Why are prices in Israel higher than the rest of the world?

During a recent three-week holiday in Japan, I decided to dedicate a morning to economic matters. I met with two senior Japanese banking officials, and together we examined the differences between the Japanese and Israeli economies. We also discussed cost-of-living in Israel, where many products are more expensive than in other places around the world. As you can imagine, we found significant dissimilarities. Of these, two main differences stand out:

  1. The Israeli economy is different from the Japanese one

    The Israeli economy is different from the Japanese one

    Indirect taxation: Besides the advanced technology and way-of-life in Japan, the main difference between the two economies lies in indirect taxation. While Israel has high rates of indirect taxes (remarkably high VAT and import taxes), rates in Japan are exceedingly low.

  2. Budget structure: Taking into account the size of Japanese population, Japanese budget is clearly larger than Israel’s. Apart from that, budget allocations are completely different in the two countries. Israel’s needs dictate a certain allocation (defense budget, support for weak local authorities, special allocations, and investment in West Bank settlements), and its budget is further influenced by low workforce participation on the part of certain population groups. Japan, on the other hand, has one of the world’s lowest defense budgets, as evident from this article providing a comparative view on defense spending and national product.

Our discussion on differences between the two economies came about following my astounding discovery, that Japanese food prices are lower than in Israel. A few more points of comparison came up:

  • Tourism: Hotel prices in Japan are not higher than in Israel.
  • Bank credit: Surprisingly, Israel has lower rates for bank credit than Japan.
  • Housing: Japan is known for high housing prices. The recent climb in Israeli housing prices will gradually bring us closer to Japanese levels.
  • Cost-of-living: Japanese basic cost-of-living (food and transportation) is lower than in Israel.
  • Minimum wage: While the Israeli minimum wage stands at NIS 4650, Japanese minimum wage is currently $2000.

Conclusions

Based on the differences I identified between the two economies, my foremost conclusion is that neither the proposed onslaught for creating competition between banks nor the dismantling of existing monopoles, will provide the answer to Israeli cost-of-living. The current structure of the Israeli budget (as arising from the country’s unique needs and nature) creates problems which preclude the possibility of lowering the cost-of-living. That is why there will be no change in price levels as long as no structural change is made.

A significant change in the Israeli economy is in fact possible, following the discovery of the new natural gas resources. I believe that developing our natural gas resources can have a profound effect on the entire economy and is therefore of the utmost importance. For this reason, the government must refrain from imposing taxes on gas, and instead should allow the forces of the free market to operate. Under certain circumstances, this will achieve price reductions in the energy market, at the least.

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