Bank of Israel Chief Urges Government to Exploit Strong Economy to Pare Back Red Tape

Karnit Flug cites data showing unemployment at its lowest in 33 years, unexpectedly strong economic growth figures for the third quarter and wage growth running at 3% annually.

Bank of Israel Governor Karnit Flug at TheMarker Socioeconomic Conference, November 22, 2016.
Olivier Fitoussi

Using the story of a kibbutz entangled in red tape as it tries to open a factory, Bank of Israel Governor Karnit Flug on Tuesday urged the government to take advantage of the country’s strong economic growth to pare back rules and regulations.

Speaking at TheMarker’s Socioeconomic Conference in Be’er Sheva, Flug cited data that came out this week showing unemployment at its lowest in 33 years, unexpectedly strong economic growth figures for the third quarter and wage growth running at 3% annually.

“The Israeli economy is in a good place, especially from the perspective of a relatively weak global economy,” she said.

But she went on to cite Israel’s low ranking in the World Bank’s Doing Business survey, which measures how difficult it is to start and operate a business in countries around the world. She pointed to the Organization for Economic Cooperation and Development’s Trade Facilitation index, which puts Israel second to last among member countries, ahead of Greece.

“Each regulator does his work faithfully, [but] every regulator looks mainly or entirely at his own domain and doesn’t want to take risks in the area he’s responsible for,” Flug aid. “No one sees or internalizes the price businessmen and the economy pay for delays.”

To illustrate her point, Flug told the story of an unnamed kibbutz in the south of the country that had closed a factory it built in the 1970s and 1980s. Three years ago, the kibbutz found a commercial tenant to rent the structure, but he needed a business license.

“What does the kibbutz need to do to get the permit?” Flug asked. It tuned out it needed to install sprinklers throughout the building at a cost of 700,000 shekels ($181,000). The rules require the sprinklers to have an independent source, which cost another 450,000 shekels. The kibbutz’s pool, with 450 cubic meters of water, was too small.

Moreover, the tank needs not one but two pumps in case one breaks down and each pump needs its own generator in case there is also a power outage. Weighing 1,500 tons, each tank needs its own concrete platform – and the platform requires a special building permit. And each building permit needs approvals from the Antiquities Authority, the Environmental Protection Ministry and the Health Ministry, which requires a sanitary program even though the water isn’t for drinking.

Then there was 120,000 shekels for a fire-warning system, 150,000 for a fire station and smoke vents for 100,000.

“Let’s now look at the issue of civil defense. The factory isn’t near the Gaza Strip but it is in the south and it needs to be protected against rockets. The Home Front Command requires the factory to build a central fortified room, including a gas-filtering system, of 100 square meters at a cost of 2 million shekels,” Flug said. “Of course, these rooms require a building permit.”

When the kibbutz began building the tank last summer, it received a stop-work order for lack of a building permit. Even though the kibbutz has been trying to get one since 2014 because the tanks’ permits are in the same permit as the protected room and the Home Front Command hasn’t given its approval.

Flug said cutting red tape had the advantage of other critically needed reforms, like more investment in healthcare and public transportation, because it would not involve extra costs for the treasury. Apart from reducing barriers to imports and aligning Israeli product standards with those of other developed countries, Flug urged a one-stop-shop structure for business permits.