Despite the immense expense of Israel’s war with Gaza — predicted to total US$67 billion by 2025 in military and civilian costs — most segments of the Israeli economy are faring well. The overall economy grew by 2.5 per cent in the first half of this year and is expected to end the year two per cent higher than last. Israel’s Jews are optimistic: 67 per cent expect the economy to flourish once the war is over. (Only a quarter of Arab Israelis feel the same way, however.)
Tourism may be down by 80 per cent but restaurants and shopping malls remain busy and — a manpower-related slowdown in the construction sector notwithstanding — so many high-rises are being built to meet the ever-growing demand for commercial and residential space that people joke that Israel’s national bird has become the crane.
Israel’s arms industry obviously benefits economically from Israel’s many wars, which provide a battle-tested showcase for the technological superiority of the country’s military. Despite needing to supply Israel’s own military during the Gaza War, the arms industry set a record in 2023 (for the third year in a row) with US$13 billion in export sales. In the global arena, Israel ranks among the top 10 arms exporters.
Such exports not only strengthen Israel’s economy, they also make Israel indispensable to countries that depend on its advanced technologies to counter regional threats. Almost 50 per cent of Israel’s arms exports go to Asian countries threatened by China, while another 35 per cent go to Europe, much of it to countries fearing the Russia-Ukraine war could spread to their own borders. As an example of the good will that accompanies Israel’s military sales, almost two-thirds of German citizens welcomed Germany’s purchase of Israel’s Arrow-3 missile defence system, according to a 2,500-person poll by ELNET, an organization that promotes ties between Europe and Israel.
Israel’s indispensability to foreign militaries could soon increase. After pressure from the anti-Israel lobby led the Biden administration to curtail its arms sales, Israel’s Defense Ministry implemented what it calls its “Independence Project” — a shift toward domestic arms production to meet what it considers an existential threat from Iran and its proxies. As a byproduct of bringing arms manufacturing home, Israel’s arms exports will likely rise, including to markets previously prohibited by the U.S.
Israel’s sale of its Arrow missile defence system to Finland is a recent example of how U.S. participation in developing Israeli technology can hamstring Israel’s exports. The U.S., which acts primarily as a venture capitalist by financing Israel’s military inventions, only permitted the $339 million sale to go through after Finland joined NATO. Many other countries continue to be blocked from acquiring the Israeli weapons they prefer, leading them to instead purchase second-best alternatives produced by U.S. weapons manufacturers. In future, Israel can minimize such entanglements by unwinding the dependence on U.S. venture capital that entitles the Americans to veto sales of Israeli inventions.
Once the fighting stops in the current war against Iran and its proxies, Israel will likely experience an unprecedented economic boom. Israel’s army has relatively few career soldiers so the depletion of the workforce necessitated by calling up almost 300,000 reservists will end as the reservists return to civilian employment. At the same time Israel’s 100,000 internal refugees — forced to abandon their homes and workplaces due to rocket fire from either Hamas in the south of Israel or Hezbollah in the north — will also return to full employment.
Immigration is also likely to soar. Applications from North America are up 120 per cent since October 7. From France, where antisemitism is especially pronounced, the increase is 500 per cent. And tourists will return in their hundreds of thousands.
The only people who may not return to Israel in large numbers are the Palestinians who before Oct 7th commuted daily from Gaza and Judea and Samaria (the West Bank). Because Gazan workers collected the detailed intelligence that enabled Hamas’s meticulously planned invasion, and because the overwhelming majority of Palestinians in Judea and Samaria endorse the butchery of October 7, most Israelis no longer trust the Palestinians they had previously employed. Instead of relying on them, Israel has already begun recruiting tens of thousands of Indians, who are attracted by salaries 10 times those they earn domestically, to replace the 85,000 Palestinians previously employed in construction.
Israel’s need to defend itself against and deter its heavily armed, populous neighbours has for decades burdened its economy. The 5.3 per cent of GDP it spends on its armed forces is more than twice what most western nations spend. But the tragic succession of wars has necessitated that Israel be the mother of military inventions, and that has made it a go-to country for many nations that, like it, face threats from belligerent neighbours.