ISRAEL'S COTTAGE-CHEESE REBELLION
By Daniel Doron
In April, 2010, the Bank of Israel's annual report on the economy included a study showing that "some 20 business groups, nearly all of a family nature and structured in a pronounced pyramid form, continue to control a large proportion of public firms (some 25% of firms listed for trading) and about half of market share." Despite Prime Minister Benjamin Netanyahu's efforts to introduce free-market reforms, not much has improved over the past year. From diapers to cars, the Israeli consumer is at the mercy of local manufacturers and government-certified importers, monopolies, and cartels that inflate prices by 100% and more.
The cottage-cheese rebellion started after a major business publication ran a series of features comparing food prices in Israel and abroad. People realized that, while salaries in Israel are about half those in America, prices of consumer goods and services are about double. Exorbitant profits, fees, and taxes make even the cheapest imported automobiles cost between $35,000 and $40,000, and a gallon of gas costs almost $10. A small apartment can cost the average Israeli worker 12 years in annual salary. Water and electricity costs are inordinately high, and the poorly-run state educational system leads many families to spend a mint on private tuition.
Izhak Alrov, a member of the ultra-orthodox community of Bnei Brak and a cantor by avocation, was outraged by what he experienced trying to survive on a modest salary. In June, the 25-year-old opened a Facebook page and called for a consumer boycott of one staple — cottage cheese. The response was electrifying. Over 100,000 long-suffering consumers soon joined the boycott. Stores reported a steep decline in cottage-cheese sales.
At first, Israel's two huge food conglomerates, Tnuva (headed by Zahavit Cohen) and Strauss (chaired by Ofra Strauss), blamed cottage cheese's high price on rising production costs beyond their control. But relentless reporting — especially by the Marker, a pro-market business publication — revealed that the consumer was being fleeced at each stage of production, from the high-prices charged by milk-producing cooperatives and the conglomerates' own dairies, to retail chains that divvy up market share to curb competition and inflate prices. The boycott forced the cartel to cut prices.
Mr. Netanyahu has done his best to enhance competition, sharply cutting personal and corporate taxes. But a high proportion of taxes is still levied as regressive indirect taxes (Israel's value-added tax, for example, is 16%) which fall heavily on the poor.
At the same time, bureaucracy and costly regulations stymie entrepreneurship and inhibit economic growth. Government owns 93% of all land in Israel and the inflated prices it charges, plus its maze of regulations and codes, raise construction costs to prohibitive levels.
Misallocation of credit by banks and other financial institutions has been inhibiting growth as well. Despite then-Finance Minister Netanyahu's financial-market reforms that broke Israel's bank duopoly in 2005, a tiny fraction of the population still uses a third of all credit, which they leverage into highly risky investments, mostly in foreign real estate. Small and medium-size businesses, the most productive enterprises in the economy, are credit-starved, as are the outlying areas of the Galilee and the Negev.
The cottage-cheese rebellion is transcending its immediate cause, the high cost of food. It is spreading to other goods and services, especially housing, and it has given voice to a feeling of economic helplessness. Not surprisingly, radical elements are trying to exploit legitimate grievances to unseat Mr. Netanyahu, who is trying to overcome oligarchs' and bureaucrats' stiff resistance to reform. But the rebellion may yet bring the right kind of change to Israeli society — truly competitive markets and a more accountable political class.
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Daniel Doron, an Israeli publicist and political activist, is a fellow of the Middle East Forum and the Founder and Director of the Israel Center for Social and Economic Progress (ICSEP), a think tank located near Jerusalem. In his capacity as ICSEP Founder and Director, Doron has recommended to the Israeli government changes in its economic policy, policy changes designed to increase the competiveness of the Israeli economy, to move the economy away from monopoly, statism, and socialism -- and toward the features of a free-market, competitive capitalist economic system. Some of these policy recommendations have been adopted and successfully implemented.
Doron's articles and op-eds on the advantages of free-market economics have appeared in the Wall Street Journal, the Christian Science Monitor, the Financial Times of London, the Weekly Standard, National Review, and the Jerusalem Post, and other periodicals in the U.S.A., Israel, and the United Kingdom.
The foregoing article by Daniel Doron was originally published in the Wall Street Journal, August 3, 2011, and can be found on the Internet website maintained by the Middle East Forum, a foreign policy think tank which seeks to define and promote American interests in the Middle East, defining U.S. interests to include fighting radical Islam, working for Palestinian Arab acceptance of the State of Israel, improving the management of U.S. efforts to promote constitutional democracy in the Middle East, reducing America's energy dependence on the Middle East, more robustly asserting U.S. interests vis-à-vis Saudi Arabia, and countering the Iranian threat. (URL: http://www.meforum.org/2998/israel-cottage- cheese-rebellion)
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