Netanyahu Gets The Hump With Cartels

The Worlds Most Expensive Camel

Brian of London here. Over the summer Israel saw it’s own “social justice” protests in the centre of it’s major cities. These culminated in huge free rock concerts that, by the end, were able to draw numbers that were so huge they became insignificant. Yes, re-read that sentence: the numbers were so huge they were insignificant.

In a country of (recently reported to be) 7.7 million, If you have 10,000 people protesting something, there’s a good chance they are all pretty solidly aligned with whatever you’re protesting. If you have 50,000 you can be fairly sure a good few are just out for a jolly. When you have 300,000 in Tel Aviv alone turn up you have to look at other reasons people are coming.

And the number one reason they drew 300,000 in Tel Aviv and a further 100,000 in other cities? Free music! I think it’s fair to say the final protest on a Saturday night pulled in pretty much every available person in Tel Aviv who didn’t have an issue with child care. And the headline act was Israel’s current top male singer: Eyal Golan. Yes, he’s come on a bit since playing at my wedding a few years back (I’m not joking).

But there are massive economic issues here and the cost of living is truly astonishing. Wages are not high and I can assure all of you in Europe and the US that it is much harder to make ends meet in very expensive Israel. All this has just been a big set up for the following article which is not available in full but this extract is pretty good. I’ll add something about banks at the end.

Israel Matzav: Can Netanyahu break the cartels?.

The primary issue is the high cost of living. A study published by the BDO Ziv Haft consulting company in 2010 found that an average Israeli home costs the equivalent of 114 average monthly salaries—as compared to 90 in France, 71 in Britain, 60 in the United States, 54 in Germany, 42 in Switzerland, and 30 in Sweden. Rents are similarly high in terms of purchasing power, as are car prices: BDO found that a Mazda 3, one of Israel’s most popular cars, costs an Israeli 14 average monthly salaries, compared to only four monthly salaries in the United States and six in western Europe. Even basic foods are expensive: the Wall Street Journal reported in June that cottage cheese (an Israeli staple) was more than twice as expensive in Israel than at a British supermarket. Consequently, even middle-class families often find it hard to get through the month, and 13.4 percent of working families found themselves under the poverty line last year—almost double the 7.6 percent rate in 1995, according to Tel Aviv University’s Taub Center for Social Policy Studies.

But high prices aren’t the only domestic issue worrying Israelis. Failing schools are another major concern. On the Program for International Student Assessment’s last global exam in 2009, Israeli 15-year-olds ranked below the OECD average in all three subjects. Out of 64 countries, Israel placed 36th in reading and 41st in math and science. Consequently, students enter university poorly prepared: as Technion President Peretz Lavie told Ha’aretz last year, there has been a “huge decline in [college] applicants’ level of scientific knowledge,” as well as in their writing skills. This requires universities to devote more time to remedial instruction rather than imparting new knowledge, so students graduate at a lower level. Israel’s economy depends almost exclusively on its human capital, so this clearly doesn’t bode well.

It also increases the cost of living, as parents who can afford it typically spend thousands of shekels a year on private tutoring to compensate for what their children aren’t learning in school. And that’s on top of the thousands of shekels required by their “free” public education. Israeli public schools don’t provide textbooks, so parents have to buy them; there are also mandatory fees for “extras” such as field trips and class parties.

Health care is a concern as well. An OECD report found that Israeli hospitals have the highest average occupancy rate in the West: 96.3 percent, due mainly to the shortage of hospital beds (only 1.9 per 1,000 people, the third-lowest ratio in the OECD). This means that certain wards, especially pediatrics and internal medicine, are perennially overcrowded. In January, for instance, the Israel Medical Association reported that wards at several hospitals were operating at almost 200 percent capacity. Israel also has only 4.5 nurses per 1,000 people, less than half the OECD average (9.1 per 1,000). Back in 1999, Ehud Barak was elected prime minister in a landslide after promising to “get the old woman out of the hospital corridor,” where overflow patients are routinely stashed. Twelve years later, she’s still there.

Crime is another growing worry. Although Israel’s crime rate isn’t high by international standards (its murder rate, for instance, is similar to Europe’s and lower than America’s), rising organized crime and gross police incompetence have produced rising anxiety. The organized-crime problem grabbed public notice in 2008, when Margarita Lautin was killed while sitting on a beach with her husband and children because a professional hit man’s bullet missed his underworld target. And police incompetence makes headlines repeatedly, as when serial rapist Benny Sela escaped police custody in 2006, or when a policeman stood and watched as a terrorist gunned down high-school students at a Jerusalem yeshiva in 2008. As for property crime, it’s a standing joke in Israel that police complaints are filed only to collect the insurance. Indeed, police admit they solve only 1 in 100 break-ins.

Corruption? Israel ranks in the bottom third of the OECD on Transparency International’s index. Stifling bureaucracy? An OECD study published in July ranked Israel 29 out of 37 countries in terms of the bureaucratic burden on start-ups, behind such luminaries as Italy and Russia. There’s the low workforce participation rate: 57.4 percent last year, compared to an OECD average of 72.4 percent. And the list could go on and on.

Yet what Israel really needs is more competition and less government control, not the opposite. This is most obvious with regard to the protesters’ main gripe, the high cost of living. Housing prices, for instance, are high largely because the state owns 93 percent of Israel’s land, which it doles out for construction stingily. This is Economics 101: with land in short supply, prices soar. Hence the only economically viable way to reduce housing prices is for the government to free up the land supply. Car prices, too, are high mainly because of government intervention: combined, the various taxes slapped on cars total more than 100 percent of a vehicle’s base price.

The same goes for food. A recent report by Business Data Israel found that at every stage of the production and sales cycle, Israel is more expensive than Europe: tariffs are higher, as are the profit margins of importers, manufacturers, and retailers. Data from the Ministry of Agriculture reveals positively outrageous markups: 683 percent on imported tea, for instance, or 348 percent on imported rice. Such high markups are possible for three reasons. First, Israeli food manufacturers and supermarket chains function as cartels; three local dairy companies, for instance, dominate the dairy market. Second, extremely high tariffs often preclude competition from imports (250 percent on honey, 230 percent on potatoes, 190 percent on beef, etc.). Third, when imports are not loaded with punitive tariffs, the government’s standard practice is to license a sole importer, who then faces no pressure from competitors to sell his product more cheaply. Even worse, this sole importer is often a local manufacturer that makes similar products and thus has no desire to undersell its own brands.

Israel’s entire economy is dominated by cartels. The Bank of Israel’s annual report for 2010 found that “some 20 business groups, nearly all of a family nature and structured in a pronounced pyramid form, continue to control a large proportion of public firms (some 25 percent of firms listed for trading) and about half of market share.” And the World Economic Forum’s Global Competitiveness Report for 2010–2011 ranked Israel 117 out of 139 countries in “extent of market dominance,” right between Mauritius and Burkina Faso. Government monopolies then jack up prices even further: at the state-owned water and power monopolies, for instance, employees’ average salary is 2.5 times the economy-wide average. The unions obtained this exorbitant benefit, which obviously necessitates higher utility rates, by threatening to shut down the nation’s water and power supply.

But lack of competition and excessive government intervention are no less problematic in other fields, such as health care. In July, for instance, Ha’aretz reported that only 60 percent of patients who need inpatient geriatric rehabilitation receive it, because Israel’s public hospitals lack sufficient geriatric rehab beds. Yet a state-of-the-art geriatric rehabilitation ward has been standing empty in a private hospital because the Health Ministry won’t let HMOs send their patients there—even though the public hospitals charge 50 percent more than the private facility does. The ministry also refused to let two other private facilities open geriatric rehab wards in recent years, insisting the beds should instead be added to public facilities. Both health-care professionals and treasury officials told Ha’aretz this policy is apparently aimed at protecting public hospitals from competition that would force them to lower their own rates. Meanwhile, not a single public-hospital bed has been added. So many patients simply go untreated, while HMOs pay 50 percent too much for those who are treated—money that could instead fund other types of care.

Or take education, where the Education Ministry’s agreements with the teachers’ unions make it nearly impossible to fire incompetent teachers. A recent Central Bureau of Statistics study found that more than 50 percent of high-school math teachers don’t have degrees in math or any related field, meaning they are unqualified to teach the subject by the ministry’s own standards. Yet replacing them would be virtually impossible even if qualified replacements could be found, because they can’t be fired. They would have to transfer to jobs elsewhere in the public school system, which would thereby be forced to pay hundreds or thousands of extraneous teachers.

The disconnect between the protesters’ demand for more government control of the economy and Israel’s actual need for a freer market poses several dangers. First, to placate the protesters, the government might adopt some of their problematic proposals. It won’t subject Tel Aviv to rent control or agree to fund free “education” from the age of three months (a wildly expensive benefit that even Europe’s most generous welfare states do not offer), but it might, for instance, increase mortgage subsidies to needy families. This proposal, which many ministers and members of the Knesset favor, wouldn’t create a new benefit; it would merely expand an existing one. But it has been tried repeatedly, with predictable results. Contractors increase housing prices by roughly the amount of the subsidy increase and reap windfall profits at the taxpayer’s expense, while needy families still can’t afford to buy.

The second reason to worry is that even sensible measures won’t be financed properly. For instance, the protesters’ demand for lower indirect taxes is eminently proper. Israel’s indirect tax burden totals 17.4 percent of GDP, compared with an OECD average of 10.3 percent. Lowering tariffs enough to make artificially high-priced items competitive, moreover, would presumably boost import volumes, and in turn boost tax revenues. But the protesters specifically want a lower value-added tax, and previous VAT reductions generally haven’t paid for themselves. The retail and manufacturing cartels typically lower prices by only a fraction of the tax reduction, so sales volume doesn’t increase enough to compensate for the lower rate.

Similarly, the government recently agreed to boost the pay of starting policemen—something it had apparently been planning for some time, but that protesters could claim as a success. This, too, is sensible: policing is a core governmental function, and Israel’s understaffed force (2.7 policemen per 1,000 residents, compared with 5 in Europe) is a major barrier to effective policing. Low starting salaries were a serious impediment to recruiting and keeping good people. Still, it must be paid for, and the risk is that the government will finance such measures either by counterproductive tax increases or by increasing the deficit. The latter, a perennial favorite of Israeli parliamentarians, would be particularly dangerous. Israel’s debt-to-GDP ratio, 75 percent in 2010, is already high, and Israel faces much greater diplomatic and security risks than other OECD countries. What’s more, debt servicing is already slated to account for 11 percent of the government’s budget this year, making it the second-largest line item after defense. A higher deficit means even higher debt-servicing costs, which means either higher taxes or lower spending on productive purposes—hardly a recipe for improving the standard of living.

The third danger is that the government will simply fail to seize this opportunity to enact the kind of reforms Israel truly needs, due either to fear of defying the anti-free-market ethos of the protesters or to disagreements within the coalition, many of whose members support big-government solutions. If that happens, not only will Israel have wasted a golden opportunity that may not soon be repeated, but also the next prime minister (who will almost certainly be less pro-market than Netanyahu) may well adopt precisely the kind of tax-and-spend policies that nearly bankrupted Israel in the past.

In this excerpt she’s missing the outrageously high cost of banking.

My company in Israel routinely sends $50k to $100k per week to America and the bank charges I pay to do this are more than 10 times higher than I would pay if I was moving money from the US to any other country.

The banks are a cartel, operated and controlled by the bank of Israel, which is the government. Tariffs for things like international exchange are clearly centrally set because if you ask three banks they all give you the same answer! You can, if you’re big enough, negotiate a discount but it’s still crazy.

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Brian of London

Brian of London is not the messiah, he's a very naughty boy. Since making aliyah in 2009, Brian has blogged at Israellycool. Brian is an indigenous rights activist fighting for indigenous people who’ve returned to their ancestral homelands and built great things.