The high cost of living is a problem that troubles Israeli consumers. We all pay prices that are tens of percent higher than those common in Western countries. The problem is especially severe in the housing and food markets, but it is not limited to them. The question arises: Is this an unavoidable fate, or is there something that can be done to ease the burden of high prices in Israel?
To answer this question, we must first understand the reasons behind the high prices. First, Israel is what is known as an “island economy” – an expensive country surrounded by nations where goods and services are significantly cheaper, but its citizens have no access to those markets. In this context, we might look enviously at the city of Basel in Switzerland.
Basel is located in a country suffering from a high cost of living – among the highest in the world – but it enjoys easy walking access to bordering cities in Germany and France. A tourist in Basel may not even realize when they’ve crossed into Weil am Rhein (Germany) or Saint-Louis (France). This means Swiss consumers benefit from many accessible and cheaper alternatives – something Israeli consumers lack.
Problematic government policy
Another problem is government policy regarding imports and competition since Israel’s founding. Various Israeli governments viewed imports as competition to local production and tried to limit them as much as possible – at least until the 1980s. Since the 1990s, certain sectors have been opened to imports, and prices in those sectors have dropped significantly, such as clothing and footwear.
However, other sectors, especially food, are still heavily protected by import restrictions and lack of competition. As a result, Israeli consumers are forced to endure unusually high prices on products such as eggs, milk, honey, and more. Furthermore, the share of foreign trade – imports and exports – in Israel’s GDP is very low compared to developed countries, about 60% compared to 80%-90%. This is another outcome of the many import restrictions, high tariffs, quotas, and non-tariff barriers.
The fear among Israeli governments that increased imports would lead to unemployment and harm local industries has proven unfounded. In fact, unemployment dropped in the years following the opening of those sectors to imports. The economy shifted from a trade deficit, which plagued it when it was closed, to a trade surplus in the more open economy that followed.
This teaches us that free imports, which reduce the overall cost of living, can even benefit exports – by lowering their costs as well. The great flexibility and adaptability of the Israeli economy explains why exposure to imports ultimately improved the labor market and significantly reduced unemployment.
The part the Israeli consumer plays
The Israeli consumer is also part of the cost-of-living problem. Our consumers are characterized by what economists call “relatively low price elasticity,” meaning that price increases do not significantly reduce their demand for those goods. Israeli consumers tend to be loyal to brands they are used to, encouraging manufacturers to frequently raise prices.
Only a combination of government policy that prioritizes competition and openness to imports – including the removal of tariffs and quotas, eliminating exclusive importers, and abolishing exemptions from competition laws for entire sectors – along with smarter consumer behavior (i.e., greater price sensitivity), will lead to a significant reduction in the cost of living in Israel. It must be understood: This is, indeed, possible. The high cost of living is not a decree of fate.
The writer is head of the Business Administration Program at Ashkelon Academic College.