Defying Gravity: Israel's (War) Economy

Israel is a land of economic contradictions. An example? The country’s thriving, highly resilient economy is a direct outgrowth of Israel’s historic lack of natural resources. Go figure.

A few decades ago, Israel was primarily known as an exporter of Jaffa oranges and textiles, along with polished diamonds. The initial years after independence were particularly austere, as the fledgling country fought for its very existence while simultaneously absorbing hundreds of thousands of Jewish immigrants fleeing the Arab world and the ashes of Europe. In the 1950s, reparations from Germany paid to Israel, along with donations from the worldwide Jewish community, were plowed directly into national infrastructure projects designed to achieve self-sufficiency. These investments paid off as Israelis—while by no means wealthy—were able to begin to sustain themselves.

In the aftermath of the 1973 Yom Kippur War, Israel’s economy entered a precarious period in which growth stalled and inflation rose, heavily burdened by the staggering cost of the country’s continued defense. By the mid-1980s, with hyperinflation peaking at over 450%, the situation came to a head, prompting vigorous government action and significant economic reforms that staved off collapse and set the course for stability into the 1990s.

That baseline stability paved the way for massive growth. Following the downfall of the Soviet Union in the early 1990s, a massive wave of nearly one million Soviet Jews chose to make the Jewish state their home. Many arrived with advanced degrees and high levels of technical training, jump-starting the national economy and transforming cities such as Ashdod, Ashkelon, and Rishon LeZion. Concurrently, the 1991 Madrid Peace Conference attracted foreign capital to Israel and opened access to critical new markets. Significantly, Israel’s long-term investment in high-tech began paying off. The military had for decades relied upon technological advantages to overcome numerical superiority. With the advent of the internet, graduates of elite technical intelligence units began creating startup companies that became the stuff of legends.

While the dot-com bust and the second intifada in the early 2000s took a heavy toll, the economy clawed its way back. By the time of the 2008 global financial crisis, Israel’s economic core was so robust that the downturn barely registered. Today, Israel boasts the most startup companies in the world aside from the United States and the third-largest number of companies listed on the NASDAQ stock exchange after the US and China. Though Israel recently discovered large natural gas reserves in its territorial waters, for most of its history, it had to rely on human capital. This scarcity drove Israel to become a global leader in solar energy, drip irrigation, and saltwater desalinization, with much of the country's drinking water now sourced from the ocean.

The standard economic playbook suggests that a prolonged, multi-front military conflict should trigger severe economic devastation. Yet, the post-October 7 landscape has revealed a surprisingly robust wartime economy that continues to defy international expectations. While sectors like tourism and local construction faced immediate disruption, Israel’s core economic engines have remained remarkably steady. A primary driver of this unexpected resilience has been a global surge in demand for proven Israeli defense technology. Facing an increasingly unstable global security environment, countries around the world have dramatically increased their procurement budgets, turning directly to the battlefield-tested innovations of the Israeli defense industry.

Consequently, Israel's defense exports hit an all-time historic record, crossing the $19 billion threshold, driven by massive international sales of cutting-edge air, land, and naval systems. Combined with multi-billion-dollar private venture capital rounds flowing steadily into cybersecurity and specialized AI sectors, this massive influx of foreign investment has triggered a unique economic phenomenon: an exceptionally strong shekel. The Israeli shekel has reached historic highs against the US dollar and Euro, reflecting deep global investor confidence in the long-term fundamentals of the Israeli state.

Silver Lining: Despite three years of war, Israel’s economy has defied global expectations—driven by a record-breaking surge in international demand for its battle-tested defense technologies.

Political Parties and the Economy

All this economic growth has created a resilient middle class with disposable income who love to shop and travel the world. Yet, alongside the successes have come structural challenges—a notable income gap and a very high cost of living. It was the latter that spurred widespread public protests in the summer of 2011. While those protests died down, the high cost of daily life propelled several modern politicians into power. Today, the poorer segments of the population, namely the ultra-Orthodox and Israeli Arabs, are represented by specific parties that push for increased family benefits and targeted social services.

Despite the fact that Israelis pay a significant portion of their income in taxes, there is little public demand for lowering taxes. It is widely understood that these revenues directly fund the defense of the nation and a sophisticated welfare state, replete with universal medical coverage. Instead, voters push political parties to address consumer prices, lower the exorbitant cost of living, and expand the supply of affordable housing.

Heading into the October 2026 general elections, the central economic debate has fundamentally evolved into a conversation about fiscal prioritization and national resilience. While right-wing and nationalist coalitions highlight the record-breaking defense exports, tech sector maturity, and the undeniable strength of the shekel as proof of a thriving, unyielding economy, the opposition focuses heavily on the widening state deficit and the burden of prolonged military spending. Centrist and secularist parties argue that to maintain financial market trust, the state budget must be aggressively restructured to incentivize workforce integration among underrepresented sectors rather than funding narrow sectarian interests. With the tangible demands of a multi-front defense resting heavily on the nation's balance sheets, the upcoming vote will serve as a critical referendum on how to balance fiscal responsibility with the unyielding security requirements of the state.