Executive Summary

Israel’s 'Capitalist’ Government Is Strangling Businesses

The coalition is supposed to be wall-to-wall free-market ministers, but a closer examination of policies reveals it’s big government as usual.

It is commonly assumed that the coalition comprises four purely free-market parties determined to make Israel’s economy competitive, private and based on capitalist principles. If you take at face value everything said in public by Prime Minister Benjamin Netanyahu, Finance Minister Yair Lapid, Economy Minister Naftali Bennett and Justice Minister Tzipi Livni, it is hard to find a word in favor of the government managing the economy. Sometimes, they go so far as to attack the “populism” aimed at the private sector. Such attacks are leveled primarily when they appear at a gathering of business leaders and are trying to make a good impression.

Netanyahu is a great believer in the market economy, and staunchly supports competitiveness and opposes red tape. He loathes the powerful trade unions that control the main switches of the economy. Bennett, who comes from the private sector, completely identifies with the prime minister while Lapid and Livni have not been caught on even a single occasion coming out with a socialist statement, unless it was part of election campaign propaganda or an attempt to hitch a ride on the social protest movement.

On the surface, Israel enjoys a “dream team” government for advancing a truly market economy. Bennett once called it a “government of opportunities.” But is this the reality?

But when you examine the real economic map, in every direction you look the government is a major feature. Take, for example, the issue of land. After six years of rising home prices − a function of very low interest rates and too little land being rezoned for development − you would have though the state would have stepped up the pace of tenders for land, since it controls 90% of it, especially in areas that are in high demand. But this is not happening.

Lapid’s Finance Ministry offers lovely presentations on plans for marketing land for the construction of 60,000 homes a year, but in practice the situation is quite different. The Israel Lands Authority this past week published a report showing that it had tendered land designated for only 16,000 homes in the first half of the year. Of those, only 13% were in the greater Tel Aviv area and center of the country. In annualized terms, that means 32,000 housing starts for the year.

The gap between the government’s plans and their execution has never been wider. But the problem goes far beyond the realm of land and is visible across the real-estate ecosystem; for example, in the area of taxes and levies. According to calculations made by the Dekel Group, a firm that specializes in measuring construction costs, the government collects about 40% of the cost of an apartment in the form of taxes and levies.

Is there a free and competitive market when the government owns the land, is its chief regulator and the primary beneficiary of the taxes collected from the entire system? Can the plethora of presentations by the Finance Ministry and the Housing and Construction Ministry overcome a fossilized, complicated system and the abundance of interested parties − including the Finance Ministry and the Bank of Israel − that want the prices of apartments to stay at their present level?

Let’s move on now to the electricity market. There as well, the government, through its actions and blunders, is strangling the economy. The Finance Ministry’s accountant general, Michal Abadi-Boiangiu, has voiced considerable criticism regarding the Israel Electric Corporation and its conduct with regard to both the corporation’s gargantuan debt (approximately NIS 70 billion, or about $19.7 billion) and its inefficient and opaque management style.

Yet, lo and behold, the very same accountant general who last year authorized an increase in the government’s financial guarantees for the IEC is criticizing the price they are imposing on the economy. Hundreds of potential exporters are being deprived of the benefit because the full allotment of guarantees has gone to the IEC.

You could, of course, blame the generations of senior managers of the IEC. However, the blame for the blunders that have caused the IEC to reach a situation where it is simply too big to fall must be placed squarely on the shoulders of the state. Because of all the blunders, the public is in the meantime not enjoying the benefits of the cheap natural gas being used to power IEC generators.

All the talk about reforms in the electricity market is fueling dozens of conferences, but no progress is being made. Who is responsible for this situation? One could, of course, blame the trade unions, but the accusing finger should be pointed at the government, which owns the IEC and has the authority in theory to do what it wants. There is, however, no proof as yet that the government has either the ability or will to exercise it.

And what about the private sector? In Israel there are about 450,000 micro-, small- and medium-sized enterprises and they employ 55% of the labor force. Moreover, everyone knows that the source of growth and jobs is small- and medium-sized businesses. So what does the government do? It is formulating legislation that will strengthen the powers of the Small Business Agency so it can act as an advocate for small businesses opposite the government itself. In other words, the government isn’t waiving its right to torment small businesses; all it is doing is to provide them with a lawyer who will deal with the problems the government refuses to solve.

Bennett believes that one of the biggest problems small businesses face are the local authorities, which issue the permits and licenses they need to operate and provide most of the services they need. He is launching an index that will rank local authorities by how user-friendly they are for small businesses, which is a wonderful initiative. But it would be even more wonderful if he would also launch a similar index that measures the effectiveness of the central government, such as the Israel Lands Authority, the Interior Ministry and the Tax Authority. It would also be an excellent idea to rate them on how quickly they pay private-sector suppliers, which has a serious impact on the ability of small businesses to survive hard times.

Do you still remember Netanyahu’s parable of the fat man and thin man? A decade ago, Netanyahu spoke of the thin private sector forced to give a piggyback ride to a fat, bloated public sector and about the need to change to fostering a creative, productive business sector. Such a change did take place for a certain period, but then it abruptly came to a halt. The governor of the Bank of Israel, Karnit Flug, has revealed that not only has the process been halted, it has actually reversed. Analyzing the growth in the number of jobs, she found that all of the growth in the previous year was in public services.

This trend has to set off alarm bells. To achieve sustainable growth, the private sector must grow. The engine for the economy’s growth is in a competitive, innovative, open private business sector, not in the public services. But the private business sector can’t grow if the government strangles it with guarantees for IEC, reforms that are never completed, total control of land and its abuse of small businesses.

Reuters