In the Race to Reform Business Regulation, Israel Still Falls behind

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Despite making regulatory improvements, the past decade saw Israel continue its slip down the World Bank's annual ease of doing business rankings. But this descent can still be reversed.

We recently learned that Israel’s ranking in the World Bank’s Doing Business index has fallen further. This index, which serves as a major indicator for businesses all over the world in choosing where to invest, examines the ease of doing business in each country according to several major criteria that include the number of required procedures, how long each procedure takes, the cost of doing business, the quality of regulation etc. An improvement in Israel's ranking in the index has strategic importance not only for the Israeli economy, but also for its social strength. While improving Israel's standing in the index would accelerate economic growth, improve international status, attracts investors, and increase productivity, the social benefits from lightening the bureaucratic burden includes increased transparency and equal opportunity mainly for self-employed workers and small- and medium-business, who have difficulty dealing with the abundance of red tape for several reasons, including lack of funds, knowledge, accessibility, and connections. In addition, reducing the regulatory burden lessens the need for “wheeler-dealers,” together with reducing the incentives and opportunities for corruption.

Israel’s ranking does not seem bad at first glance — 54 out of 190 countries throughout the world, places Israel in the upper third. But, compared to the OECD countries Israel ranked fifth from last. More disturbing is the consistent downward trend over the past decade in Israel's relative placement, a trend that has accelerated significantly over the past five years.

Between the years 2007 – 2015 Israel fell ten places in the ranking — from 26th to 36th place, since 2012 it has fallen a further eighteen places — to 54th place. The pace of the rate of deterioration has grown stronger in recent years, raising serious questions, because it happened while the Israeli government set the goal of reducing the bureaucratic and regulatory burden, created the Better Regulation Unit in the Prime Minister’s Office, and set a quantitative goal for reducing red tape costs by 25 percent. This apparent paradox suggests Israel government needs to rethink the direction in which it's heading.

An in-depth analysis of the Doing Business index’s components, conducted by the Israel Democracy Institute (IDI), shows that the main reason for the ongoing deterioration in Israel’s ranking is not an increase in the regulatory burden, but rather the more rapid improvement of other countries around the globe, who compete with Israel.

For example, according to IDI's analysis when it comes to starting a new business in Israel, notwithstanding the fact that the number of procedures required decreased by 20 percent over the past decade, the amount of time the procedure takes fell by 65 percent, and the costs of starting a new business declined by 27 percent - Israel's ranking in this parameter fell from 17th place in 2008 to 37th today!

Similarly, IDI's analysis shows that in spite of Israel's dramatic improvement in the international trade sub-index, including a significant decrease in the costs and the time required for international ltrade, Israel's ranking in this sub-index fell from eighth a decade ago, to 60th today — the reason being that while Israel improved its performance, others just improved faster.

The bottom line is that for Israel to significantly increase its standing in the rankings, it must learn from the experience of those countries that already made the upward leap and the leaders of that pack.

In spite of all that has been said, according to IDI's analysis, Israel today faces the opportunity to make that leap. How you ask? Israel could jump upward 16 places to reach 38 if it reforms to match the OECD's standard of conduct average in two parameters — the number of procedures and amount of time in four key areas defined by the index: 1) dealing with construction permits; 2) getting electricity; 3) registering property; and 4) paying taxes. These are fairly simple things to accomplish, and most of them require no changes in legislation. In order to carry them out, Israel must adopt computerized reporting, increase transparency, and use technology to simplify procedures. In addition, the state should adopt some principles from behavioral economics that are accepted around the world. These have been found effective in improving governance, maybe more importantly improving the interaction between the government on the one hand and the citizens and the business sector on the other.

Israel should and can turn this warning light from the World Bank into an opportunity and make the upward leap in the rankings. This would lead not only to a better business environment for the business sector, especially for the small and medium businesses in Israel, but also to a better economy for all of Israel's citizens.