Israel dropped three places in the Heritage Foundation's annual economic freedom ranking, and is now 51 out of 185 nations.
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Israel received a grade of 66.9, which puts it in the category of moderately free, according to the conservative think tank. The global average is 59.6 this year, but the 60 top-ranked economies have an average of 84.5.
The Washington, D.C.-based Heritage Foundation publishes its Index of Economic Freedom in partnership with the Wall Street Journal. The ranking measures countries' freedom in terms of property rights and freedom from government regulation, averaging 10 factors that include government corruption, international trade barriers, income tax and enforcement.
Israel fell in the rankings because its score dropped in six categories including budgetary freedom and freedom from corruption.
Hong Kong has been ranked number one for 19 years running, although its score was lower this year than last year. It was followed by Singapore, Australia, New Zealand, Switzerland and Canada. The United States was ranked 10th.
The countries at the bottom of the list are North Korea, Cuba, Zimbabwe and Venezuela. Afghanistan, Iraq, Libya, Lichtenstein, Sudan and Syria are not included in the rankings.
Israel is ranked below countries including Mexico, Jordan and Qatar, but higher than France and Italy.
Israel ranked a relatively high 26th when it comes to intellectual rights, one of the 10 factors in the ranking. "The relatively sound judicial framework that sustains the rule of law and provides consistent protection for property rights has contributed to Israel's stability and long-term competitiveness," states the report. Also on the positive side, it notes, "Openness to global commerce supports productivity growth. With an increasingly diversified productive base and ongoing structural reforms, Israel's growth has been about 5 percent annually over the past five years."
In the freedom from corruption ranking, Israel is 36th. "Relatively effective anti-corruption measures help to strengthen the foundations of economic freedom," it states.
The country's rankings are relatively low when it comes to government intervention in the economy. Israel's score dropped in this regard over the past year, due to its high income taxes, among other reasons. The report notes that the highest income tax bracket was raised to 28% and that corporate tax rates increased to 25%. Israel ranked 163rd in terms of fiscal freedom and 145th in terms of government spending.
The report also had mixed things to say about the atmosphere for new initiatives. "The relatively efficient regulatory framework supports business formation and innovation. With no minimum capital required, launching a business takes only five procedures on average," it states. "However, obtaining necessary permits involves about 20 procedures and over 200 days. The labor market needs more flexibility to accommodate rapid economic transformation," it adds.
It ranked Israel 87th when it comes to business freedom, 75th in labor market freedom and 52nd in monetary freedom. Israel did relatively well when it comes to investment freedom (17th ) and financial freedom (also 17th ). But it came in only 49th in trade freedom due to barriers including customs duties.
"Respect for the principle of limited government, however, has weakened, entailing new risks for Israel's economy. Fiscal consolidation and better management of public finance are needed to curb a growing debt burden caused by growing government spending," it states.
The think tank defines economic freedom as "the fundamental right of every human to control his or her own labor and property. In an economically free society, individuals are free to work, produce, consume and invest in any way they please, with that freedom both protected by the state and unconstrained by the state."