Policy for Regulatory and Bureaucratic Optimization for Enhanced Economic Productivity


The crisis which befell Israel in the wake of the COVID-19 pandemic has revealed the importance of regulation to the functioning of the state, but at the same time it has accentuated some underlying problems in the Israeli economy. Following years of considerable growth between 2003 and 2010, which had seen a reduction of the gaps in productivity and GDP per capita between Israel and OECD countries, over the past decade the gap has remained stable and even slightly increased, compared to common comparison countries. One reason is the excessive, nonoptimal regulation in Israel. According to the OECD, "improving regulation in Israel, even if only to average OECD levels, would increase GDP per capita by 3.75% within five years, and by 5.75% within a decade" (amounting to around NIS 75 billion). Regulation plays a vital role in the advancement and protection of public interests, however nonoptimal regulation may be ineffective in protecting these interests, and even lead to undesired consequences such as the accumulation of excessive regulatory burden which incurs economic costs, obstructing small and mid-size businesses who struggle to make headways in the tangle of regulations, and creating conditions of uncertainty and instability for businesses and government alike. Further damage to public interests may manifest as stunted competition and increased market centralization, due to regulatory trade barriers and barriers to the establishment of new businesses. These consequences, in turn, have detrimental effects on investments and productivity across the economy, ultimately hindering growth. A further outcome is a rise in the cost of living. This is the background for the efforts by the "Smart Regulation" team to draw a national plan for regulatory revision, designed to address the challenges facing economic recovery from the COVID-19 crisis. This plan includes the creation of a legal framework for long-term infrastructures which are essential for the advancement of the smart regulation policy in Israel, along with short-term solutions meant to provide regulatory relief where applicable.


An international comparison of the stock of aggregate capital – both public and private – in OECD and the benchmark countries clearly demonstrates that the stock of aggregate capital in Israel is very low. Examination of import components shows that the relative share of imported inputs has been decreasing since 2007. The import of services to Israel is also on the decline, and its quality is low. This import component refers to the activity of foreign firms in Israel. This issue is discussed at length in our paper: Israel imposes barriers to entry on foreign firms in the commerce and service sectors, as measured by the OECD through the Services Trade Restrictiveness Index (STRI). Furthermore, according to all international indexes – as well as an international comparative and economic analysis which was conducted at the Aaron Institute and supported by OECD and IMF reports – the regulatory and bureaucratic structures in Israel constitute a considerable tax on investments in Israel. These additional costs discourage private enterprise and investment in Israel, as reflected in the extensive overseas investments made by Israelis. The prominent role of insufficient investments as a primary cause of Israel's low labor productivity, along with the low import rate and its implications for the openness of the economy as well as its capacity to enjoy the associated relative advantages for the benefit of all citizens, highlight the need for a government policy which supports competition and investment by optimizing and streamlining the regulatory apparatus. In order to encourage private investments, market competitiveness must be boosted by lowering barriers to entry and reducing the administrative burden – these measures are crucial to encourage enterprise, innovation, and investment. Digitalization of the interfaces between the government and the business sector is an important step towards reducing the administrative burden on the business sector. Bridging the gap in public ICT capital stock is expected to raise the GDP by NIS 14 billion per year (around one percent of the GDP). This is an investment on a significantly lower scale compared to investment in transportation infrastructures, which nevertheless has a major potential impact on government efficiency, the optimization of bureaucracy, and the advancement of the business sector due to the need of some businesses to update their technological resources to match the new government interfaces.