How the outbreak of war is putting Israel’s economy to a tough test

Hundreds of thousands of Israelis were evacuated from the borders of Gaza and Lebanon or called up as reservists. One group in particular is now missing from the job market. It is central to the recovery of the economy.

After being evacuated from their homes on the border with the Gaza Strip, tens of thousands of Israelis have been housed in other parts of the country. Many are waiting in holiday apartments or hotels – for example in Eilat on the Red Sea – for the fighting to end. Many people have also fled or been taken from the northern border regions with Lebanon to safer parts of the country. Overall, estimates of the number of Israelis evacuated vary between 200,000 and 250,000.

Around 360,000 reservists have so far been called up to fight against Hamas, Islamic Jihad and Hezbollah. In the evacuation zones, shops are closed and companies have shut down.

In addition, no tourists have come to the country since the Hamas massacre on October 7th, which killed around 1,200 people. Hardly any foreign airlines still fly to Israel, says Dan Ben-David, an economist at the Shoresh Institution and Tel-Aviv University, in an interview with Deutsche Welle (DW). And this in a country where many people make a living from tourism. The economist confirms that economic life has actually come to a virtual standstill. But how can the State of Israel survive such a situation?

“The fact that people are being evacuated means they have to live somewhere. And many of them are staying in hotels that someone has to pay for,” says Ben-David.

We have all of this under control so far. “But the impact depends on a whole range of variables: How long will the war last? Will Hezbollah intervene in the war? And if the war continues, how long will we need the reservists?”

If 360,000 people are in the army, that means their spouses can’t work either. Ultimately, someone has to look after the children, especially since many schools are closed, says Ben-David.

Israel’s dependence on high technology

“In Israel, only about ten percent of employees work in high technology, but they are responsible for over 50 percent of our exports,” explains the professor at Tel-Aviv University.

These people are relatively young and a large number of them are in uniform in Gaza or on the Lebanese border and do not work. This is not a proportional problem in which the gross domestic product (GDP) falls by 20 percent if ten percent or 20 percent of the workforce is drafted into the army, said Ben-David.

It’s more about who these people are. It is primarily young, well-educated people who serve in the army. And these are usually the ones who have the highest productivity. “On the other hand, those who are not subject to military service, for example the ultra-Orthodox or the Arab Israelis, have very low productivity,” emphasizes the economist.

Gilad Malach, director of the Israel Democracy Institute, calculates that almost half of all ultra-Orthodox men do not have a job. They and their families, most of whom have large families, live on state subsidies worth billions, which Prime Minister Netanyahu’s ultra-Orthodox coalition partners would like to increase even further.

The economic damage is even greater because the productive, well-educated Israelis in particular are now completely excluded from economic activity as a result of their drafting. “Because we are so dependent on high technology, which is both good and bad, we have put all our best eggs in one basket,” says Ben-David. This means that everyone in Israel will be in trouble if the high-tech industry suffers a setback.

High-tech industry as a savior in the crisis

In the past, the high-tech industry has often protected Israel from the worse effects of economic crises. High technology has helped Israel get out of recessions more quickly or avoid economic downturns in the rest of the world.

After the second intifada (September 2000 to February 2005, editor’s note), the country was in ruins for quite a while until the numerous suicide attacks decreased and the Israeli army asserted military control over the West Bank.

“But the economic recovery that followed was phenomenal because high-tech was the main driver of growth. Then came the Great Recession of 2008 and 2009, the worst recession in the Western world since the Great Depression of the 1930s. But Israel didn’t even feel it, because the high-tech industry around the world barely felt it. And because high-tech is very important here, we didn’t notice anything about it,” emphasizes Ben-David.

Israel got through the COVID pandemic in a similar way. Every country was affected by the pandemic; millions of people in industrialized countries had barely worked for a while. “But Israel has recovered faster than almost all other OECD countries. And again it was the high-tech industry that was not as affected worldwide. And since high-tech is much more important for the economy in Israel than elsewhere, our economy has recovered much more strongly,” the economist sums up.

Ben-David’s conclusion is clear: If the war against Hamas does not last too long and Hezbollah does not enter the war in Lebanon, then the Israeli economy could quickly return to its former strength.

Protests against judicial reform are slowing down investments

According to the economist, whether this happens depends primarily on whether Benjamin Netanyahu and his followers remain in power in the future or not. Until the massacre of Israeli civilians on October 7th, mass protests against Netanyahu’s judicial reform had kept the country in suspense.

“Although there was not a complete economic standstill, investments fell significantly. Investments in high-tech sectors declined and share prices fell. Many Israelis withdrew their money from the country and the shekel was significantly devalued,” said the economist.

For Ben-David, the real question is what happens after the war: “If we can throw out Netanyahu and his cronies and restore order, the high-tech industry should probably remain intact. But what happens if not?”

Then not only would more money flow out of Israel, but many people and high-tech companies would also turn their backs on the country, he fears.

A certain trend had already emerged among startup companies before the war. Instead of in Israel, most of the new businesses founded by Israelis were in the USA and elsewhere in the first nine months of 2023.

“When these start-ups are mature and start making money, the tax money will no longer flow to Israel, but to where they are now based,” summarizes Ben-David.

The fact that a number of prominent high-tech entrepreneurs do not agree with Netanyahu’s political course was seen in the mass protests against the judicial reform. Many leaders of the demonstrations came from the high-tech sector, such as entrepreneurs Moshe Radman and Ami Dror. “The unusual thing was that before these high-tech people would never have gotten involved in anything that had to do with politics. They were just too busy developing ideas and making money. They wanted nothing to do with politics. But when they realized that the future of the country was at stake, they took action,” said Ben-David. They were the main financiers of the protests.

His fear is that key representatives of the high-tech industry could leave Israel if Netanyahu can stay in power. In addition, many scientists or doctors could also be thinking about leaving Israel.

Another central figure in the protests is the well-known scientist Shikma Bressler. The physicist is a professor at the top research institute Weizmann Institute of Science. The 43-year-old mother of five children, who became a prominent leader of the protests against judicial reform, works as a particle and astrophysicist not only in Israel. Bressler also conducts research at the European nuclear research center CERN near Geneva, which is best known for its particle accelerator.

Fear of brain drain

The fact that the danger of an exodus of academics is real was already apparent to doctors before October 7th, says Ben-David. In August and September, many Israeli doctors applied to the Ministry of Health for official certificates stating what medical work they do and how long they have been working, the Economist reports. “This is always the first step to apply abroad and work as a doctor there.” The number of these applications has recently risen sharply.

For Dan Ben-David, the fact that Israel’s politicians and generals want to end the war against Hamas in six to twelve months does not mean that 360,000 people can remain in service permanently as reservists. The army must therefore be used much more efficiently, “because people have to go back to work, someone has to pay taxes and provide for their family.”

Enormous financial burdens

According to the Bloomberg news agency, the war is costing Israel around $260 million per day. In October alone, Israel’s budget deficit jumped sevenfold. At the end of October, the national currency, the shekel, fell to an eleven-year low against the US currency, but has since stabilized again following interventions by the Israeli central bank. But for November, the Finance Ministry in Jerusalem announced that it would increase government borrowing by a further 75 percent.

“Israel is a country at war where spending is exploding, revenue is falling and borrowing costs are rising,” says Bloomberg columnist Marc Champion.

Small country with big challenges

Dan Ben-David’s place of residence, Kokhav Ya’ir, near the city of Kfar Saba (in the center of Israel, ed.) borders directly on the “Green Line”. The armistice line, which defined the border of the Jewish state after the War of Independence in 1949, still marks the border with the West Bank in this part of Israel today. At this point, Israel is only around 16 kilometers wide and extremely vulnerable.

“My community borders directly on the Green Line. That means: If the West Bank rises, we will be directly affected,” Ben-David points out.

Israel has neither the territorial size nor enough people to wage long wars. “And that is why we have to strike devastatingly. To end wars as quickly as possible.”

Unless Hezbollah intervenes in the war on a large scale, he warns. “Hezbollah can bomb large parts of Israel and turn them into a parking lot, but we can do much worse to Lebanon,” says Ben-David.

He hopes for the balance of terror – that the certainty of certain mutual destruction will keep Hezbollah from “going crazy.”

If this were to happen, Israel would have no choice but to strike back massively. “But then we are talking about a completely new situation when it comes to the economy here.”

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