In the wake of public outcry, Israel’s government announced a new plan to cope with an old problem—the high cost of living. Though Israel has come a long way economically from the 1950s, it still ranks as one of the most expensive places in the world to live. Will this plan succeed where past schemes to rein in prices failed? Many analysts remain pessimistic, saying the proposals ignore the root causes that put upward pressure on prices.
“From time to time, people start to say they aren’t happy. It’s not clear what started it, but the government is for the moment very afraid of it and wants to do something. But what it does is absolutely not related to the cost of living,” Elise Brezis, professor of economics at Bar-Ilan University and director of the Azrieli Center for Economic Policy, told JNS.
Unlike the June 2011 protests that began over the cost of cottage cheese, which rose 45% in the space of three years, observers can’t point to a specific catalyst that started the current debate.
On Feb. 9, during a nationally televised press conference, Israeli Prime Minister Naftali Bennett, Minister of Finance Avigdor Lieberman and Minister of Economy Orna Barbivai introduced their plan. Estimated cost: 4.4 billion shekels ($1.4 billion).
The plan has several elements. First is a tax break for middle-class, working families with children, ages 6 to 12 (230 shekels, or about $70, a month per child). Second is a cut in import taxes for basic commodities, including foods like olive oil, meat and fish, as well as an assortment of other items, from kitchen utensils to furniture to car parts. In addition, the plan increases the subsidy for children’s day care and, to help relieve rising energy costs, cancels a coal tax.
To Brezis, the plan misses the boat because it fails to address restrictions on goods imported into Israel. Those restrictions consist of tariffs, quotas and non-tariff barriers (NTBs). By keeping imports out, they drive up prices for Israeli citizens, who must either pay a premium for those goods or rely on domestic products, whose costs are more than they would be if they faced greater competition.
“Reduce all the tariffs, all the quotas and all the NTBs—they are adding 40% to 80% to the cost of most products,” she said. “That’s the first thing the government has to do. It’s very simple. When they do that, then there will be a big change. The rest is commentary.”
NTBs come in various forms. One is Israel’s import standards where products must pass tests (literally) to meet country-specific criteria before they can be sold in the domestic market. Brezis said standards proved to be an effective tool to protect domestic goods during the state’s early years, but they have long since outlived their usefulness, serving only as a barrier to competition from imported goods.
‘It’s very difficult to import stuff’
Michael Sarel, a senior fellow at the Kohelet Policy Forum, as well as former chief economist and director of state revenue, research and international affairs at the Ministry of Finance, is not as down on the government’s plan as Brezis.
“It was better than the alternatives,” he said, noting that some politicians were calling for price controls. “Instead, the government did two things which I think are much better. One was to reduce the import duties on some products. The second was to increase the disposable income of middle-income families with children. It doesn’t really deal with the cost of living in the sense of the prices of the products, but it increases the disposable income, so at least it will be easier for these families to deal with the high prices.”
Still, Sarel agreed that the plan doesn’t cut to the heart of the problem and that Brezis is correct that doing away with import restrictions offers the single biggest bang for the buck for reducing Israel’s cost of living.
“There are a lot of import restrictions—not really import duties—but non-tariff barriers [NTBs]. It’s very difficult to import stuff. You have to fill out a lot of forms. There is a lot of bureaucracy; there’s a lot of regulation. You have to test a sample of everything you’re importing,” he said.
That said, “the standards make it difficult to import and raise costs,” added Sarel. “It reduces competition in the domestic market because domestic manufacturers are protected. They don’t have to fear imports.”
He said small importers can’t navigate the Israeli bureaucracy, which is an expensive process. As a result, only large importers are able to bring products into Israel.
“Do you know that we have a standard for tea bags in Israel different from Lipton? It’s ridiculous,” he pointed out. “The only reason is because that was exactly the barrier Wissotzky needed. They created a standard for Wissotzky.” The Wissotzky Tea Company, founded in Moscow, opened a Middle East branch in 1936 and long ago moved its headquarters to Tel Aviv.
“So now is a good moment to say, ‘All the standards out—because sorry—we can trust that the E.U. standards are OK,’ ” she said.
Brezis noted that some Israeli standards, tariffs and NTBs have been eroded thanks to free-trade agreements signed over the years, notably with the United States, the European Economic Community and then the European Union, “but we still kept a lot.”
‘There is a cartel’ for everything
If the problem is clear to economists, then why is it so difficult to remove import restrictions? The answer is vested interests. “The business sector knows how to defend this regulation. And they, of course, oppose most measures to liberalize imports,” said Sarel.
While import restrictions are the key issue, Sarel said other important factors contribute to living expenditures. “In Israel, not only do we have a lot of protections for the agricultural sector, we have a very peculiar way of protecting it,” he said, noting that the protections come not in the form of subsidies (although there are some) but rather in allowing the farmers to form “legal cartels.”
“There is a cartel of eggs. There is a cartel of vegetables. There’s a cartel of milk. For each one of these agricultural products, there is a cartel. And they don’t have to compete with imports because imports are very restricted. Of course, this increases the price of food,” he said.
Reform is difficult because the agricultural lobby is powerful in the Knesset and organizes quickly, said Sarel, adding that “now there is another attempt at reform and it seems that there is some chance that it will succeed.”