[This is the second in a five-part article series on “Israel’s Zombie Economy,” based on the breakthrough series of broadcasts on Israel’s political economy with Shir Hever. Click here to watch the interviews for this series and see below for links to the remaining parts of the article series]
Israel’s political economy is one of the most militarized in the world (Bayer, 2023), and the military industry is a key component of this. In my book, The Privatization of Israeli Security (Hever, 2017), I traced the process of privatization of the Israeli arms industry: how it started as a highly collectivist element of Israeli militarism—state-owned and aligned with national goals—and rapidly underwent a revolutionary transformation due to US military financing, and the crisis within the arms industry. Critical in this was how the industry adopted neoliberal and individualistic values, prioritizing professional expertise and technological superiority over the older ideals of national heroism and sacrifice. In the settler-colonial model, armed groups precede the establishment of state institutions, rather than the other way around (Veracini, 2010). However, Israel is an anomaly as the last remaining colonial western colonial frontier—one in which neoliberalism clashes with the needs of the settler colony. After Israel launched its genocide of Palestinians in the Gaza Strip in October 2023, Israel’s arms industry was instantly and radically transformed. It returned to values, practices, and financial structures which preceded the privatization process. In other words, a counter-revolution in the opposite direction from which I traced in my book.
Early Steps in the Arms Industry and Its Initial Goals
Israel’s arms industry has roots that predate the founding of the state itself. Israeli Military Industries (IMI) was established in 1933 to arm the Zionist militias that would later amalgamate into the Israeli military (Marketplace Aviationweek, 2024). The weapons produced in secret, smuggled, and stashed illegally for use by these armed Zionist groups were critical to the ethnic cleansing of much of Palestine during the Nakba in 1948 (Dana, 2024).
Arms manufacturing was monopolized by the Labor Zionist movement. This was in part due to Israel’s first prime minister David Ben-Gurion (who co-founded Mapai, one of Labor Zionism’s leading parties) ordering the sinking of the ship Altalena in 1948, which was transporting arms to right-wing Zionist militias (Grunweis Kovalsky, 2023). This act aligned arms production with collectivist values. As former chief economist for the Israeli Ministry of Defense Yaakov Lifshitz observed, in the early days of Israel’s arms industry, generating revenue from weapon sales was only a secondary priority. The proceeds from arms sales and exports were largely reinvested in military research (Lifshitz, 2000).
The War of 1973 and the US-Israel Symbiosis
The 1967 war, which resulted in significant territorial conquests by the Israeli military within a short time, created euphoria, overconfidence, and arrogance among Israeli military elites (Klein Halevi, 2017). Alternatively, the 1973 war shattered Israel’s misconception that it could be self-sufficient in arms manufacturing (Gelber, 2022). The dependency on US military financing which began in the middle of the 1973 war quickly became the key feature of the Israeli arms industry. In turn, Israeli militarism underwent significant transformation in the 1970s due to US military financing.
Private arms companies gained prominence over state-owned enterprises, and the management of arms companies redefined its role. The “laboratory” model was a key dynamic in shaping Israel’s role in the global arms market, as it granted military technology a scientific aura. The Israeli armed forces built their reputation around the quality of their technology rather than around heroic stories. Sociologist Yagil Levy called this new version of soldiers “capital-intensive warfare” (Levy, 2012). The “laboratory” model was primarily developed during the Second Intifada (2000–2004, discussed below).
The Crisis of the 1980s-1990s and the Beginning of Privatization
The Israeli arms industry faced a series of setbacks during the 1980s and 1990s, starting with painful adjustments to US constraints imposed on arms production (Lifshitz, 2011). These constraints led to the last-minute cancellation of Israel’s flagship arms project—the Lavi jet fighter, which had been designed to surpass the F-16 Lockheed Martin fighter. The same process repeated itself when Israel’s Rafael company attempted to develop a competing missile to US-made LAW missiles (Sadeh, 2001: 64–77). The United States also placed restrictions on Israel’s ability to export military technology to China (Pomper, 2005). The end of the Cold War dealt another significant blow to Israel’s arms industry, as defense budgets around the world were dialed back. The Oslo peace negotiations between Israel and the Palestine Liberation Organization (PLO) also increased demands within Israel for a “peace dividend,” which meant that new elite groups have emerged and competed with the security elite over resources, demanding a reduction in defense expenditure (Bichler & Nitzan, 2001).
The Defense Ministry established the Sadan Committee in 1991 to provide recommendations on the more efficient allocation of public funds for security. In 1994, the committee submitted its findings, which focused on a single solution: privatization (Seidman, 2010). The neoliberal consensus among Israel’s security elite was that the private sector was more efficient than the public sector. At the time, Israel’s Chief of Staff Ehud Barak famously declared, “everything which doesn’t shoot will be cut” (Tzur, 2011). However, rather than cutting Israel’s security spending, Barak’s policies redirected funds to the private sector. This wave of privatization culminated in the 2018 purchase of the state-owned Israel Military Industries (IMI) by the privately-owned Elbit Systems (WhoProfits, 2024). This acquisition transformed Elbit Systems into Israel’s largest arms company and the twenty-eighth largest arms company in the world by 2019 (SIPRI, 2020).
In addition to privatization, the Israeli security industry also followed a path of specialization, cultivating an Israeli comparative advantage in specific niches such as cyber-warfare, attack drones, and advanced electronic systems for military vehicles (Sadeh, 2001: 64–77).
Technology of Oppression
During the Second Intifada (2000–2004), Israel’s arms industry specialized in technology of domination, surveillance, and reppression. As the Israeli security elite developed methods of mass surveillance, movement restrictions, and racial profiling techniques—training tens of thousands of private security guards—the September 11 attacks against the United States prompted the establishment of a new department in the United States. In 2003, President George W. Bush created the Department of Homeland Security, with a budget exceeding 59 billion US dollars, equivalent to the entire defense budget of the United Kingdom (DHS, 2013). Israeli military and security companies quickly leveraged their “experience” from the Second Intifada, presenting the Occupied Palestinian Territory (OPT) as a laboratory for developing homeland security products (Cook, 2013). These companies offered goods and services to the newly formed DHS. Rhys Machold demonstrates in his book Fabricating Homeland Security, that demand for homeland security products is a global phenomenon (Machhold, 2024). Neve Gordon argues that Tel Aviv soon became the “world capital” of the homeland security sector (Gordon, 2009).
In the fifty years following the 1973 war, Israel exclusively waged asymmetrical conflicts, and developed weapons for “warehousing” undesired populations (Halper, 2015). The purpose of the technology is not to kill, but to surveil and control (Loewenstein, 2023). Israeli arms companies marketed their products as “battle-tested” after deploying them against Palestinians in the OPT (Goodfriend, 2024). Every military operation conducted by the Israeli armed forces was followed by an arms fair showcasing new technologies (Kane, 2015). The Israeli government allocated research funds, and joint research programs with Israeli universities lent an aura of scientific legitimacy to technologies of repression. The conflation and obfuscation of technology and science through the “laboratory” model were more pronounced in Israel than anywhere else (Wind, 2023).
The widely cited figure that Israel’s arms industry produced only 20%-30% of its weapons for domestic armed forces and 70%-80% for exports highlights the unusual nature of the Israeli arms industry (Dana, 2024). While Israel has not reached the export scale of leading global arms exporters such as the U.S, Russia, the UK, France, and Germany, it became the world’s largest per-capita arms exporter around 2009
The Counter-Revolution
In response to the October 7 attack, Israel launched a genocidal war on the Gaza Strip. Alongside the attacks on Iran, Lebanon, Qatar, Syria and Yemen, Israel used primarily imported weapons (Hussein, 2024). Locally produced weapons were neither sufficient nor suitable for committing genocide. US-imported weapons were essential in enabling the Israeli forces to sustain their relentless bombing campaign, particularly the 155mm artillery shells and 1-ton Mk84 bombs, both of which are notoriously inaccurate. In military jargon, such weapons are referred to as “statistical” weapons—the very opposite of precision weapons (Amit, 2024). General Giora Eiland openly called for using starvation as a weapon of war, resorting to medieval siege tactics (Hecht, 2024).
Elbit Systems’ financial reports as well as other large arms companies for the third quarter of 2024 revealed that the company’s revenue surged, but growth was driven by orders from the Israeli military. Exports declined, as the company accumulated a backlog of orders it couldn’t fill (Azulay, 2024). Elbit Systems’ sales in Africa, Asia-Pacific, and Latin America (collectively, the Global South), had been halved (Gabizon, 2024). This decline likely reflects the impact of the October 7, 2023, attack on Israel and the subsequent genocidal response in Gaza, which appear to have discouraged governments in the Global South from signing contracts with Israeli companies.
Ynet revealed that Israeli arms dealers authorized to sell Israeli weapons were tasked with a new role: to procure ammunition, materials and components for Israel’s army in countries which do not trade arms openly with Israel (Zitun, 2024). They essentially returned to the role of Zionist arms smugglers, who procured weapons for the Zionist militias in the 1940s before the establishment of the State of Israel (Calhoun, 2020). Shifting the focus on local manufacture is a break from the policy of specialization could alienate the U.S arms industry. Knesset member Amit Halevi initiated a discussion in the “harm” caused to Israel by U.S military financing (Amit, 2025).
More from the Israel's Zombie Economy Series
Part 1: The War Currency
Part 2: The Counterrevolution of the Israeli Arms Industry
Part 3: Israel’s Breakdown into Tribes
Part 4: Is Israel’s Economy on the Verge of Collapse?
Part 5: The Disinformation Bubble
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