Israel's level of economic freedom fell five places in this year's Economic Freedom of the 2007 World Annual Report of the Jerusalem Institute for Market Studies economic think-tank published Tuesday.
The report placed Hong Kong first in its international rankings, followed by Singapore and then New Zealand in third place.
Despite dropping from 39th place in 2006 to 44th this year, Israel's cumulative score improved 0.1 points to 7.1 in 2005, the last year in which data is available.
"Israel has seen drastic improvements over the past 25 years and become a freer society," said Corinne Sauer, director of the Institute "This coincides with a global trend towards greater economic freedom and while Israel has moved from a socialist to a post-socialist economy, it is not moving fast enough to keep up with the rest of the world."
The peer-reviewed report uses 42 different measures to create an index ranking countries around the world based on policies that encourage economic freedom. According to the Institute, the cornerstones for economic freedom are personal choice, voluntary exchange, freedom to compete and security of private property.
"While Israel has seen several positive changes such as the decline of socialism in kibbutzim and a burgeoning hi-tech sector and tremendous entrepreneurship, Israelis are more divided then ever - there is greater support for capitalism and a free economy then ever before, yet there are other segments of Israel's population that have become entrenched in their support for socialism and an unfree economy," added Sauer.
The report noted that Israel's ranking was weakened significantly due to the country's oversized government, its extremely burdensome tax rates, bureaucracy costs and the ownership of banks, which are controlled by a small number of competitors.
"The concentrated banking sector limits competition and hurts everyone and results in less investment. Israel's working class is especially hit hard by the lack of competition," said Sauer.
While the report highlights many of the country's most vexing and complicated problems, at least one economist feels that the solution is very straightforward.