Israel’s Economic Deep State Drives High Prices Despite Strong Growth Forecasts

Israel’s macroeconomic indicators appear surprisingly strong, with the Bank of Israel projecting 4% growth and 1.8% inflation for 2026, even after a prolonged war and massive reserve mobilizations. However, ordinary Israelis do not feel wealthy, as food, housing, and car prices remain among the highest in the developed world. According to the OECD, Israel ranks among the five most expensive countries, with prices exceeding what would be expected based on GDP per capita. This discrepancy is attributed to a structural issue dubbed the "economic deep state," a complex system of entrenched interests, regulations, and barriers that protect established players rather than a secret conspiracy.

Economist Mancur Olson’s theory explains how small, organized groups like large importers, banks, and food suppliers can dominate markets by investing heavily to maintain profits, while consumers lack incentives to organize against them. This creates a "rent economy" where incumbents fiercely defend their positions, and newcomers face endless regulations and licensing hurdles. For example, three suppliers control about 84% of food sales, and direct importers dominate over 97% of the car market. Banking is similarly concentrated, with five major groups holding nearly all assets, prompting the Competition Authority to label them a "concentration group" despite opposition from the Bank of Israel.

In housing, the state itself contributes to shortages through slow planning and licensing processes, sometimes taking 13 years from planning to occupancy. The "revolving door" phenomenon, where regulators and industry insiders frequently switch roles, reinforces this system by aligning the interests of regulators with those of the regulated, without necessarily involving corruption.

The article also critiques the selective nature of the recent Kaplan protest, which opposed political concentration of power but largely ignored entrenched economic powers affecting everyday costs. The protest supported forces labeled "professional" or "independent," which often align with the old hegemonic economic structures. Addressing Israel’s high cost of living requires dismantling this economic deep state by opening imports, reducing entry barriers, breaking up concentrated markets, limiting the revolving door, accelerating construction, and enabling genuine competition. Without such structural reforms, Israelis will continue paying rents to entrenched powers, many of which ironically supported the very protest that ignored them.

The piece is authored by Prof. Moshe Cohen-Eliya, founder of "Masad Haaretz," a research institute focused on Israeli society.