Bureacracy and a bogged-down Israeli economy: How the government is responding

Two weeks ago, I published a column in the Wall Street Journal arguing that Israel’s economy was lagging behind well behind developed world standards and that its somnolent, often obstructionist bureaucracy was the most importance hindrance to economic vitality. Some days later, I received a call from Amit Lang, the director-general of the Israeli Ministry of the Economy, and we talked for quite some time.

To my surprise, Lang did not challenge either my thesis or the evidence I cited, but he was in no way defensive about it. Instead, he laid out the steps that are being taken to address the problem. The new government, he said, was committed to improving the metrics of performance by 25 percent over the next 5 years. To accomplish this, each ministry would be required to submit a detailed plan covering all the bureaucratic and regulatory matters within its sphere of jurisdiction. A special unit within the prime minister’s office would coordinate these plans and oversee their enforcement.

In response, I pointed out that a 25 percent improvement would leave many key indicators far short of international benchmarks. For example, it takes on average 6 working days in the U.S. to start a new business. The OECD average is 13 days. In Israel, it takes 34 days. So a 25 percent improvement would bring Israel down to 26 days, still twice as long as the OECD and four times as long as the U.S. Even worse, completing the process of obtaining construction permits takes on average 11 years in Israel, compared to just months or even weeks throughout other western countries. The necessary changes could not be incremental; they had to be structural.

Lang did not contest the point. Instead, he gave exactly the answer I would have given when I was serving in the Clinton White House: We have to start somewhere, and besides, the 25 percent is a floor, not a ceiling. Ministries are free to go father, and they will be encouraged to do so.

Lang went on to say that the government was also concerned about the obstacles to economic growth and living standards created by Israel’s import barriers and that a committee had been created to address this problem. Within a year, non-tariff barriers will be reduced or even abolished outright, and Israel’s import regime will be harmonized with US and OECD norms.

A report issued on June 18 by the Taub Center for Social Policy Studies in Israel, “A Picture of the Nation 2015,” underscores the urgency of this effort. Since 2005, the Center finds, the difference in food prices between Israel and the OECD has soared. Meat, poultry, fish, and bread are all more than 20 percent more expensive than the OECD average. Dairy and eggs are 51 percent higher; beverages, 56 percent.

The Center is blunt about the reasons for this huge gap: “The food industry in Israel is quite monopolistic, and most of the food that is sold is produced by a small number of companies.” The industry has used import barriers to protect its monopoly, with the result that imported food represents only 16 percent of household food expenditures, compared to 40 percent for furniture and nearly 70 percent for shoes and clothing. The import share of the most widely consumed food groups is especially low, reducing competition and contributing to the high cost of food in Israel.

The link between government policy and the well-being of average Israeli households could not be clearer, and it will be interesting to see whether the new government is up to the task of uprooting these long-entrenched monopolies.