Committee pinpoints causes of high prices in Israel

Prof. Zvi Eckstein

The Committee for the Promotion of the Trade and Service Sectors says low productivity in these sectors weighs on the entire economy.

Regulation and burdensome bureaucracy, high concentration and barriers to entry, along with low investment in innovation, are the main problems in commerce and industry making it hard for Israeli firms to compete in international markets. These are some of the findings of the Committee for the Promotion of the Trade and Service Sectors which published its recommendations in an interim report released last week.

The committee says that these main problems cause difficulties for the private sector and for new players trying to enter the market, and that they are responsible for prices in Israel being 20% higher than in other countries in an international comparison carried out by the OECD. Beyond that, the report finds that the government does not see trade and services as an economic growth engine. These sectors, like all the sectors of the economy, consist mainly of small and medium-size businesses, but are mainly oriented towards the domestic market and are not highly exposed to international trade.

These sectors were also the main ones hit by the coronavirus pandemic, and they are among the last to be opened up as the economy gradually emerges from Israel's third lockdown. Even before the pandemic, these sectors were characterized by low productivity on international comparison, and the crisis only exacerbated existing problems. The damage it has caused is mainly a fall in employment as a result of the policy of lockdowns and imposed social distancing.

Trade and services account for a substantial proportion of the Israeli economy - 65% of people in employment and of the gross added value in business sector product. Their high proportion of business product means that they have a large effect on overall productivity in the economy and on the cost of living. Unfortunately, these sectors are characterized by low productivity by international comparison. The gap in product per work hour reaches 44%, such that they weigh on the economy. The low level of productivity in these sectors (that is, low added value per job in relation to the average) harms the economy's growth potential. The committee found that, looking at the long term, productivity was the growth constraint on the Israeli economy and the reason that Israel remains with a low standard of living in comparison with the most developed countries.

The coronavirus pandemic, which broke out just when the committee was formulating its conclusions, only sharpened the need to act on the recommendations for the sake of which it was formed in 2018 to examine the gap in productivity between Israel and other countries. The committee members came to the conclusion that there lacked a holistic approach to business on the part of the regulators, leading to contradictory requirements, an absence of measurement and control, and no breadth of vision.

"Businesses in the trade and services sectors are affected by burdensome government regulation. Getting these sectors onto a track of growth and higher labor productivity necessitates a long-term view in planning and execution, and introducing significant changes in existing government mechanisms," Michal Fink, deputy director for strategy and planning in the Ministry of Economy and Industry told "Globes". "The coronavirus crisis only worsened the difficulties and constraints in these sectors, and the insights that were derived are doubly valid. On the one hand, we saw a decade's worth of progress in digital capabilities, but on the other hand whoever failed to get onto this bandwagon found himself left far behind. To raise productivity it is necessary for all sectors to deal with introducing innovation and technology."

The committee is made of representatives of the Ministry of Economy and Industry, the Aaron Institute for Economic Policy at the Interdisciplinary Center Herzliya, the Central Bureau of Statistics, the Ministry of Finance Budgets Division, the Chief Economist department, the Federation of Israeli Chambers of Commerce, and other bodies.

The business trends survey for January carried out by the Central Bureau of Statistics, released last week, indicated significant slowdown in the rate of improvement in the activity of the trade and services sectors, to a large extent because of the tighter lockdown restrictions in force last month. The joint chairperson of the committee, together with Fink, Prof. Zvi Eckstein, head of the Aaron Institute for Economic Policy and dean of the Interdisciplinary Center Herzliya Tiomkin School of Economics, said, "Because businesses in trade and services are generally small, regulation hits them harder. In the end, industry has to sell its products on the shelves of those stores suffering from excess regulation. The places that we should like to emulate, with capital per worker 40% higher than us, are the places where productivity in trade and services rose.

"There is almost no professional training for trade and services. We are trying to give the government measurable goals that can be monitored, and that way it is possible to focus on areas that can be improved," Eckstein added. "The first measure we looked at is mapping the regulation that the government introduces and that restricts global trade in services and commerce. The ability to connect to overseas raises productivity through competition and greater efficiency. Our location deters investment from overseas. It’s not that the government, or the prime minister, or the ministry haven't thought about this, but they have not measured the cost of the bureaucracy. If they adopt the measuring method, there will be a mechanism that can be compared with international norms. In the end, we could adopt the policy norms of the European market, for example, on the use of risk management mechanisms as well."

The committee defines three main focus areas: boosting competition and improving regulation; investment in physical capital, technology, and encouraging innovation; and human capital. The committee also discussed change in the organizational structure of the Ministry of Economy and Industry to facilitate adoption of the report's recommendations and to reflect more accurately the breakdown of the branches of the business sector under the ministry's responsibility.

Among the committee's recommendations are lowering import barriers to boost competition, reducing the bureaucratic costs of importing sensitive foodstuffs, and adoption of international standards. The committee also recommended measurement of the bureaucratic burden, and continued implementation of existing reforms, among them differential business licensing rules. Eckstein added that training in these areas should be facilitated, as most employment growth was in these sectors, but productivity in them was low. He said that the right employee training would also help when it came to regulation.

Published by Globes, Israel business news - en.globes.co.il - on February 15, 2021

© Copyright of Globes Publisher Itonut (1983) Ltd. 2021

Prof. Zvi Eckstein
Prof. Zvi Eckstein
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