The State of Competition in Israel

The conference, in collaboration with the OECD, explored various aspects of competition in Israel’s domestic market from a number of different perspectives

Date: February 01, 2016

The symposium on “The State of Competition in Israel,” jointly hosted by the Taub Center and the OECD, was held on Monday, February 1st and attracted an audience of over 50 participants including senior economists, academics, and journalists. The conference, moderated by Taub Center Director of Policy Liora Bowers, began with remarks by Prof. Avi Weiss, Executive Director of the Center, who presented key findings from the State of the Nation Report 2015. According to Prof. Weiss, with regards to the economy in Israel, “While it’s not necessarily easy to raise prices, once prices are high it’s much easier to sustain them at that level. If you are not faced with competition, you are not required to lower prices.”

 
Prof. Weiss was followed by Claude Giorno, head of the Israel Desk at the OECD. Giorno discussed the OECD’s Fourth Economic Survey of Israel, which was published the previous day, and highlighted that various flaws in the Israeli market are hurting the economy’s productivity. He suggested that competition should be promoted in the food, banking, and electricity industries, and, more generally, that the whole market should be opened to competition from abroad. Another recommendation put forth by Giorno is to make regulations more business-friendly and to improve the effectiveness of government intervention. Giorno also pointed out that the cost of living in Israel is 20% higher than in Spain and 30% higher than Korea, two countries with similar income levels to Israel.

 
Following Giorno, Taub Center Researchers Eitan Regev and Gilad Brand presented findings from their recent research relating to competition and the cost of living in Israel. According to Brand, there has been an abnormal increase in food prices since 2006, which was accompanied by a rise in profit margins in the industry. Regev highlighted that the staple food groups that Israelis most rely on, such as meat and dairy products, are imported at the lowest levels and concluded with the question: “is this the result of the largest companies having the strongest lobbying efforts?”

 
As part of a high-level panel on “Competition in Israel,” Prof. Weiss posed the question of why prices have not fallen in Israel as they have in other countries. According to Prof. Weiss, the reasons for this phenomenon are: the relative isolation of Israel, which doesn’t trade with its neighbors; the regulations that led to the growth of monopolies in key industries; and the tendency of strong unions to prevent competition in the market. Panelist Prof. David Gilo, the Former Director General of the Israeli Antitrust Authority, said that the government’s efforts to increase competition have received criticism. “This means that if the government decides to combat the cost of living and promote competition, it must be determined to carry out this plan. A significant challenge we’ve faced in recent years is the high cost of food prices. The law that passed a year ago (which imposes restrictions on large food retailers and requires greater price transparency) needs to be implemented carefully so that it works and, furthermore, we need to fight the high concentration among retailers.”

 
Prof. Eytan Sheshinski from the Department of Economics at Hebrew University and an Economic Policy Fellow at the Taub Center addressed the topic of pensions, saying that “instead of always making small changes in this area, it is better to create comprehensive, systematic change.” He noted that he supports the recent steps taken by the Commissioner of Capital Markets, which include reducing management fees on pension savings, but that Israel should consider following in the footsteps of countries that have done even more. “I know that this is a traumatic process that won’t happen in one day, but it’s better than trying to fix it each time until the problem appears again somewhere else.”

 
Dafna Aviram-Nitzan, Former Director of the Economic Research Department of the Manufacturers Association of Israel, focused on the domestic market, emphasizing that increasing imports alone is not enough. “To flourish, the domestic market needs greater internal competition and incentives that will cause an improvement in productivity.” According to her, high food prices are due to relatively high value added tax (VAT), the costs of kosher certification on food, and the overall business environment in Israel.

 
Dana Heller, Head of Competition and Deputy Chief Economist at the Israel Antitrust Authority, spoke about the necessary balance between regulations and efficiency. “There is a tendency to correct flaws in regulation through additional regulation, but this is not the correct procedure. First identify the points that prevent entry –that is the first step in finding good solutions. Some think that a lack of regulation is a good thing, but the secret is to find the right balance.”