Is Israel’s genocide economy on the brink?
Sid Shniad
Is Israel’s genocide economy on the brink?
Economist Shir Hever explains how the Gaza war mobilization propped up a ‘zombie economy’ that appears to function but lacks any future horizon.
Since October 2023, Israel has faced a convergence of economic shocks. Tens of thousands of residents have been displaced from border regions in the south and north as a result of hostilities with Hamas and Hezbollah, while hundreds of thousands of reservists were pulled out of the workforce for extended periods, leaving key sectors short-staffed and productivity depleted. Public services, education, and healthcare have deteriorated as state spending was diverted to the war, and almost 50,000 businesses have gone bankrupt.
Capital flight — particularly in the high-tech sector — together with a growing reliance on foreign loans has added significant strain to the economy, with debt expected to reach 70 percent of GDP in 2025. Israel’s international standing has also weakened: Once-stable trade partners are turning away, sanctions and boycotts are expanding, and major investors are beginning to look elsewhere.
An annual poverty report published Dec. 8 by the Israeli NGO Latet underscores the depth of the social crisis. Household expenses have risen dramatically since the war, nearly 27 percent of families and over one-third of children now experience “food insecurity,” and about a quarter of aid recipients are “new poor” pushed into hardship over the past two years.
Yet, at the same time, Israel’s economy has also displayed signs of resilience. The shekel has appreciated nearly 20 percent against the U.S. dollar since the start of the war, and the Tel Aviv Stock Exchange has reached record highs, buoyed in part by wartime spending and central-bank intervention.
To make sense of these seemingly conflicting signals — surging markets alongside deepening social and economic turmoil — it is necessary to look beyond traditional indicators. Israeli economic researcher and BDS activist Shir Hever argues that Israel is now operating in what he calls a “zombie economy,” one kept moving through massive military expenditure, foreign credit, and political denial.
For over two decades, Hever has examined the ties between the Israeli economy, militarism, and the occupation. In an interview with +972 Magazine, he explains why Israel’s economic crisis cannot be measured simply in terms of GDP or inflation, and why the pillars that once sustained its growth — foreign investment, technological innovation, and global integration — are beginning to erode. He also discusses the illusion of a sustainable wartime economy, the social and economic toll of prolonged mass mobilization, and how Israel’s growing isolation in global markets may signal the start of a long-term decline.
The interview has been edited for length and clarity.
To start, if we assume the Gaza war, in the form that it’s been waged over the past two years, has finally ended, do you expect the Israeli economy to recover — and, if so, how would that happen?
I think it’s important to first ask: Recover from what?
Israel’s economic problem is multifaceted. First, there is direct harm to productivity because of the displacement of tens of thousands of households from areas close to the borders with Gaza and Lebanon, and from direct damage inflicted by missiles and rockets in those areas.
Second, the recruitment of almost 300,000 reserve soldiers for a very extended period of time caused a noticeable drop in participation in the workforce. It also erased countless days of training that had been invested in these workers, at a time in which the means to educate and train replacements is far from full capacity.
Third, the educated middle class in Israel is starting to consider emigration, and tens of thousands of families have already emigrated.
Fourth, the financial crisis: Many Israelis took their savings abroad in anticipation of inflation, coupled with a loss of value of the Israeli currency, a drop in Israel’s credit rating, and an increase in Israel’s risk premium.
As resources were diverted for the war — with the government’s own data showing that it has purchased tens of billions of dollars’ worth of weapons on credit — the quality of public services and higher education has declined dramatically. Israel has never in its history been closer to reaching a debt-trap [a situation in which the state is forced to take out loans in order to cover the interest payments on older loans].
Finally, and this is very important, Israel’s brand has become toxic. It faces boycotts, divestments, and sanctions on a level that has never been seen before. Israeli businesses find that former business partners abroad shy away from dealing with them.
I read this article on Ynet where they interviewed a bunch of Israeli business people who were saying how isolated they feel, and how their business partners, even long-term ones, say they don’t want anything more to do with them. They described how, even in “very friendly countries [to Israel]” they were told “please delete all records of this meeting, we don’t want anyone to know that we met with you.” They most likely referred to Germany, as the IFA fair had just taken place in Berlin prior to the interview.
In recent months you’ve described Israel’s economy during the Gaza war as a “zombie economy.” Could you explain what you mean by that?
I call it a zombie economy in the sense that it’s an economy that is moving but is not aware of its own state of crisis or its impending demise.
A capitalist economy is based on the idea of a constant, future horizon. You cannot have a capitalist market without investment, and investment is based on the idea that you invest the money now in order to make a profit in the future. But in Israel, the government has passed a budget that is detached from the actual expenditure, driving the debt out of control, and the draft of next year’s budget is equally delusional.
At the same time, many of the most talented and educated people are leaving the country because they don’t want to raise their children there. This is precisely the opposite of a future horizon — a state that plans for the immediate term rather than the long term.
So while the economy might appear to be functioning on the surface, that’s largely because a significant portion of the population has been mobilized for reserve duty — armed, equipped, fed, and transported to sustain the war. The war is the main economic activity that the government is undertaking; even now, two months into Trump’s so-called ceasefire, there hasn’t been a mass release of reservists back to civilian life.
Haaretz calculated that the destruction of the Gaza Strip is the largest engineering project in Israel’s history. The amount of cement, construction materials, vehicles, and fuel being used surpasses the construction of HaMovil HaArtzi [the national water pipe], which was the big engineering infrastructure project of the 1950s, and of the West Bank separation wall, which was the big engineering project of the early 2000s. So this is really an economy that appears to be functioning, but without any trajectory for a future. It’s based on a delusion.
Presumably, all the reservists who served in the war, and all the people who were displaced from their homes in the south and the north, are going to re-enter the workforce at some point. Could that allow Israel to escape an economic crisis?
To begin with, many of those reservists simply won’t have jobs to return to, because more than 46,000 businesses have gone bankrupt during the war.
There’s also the psychological aspect. I’m not qualified to answer what happens when these people try to resume civilian life, but the impact is likely to be dramatic. Will they use violence whenever something annoys them, as they did for hundreds of days in Gaza? Are they going to require a tremendous amount of psychological treatment to manage the trauma and guilt? We’re already seeing a lot of soldiers committing suicide.
Remember that these are also people who haven’t spent any time keeping up with developments in their professions and instead were committing genocide in Gaza, so this also feeds into the technological and educational crises. University enrollment has not kept pace with population growth, meaning Israel is on track to become less educated in the long run.
Then there are the approximately quarter of a million Israelis who are displaced from their homes near the borders with Gaza or Lebanon, who have been living for over a year in hotels. They’ve been living under the assumption that they might be asked to return at any moment. It’s very difficult to find new jobs in this condition since their compensation depends on their willingness to return to their original communities. In other words, they have to choose between obeying the government’s terms, or giving up their compensation and leaving the country — which some of them in fact did.
Nevertheless, we see the Israeli stock market reaching new highs and the shekel is stable. How do you account for that?
It’s important to note that the stock market isn’t going just in one direction. For example, it dropped after Netanyahu’s “Sparta speech” in September. People really panicked when he said that, because he acknowledged to some extent that Israel has been impacted by sanctions and boycotts and the economic isolation. That was a little needle puncture in the balloon of the delusion.
But there are other reasons for this, one being that Israel changed its rules about how much it pays reservists, to the point that now they’re paid NIS 29,000 per month — more than double the average market wage in Israel and more than four times the minimum wage. Some career army officers even left the army so they could rejoin as reservists to make more money.
These reservists didn’t have anything to spend all this money on because they’re in Gaza, so they’ve invested it in stocks, or put it in some kind of trust fund through a bank, which means that again, it goes into stocks. This keeps funneling more and more money into the stock market — so of course the stock market is high. The important question is where does this money come from?
The director-general of the Finance Ministry noted that these payments to reservists are not reflected in the defense budget — yet. They will be in retrospect, and when that happens, the gap between the approved budget and the actual spending will be exposed. Then, I expect Israel’s credit rating to go down and international banks to be very scared to trade with Israel.
Beyond that, the massive spending is also increasing inflation while productivity isn’t going up. People with available income try to protect their savings by investing in the rising stock market, contributing to the bubble.
So you have a kind of stagflation, where inflation is rising alongside an economic slowdown. Israel’s central bank has been managing this by selling large amounts of dollars — especially early in the war — which created the impression that everything was under control and that Israel could afford to keep fighting. This trick worked, and it mainly worked on international investors.
This created a very strange situation in which, on the one hand, Israeli economists writing in Hebrew are saying, “Isn’t it weird that the credit agencies are only reducing Israel’s credit rating by one step? They still believe the government will repay its debts. How naive can they be?” And on the other hand, the credit agencies, even though they surely read Israeli financial media, refuse to react.
I think this is a form of complicity by the international financial media. They fear that if they report the facts, they’ll be accused of being “anti-Israel.” They see how the governments in the United States, the UK, and Germany are disseminating lies and acting as if Israel is merely undergoing a temporary setback. If the financial media contradicts those governments, they risk repression, so they prefer to withhold the information from their readers. On the basis of this biased reporting, credit ratings agencies are also afraid to make fact-based decisions.
How is the economic situation you’re describing manifesting in Israelis’ day-to-day lives?
There is a very big difference between how the stock market or the currency is responding, and how the standard of living is actually being impacted.
A recent article in the Israeli financial daily The Marker calculated the cost of the war per household [comparing the average growth rate of the Israeli economy with the actual growth rate over the last two years] at NIS 111,000. This translates to about $34,000 — a very large amount.
If you have more than 40 percent of Israeli households spending more than they are earning every month, they’re in crisis mode already. They’re going into deeper and deeper debt every month just to keep their heads above water — shopping for food and paying the rent, etcetera.
Israel’s National Insurance Institute has yet to even publish its official poverty report for 2024, but an alternative report by the civil society organization Latet found that many Israelis who are not officially classified as living under the poverty line are nevertheless in a serious crisis. The share of people unable to buy enough food — classified as food insecure — rose by nearly 29 percent in 2025. The report described the situation as a “state of emergency.”
A large proportion of Israeli households are known to have been “in minus” for years, i.e. overdrafting their accounts and buying on credit. Are Israelis not used to this situation already? What has changed during the war?
The ratio of Israeli households that buy on credit and overdraw from their accounts has been about 40 percent over the last five years, but two differences have been noted during the war.
First, the products that people are financing with credit are less luxury products and more basic necessities. Second, there is a difference between households that maintain a more or less steady level of loans to the bank and pay interest every month, and those whose debt increases every month and the interest payments rise as well, until they are forced to sell assets. We’ve been seeing more and more of the latter during the war.
And meanwhile, all the government’s money, all the efforts, all the resources go to the war. Of course people feel it. The cost of living goes up, and the level of government services is collapsing — in terms of the quality of transportation, health services, and education services. Income is going down for almost everyone except reservists, and they, as we said, aren’t spending more than they are making.
What about the fact that foreign investments remain high, most notably the big “exits” in the tech sector? Does this not reflect that the Israeli economic model, however twisted, is sustainable?
If you take away the giant “exits” like Wiz, then the net change in investment is negative, and very deeply negative. Investments are dropping dramatically, especially in the tech sector.
But even if you look closely at those exits, you’ll see that the amount the Israeli government is expected to collect in taxes from them is ridiculously small compared to the size of the deal.
In the tech sector it’s very common for the workers to have options, which means that employees, especially the well-paid ones like the programmers, actually own shares in the company. So if a foreign company like Google is buying the shares, it’s actually buying it from them. So they’re becoming rich, but they don’t spend this money in Israel, because they’re leaving. The money is being taken out.
These exits are basically the Israeli tech sector escaping the country. These companies are already one foot out the door, and this other foot that is still in Israel wants out as well.
I’ve heard Israel’s behavior during the Gaza war being described as a form of military Keynesianism, suggesting that this is at least a somewhat viable economic approach. Could you elaborate on that?
It’s first important to note that there is no such thing as military Keynesianism in the 21st century — not anywhere in the world.
It’s a theory that was developed mainly in the 1960s, and during the Cold War it sort of made sense, in a dark and macabre way. Basically, governments in the United States and Western Europe created jobs artificially by spending a lot of money on weapons, instead of investing in welfare, education, and a healthy society, and convinced the public to go along with it out of fear of nuclear annihilation.
But since the productive value of weapons is zero — in fact, negative, since weapons destroy rather than produce — this only worked for a very short time. In the 1970s, it caused a crisis, which is when neoliberalism came into being and said that military expenditure has to be cut as well.
Now, Israeli Finance Minister Bezalel Smotrich has this fantasy that, “Hey, what’s the problem? Let’s go back to the good old days of the 1960s and just have a nation in uniform and instead of people going to work they’ll go to reserve duty.” But you can’t just go back.
The reason is that in the days of military Keynesianism, global trade was a fraction of what it is today. Consumer companies that were suffering because people had less disposable income could not have simply moved to another country. Today, some Israelis are indeed stuck in Israel for personal, health, and family reasons, and have no choice but to function as part of a militaristic economy even as their standard of living is declining. But capital has no such constraints and can skip to other countries.
What about South Africa during apartheid, and Russia today? Could Israel not emulate those regimes in how it shifts its economy in a way that allows it to remain belligerent?
First of all, let’s not forget that the apartheid regime in South Africa eventually collapsed. But for years, it could sustain itself despite widespread boycotts because it was rich with natural resources and had a relatively self-sustaining economy. This certainly is not the case for Israel which is very dependent on foreign trade and cannot keep the population in a state of permanent military readiness.
Israel depends on imports of energy, raw materials, technology, components, and finished goods for all of its sectors, and also depends on exports to finance itself and obtain the foreign currency required to maintain the imports.
As for Russia, what I think could explain its ability to sustain its economy is selling weapons, as well as oil and other natural resources, to other countries. And here, I think, is the main difference between Russia and Israel. Because Russia, as a result of the war in Ukraine, has actually expanded its international influence. There are countries like China, India, Iran, and Turkey that see potential in improving relations with Russia, while Israel in contrast is not exactly flourishing diplomatically as a result of its war, and in fact is becoming isolated from its own allies.
Israel tried to build new alliances and trade partnerships outside of the West, but this has largely failed. Europe remains Israel’s largest trading partner followed by the United States.
The Abraham Accords were presented as a new frontier for Israeli influence and alliances, but in practice they are little more than a partnership in arms trading which predates the agreements. But after the UAE banned Israeli companies from the Dubai arms fair following the Israeli strike in Doha, it remains to be seen what’s left of the Abraham Accords.
Until recently, you were also the military embargo coordinator on the official committee of the BDS movement. So I’m curious to hear your thoughts on where the campaign for an arms embargo against Israel stands after two years of war, and going forward.
When I started the work in 2022, I believed very strongly in the military embargo campaign, but I thought it would probably be the last [aspect of BDS] to succeed because individuals cannot really boycott weapons. I expected to first see boycott campaigns against consumer companies and then divestment campaigns, and then, finally, when sanctions pick up, we would see a military embargo.
So I was planning for the long term. But then, when Israel started committing genocide, I found myself sitting across the table from ministers of different governments and telling them that it’s against the law for their country to trade weapons with Israel. And they were fidgeting in their chairs, and had no choice but to agree that this is a fact.
So they found themselves in a very difficult situation, and many governments actually took action. Not enough and not fast enough — we can always demand more, and we should demand more — but if I just look at the rate at which military embargo actions have increased in different countries, especially in the Global South but also in Europe, it’s really unbelievable.
And it’s not comparable to other cases of genocide. Sure, most of the world didn’t really care very much about their relations with the Rwandan regime, so they observed international law and did impose a military embargo. But there were countries — like Israel — that broke the embargo and they weren’t punished for it. Now, however, we see that in countries that fail to impose the military embargo, dock workers in the ports are saying, “Well, in that case, we have a legal and moral obligation not to load the weapons onto the ships.”
And the United States, which is the biggest supplier of weapons to Israel — and, of course, the most complicit and the most interested in prolonging the genocide — still has a serious logistical problem because the weapons have to go through Europe on their way to Israel. It’s just not technically feasible to do it otherwise. Because of this, even U.S. arms transfers to Israel are being impacted.
How do you foresee Israel’s economy developing over the coming years?
If I’d known how to predict economic development, I would be very rich. But I think we should pay attention at the end of the year when the Finance Ministry reports what the government really spent on the war in comparison to its commitment under the 2025 budget. I expect many international investors and institutions to lose trust.
In the longer term, while Israel’s central bank warned that the economy will recover slowly if at all, the public expects a rapid recovery. The disappointment will hit Israeli society hard, and if it results in more emigration of educated professionals, Israel’s military will cease functioning as a modern army within 2-3 years.
We can already see signs of this in the breakdown of military discipline. Some units adopt their own insignia, operate with impunity, and follow informal chains of command. In the West Bank, soldiers increasingly join settler militias and participate in pogroms against Palestinians. And as thousands of soldiers collapse mentally and morally, and thousands more leave the country, the government responds by increasing payment to reservists. The result is a kind of mercenary force migrating from unit to unit instead of serving within a coherent, disciplined structure. In this sense, the disintegration of Israeli society is increasingly mirrored in its military.
Amos Brison is an editor at +972, based in Berlin.