Something illogical is happening in Israel: On the one hand, consumers are experiencing high food prices, and on the other taxpayers and consumers are required to give huge subsidies to the agricultural sector.
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Agriculture was a top priority for the State of Israel during its early years and was needed to develop specific areas of the country for geopolitical security, avoid food shortages and provide employment for new immigrants.
Although agriculture today represents only 2.6 percent of the GDP and 6% of the work force, the same policies protecting agricultural producers are still in effect and are hurting consumers and taxpayers.
From struggling in the early years of the state, the agricultural sector is today flourishing and doesn’t need more subsidies from Israeli citizens. Israel produces 95% of its own food requirements and the total export of agricultural fresh produce and processed food has almost doubled from $1.2 billion in 2003 to $2.4b. in 2012. Agricultural exports have increased over the past 20 years by 3% annually, growing at a faster pace than any other sector of the economy.
Exports are flourishing partly because Israeli citizens are de facto subsidizing foreign consumers. By various mechanisms such as compensation for surplus production, subsidized water prices, investment support and direct payments, Israeli producers can export products at below-market prices; the difference being paid by Israeli consumers and taxpayers.
While the overall level of agricultural support has been falling, the OECD shows that the share of the most distortive types of support has increased over the past two decades. High barriers to import for agricultural commodities have pushed domestic prices above international levels and resulted in high market prices.
High tariffs on imports of the majority of agro-food products is the most costly policy to consumers. Average tariffs in the dairy sector are 108% and can in some cases reach 160%.
The current level of agricultural producer support, an indicator of the annual monetary value of gross transfers from consumers and taxpayers to support agricultural producers in Israel is 17% of farmers’ gross receipts, below the OECD average of 23%, but considerably higher than in the United States (10%).
However, transfers from consumers alone, a measure of the cost to consumers arising from policies that support agricultural producers by raising domestic prices, is higher in Israel at 18% compared to the OECD average of 13%. Looking at specific products, the impact on consumer prices at farm gate is even higher and reaches 35% for milk, 16% for eggs and 42% for beef and veal.
The typical Israeli household’s monthly budget for food is NIS 2,251 or 16.1% of its total expenditures.
However, the poorest households spend relatively more on food and their food expenditures represent 22.2% of their total budget. Taxing consumers through barriers to imports actually hurts the poorest much more than the well-off households. Every year the poorest 20% of households transfer NIS 517 million to farmers by paying in excess of the competitive price.
Interestingly enough, farmers are quite well off economically and in 2008 agricultural incomes were about 50% higher than the national average. It is a typical case of the poor subsidizing the rich! Our government and policy makers are well aware of this problem. Ahead of deciding whether or not to allow Israel to join the OECD, a report recommended Israel privatize agricultural land, raise water rates, and reduce protectionist quotas on agricultural imports.
But the farmer lobby is so powerful in Israel that the government is more heavily involved in the agriculture sector than in virtually any other sector, mainly through protectionist quota policies. Israel’s import tax on agricultural produce is three times higher than that levied on non-agricultural products.
Reduction of indirect support and import barriers would not only lead to significant savings for consumers, but would also increase productivity and competitiveness, which would lead to further price declines.
Farmers themselves will benefit from an increased demand due to lower prices which will in turn increase their revenues.
Corinne Sauer is executive director of the Jerusalem Institute for Market Studies, Shaul Kirshenbaum is a research fellow there.