The political economy of rent seeking: The case of Israel's water sector

Abstract

The paper examines the success of Israeli farmers in retaining their political clout at a time when their sector was shrinking. Comparing differing explanations, it is shown that since the 1970s farmers' effective rent seeking explains their success in an ongoing political struggle – mainly against the Ministry of Finance – to buy water at subsidized rates. The characteristics of Israeli farmers' successful rent seeking are portrayed, and the logic behind success is analyzed. Finally its consequences – directly influencing income distribution, and indirectly contributing to aquifer depletion and desalination postponement – are examined.

Acknowledgements

The knowledge and insight of Saul Arlosoroff and Eran Feitelson were of great help in writing the paper. Itzhak Galnoor, Daniel Gottlieb, Ran Sharabani and two anonymous referees provided very helpful comments on the draft. All remaining errors and omissions should be attributed to the writer of the paper.

Notes

1. Rauser and Zusman 1991 offer a formal economic model of the activity of interest groups in the water sector, the conclusions of which are consistent with Olson's analysis. In a recent contribution Feitelson (2005) offers a game-theoretical perspective of the political economy of Israel's groundwater exploitation.

2. The state's control over water does not necessarily mean the existence of rents, since water can be sold to customers at non-subsidized rates.

3. Water costs are between 10 per cent and 20 per cent of all costs in Israel's plant farming (Kislev and Vaksin 1997). These numbers, together with the low profit margins typical of such farming, explain the importance of water subsidies for its profitability (for instance, abolishing a 50 per cent water-price subsidy would be equivalent to levying a 5 to 10 per cent tax on plant farming).

4. The Agricultural Center, representing most of Israel's farmers, coordinates the sector's positions and activities.

5. The Manufacturers Association is Israel's industrialists' representative organization.

6. It was also confined by the clout of Tahal, another agency active in the sector (Margoninsky 2004: chap. 4).

7. In 2002, for instance, it was 0.075 per cent of GDP (the calculation can be obtained from the author).

8. On this see Aharoni 1991 and Kleiman 1997.

9. On the development of Israel's aquifers see Gvirzman 2002 and Zaslavsky 2002.

Additional information

Notes on contributors

Yossi Margoninsky

Yossi Margoninsky works for Israel's central bank; he has been working on financial stability and exchange rate regimes, among other issues, and was advisor to Governors Bruno and Frenkel. He received his PhD in 2005 from the Hebrew University of Jerusalem. His dissertation analysed environmental change processes, using Israel's water sector as a test case.