The Price of Business: Why Israel Will Never Be Rid of Red Tape

Farmers, manufacturers, builders and the rest only see their own narrow interests: Real reform might depress profits slightly, but everyone would benefit in the end.

Tomer Appelbaum

Every few months, the heads of a few trade associations make a pilgrimage to the Prime Minister’s Office, in order to vent and to whine about red tape, overregulation and what they call Israel’s anti-business climate. They wrap together a hodgepodge of issues and slogans and present it to Prime Minister Benjamin Netanyahu, in the hope that he’ll offer to help.

Last week it was the turn of Manufacturers Association of Israel President Shraga Brosh, Israel Farmers Association Chairman Dubi Amitai, Israel Hotel Association President Eli Gonen and Association of Contractors and Builders President Roni Brik.

According to a statement issued by the Prime Minister’s Office, several issues were discussed, including the “excess regulation and legislation of the business sector, economic growth and what [the representatives] say is a negative feeling toward the business sector.”

In a statement issued after the meeting, Netanyahu said he intended “to instruct the cabinet ministers, Knesset members and regulators to do a ‘rethink’ and end unnecessary regulation. Our main goal at present is to restore economic growth by enhancing its competitive capacity, increasing productivity and removing regulatory obstacles. Without competitive business activity, free of extraneous regulation, there will be no growth and we will not create new jobs.”

Netanyahu is right. Every word is true. Yet in the same announcement, Brosh was quoted as saying that “while other countries encourage their own business activity, Israel encourages the business activity of other countries by encouraging imports, removing barriers and discriminating against productive sectors in Israel.”

The only conclusion is that nobody in that room was listening to anyone else.

The manufacturers demand regulation where it suits them, such as exchange rates. They want the Bank of Israel to intervene in the market to buy dollars in order to weaken the shekel, increasing exporters’ profits. Yes, that’s intervention.

While the government wants to open the markets to competition and to remove barriers to competition, Brosh tells it to stop: We want import barriers, we want import quotas and we want protection for domestic industries. That doesn’t jibe with Netanyahu’s talk of the need to strengthen competition. You can’t heighten competition without opening Israel to imports. You can’t increase productivity without invoking the sword of competition.

One man’s regulation

The others in the room also mean something else, presumably, by “regulation.” To them, removing barriers and restrictions is regulation, when in fact it’s exactly the opposite.

Take Amitai, for example, who is a lobbyist for Israel’s farmers. The agricultural sector is based entirely on regulation: Crop quotas and central planning prevent real competition.

Amitai recently fought a Finance Ministry proposal to abolish the agricultural associations — the Egg and Poultry Board, the Vegetable Growers Association and the like — which have hundreds of employees and only jack up prices at the expense of both farmers and consumers.

How can Amitai complain about regulation? What the treasury is doing is deregulation, reducing intervention that increases prices. When Netanyahu says he wants to remove regulatory barriers, we can assume he means quotas and customs fees, as well and the trade associations that dictate farmers’ actions and diminish competitiveness.

That doesn’t mean the government is entirely in the right. It isn’t. Governmental instability means that conflicting policies are adopted piecemeal, causing havoc and failing to solve the fundamental problems.

The housing market is an extreme case of this: In the past several years there have been multiple attempts, some of them bizarre or even desperate, to bring down home prices. None has worked.

There are many other instances of unwieldy, confused government policy and behavior that have hurt both business and consumers. But don’t let the cries of “hyper-regulation” confuse you into thinking that business leaders are only gunning for regulations that makes their lives more complicated. They are more upset over regulation that would open up the economy and force them to become more efficient.

Who benefits?

It is true that a series of issues in recent years has soured the public against big business. But overall, the changes proposed by the government would help both the economy in general and business in particular.

If the framework agreement with the natural-gas companies were made better, the main beneficiaries would be the thousands of businesses that will get cheaper energy. If the biggest banks were to sell off their credit-card companies, small businesses that pay through the nose to the banks and the credit-card companies would benefit. The buyers of the newly independent credit card companies could establish online banks. The main beneficiaries of the decline in the cost of mobile plans are the small businesses, the plumbers, the real estate brokers, the taxi drivers, architects and other small fry who use to pay 700 shekels a month for cellphone service and now pay 100 shekels.

Even diluting business concentration serves mainly small- and medium-sized businesses that are struggling thanks to the big business pyramids’ stranglehold over the economy. The money that used to serve the tycoons has been diverted to the small and medium businesses. Even Bank of Israel regulation is somewhat connected, because it forced the banks to hold more capital and to allocate their capital more efficiently and more broadly, instead of lending most of it to a handful of overly adventurous tycoons.

The government has a long way to go in scaling back bureaucracy and ineffective regulation and in creating the governmental stability that would enable it to see its initiatives through to completion, rather than have them vanish with the next administration.

There have been plenty of initiatives by the previous Netanyahu government that didn’t get picked up by the new Netanyahu government. (They include then-Health Minister Yael German’s plan to regulate the public health system and the Alalouf Committee to Fight Poverty in Israel.) But it would be a mistake to think the lobbyists for agriculture, the banks and industry really want to roll back regulation. They don’t.

They don’t want reforms, but they do want the regulation that works in their favor and stymies competition.