2009 Index of Economic Freedom

Quick Facts

Population:

• 7.0 million

GDP (PPP):

• $169.8 billion
• 5.2% growth
• 3.4% 5-year compound annual growth
• $24097 per capita

Unemployment:

• 7.3%

Inflation (CPI):

• 0.5%

FDI Inflow:

• $14.3 billion

Israel's economic freedom score is 67.6, making its economy the 42nd freest in the 2009 Index. Its overall score increased by 1.3 points, reflecting improved scores in fiscal freedom, monetary freedom, and particularly financial freedom. Israel is ranked 2nd out of 17 countries in the Middle East/North Africa region.

For five years, Israel's diversified economy has enjoyed steady growth of about 3.5 percent annually, and unemployment has declined. Benefiting from its openness to global trade and investment, Israel's overall economic competitiveness is supported by strong protection of property rights and relatively low corruption. Inflation is low, although the government interferes with the market by subsidizing certain basic goods.

Israel remains committed to economic restructuring and development, and there is room for improvement in government size and fiscal freedom. Government spending equals almost half of GDP. Income and corporate tax rates remain relatively high, but tax cuts are scheduled to be implemented in coming years.

Background Back to the top

Established in 1948 under a U.N. plan to partition the former British mandate in Palestine, Israel was attacked by neighboring Arab states that rejected the plan. Repeated conflicts have imposed a high defense burden on the economy. Israel began to move away from a socialist economic model in the mid-1980s and made even more free-market gains in the 1990s. One of the benefits has been the emergence of a thriving technology sector. The collapse of the 1993 Oslo peace agreement with the Palestinians and the onset of the “Second Intifada” in September 2000 depressed tourism, discouraged foreign investment, and contributed to economic recession, but the economy rebounded in 2003 and 2004 as a result of increased foreign investment, restored tourism, and a greater demand for Israeli exports, especially high-technology goods and services. Despite the 2006 war against Hezbollah forces in Lebanon and continued Palestinian terrorist attacks, the economy has grown significantly.

Business Freedom 67.8 Back to the top

The overall freedom to conduct a business is relatively well protected under Israel's regulatory environment. Starting a business takes an average of 34 days, compared to the world average of 38 days. Obtaining a business license requires slightly more than the world average of 18 procedures and 225 days. Bankruptcy can be lengthy and costly.

Trade Freedom 86.0 Back to the top

Israel's weighted average tariff rate was 2 percent in 2006. Import bans and restrictions, high agriculture tariffs, import fees and taxes, a complex and non-transparent tariff rate quota system, restrictive labeling requirements, import licensing, non-transparent technical standards and government procurement, and export subsidies add to the cost of trade. Ten points were deducted from Israel's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 57.1 Back to the top

The top income tax rate is 47 percent (to be reduced to 44 percent by 2010), and the top corporate tax rate is 27 percent (to be reduced to 26 percent as of 2009). Other taxes include a value-added tax (VAT) and a capital gains tax. In the most recent year, overall tax revenue as a percentage of GDP was 36.8 percent.

Government Size 35.1 Back to the top

Total government expenditures, including consumption and transfer payments, are high. In the most recent year, government spending equaled 46.5 percent of GDP. Privatization has accelerated in recent years.

Monetary Freedom83.7 Back to the top

Inflation is very low, averaging 1.0 percent between 2005 and 2007. The government influences prices through the public sector and provides some subsidies, especially for agriculture production. The energy sector remains largely state-owned and heavily regulated, and the government can impose price controls on vital goods and services. Ten points were deducted from Israel's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom80.0 Back to the top

Foreign investment is restricted in a few sectors, such as defense, but is not screened, and regulations on acquisitions, mergers, and takeovers apply equally to foreign and domestic investors. Investments in regulated industries, such as banking, require prior government approval, as does the receipt of investment incentive benefits. Commercial law is consistent and standardized, and international arbitration is binding in dispute settlements with the state. Bureaucracy can be complex and burdensome. Residents and non-residents may hold foreign exchange accounts, and there are no controls or restrictions on current transfers, repatriation of profits, or other transactions.

Financial Freedom70.0 Back to the top

Israel's small but growing financial sector has been restructured in recent years but is still dominated by the highly concentrated banking sector. The country's five main banking groups together held more than 95 percent of total assets as of June 2007. Commercial banks provide a full range of financial services that facilitate entrepreneurial activity and development of the private sector. Credit is available on market terms, and financial institutions offer a wide array of credit instruments. Supervision is prudent, and regulations conform to international norms. The 2005 Bachar Reform bars commercial banks from owning holdings in mutual funds and provident funds that resemble pension savings. Since reforms in 2003, capital markets have been largely liberalized as part of Israel's effort to reinvent itself as a finance hub.

Property Rights70.0 Back to the top

Contractual arrangements are generally secure. Commercial law is clear and consistently applied. Expropriation reportedly occurs only if the property is linked to a terrorist threat and expropriation is deemed to be in the interest of national security. Jurisdiction for the enforcement of intellectual property rights is problematic, especially since responsibility in the West Bank and Gaza rests with the Palestinian Authority.

Freedom From Corruption61.0 Back to the top

Corruption is perceived as present. Israel ranks 30th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Recently, there have been numerous allegations of misconduct by senior political figures and in government ministries. Israel has not signed the OECD Anti-Bribery Convention.

Labor Freedom64.9 Back to the top

Israel's relatively flexible labor regulations could be improved to enhance employment and productivity growth. The non-salary cost of employing a worker is low, but dismissing a redundant employee is relatively costly. Restrictions on the number of work hours are not flexible.