Many Israelis returning from a trip to Scandinavia will talk about the high prices in Scandinavian countries and how every visit to a restaurant or even a grocery feels very expensive. A new study from the Aaron Institute for Economic Policy in the Tiomkin School of Economics at Reichman University indicates, however, that the cost of living in Israel has overtaken, and by a long way, even the wealthiest countries in Europe.
In the past twenty years, the cost of living in Israel has lost touch even with these countries, the main elements being food and housing. The researchers stress that this is not a decree of fate, but that the solutions are still a long way from implementation because of political pressures.
In comparison with the wealthiest countries — Austria, Finland, Denmark, the Netherlands, and Sweden — where GDP per capita is higher than in Israel, Israel is dearer by no less than 21% for a basket of services and products for an average household. A comparison with countries where GDP per capita is lower than in Israel and where many Israelis visit, such as Greece, Cyprus, Italy, and Spain, finds Israel to be higher by 68%.
The cost of living in Israel is such an outlier that it erodes the standard of living in the country by 14%, and the study argues that it could encourage emigration.
Closer examination finds that food and housing are the main factors at play, responsible for more than half of what is termed "the cost of living."
Housing higher by 85%
In the past the picture was different. In 2005, housing costs in Israel were 31% lower than in the wealthy countries surveyed in the study; today they are higher by 26%. Unsurprisingly then, in comparison with the countries where GDP per capita is lower than in Israel housing costs here are higher by as much as 85%. "It is therefore no wonder that many Israelis buy homes in these countries," the study states.
Food costs have also risen worryingly. In 2005 they were lower in Israel than in the wealthy countries surveyed by 26%; today they are higher by more than 27%.
The study was compiled by Dr. Sarit Menahem-Carmi, a senior researcher at the Aaron Institute and an expert on the cost of living, together with Dr. Idit Kalisher and David Bitan. They raise another issue: It is sometimes argued that prices in Israel are so high in comparison with these countries because Israel is a virtual island country that has to bear high transport costs, unlike European countries, which are connected by road and rail and enjoy the regulatory benefits of membership of the EU.
Comparison with other island countries in the OECD, however, gives a similar result. Israel is higher, by far, than Iceland, Australia, Canada, New Zealand, Norway, Britain, Japan, and Cyprus. The cost of living in Israel therefore has unique causes that are not beyond control.
In recent years, public discourse in Israel and in the Israeli government has focused on housing costs, but despite the actions taken in this area prices are still, as mentioned, dramatically higher even than in the wealthiest countries. Food prices have received less attention. Reforms in this area have been cancelled or have never got off the ground, and meanwhile prices soar. The researchers chose to focus on this problem.
40% of the food basket measured in the study consists of dairy products and fresh produce. Prices of dairy products have risen by 47% within twenty years, and prices of fresh produce have shot up by 86%, despite the fact that fresh produce is exempt from VAT in Israel, unlike in other countries.
There are reasons for this. In all the European countries surveyed in the study there are aid and subsidies for farmers, arising from social, environmental, and strategic considerations. But whereas in these countries the aid is given directly to the farmer, in Israel it comes in the form of inflated prices due to heavy customs duties on imports and regulatory restrictions applicable to imports of fresh produce designed to protect local flora and fauna. In Israel, the indirect support via market prices as a proportion of all aid given to farmers is among the highest in the OECD, reaching 70-80% of total support.
"Regulation is Israel is so strict that it determines what fruit or vegetable can be imported and from which country. Bananas, for example, cannot be imported. In the dairy sector, besides the restrictions on imports, support is given through planning of the sector — distribution of production quotas and the sale of raw milk to the dairies at the target price. These restrictions meet a high rate of growth in demand, because of population growth and the rise in the standard of living," Menahem-Carmi explains.
Thus, she says, 95% of the arable land in Israel is already exploited, and while in the past twenty years local production of fresh produce has grown by 10%, the population has grown by 52%. Israelis pay at the supermarket for this gap and the inability to bridge it.
"A switch to direct support is essential," the researchers state, but add that "agreement must be reached with the farmers on the basis of which the transition process will be determined so as to prevent shocks in the sector and harm to veteran farmers in particular."
Israel's governments have failed on both sides of these policies. The previous government passed reform measures in agriculture, but these were cancelled by the current government under pressure, and Minister of Finance Bezalel Smotrich has not succeeded in passing the dairy industry reform that he planned.
The Aaron Institute study recommends direct support to secure production and farmers' income, on the basis of the area of land worked or output, as in the advanced countries, and abolition of dairy industry planning. It also recommends gradual reduction of customs duties and relaxation of restrictions on imports arising from flora and fauna regulations.
Other material differences between Israel and the comparison countries are also causes of the price gaps. First of all, there are differences in taxation. The rate of VAT in Israel is higher than in those countries. There are also the demands of kashrut. Together, these two factors explain about 35% of the gap in prices. The other 65% is attributed to barriers to trade, to the structure of the food industry which is characterized by high concentration in the hands of a handful of conglomerates holding many brands, to the high production costs of a small market with a heavy bureaucratic burden, to high raw material costs, and to high transportation costs because of the shortcomings of the transport infrastructure.
"How does it protect the public?"
"The Israeli market is a small market with an oversized regulatory and bureaucratic burden, and that arises in every international measurement," says Menahem-Carmi. "This burden is a tax on entry and on routine activity. For example, there is regulation requiring every supermarket in Israel to allocate 30% of its floor area to storage, even in central Tel Aviv. How does that protect the public interest? Every country has regulation of fresh produce imports to prevent infiltration by pests, but in Israel it is much stricter."
The Aaron Institute recommends boosting competition by removing barriers to imports and expanding the "what's good for Europe is good for Israel" reform on both food and cosmetics; breaking the Chief Rabbinate's monopoly on kashrut and determining that European kashrut can also apply in Israel; dealing with the distribution segment; and removing barriers to the entry of foreign companies into Israel.
Menahem-Carmi points to another barrier relating to the fact that in Israel every supplier reaches every store. In Europe that doesn't exist, and it substantially raises distribution costs and increases the power of the major suppliers, with small suppliers reliant on their distribution networks. Instead of this, she suggests encouraging the formation of manufacturers' organizations for distribution, something that may sound unexciting but which is critical for reducing prices.
Finally, the Aaron Institute's recommendation is that all these changes should be introduced simultaneously, because a solution in one area without holistic treatment will not lead to a reduction in the cost of living.