How the Yacimovich economic program would hurt Israelis

Shelly Yacimovich, a candidate who wishes to represent the poor and middle class, has just proposed a devastating economic program that would solely benefit the already privileged public servants and union members.

Displaying the politician’s typical predilection for spending other people’s money, she calls for an increase in government spending, to be financed by tax increases or budget deficits. I assume that the Greek, Spanish and Italian experiences that brought those countries to the brink of bankruptcy haven’t been part of Yacimovich’s education in economics.

The problem is exacerbated by the fact that, unlike those floundering economies, Israel would not be rescued from bankruptcy by the European community. We would go bankrupt alone and risk our survival as a nation. Israel needs a strong economy and strict fiscal discipline in order to provide security for its citizens.

If Yacimovich really wants to help the middle class and not just her Histadrut cronies, she will call for increased competition, reduction of import tariffs and decreased government spending.

Competition in markets ensures lower prices and better services. Every Israeli knows that opening the cellular phone market to competition has allowed households to save hundreds of shekels each month. Cell phone providers are fighting for customers, lowering their prices and increasing the quality of their services.

Unfortunately, this sector is the exception to the general Israeli rule.

Many goods and services – such as electricity, water, rail, air and sea ports – are still produced or provided by government monopolies, and Israelis pay much more for these products than Europeans or North Americans do.

The reason is simple and was made very clear by the Trajtenberg Committee.

Employees at government monopolies are paid in excess of a billion shekels a year, far above what they would earn in a competitive market. The salaries of these overpaid union members and government employees are financed directly by the middle class. Increasing government intervention as recommended by Yacimovich would only make the bill larger and erode further the standard of living of the middle class.

In fact, she is so opposed to competition and so protective of the monopolies and their overpaid employees that she wants to increase import duties. A reduction of import tariffs as recommended by the Trajtenberg Committee and implemented in part by Prime Minister Binyamin Netanyahu opens markets to foreign suppliers, thereby increasing competition and lowering prices. Without free trade, Israeli companies enjoy the status of monopolies or cartels, enabling them to keep prices well above the market prices. Trade liberalization undermines that market power and local industries must reduce prices to compete.

Unfortunately, today in Israel, international trade is entirely controlled by high tariffs, customs duties, quotas and regulatory requirements preventing the import of many products. Over the years, Israel has ignored its agreements with other countries in terms of free trade.

Although agreements were intended to give Israeli consumers access to cheaper foreign goods, local industry and major importers forced the government to increase the cost of imported goods, or prevent them from entering Israel.

This is exactly what happened when the Kedmi Committee recommended opening the retail food market to international competition. Olive oil producers not only opposed a reduction of tariffs but asked for increased customs duties to insure that imported olive oil would be more expensive than the locally produced oil. As a consequence of this lobbying, in the biblical land of olives, the price of olive oil is two to three times higher than in the United States and Europe.

Milk producers are also vehemently against lowering tariffs on dairy products. Their influence in political circles allows them to lobby in favor of protectionist laws that prevent imports or make them prohibitively expensive through high tariffs, condemning Israelis to having to pay 44 percent more for milk and eggs than citizens of other countries.

If Yacimovich really wanted to help the middle class and increase their standard of living she would be in favor of cancelling all import duties instead of asking for more protection for local monopolies that drain Israelis households by overcharging them for all basic products. As Milton Friedman wrote: “‘Protection’ really means exploiting the consumer.”

A trade liberalization program, similar to the one Israel launched in the early 1990s, would not only expose domestic industry to foreign competition leading to significantly cheaper prices but would also spur increased economic growth.

Economists agree that free trade creates jobs through economic expansion. Hong Kong, one of the richest nations in the world, illustrates this point. Within 40 years and with a totally free trade policy, Hong Kong saw its GDP per capita increase 25 fold and its employment 20 fold. Singapore, Taiwan and South Korea have also achieved stellar economic performance because of their trade policies.

Today, what Israelis need is not another politician who protects the unions, the tycoons and the government monopolies’ employees but a brave candidate who will fight for the middle class and open our country to competition and international trade. This would allow all Israelis to raise their standard of living and pay fair and affordable prices for basic products.

The writer is director of the Jerusalem Institute for Market Studies.