, we thought it would be timely to rerun the series.]

The philanthropy of Diaspora Jewry in Israel needs to undergo a qualitative leap in its impact on Israeli society. One of the elements of this leap would be to focus on government and market failures and avoiding being ‘diverted’ and ‘seduced’ to do otherwise.

The logic has been laid out in previous posts of this series. Jewish philanthropy in Israel is facing a double-challenge of expanding options and diminishing marginal impact (see posts 3-6), which requires a qualitative response (see post 7). One of the elements of this response is better focus.

In this post I argue that the most important secret for Diaspora Jewish philanthropy to redeem its center stage role in Israeli society by providing unique and substantial value is to focus on areas that are subject to market, as well as to government failures.

Wikipedia defines ‘market failure’ as a condition where market forces inefficiently allocate goods and services. In other words, a sector of the society is overcharged for certain services or does not have enough of certain goods. Some of the reasons for market failures are excessive market power such as due to the existence of monopolies or cartels; benefits or costs to third parties such as in the areas of public health, environment or education; or due to the inability of a market to emerge such as in the areas of Israel-Diaspora. This is by no means an exhaustive discussion of market failures but I hope it is enough to provide a good sense of them.

A Government failure occurs when the government intervention or lack thereof denies certain sectors of products or services at a market price. There are many different kinds of government failures. In this context, the most relevant are government failures that are an outcome of powerful political incentives that deny adequate response to public needs. In other words, these are areas where the government can not intervene effectively due to structural and institutional reasons. At the same time, areas where the government will not take action because of priorities do not represent government failures.

A sophisticated philanthropist will be able to tell whether an area is subject to market as well as government failure. If a problem can be addressed by purchasing a product or a service at market price there is no market failure. If a problem can be addressed by the government, there is no government failure. If neither is true, then one faces not only a dual failure but also a significant opportunity for a transformative philanthropic intervention.

For example, Birthright Israel is such a project. On the one hand, there was a clear need emanating from ample evidence that a visit to Israel will positively impact all parameters of Jewish identity of young adults who were willing to come to Israel but unwilling to pay the cost of a trip. On the other hand, Israeli politics would have rendered offering such a free trip impossible and there was no market that could have offered no-cost travel to Israel. Consequently, a massive philanthropic intervention has made Birthright Israel into a project that may impact the entire Jewish world.

Another such example is transitions. Politicians have a hard time driving difficult changes. Their incentives are for short term, sectarian and populist conduct. This is particularly true in Israel where our electoral system generates short and unstable tenures and a fragmented legislature and executive. Hence, providing a safety net to individuals, households or communities through a painful yet necessary change is an example of a philanthropic intervention in an area that is subject to government and market failures.

A third example is public innovation and experimentation. Here too, the public sector with its red tape and legalistic mindset has a hard time providing the conditions for social and societal experimentation and entrepreneurship. Philanthropy may be critically important here.

There are many activities that may fall in grey areas. What should be the philanthropic position with regard to building university laboratories, hospitals, museums or public libraries? What about the operating costs of these institutions? How should we view food security? There are no clear answers to these questions. But there should be serious consideration and debate on where to draw the line?

Philanthropists have to remember that it is easy for politicians to treat them as a source of additional funding to cover their deficit. It is a conscious political decision of the government not to build enough classrooms or to deny fitness centers from army bases or furnishing air raid shelters. Philanthropy can never fill this bottomless pits of government needs neither should it try to.

A major challenge for philanthropists is to avoid what Ron Heifetz and Marty Linksy call the ‘diversion’ and ‘seduction’ by the Israeli Government and its agencies, by municipalities or by the Jewish Agency. Taking a meeting, spending quality time and offering praises and honors are forms of seduction. Their price is compromising the prospects of making a transformative impact in Israel. A dollar spent on a project the government will not do is a dollar which is not spent on a project that neither the government nor the business sector can do. Furthermore, by definition, the government will not and can not ask philanthropists to spend resources on its own failures. Identifying government failures is up to the philanthropists.

Finally, real philanthropic leadership is rooted in saying yes to the right projects while rejecting others. Projects that focus on government and market failures hold the promise of a possible transformative change of priorities, habits or patterns that constitutes leadership. Such projects should be the focus on Diaspora Jewish philanthropy.

Gidi Grinstein is the Founder and President of the Reut Institute.