Since the war with Hamas began, 200,000 to 250,000 Israelis have fled their homes to relocate to safer parts of the country – away from the northern border with Lebanon and the parts of the country under attack. In the evacuated areas, shops and businesses have closed. At the same time around 360,000 reservists have been called up to fight against Hamas. Furthermore, since October 7, no tourists have visited Israel – a country where many people make their living from tourism.

The effects of the evictions, like the recruitment, are many, as Dan Ben-David, an economist at the Shoresh Foundation and Tel Aviv University, explains to DW. Many of those who have left their homes “stay in hotels, which someone has to pay for”. At the same time, the partners of the 360,000 reservists can no longer work. They have to take care of their children, especially since many schools are closed.

Economic life is virtually at an absolute standstill. How can the country cope with these conditions?

Israel’s dependence on high technology

A problem that still exists is the country’s dependence on high technology. As the professor explains, “only 10% of workers are employed in high technology, yet they produce 50% of our exports”.

These are mainly young people, many of whom were drafted into the army. The issue is not that GDP will decrease proportionally by 20% if 10-20% of workers are recruited. The problem is much more who these people are: qualified young people who are usually also the most productive. “On the contrary, those who do not go to the army, such as the ultra-Orthodox or Arab Israelis, are not as productive,” the economist emphasizes.

Gilad Malach, director of the Israel Democracy Institute, estimates that nearly half of ultra-Orthodox men do not work at all — living primarily off billions in state benefits provided by Prime Minister Netanyahu’s ultra-Orthodox partners.

The high-tech industry as a lifeline

In the past, high technology saved Israel many times – either by pulling the country out of an economic crisis, or by allowing it to completely avoid a recession that the rest of the world was in.

After the Second Intifada (September 2000 – February 2005) the country was collapsing. But then “an unprecedented economic development followed, with high technology as a central pillar”, underlines Ben-David. “When the Great Recession of 2008-2009 later hit, the worst recession in the Western world since the 1930s, Israel never experienced it because globally the high-tech industry was barely affected.”

The same thing happened during the pandemic – Israel and its economy recovered much faster than many other countries because they rely so heavily on high technology, which once again did not take a significant hit.

At this stage the Israeli economy could once again recover rapidly – ​​as long as the war is of limited duration and does not escalate with the involvement of Hezbollah.

The protests are affecting investment

However, whether or not the Netanyahu government remains in power will be a catalyst for the country’s economic course. Because the protests against judicial reform that took place before October 7th had significant economic consequences.

“There was no complete economic stagnation, but investment was significantly curtailed, for example in the high-tech sector, while stock prices fell. Many Israelis pulled their money out of the country and the shekel lost a lot of its value,” explains Ben-David. And the economist fears that if Netanyahu remains in power, the economic fallout will continue, while many high-tech companies may turn their backs on the country. After all, even before the war in the first nine months of 2023, most Israeli start-ups were in the US. and other countries, than in Israel.

The difference of opinion between high-tech companies and Netanyahu is also demonstrated by the fact that many of the leaders of the protests against judicial reform came from such companies. In fact, they were also the most important sponsors of the demonstrations. For years they were not involved in politics – but now they believe that the future of the country is at risk. At the same time, Ben-David fears that many university graduates may also leave the country.

The huge financial costs and challenges

According to Bloomberg, the war is costing Israel about $260 million a day. The budget deficit increased sevenfold in October, while at the end of the month the shekel-dollar exchange rate fell to an 11-year low. The Ministry of Finance announced that in November government borrowing will increase by 75%.

Ben-David lives near the city of Kfar Saba, in the center of Israel, next to the “green line”, i.e. the border with the West Bank. At this point Israel is only 16 kilometers wide and is particularly vulnerable.

“If the West Bank rises up, my area will be hit immediately,” says the economist. He believes that, because Israel is neither large nor has a sufficient population, “we must strike relentlessly. So that the war ends as soon as possible.”

As for the possibility of Hezbollah’s involvement, it “can bomb areas of Israel and literally turn them into parking lots, but we can do much worse in Lebanon.” The economist hopes this balance of terror will prevent Hezbollah from going “crazy.”