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Can the Israeli economy withstand the current conflict? – DW – 11/18/2023

After being evacuated from their homes on the border with the Gaza Strip, tens of thousands of Israelis now reside in other parts of the country. Many people living along the northern border with Lebanon also moved to safety. The total number of Israelis evacuated is estimated at between 200,000 and 250,000. In addition, around 360,000 reservists have already been called up to the army.

Businesses closed in areas where residents were evacuated. Moreover, since the October 7 Hamas attack that killed 1,200 Israelis and foreigners and sparked the current conflict, tourism has ceased, cutting off one of the country’s main sources of income. Almost no foreign airlines still fly to Israel, Dan Ben-David, professor and director of the Shoresh Institute for Socio-Economic Research, based at Tel Aviv University, told DW.

So far, this break with economic life remains under control, he said. “But the impact depends on a whole host 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 military, then many spouses will have to give up work to care for children, especially since many schools have been closed, Ben-David added.

Empty shelves at an Israeli supermarket on October 13 after frightened residents stocked upImage: Nir Alon/Zuma/IMAGO

“All our best eggs in one basket”

The war will also strain another key sector, the technology industry. “In Israel, only about 10% of employees work in the high-tech sector, but they are responsible for more than 50% of our exports,” Ben-David said.

Most of these workers are relatively young and now serve in the army in Gaza or on the Lebanese border. The problem is not with the percentages, where one would think that the gross domestic product (GDP) would fall by 20% if 20% of the workforce were enlisted in the army, he explained. Instead, it focuses on who exactly these recruits are: they are young, well-educated and very productive.

In contrast, those who were not drafted tend to have lower productivity, the researcher said.

Gilad Malach, director of the Ultra-Orthodox Society Program at the Israel Democracy Institute, estimates that nearly half of ultra-Orthodox men do not work. They and their often large families receive billions in state subsidies that Prime Minister Benjamin Netanyahu’s ultra-Orthodox coalition partners would like to increase even further.

“Because we are so dependent on the high-tech industry, which is both good and bad, we have put all our best eggs in one basket,” Ben-David argued, adding that a setback in this area would have an impact on the entire country.

One of the many tech entrepreneurs opposed to Netanyahu: Moshe Radman (4th from left, white T-shirt), at a protest in July 2023Image: Matan Golan/Imago Images

The technology industry as an economic buffer

In the past, the tech industry has mitigated the worst effects of economic crises, helping Israel emerge from recessions more quickly and avoid economic downturns that hurt other parts of the world.

After the Second Intifada – a period of violence and Palestinian uprising between September 2000 and February 2005 – the country’s economy was in poor shape. “But the economic recovery that followed was phenomenal because technology was the main driver of growth,” Ben-David said. “Then came the Great Recession of 2008 and 2009, the worst recession the Western world had seen since the Great Depression of the 1930s. But Israel didn’t even feel it because the world’s high-tech industry l “We barely felt it. And since technology is so important here, we didn’t notice anything.”

Israel experienced the COVID-19 pandemic in a similar way. While all countries were hit by the pandemic, with millions of people barely working for a while, Israel recovered faster than most thanks to the strength of its tech industry.

Ben-David concludes that if the war with Hamas does not last too long and Hezbollah does not enter the war, then the Israeli economy could quickly return to its former strength.

Demonstration against Benjamin Netanyahu’s judicial reforms on September 9 in Tel AvivImage: Mustafa Alkharouf/AA/photo alliance

Protests hampered investments

But that will depend on whether Netanyahu and his supporters remain in power. Before the war began, massive protests against his judicial reforms had kept the country in suspense.

“While the economy is not completely at a standstill, investment has fallen significantly,” Ben-David said. “Investment in the high-tech sector declined, stock prices fell. Many Israelis withdrew their money from the country and the shekel was significantly devalued.”

The real question is what will happen after the war, the economist said. “If we manage to expel Netanyahu and his cronies and restore order, the high-tech sector should probably remain intact. But what if not?”

It is likely that more money will flow out of Israel as tech companies turn their backs on the country, Ben-David said, citing a trend that had already emerged among startups before the current conflict. In the first nine months of 2023, most Israeli startups were founded in the United States and elsewhere, rather than in Israel, meaning a loss of tax revenue, he added.

A prominent face of the protest: physicist Shikma BresslerImage: Jack Guez/AFP/Getty Images

The brain drain is underway

During the massive protests against the judicial reforms, it became clear that a number of high-profile tech entrepreneurs disagreed with Netanyahu’s policies. In fact, many of those who led and even financially supported the anti-government protests came from the tech sector, such as entrepreneurs Moshe Radman and Ami Dror.

“What’s unusual is that in the past, these techies would never have gotten involved in anything to do with politics. They were simply too busy developing ideas and making money.” , said Ben-David. “But when they realized that the future of the country was at stake, they took action.

If Netanyahu remains in power, prominent figures in the tech industry, as well as scientists and doctors, could also consider leaving Israel, the economist said.

For example, another central figure in the anti-government protests was physicist Shikma Bressler, a professor at the Weizmann Institute of Science in Rehovot, central Israel.

Ben-David believes that the danger of an exodus of academics like Bressler and other professionals was already brewing before October 7. In August and September, there was a sharp increase in the number of Israeli doctors requesting official certificates from the Health Ministry confirming their expertise and work. files – the first step in applying for a job abroad.

Israeli ground troops deployed to the Gaza Strip on November 2Image: Israel Defense Forces/AP Photo/photo alliance

A huge financial burden

According to Bloomberg According to one media outlet, the war is costing Israel around $260 million (238 million Є) per day. In October alone, Israel’s budget deficit increased sevenfold. By the end of the month, the national currency, the shekel, fell to an 11-year low against the dollar, although it has since stabilized following interventions by the Israeli central bank. However, the Jerusalem Finance Ministry announced that it would further increase public borrowing by 75 percent in November.

In a column Friday which criticized the policies proposed by Jerusalem to deal with economic tensions linked to the war, Bloomberg Columnist Marc Champion summed up the difficult economic situation this way: “Israel is a country at war, with exploding spending, reduced revenues and rising borrowing costs. »

This article was originally published in German.

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