By Kristen Carpenter
Israel is often nicknamed as the “start-up nation” for its thriving high-tech industries and successful entrepreneurial ventures. Unfortunately, the country is also known for its protectionist policies in the economic sector. A report by the Brookings Institution found that Israeli industries have above-average market concentration rates across all sectors, including manufacturing, real estate, transportation, and retail. These industries lack market competition as a result, leading to price increases for consumers and higher costs of living.
The Organization for Economic Cooperation and Development (OECD) collected data from 48 member and non-member states to measure regulatory restrictions in the professional services and retail distribution sectors in 2013. The research focused on analyzing price controls, barriers to entry, and other regulations that impact the operation of businesses. On a scale with 0 as least restrictive and 6 as most restrictive, Israel scored a 3.51 in retail trade regulations. This puts Israel as the third most restrictive OECD country, behind Belgium and Luxembourg. By contrast, Turkey received a 2.38 and the United States a 1.90 under the same measure.
Israel’s regulatory environment and protectionist policies shield businesses from competition at home and abroad. This fosters crony capitalism, a system wherein corporations that curry favor with the government can lobby for regulations to their competition.
Regulations that promote market concentration and shield existing companies from foreign competition encourage Israeli supermarkets to increase the prices of goods. Shufersal, the largest retailer in Israel, opened its doors in 1958 as Tel Aviv’s first modern supermarket. It now has 248 stores across the country. Shufersal and Mega, another major Israeli supermarket chain, own roughly 60 percent of all food outlets. Tnuva, Strauss, and Osem-Nestle control 40 percent of Israeli food processing. The company Tnuva holds a near monopoly in the dairy industry, controlling 70 to 90 percent of dairy sales.
Inadequate competition results in comparatively higher price levels in the food industry. This fosters social unrest. In 2011, the price of cottage cheese had increased by 45 percent over a three year period, prompting a “Cottage Cheese Protest.” Then in 2014, a consumer in Germany posted a receipt from a recent purchase of chocolate pudding from the Israeli brand Milky. The receipt showed that the product costs significantly less in Germany than in Israel, where the good is made, which led to more consumer protests. This led the Israeli government to implement widespread reforms. Later that year, the Israeli parliament, known as the Knesset, passed the “Cornflakes Law,” which aims to reduce regulations with high burdens of entry and smooth the way for the importation of non-perishable food items, such as cereal, rice and crackers. Ironically, the law does not apply to dairy products, the food that sparked the protests.
The United States is no stranger to protectionist policies that result in high prices for consumers. A key example is the Jones Act, which requires vessels traveling through American ports to be owned and manned by at least 75 percent of American citizens and be built in the US. By artificially reducing competition, the Jones Act resulted in significant net costs for the American economy.
In both Israel and the United States, protectionist economic policies have negatively impacted consumers by making goods more expensive for consumers and hindering the economic growth of other industries. Allowing for increased free-trade and market competition from abroad would ultimately prove beneficial to consumers paying lower prices for goods and increase economic growth.