When Hillel Reuveny’s little corner store gets a fresh batch of Israeli butter, the first thing she does is send a picture of the 100-gram packets to her customers on the WhatsApp messaging service.
“They come running,” she said, pointing to the customer replies that come pouring in. “Save me one,” read one message. “I’ll pay anything,” said another.
Israel is almost a year into an acute butter shortage that has caused the staple to disappear from supermarket shelves across the country. The scarcity has borne several conspiracy theories, with Israelis sharing photos of locally made butter on European shelves and the emergence of Facebook groups where users track supermarket butter stocks with near religious fervour.
But more than a matter of middle-class frustration, economists say the shortage illustrates fundamental weakness in Israel’s politics and economy.
“This is really just a combination of extreme populism with an unwillingness to do anything to stop the big unions, or break up cartels or subsidies to the farming sectors that eventually just end up [hurting] the public,” said Omer Moav, a professor of economics at the University of Warwick and a former adviser to the finance ministry.
“Israel has these very strong roots of socialism, and price controls are very popular, even though they don’t really work.”
Economists have regularly warned that Israel’s decade-old rightwing government has delayed tackling major structural issues to modernise the economy, including ending subsidies for the largely unemployed ultraorthodox and making large-scale investments to boost worker productivity.
Despite Israel’s booming high-tech sector, which also benefits from generous government support, the country suffers from an affordable housing crisis and some of the highest costs of living among OECD countries, especially when it comes to food.
The importation of bananas is restricted, for instance, and until tariffs on imported butter were relaxed in November, a block of basic French butter cost as much as $8.
Dairy represents less than a fraction of one per cent of Israel’s nearly $400bn economy, but the butter shortage has become a symbol for a stalled bureaucracy.
Milk production in Israel is controlled by an industry-wide quota system and it is illegal to sell dairy under a price that’s fixed early each year by a powerful dairy lobby. At the same time, the finance ministry sets the price of locally produced dairy products, while heavily taxing butter imports.
Usually the end result is that Israelis overpay for butter but it is plentiful. The compromise helps protect farmers but mostly benefits large commercial agriculture and a handful of major Israeli butter-manufacturers.
This year though, Israel’s largest butter-maker, Tnuva, said the pricing resulted in a shortage of fatty milk — the crucial ingredient for butter — and took the finance minister, Moshe Kahlon, to court to demand he adjust the formula.
Reluctant to raise the price of dairy in an election year, Mr Kahlon resisted until he lost in court in March. A month later, Israel went to the first of its two elections this year and nearly all government decision-making came to a halt.
Mr Kahlon blamed the political deadlock for a lack of action, saying he would have preferred to end the price controls completely. Only in November, after Israel lurched towards its third elections in under a year, did Mr Kahlon give in to demands from consumers and manufacturers to adjust tariffs on butter imports.
The protectionist butter policies are a direct result of established traditions in Israeli politics, economists said.
“When it comes to dairy, the way it is being sold to the voter is that this is a way to keep the family farms alive, even though some two-thirds of the production is from large commercial operations,” said Asher Meir, Director of Economic Research at the Jerusalem-based Kohelet Policy Forum, a think-tank, who served on committees that has helped set the prices and quotas.
“This for some reason has a very powerful hold on the Israeli voters — what’s keeping this alive is a part of the Zionist tradition of keeping the yeoman farmer alive and thriving.”
But for the University of Warwick’s Prof Moav, whose research argues that the Israeli public has often been misled about core economic issues, the price controls no longer work.
According to Prof Moav, while Prime Minister Benjamin Netanyahu’s government is described as rightwing, it has continued socialist traditions such as subsidies to the detriment of the broader economy.
“In Israel, the left-right divide is on issues of nationalism and about the occupation. On economic issues, most of the political parties are very interventionist,” he said. “As a result, in Israel, more than in other countries, governments continue to run bad economic policies and get away with it.”
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Author: Financial Times