More competition, less red tape cure to nation's ills says think tank

The Taub Center for Social Policy painted an tough picture of the state of Israel's society and economy its annual "Picture of the Nation" report, released Wednesday.

June 18, 2015 18:38
3 minute read.
Construction (illustrative).

Construction (illustrative).. (photo credit: REUTERS)

The Taub Center for Social Policy painted a tough picture of the State of Israel’s society and economy in its annual “Picture of the Nation” report, released Thursday. To tackle some of the most pressing issues, the center recommends an oft-heard antidote: reduce regulation and increase competition by making it easier to import.

“Many Israeli households – across sectors and income levels – have difficulties covering their monthly expenditures,” the report said, noting that food prices have soared in Israel (up 19 percent from 2005 to 2011) relative to the OECD (where they fell 16%). Housing prices increased over 60% from 2000 to 2014.

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Taub researcher Eitan Regev noted that many of the problems Israelis face, especially concerning the cost of living, would be eased if there were more competition and less red tape.

“There are 37 different regulators in Israel that are in charge of different aspects of imports,” he said Thursday. As an example, he points to pineapples. In Israel, he says, a pineapple will cost NIS 30-NIS 60, while in Europe it costs just a euro (about NIS 5), despite being of far higher quality.

“You know why that it is? It’s because they grow it here.” he said. “Maybe we shouldn’t be growing pineapples here, because we don’t have the right climate.”

In the Taub report, Regev found that food is clustered into two groups in Israel. The food groups that had a high level of import competition (fish, cooking oils, tea, coffee, cocoa and sugar products) represented a lower share of expenditure on food, while the categories that didn’t have much import competition (meat, milk, fruit, soft drinks) represented the opposite. In other words, more competition means lower prices.

Recent reforms to open up the food market were steps in the right direction, he said, but had not gone nearly far enough; an outcome he attributes to strong lobbying and protectionist tendencies toward local farmers.

On housing, too, Regev applauded early steps by the new government to increase supply. Finance Minister Moshe Kahlon is pushing to increase taxes on real estate investments, hoping to encourage landlords (who tend to be in the top 20% of the socioeconomic stratum) to put apartments up for sale. Such tactics, he said, shouldn’t disrupt the rental market too much, because they will be reducing the number of renters as young couples buy new homes.

“The people who can’t manage are the younger generation. We’ve seen a rise from 42% to 54% of young couples who don’t own a home,” he said.

In the long-run, he added, steps have to be taken to increase the number of housing units built, a problem given that Israel’s bureaucracy makes the process of getting new units onto market last some 13 years.

To do that, Kahlon will have to make sure that local authorities, responsible for building the right infrastructure, have incentives to get more housing on the market.

Currently, they bear the cost, but reap few of the benefits, a problem that the spate of “umbrella agreements” former finance minister Yair Lapid embarked on was meant to address. Such agreements guarantee funds for the infrastructure up front.

Regarding Israel’s red tape, the cabinet appointed a committee to explore ways to cut the overwrought bureaucracy and to make recommendations in the coming months. Even so, said Regev, it won’t be easy to follow up, especially given entrenched business interests and territorial regulators within the government.

“Unless you have a minister who’s really void of external interests, it’s a problem,” he said.

In late May, the center put out a more comprehensive list of policy recommendations for the new government, which included increasing support levels for the poor elderly, creating incentives for savings, establishing a law for the provision of social services, and increasing government funding of health services.

It also encouraged increasing negative income taxes and imposing new taxes on rental income.

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