Israel’s Cottage-Cheese Rebellion

This spring’s Arab revolts were ignited by rapidly rising food prices, but they soon mutated into political rebellions protesting decades of brutal oppression. Similarly, rising food prices in Israel have led to widespread protests this summer—dubbed the “cottage-cheese rebellion"—which could grow into an uprising against a dysfunctional political system and an economic system long controlled by monopolies and cartels.

In April 2010, the Bank of Israel’s annual report on the economy included a study showing that “some 20 business groups, nearly all of a family nature and structured in a pronounced pyramid form, continue to control a large proportion of public firms (some 25% of firms listed for trading) and about half of market share.” Despite Prime Minister Benjamin Netanyahu’s efforts to introduce free-market reforms, not much has improved over the past year. From diapers to cars, the Israeli consumer is at the mercy of local manufacturers and government-certified importers, monopolies and cartels that inflate prices by 100% and more.

The cottage-cheese rebellion started after a major business publication ran a series of features comparing food prices in Israel and abroad. People realized that while salaries in Israel are about half those in America, prices of consumer goods and services are about double. Exorbitant profits, fees and taxes make even the cheapest imported automobiles cost between $35,000-$40,000, and a gallon of gas costs almost $10. A small apartment can cost the average Israeli worker 12 years in annual salary. Water and electricity costs are inordinately high, and poor government-run education leads many families to spend a mint on private tuition.

Izhak Alrov, a member of the ultra-orthodox community of Bnei Brak and a cantor by avocation, was outraged by what he experienced trying to survive on a modest salary. In June, the 25-year-old opened a Facebook page and called for a consumer boycott of one staple—cottage cheese. The response was electrifying. Over 100,000 long-suffering consumers soon joined the boycott. Stores reported a steep decline in cottage-cheese sales.

At first, Israel’s two huge food conglomerates, Tnuva (headed by Zahavit Cohen) and Strauss (chaired by Ofra Strauss), blamed cottage cheese’s high price on rising production costs beyond their control. But relentless reporting—especially by the Marker, a pro-market business publication—revealed that the consumer was being fleeced at each stage of production, from the high-prices charged by milk-producing cooperatives and the conglomerates’ own dairies, to retail chains that divvy up market share to curb competition and inflate prices. The boycott forced the cartel to cut prices.

Mr. Netanyahu has done his best to enhance competition, sharply cutting personal and corporate taxes. But a high proportion of taxes is still levied as regressive indirect taxes (Israel’s value-added tax, for example, is 16%) which fall heavily on the poor.

At the same time, bureaucracy and costly regulations stymie entrepreneurship and inhibit economic growth. Government owns 93% of all land in Israel and the inflated prices it charges, plus its maze of regulations and codes, raise construction costs to prohibitive levels.

Misallocation of credit by banks and other financial institutions has been inhibiting growth as well. Despite then-Finance Minister Netanyahu’s financial-market reforms that broke Israel’s bank duopoly in 2005, a tiny fraction of the population still uses a third of all credit, which they leverage into highly risky investments, mostly in foreign real estate. Small and medium-size businesses, the most productive enterprises in the economy, are credit-starved, as are the outlying areas of the Galilee and the Negev.

The cottage-cheese rebellion is transcending its immediate cause, the high cost of food. It is spreading to other goods and services, especially housing, and it has given voice to a feeling of economic helplessness. Not surprisingly, radical elements are trying to exploit legitimate grievances to unseat Mr. Netanyahu, who is trying to overcome oligarchs’ and bureaucrats’ stiff resistance to reform. But the rebellion may yet bring the right kind of change to Israeli society—truly competitive markets and a more accountable political class.