Israel may be the Startup Nation, with the highest number of startups per capita in the world, first among 141 economies in entrepreneurial risk, companies’ innovative growth and R&D expenditure, but the red tape in this country is notoriously convoluted. From trying to get simple things done, like changing your address at the bank, to opening a business, Israeli bureaucracy can be a trip down a rabbit hole.
The latest World Economic Forum’s Global Competitiveness Report for 2019-2020 ranked Israel in 69th place for its burden of government regulation sub-category, part of the public-sector performance pillar. This ranking marked a 10-point drop from 59th place out of 141 economies in the 2018-2019 Global Competitiveness Report.
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But a new World Bank report ranking 190 economies on how they have tackled burdensome regulation showed that Israel has markedly improved since last year, jumping 14 spots from 49th to 35th in the “Ease of Doing Business” ranking as part of the latest “Doing Business 2020” report. Israel’s ranking rests below Azerbaijan but above Switzerland.
The annual report looks at regulation in 12 areas of business activity including the processes for incorporating a business, getting a building permit, obtaining an electricity connection, transferring property, getting access to credit, protecting minority investors, paying taxes, engaging in international trade, enforcing contracts, resolving insolvency, employing workers, and contracting with the government.
According to the report, Israel improved in four key areas: starting a business, access to credit, paying taxes, and easing export requirements. Israel made starting a business easier “by allowing joint registration of corporate tax and value-added tax, reads the report”; it “improved access to credit information by reporting both positive and negative data on individual borrowers”; it made paying taxes easier by “implementing an electronic system for filing and paying value-added tax and social security contributions” and less costly by “reducing the corporate income tax rate”; and it made exporting easier by “eliminating the certificate of origin requirement, thereby decreasing the time and cost of export documentary compliance.”
Prime Minister Benjamin Netanyahu welcomed the findings but said there was “still a way[s] to go.”
This summer, Netanyahu presented his cabinet with an internal report detailing ministry-wide efforts to lower Israel’s regulatory burden. The report is an annual update on the Israeli government’s five-year regulation reduction initiative and detailed 58 different plans enacted by various government ministries to reduce procedures in the market and that have saved the economy approximately NIS 1.5 billion (approximately $42 million) since last year, the Prime Minister said in a July statement.
The report included plans formulated by 12 government ministries and three authorities (the Tax Authority, the Consumer Protection Authority and the Competitiveness Authority) to cancel or reduce over 50 requirements that would prohibit employment and work, such as the cancellation of the demand for a license and test to become a real estate broker, the cancellation of the requirement for a minimum number of vehicles to receive a license to operate a vehicle leasing company, and the cancellation of structural requirements for small pastry bakeries. The plan also detailed over 50 government processes that have been digitized (such as the transition to online licensing examinations, tax payment receipts, etc.)
Netanyahu said the improvement was seen in the latest OECD Product Market Regulation index, published every five years, which saw Israel jump 16 spots from the next-to-last place between Turkey and Mexico in the 2013 index to 18th place in the 2018 index.
The 2013 index essentially prompted Netanyahu to establish a ministerial committee to cut regulation and bureaucracy. “Five years have passed and the OECD issued a new report …. We were almost last and now we have jumped 16 places. This is unheard of,” he said.
But, he went on, “I want another jump forward. I want to be above the average; in the middle is not a good place. I want to be one of the least bureaucratic countries, least regulated countries, in the world, because this means money in consumers’ pockets.”
Last Thursday, following the publication of the World Bank report, Netanyahu said the ministries’ work and efforts were welcome and were “changing the face of the Israeli economy.”
“This is an important achievement. It must be continued,” he added.
Israel’s Finance Minister Moshe Kahlon said the latest “Doing Business” report was “great news for the Israeli economy.”
“It is a signal. The messages are also for global markets and international investors: Come invest here. It is much easier to do business; there is much less bureaucracy. And of course [it is a message] for the international credit rating firms, which see that the State of Israel is moving in the right direction,” Kahlon said.
Daphna Aviram-Nitzan, the director of the Center for Governance and Economics at the Israel Democracy Institute (IDI) who leads the regulation reduction project at the Jerusalem-based research center said that for many years, Israel’s business environment has been “suffering from a burdensome and cumbersome bureaucracy, which negatively affects the willingness of foreign and local business people to invest in Israel, establish factories and in general, conduct business in the country.
“This existing environment is a significant barrier to economic growth and impairs labor productivity,” she said.
Israel’s standing in the World Bank report is a “remarkable improvement” and a result of ongoing efforts by a number of government agencies focused on improving the business environment and reducing regulations facing the business sector, she explained in a press statement issued by the IDI.
Aviram-Nitzan told the Jerusalem Post that the report plays an important role in the decision-making processes of international investors and businesses.
“When investors all over the world decide where to locate their next investment, they look at the tax rate in each country, the growth rate and so on – they also look at the ease of doing business. Time is money so they want to go to places where it is easy to do business. If it is hard to pay taxes, enforce contracts, to get electricity and permits to start businesses in one country, they will prefer to pay more tax and not face such heavy demands in another country,” she told the publication.
Aviram-Nitzan said Israel’s next steps should be a “digital one-stop-shop” to manage and reduce government bureaucracy. “Such an entity would relieve the business sector of the cumbersome processes, slow response times, lack of coordination with government agencies and conflicting regulatory requirements that they often face,” she advised.