Israel strives for ‘smart regulation’ to help boost post-COVID economy

Over-regulation weighs down growth, productivity, report says, calling for new regulatory authority; cutting down rules could generate up to NIS 100 billion for economy

Shoshanna Solomon was The Times of Israel's Startups and Business reporter

Finance Minister Avigdor Liberman, left to right, Prime Minister Naftali Bennett, Justice Minister Gideon Sa'ar and deputy minister Abir Kara present new plan to cut back Israeli red tape;  Jerusalem , July 6, 2021 (Kobi Gideon / GPO)
Finance Minister Avigdor Liberman, left to right, Prime Minister Naftali Bennett, Justice Minister Gideon Sa'ar and deputy minister Abir Kara present new plan to cut back Israeli red tape; Jerusalem , July 6, 2021 (Kobi Gideon / GPO)

Prime Minister Naftali Bennett, Finance Minister Avigdor Liberman and Justice Minister Gideon Sa’ar on Tuesday launched a national plan to lower regulation and bureaucracy.

The aim of the program, set up jointly by the Prime Minister’s Office and the two ministries, is to enforce “smart regulation” and do away with unnecessary and burdensome rules in order to help the economy come out of its coronavirus slump.

“We are not just talking” about cutting back on regulation, Prime Minister Bennett said at a press conference in Jerusalem on Tuesday. “We are going to do it.”

The big challenge, he said, is not necessarily setting out the right strategy, “but executing the strategy, because words are cheap and we have endured 12 years of lofty words and platitudes with minimal execution and delivery.”

Bennett was referring to the 12 years in which now-opposition leader Benjamin Netanyahu headed the government.

“This is an amazing plan that goes to the very core” of what the government wants to do, he said. “We are shifting. From now on Israel’s business is business. We are going turn ourselves into a paradise for small and medium businesses. Because truly, in Israel there are two different worlds. There is the high-tech world – which is paradise” — barely subject to Israeli regulation because it operates globally. And there is the world of the small businesses.

Global businesses “don’t have to deal with all the frustration that a pizzeria in Rishon has to deal with,” Bennett said. “So, we want to ‘high-tech’ the rest of the economy: make it easy and compelling to open a business and succeed.”

Over-regulation, said a document issued by the three bodies, is one of the reasons Israel’s per capita GDP and productivity, which surged between 2003 and 2010, have been lagging behind those of other OECD countries over the past 10 years. And the World Economic Forum has said that ineffective government regulation is one of the major challenges of doing business in Israel.

Improved regulation could generate NIS 58 billion to NIS 100 billion for the Israeli economy, the authors of the report estimated. The OECD has estimated that on average it could boost Israel’s per capita GDP by 3.75% over five years, and 5.75% in a decade.

“Regulation plays a vital role in promoting and protecting public interests,” the authors of the report said. But “non-optimal regulation” may be ineffective in protecting these interests and may cause unwanted consequences, such as added costs to the economy as small businesses struggle with a tangle of rules. Burdensome regulation also harms competition and can increase concentration — in which a small number of firms controls a large chunk of the economy — by erecting barriers to trade and the founding of new businesses. All of this hurts investments and reduces productivity, which in turns impairs growth and raises the cost of living, they said.

Israel is ranked 35th out of 190 countries in the World Bank’s Ease of Doing business.

People shop at the Dizengoff Center mall in Tel Aviv on June 14, 2021, after the Health Ministry announced the end of the COVID-19 obligation to wear a mask in closed public places. (Miriam Alster/Flash90)

Toothpaste costs three times more in Israel than in to other countries, Bennett said. “We are not prepared to accept this reality anymore,” he said.

Bennett said that a few years ago his wife set up a boutique ice cream store in Kfar Saba, but instead of channeling her efforts into creating new products, she was kept busy running in circles meeting demands of various regulators. “This is a reality  that all small businesses face,” he said,  and they are the engine of the economy.

Deterring small businesses from setting up their ventures means less competition and price rises. The idea is to “significantly cut back bureaucracy on businesses and citizens.”

The coronavirus pandemic caused Israel’s economy to contract by 2.6% and unemployment to surge to an average of 15.3% in 2020. This compares to growth of 3% and a record low unemployment rate of 3.8% in 2019. And while the economy is recovering, amid a vaccination drive that is keeping the coronavirus more or less in check, unemployment is still expected to remain higher than before the pandemic.

The Bank of Israel cut its growth estimates for 2021 to 5.5%, as the COVID-19 Delta variant is spreading, posing a renewed risk to the economy.

Global studies have shown that cutting back on red tape boosts economic growth, the authors of the report said.

Finance Minister Liberman said at the press conference that over-regulation has become a main obstacle to the development on the economy, and just as in the 1980s Israel set up its budget law to deal with inflation, in 2021 the government must deal with “regulatory inflation,” he said.

There are 209 different regulators operating in Israel, Liberman said, and citizens and businesses fighting with them is like Don Quixote tilting at windmills.

The inter-ministerial team recommends a number of steps. These include enacting a regulatory framework law that will regulate the internal government processes and outline the principles of how regulation should be formulated; setting up a central control authority that has legal power to supervise economic regulation and be the professional government arm in this field; and anchoring regulatory policy in legislation.

The authors of the report recommend setting up a regulatory authority as part of the Prime Minister’s Office that will have the power to oversee how rules are formulated and implemented; assess existing regulation; and liaise with the various regulators as well as advise them and the government about steps that need to be taken in the regulatory realm. An independent and professional expert should be appointed as head of the new authority, with its other members coming from the justice and finance ministry and other government offices, the report said.

Abir Kara, deputy minister at the Prime Minister’s Office, said at the press conference that bureaucracy problems can’t be solved all at once.

“It is a long process” to free the economy from the “regulatory knots” that are bringing it down, he warned.

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