Food prices in Israel are 30-40% higher than in Europe. We all pay the price, but the poor pay more.
The average Israeli household expenditure on food is NIS 2,251 monthly, which is 16% of average household income. The bottom 20% spends only NIS 1,886 on average, but this figure represents 22% of income in the lower socioeconomic brackets.
A reduction in family food expenses is only attainable through a dramatic measure. As in the reform that lowered phone prices, we need to introduce another “operator” into the market, and the “other operator” is a cancellation of import duties on food and agricultural produce, and an easing of barriers to importing foreign goods.
NIS 800 savings each month
The Kedmi committee, which was established in response to the social protests over the high cost of living in the summer of 2011, recommended a reduction in import duties and opening the market to competition. However, the Kedmi committee’s recommendations were watered down, or were implemented in such a way that they were spread-out over the course of many years, preventing any dramatic price changes from occurring.
A tremendous missed opportunity
Were the recommendations implemented as drafted, or even more broadly, including the removal of restrictions on food imports, we would see a 20-30% drop in prices. This would amount to a saving of NIS 500-800 per family. This is an even greater saving than was attained in the cellular market following the policies implemented by Moshe Kahlon, during his tenure as Minister of Communications.
20,000 jobs lost
There are, however, convincing arguments as to why we should not rush to open the food market to imports.
First of all, the food sector employs 55,000 workers, and it is true that sudden exposure to imports could bring about layoffs of 10-20,000 of them - mostly in the periphery, and mostly in areas where there are few employment options to begin with.
Another reason is that full exposure to imports will harm the profits of some domestic agricultural sectors. There are industries, such as hard cheeses, in which it is already difficult for Israeli farmers and manufacturers to compete with their European counterparts, who enjoy better conditions and direct subsidies. It stands to reason that exposure to imports will make matters even more difficult for these farmers.
Yet another consideration is that opening the gateways to imports would flood the market and allow low-quality and counterfeit products to enter.
At the time, similar claims were raised against Kahlon’s reforms in the mobile telephony. It was said that the reform would bring about layoffs of thousands of workers, there were threats that it would shock the economy, and it was said that we would receive lower-quality products and services.
They were right. The changes in the cellular market came at a price: thousands were fired, billions were wiped from the value of the public’s holdings in communications companies, and the capacity of major borrowers to repay their loans was hit, which caused additional losses to all pension savers.
Despite all this, no one believes that it would have been preferable to continue to pay hundreds of shekels a month to the cellular companies unnecessarily. Economic prosperity is based on voluntary high payments by the consumer, not coercion.
Agricultural exports
Yes, if we open the market to imports, domestic agriculture will be hurt. However, there are agricultural sectors in which Israel has an international reputation, and with governmental support and guidance, some of the growers and farmers could retrain for export-oriented products. Everyone would benefit from such a move.
As for layoffs - most of the jobs at risk are in packaging plants for agricultural produce, where the pay is very low. Overall, salaries in the food industry are a third lower than average salaries in industry as a whole. At such low wages, there are many employment options in Israel, even if they are not always in the periphery, or in settlements whose continued existence is uncertain.
The conclusion that arises from all this is that even if the government loses NIS 2-3 billion in each of the coming years, which would be used to help farmers and to support workers who are harmed by the process, the economy as whole, and the bottom 20% in particular, would benefit from the process considerably.
Margaret’s choice
The price gap between Israel and Europe stems primarily from different policies governing the agricultural sector and a concentration of food manufacturers.
Agricultural subsidies in Israel are carried out primarily in ways that cause the prices of agricultural products to rise, such as import duties and production quotas. In Europe, agricultural subsidies are based more on methods that cause a reduction in the price of products, such as direct subsidies based on quantity.
The concentration of power in the food sector becomes clear if you look at the various sectors within it: Tnuva Food Industries Ltd. and Strauss Group Ltd. (TASE:STRS) control 85-90% of the dairy market, Osem Investments Ltd. (TASE: OSEM) alone controls 56% of the pasta market, and Osem and Strauss together dominate the entire coffee market.
Going up against big, established companies is difficult. Standoffs with workers who fear for their livelihoods are very unpleasant. It’s true, lowering the cost of living in Israel is not easy.
The question is whether the government is willing to take on such a challenge, or whether it prefers the current quiet over layoffs in high-tech companies to flaming tires, and cows on the road at the entrance to the government complex.
Prime Minister Benjamin Netanyahu, who was a devotee of the late Margaret Thatcher, knows which option she would have chosen.
The author holds a PhD in Economics and is a senior partner at international consulting firm Goldratt Consulting
Published by Globes [online], Israel business news - www.globes-online.com - on November 10, 2013
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