The price of living in a crowded country

Traffic jam on Ayalon Highway  credit: Eyal Izhar

Under-investment in Israel's infrastructure is costing us not just time and annoyance, but billions in lost GDP.

We all wait in line, and pay for that not just in time and annoyance, but also through our pockets. We all feel the inefficiency of public services, via the cost of living, the lengthening traffic jams on our roads, the months of waiting for an appointment with a medical specialist, and in submitting applications for basic services in order to exercise our rights as citizens or as businesses. This inefficiency carries a heavy economic price.

Annual cost of road congestion: NIS 40 billion

The first price we pay is in Israel's low labor productivity. That is caused by, among other things, years of neglect in public investment. The result is low efficiency in work processes in the economy, low quality of government services and institutions, and burdensome bureaucracy. For example, because investment in transport was neglected for many years, workers in Israel have to waste working hours in traffic jams, and as a result their output declines.

One of the accepted ways of measuring labor productivity is through Israel's stock of economic infrastructure (such as power supply installations and Internet networks), and through physical capital (the value of all the buildings, plant and equipment in the country), as a proportion of gross domestic product. In Israel, this figure is very low in comparison with the OECD countries. In 2019, capital stock as a proportion of GDP in Israel was 50%; the OECD average was 71%.

The rate of investment in transport infrastructure in Israel has been at about the OECD average on recent years, and the latest Economic Arrangements Law placed great emphasis on this area. This level of investment, however, is far from the amount required in order to narrow the deficit that transport infrastructure in Israel in general, and public transport in particular, has accumulated over the years. Moreover, the traffic jams on the Ayalon Highway become even more frightening when one remembers that Israel has the highest rate of population growth in the Western world.

The business sector blames the government. "The traffic jams in Israel are not a decree of fate. They represent three things: erroneous policy; under-investment; and inefficiency," says Dubi Amitai, chairperson of the Presidium of Israeli Business Organizations.

How much does it cost us? The clogged highways translate into a loss of product estimated at NIS 40 billion annually - NIS 20 billion because of the loss of working and leisure time, and NIS 20 billion because of traffic accidents and air pollution. Experts in the field estimate that unless significant steps are taken to reduce Israel's transport systems deficit, the economic damage will almost double itself within less than a decade, and reach NIS 70 billion annually by 2030.

Even the streets are jammed in Israel. Today there are about 410 people per square kilometer, and within thirty years that figure will double because of the local rate of childbirth. To cope with density of that order will require correct national and urban planning.

The housing shortage has led to heavy-handed planning focused on building more housing units at almost any price. Neighborhoods consisting of housing only, with no proper urban, cultural or transport services, cause daily traffic jams at almost every corner. If the neighborhood has no post office, no health clinic, and no places of leisure and entertainment, all its residents have to "migrate" regularly out and back.

The good news is that there are those who have understood the price of the narrowly-focused planning of recent decades. There is now a trend back to the planning concept of mixed use (residential, commerce, and public institutions in the same building or street), and of neighborhood commercial centers. In economic terms, proceeds per square meter in stores in neighborhood commercial centers and on residential streets have grown faster in recent years than proceeds per square meter in te big shopping malls. Between March-December 2019 and March-December 2021 proceeds per square meter grew 10% in neighborhood commercial centers and 9% in on-street stores, while in the big malls growth was less than 7%. The state should continue to encourage this trend.

Fiber-optic lag

According to the index of household access to fiber-optic networks published by the FTTH Council Europe, the proportion of homes in Israel connected to fiber-optic cable in 2020 was 28%. The OECD average is 53.7%. Here too, investment has increased in Israel in the past few years, but the gaps are large, considering the growth in the work-from-home model and in relation to population growth. The Bank of Israel estimates that the country's labor productivity can be improved by 2.7% of GDP through investment in communications infrastructure alone.

Inefficiency at the ports costs NIS 6 billion a year

The lack of efficiency and the congestion at Israel's ports are among the causes of the sharp rise in the cost of shipping, which translates into a rise in the cost of living. 99% of the movement of goods to and from Israel is by sea. The lack of efficiency at the ports is estimated to cost half a billion shekels a month, or six billion a year. Despite the fact that it can and should do so, the state refrains from imposing fines on the ports for ships kept waiting, and the price is paid by businesses and consumers.

In the latest index of government effectiveness published by the World Bank, covering 2020, Israel scores 83.17, below the OECD average score of 87.22.

Excessive bureaucracy leads to a black market of queue jumping in exchange for cash. How is the government faring in dealing with that problem? In the World Bank's index of control of corruption for the same year, Israel scores 70.67, again below the OECD average, which was 85.61.

Published by Globes, Israel business news - en.globes.co.il - on May 8, 2022.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.

Traffic jam on Ayalon Highway  credit: Eyal Izhar
Traffic jam on Ayalon Highway credit: Eyal Izhar
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