Set My People Free! (From Government Regulation)

The Israeli desire for economic freedom and prosperity is being driven underground by its own government.

Although the Israeli National Anthem proclaims the dream of “being a free people in our land”, this freedom does not extend to economic freedom • A new OECD report tells the whole sad story in detail – burdensome regulation, government-imposed market barriers, endless bureaucracy and a bevy of professional guilds put Israel at the bottom of the developed world when it comes to economic freedom

It’s hard not to shake your head in despair when reading the latest OECD report on the economic freedom of developed countries. The report tells a very different tale than that often told in the local media. Far from being a bastion of laissez-faire free markets, Israel is actually the most socialist country in the west: there are numerous barriers to competition, and government involvement can accurately be described as strangulation.

In Last Place

The 2013 OECD study of government regulatory regimes evaluated the degree of market competitiveness, and the factors which help or hinder economic growth. These include the degree of government involvement in the market, how many hurdles new entrants in to the market have to clear, the degree of support for monopolies and cartels and regulations which make free trade harder, among others.

Of the 29 countries looked at, Israel is the state with the highest barriers to competition and entrepreneurship. If that’s not bad enough, Israel is not only last place – it’s far below all other countries: regulation in Israel is, on average, 53% higher (!) than other countries in the study, on average. The reports that Israel is only the third from the bottom are only true if you include South Africa and Bulgaria, neither of whom are OECD members.

Israel has earned this dubious distinction thanks to the hard work and dedication of its successive governments. Not only is Israel in last place in the general economic ranking, it also “won” last place in the fields of government control of the economy, barriers to entrepreneurship and many others. Only in the field of barriers to trade and investment did Israel inch past South Korea.

Another metric examines competition in the area of infrastructure. Barriers to competition, the degree of public ownership, control of production, transport and distribution, and how much the largest player in the market controls are all examined. Israel succeeded in avoiding last place, coming ahead of Slovenia. This depressing ranking is due not only to its very low ranking in the electricity and train markets, but also the barriers to entry in the communications and aviation markets (last place in both).

A third metric of the OECD study deals with retail sales. Here licensing and registration requirements, protection of existing companies, regulation of opening hours, and limitations on pricing and bargains are all looked at and compared. Once again, Israel is next to last (down from seventh to last), beating Belgium in the process. Once again, we see the Israeli bureaucracy hard at work at making the Israeli retailers’ life a living hell. Aside from limitation of bargains, where Israel is similar to other developed countries, it excels at price regulation (third from the bottom), regulation of store opening hours (sixth to last), protection of existing companies (shared last place), regulation of large store chains (next to last), and the number of licenses need to engage in trade (eighth from the bottom). After Belgium has improved their policy in preventing bargains and regulating prices, Israel has a good chance of winning last place in this area as well.

Modern Guilds

The last metric looked at barriers to entry to four white-collar professions: accountancy, architecture, engineering and the legal profession. Barriers to the entry of any profession limit competition between existing practitioners and reduce competition – with its attendant increased efficiency and lower prices – by keeping out new blood. In many cases, these limitations are a deliberate policy by the existing guilds, which effectively creates a two-tier class system within the profession: a class of interns and wage-earners who earn a low salary, and the owners of a limited number of partnerships and companies who earn the lion’s share.

It’s not surprising that Israel comes in fourth to last in the engineering profession, the bottom third in the professions of accountancy and architecture, and fourth to last in the legal profession. In the overall ranking, Israel comes in at fourth to last, interestingly ahead of Canada, Hungary and Germany.

A Rotten System

The reason for Israel’s wretched ranking has to do with the roots of Israel’s social and economic system. The late Professor Ezra Zohar declared the Israeli economic regime of the 1950s as “moderate Bolshevism”. From its inception, the Israeli government was imbued with a centralistic and interventionist ethos, which sees the expansion of government authority as the solution to any and all problems. But against this ethos is the freedom loving “Jewish gene”, of a minority faced against an often hostile foreign government: hidden rebellion, silent disobedience of laws of the land.

As Milton Friedman said:

After my first extended visit to Israel [in the 1960s], I concluded that two traditions were at work in Israel: an ancient one, going back nearly two thousand years, of finding ways around governmental restrictions; a modern one, going back a century, of belief in “democratic socialism” and “central planning.” Fortunately for Israel, the first tradition has proved far more potent than the second.

This conflict created the two-track Israeli economic regime. On the one hand, Israel has a heavily regulated economy with a government constantly trying to increase its involvement in all aspects of life. This is backed by an openly collectivist public ethos of the elite, in which pundits and intellectuals all lament the alleged existence of “neo-liberal” or “piggish” capitalism which must be reined in – by the government, of course. On the other hand are the mass of individual citizens who can’t change the system but work instead to bypass it and “work around it”.

The end result is controlled anarchy: high taxes on legal work with lots of people working off the books, extremely severe building regulations which people ignore, complicated rules for opening a business which lead people to open up stores and offer services without regard for any of them, an army of strict bureaucrats arrayed against a small force of “fixers” who help people make an end run around them and many more such distortions. The only fields in which government control is truly effective are where the government actually dominates the market, such as in the field of infrastructure. According to various estimates, the black market in Israel is estimated at about 200 billion NIS, or about 20% of GNP.

It is past time that the Israeli government learned that – contrary to the opinion of much of the self-appointed elites – regulation, legislation and government intervention only harm the economy and the average Israeli citizen. Now, during the Holiday of Freedom, is the time to understand that economic freedom is no less critical than political independence for the flourishing of the Jewish People as a “free people in its country.”

English translation by Avi Woolf.

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