Regulatory Reform and Shakeout in Israel’s Bread Industry, 1948-1977

Daniel Schiffman, Ariel University
Eli Goldstein, Ashkelon Academic College

During 1953-1977, the number of Israeli bread bakeries declined from 443 to 90. In this paper, the first study of Israel's bread industry, we use archival materials to document the role of regulatory reform in accelerating the shakeout. In the early 1950s, the government controlled wheat imports, bread and flour prices, subsidies and bakery credit. Large bakeries were mechanized/profitable; small bakeries were nonmechanized/unprofitable. Massive excess capacity existed: Bakeries worked one 8-hour shift because consumers demanded hot bread in the morning, and night baking was illegal. The industry was ripe for a shakeout, but the shakeout was delayed, due to a special feature of the price-setting mechanism: The bakers lobbied to base prices on small bakery costs ("cost-plus for primitive bakeries"), and policymakers obliged. This ensured the survival of small bakeries and generous profits for large bakeries, and created a perverse incentive for large and small bakeries to coexist. Israel’s leading policymakers, Eshkol and Sapir, decided to end the status quo. Eshkol increased the flour cost/price ratio for standard bread (1952-1954). Sapir declared that prices would be based on medium bakery costs, reduced real bread prices, and abolished small bakery credit (1955-1960). These reforms eliminated the incentive to coexist. Large bakeries expanded capacity and output, thus driving small bakeries out of business: Over 1959-1963, mechanized bakeries’ market share rose from 32% to 62%; nonmechanized bakeries’ market share declined from 52% to 25%. During 1964-1974, Sapir froze bread prices and conditioned large bakery credit on cooperation. Sapir maintained the freeze even though large bakeries were unprofitable by 1964-1965, and global wheat prices had increased by 278%. During 1973-1977, large bakeries moved illegally to three shifts, with explicit government approval; by January 1977, just 90 bakeries remained. Although mechanization made Israel’s bakery shakeout inevitable, the Eshkol/Sapir regulatory reforms almost certainly accelerated the process.

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 Presented in Session 216. Industries, Regulations and Subsidies