[This is the fourth 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]
The economic collapse of the Israeli economy is in full swing. In order to have a clear perspective of it, despite various short-term indicators (such as a stock market surge or a stable currency exchange value), it is important to discuss the foundations of the Israeli political economy. I will endeavor to do so in five parts.
Gross Domestic Product
Israel's GDP is in decline, both in absolute amounts after the war has started and even more so in per-capita terms, which indicates negative growth (Liu, 2025). According to the Israeli Ministry of Finance (Accountant General 2025), Israel's official debts have skyrocketed to 69 percent of GDP. But these numbers are almost meaningless. GDP, which in general is already a poor measure of economic wellbeing, is even less useful for measuring economic performance during wartime, especially when the war is so total (Osberg, 1985).
Israel's failed invasion of Lebanon in 2006 is considered a war in which Israel military lost. Yet the GDP jumped by 6 percent. The reason is that Israelis took their families to hotel rooms away from the front, while at the same time reconstruction costs for damaged property was high and ultimately compensated by insurance companies and the government. All these economic activities ended up contributing to an increase in GDP, even though they are actually indications of economic damage (Hever, 2006).
Military economist Brigadier General Reem Aminoach, a former financial advisor to the chief of staff and current head of the budget department of the Ministry of Defense, said in an interview that the cost of the current war will beyond a doubt "exceed a trillion Shekel" (Azoulay, 2025), which is approximately 306 billion US dollars. This amount represents 56 percent of Israel's 2024 GDP, and the money hasn't been paid yet. Put differently, government expenses toward the medical bills of soldiers, reconstruction of destroyed buildings and infrastructure, and replenishes ammunition stores will only increase the GDP if there are actual funds to pay those bills.
Bad Management
The possibility of Israel recovering from its economic crisis depends on the policy of state institutions and how effectively they manage the crisis. However, Israel's crisis started before the genocide. In January 2023, a far-right government came into power (BDS, 2025). Its appointment of the extremist and messianic Bezalel Smotrich as minister of finance precipitated a crisis of faith. Smotrich referred to the state budget as "a war budget, and God will give us victory." Instead of applying professional considerations, Smotrich trusts in God to save Israel's economy (Luxemburg, 2025).
Israel failed to pass the 2025 budget in a timely manner, and instead negotiated a ceasefire budget, which assumed cuts to military spending during the ceasefire. However, the government soon-after broke the ceasefire on18 March 2025, and then proceeded to pass the budget unchanged. Very quickly the Ministry of Defense exceeded its allocated budget, even without counting the massive payments to reservists (see “Pary 1: The War Currency” of this essay series).
Indeed, Israeli economists accused the government of mismanaging the economy. The Ministry of Finance's executive manager issued a warning (Toker, 2025b), followed by a proposal from within the military to rein in military expenditure in order to prevent financial disaster (Ben-Gal Hirschhorn, 2025). The State Comptroller gave further details in his report on the irresponsible behavior of the Finance Ministry (Toker, 2025c).
Loss of Means of Production
Marxist theory argues that political economy rests on the "real" foundation of means of production (labor, and the materials and capital which are produced with labor). Without getting into Marxist theory here, suffice it to say that Israel's means of producing services and products are essential for any future recovery of the economy. And yet every aspect of Israel's sources of wealth has been negatively impacted by the choice to commit genocide:
The laboratory: Israel's "Palestine laboratory" model is the engine which fueled Israel's arms exports, by marketing its weapons as "battle tested" (Loewenstein, 2023). But during Israel's longest and hardest war, Israeli forces switched to U.S.-made weapons. It may have indeed contributed to the sales of U.S. arms companies, and to additional profits for German arms companies, but not to the reputation of Israeli arms companies (Hever, 2025).
The energy market: Energy products are necessary for economic activity, but they are dual-use items which can also be used to fuel Israel's war machine. Israel's biggest supplier of coal, Colombia, stopped coal exports to Israel as a sanction on Israel for committing genocide powered by Colombian coal (EY Global, 2024). Similarly, Iran struck Israel's oil refinery during the 2025 12-day war with Iran (Yilmaz, 2025). After the war, Israel was left heavily dependent on natural gas as an energy source, but in order to make quick cash and pay for the expenses of the war, it sold much of the natural gas to Egypt—despite Israeli economists warnings that selling the natural gas undermines Israel's long-term energy plans (Eitan Moustaki, 2025).
The workforce: A Central Bureau of Statistics study of a sample of Israelis who have emigrated during the genocide and also in the years leading up to it shows that these persons are—on average—better-educated, younger, and with families as compared to those remaining Israel (Toker, 2025d). Israel's middle and upper-middle class is better prepared and able to emigrate than other parts of society, with work and study opportunities outside of Israel and sometimes even a second passport. The full number of emigrating Israelis is unknown, because many of those who emigrate continue to maintain a legal and bureaucratic presence in Israel in order to keep the option to return open. Israeli economist Dan Ben-David warned that Israel's entire economy rests on the shoulders of about 300,000 people, the leading doctors, scientists, professors, and business leaders. If a significant portion of them would leave, Israel will no longer exist as a developed economy (Zarchovitz, 2024).
Divestment
Divestment is part of the BDS campaign, but the strategy of divestment does not depend only on conscientious investors choosing to withdraw their investments. There is also a snowball effect, by which even cynical capitalists would eventually divest from Israeli companies and international companies which are complicit in Israel's crimes out of pure financial logic. The wave of divestment from Israel accelerated in 2023, especially against the high-tech sector, because Israel's far-right government expressed clear illiberal tendencies, contempt for the judicial system and this creates a hostile environment for foreign companies (Orbach, 2024). Israel's atrocities against Palestinians, before and during the genocide, have emboldened conscientious campaigners to call for divestment from Israel on moral grounds. The Norwegian Pension Fund expanded the list of companies from which it divests in response to Israel's violations of international law and human rights (Amnesty International, 2025).
Divestment has also strengthened from a legal point of view, because the International Court of Justice (ICJ) ruled on 19 July 2024 that Israel's occupation of the Occupied Palestinian Territories (OPT, constituted by the West Bank, including East Jerusalem, and the Gaza Strip) is illegal and that companies are forbidden from operating in a way which supports it (ICJ, 2024). The UN General Assembly adopted a resolution on 17 September 2024 with a large majority calling for sanctions against Israel (UN News, 2024). In a 2024 article, Irene Pietropaoli laid out the legal arguments which bind corporations from refraining in activities which could support Israel's genocide (Pietropaoli, 2024). Therefore, a legal risk now exists for companies which enable the genocide. Some of these companies were named by the UN report of 2 July 2025 (UNHR, 2025). Investors who ignore these warning signs and choose to invest in companies that partake in illegal activity may lose all of their investment, and would not have legal grounds to demand compensation, because they have knowingly risked their money on the companies mentioned in international reports.
After Moody's and S&P downgraded Israel's credit rating, Intel cancelled a plan for a 25 billion dollar investment in Israel and giant Israeli tech companies: WIZ and CyberArk were sold whole ("exit") to foreign investors. Israel has been so emptied of investments that the stock market has to a high degree become financed by domestic money, which made the stock market volatile, but not necessarily downward trending.
Israelis Losing Faith in Their Own Economy
The most important element which determines whether Israel can recover its political economy or not depends on the future expectations of the population. Israel has seen serious economic crises in the past, but the key to recovery has been the willingness of the general public to make painful individual and collective sacrifices on behalf of the "national interest." This willingness has been eroded over the years as Israel became an increasingly individualistic society.
Israel's breakdown into tribes (see Part 3 in this essay series) has made it very difficult for Israel's society to build collective solidarity and bear the costs of international isolation willingly. When Netanyahu attempted to cast Israel's material hardships as heroic, by saying that Israel must be a "super Sparta," the stock market plummeted and Netanyahu quickly gave another speech and retracted his previous statements (Freiberg & Berman, 2025).
Israel's skyrocketing cost of living (State Comptroller, 2025) is not just a result of the inflation, the difficulty to import and the reduced production capacity inside Israel, but also a result of the Israeli public refusing to acknowledge the reality that Israel is on a self-destructive economic path. While a small part of the population finds itself with a large disposable income received through military reserve service (see essay number one in this series), a much larger part of the population is impoverished, with about 40% of households spending monthly more than their income and digging themselves deeper and deeper into debt (Toker, 2025a).
The only thing holding Israel's political economy together is the collective delusion, which has been reinforced by the Trump-imposed ceasefire of October 2025. Israeli media, artists, academic staff and politicians expressed surprise that the boycott of Israel hasn't ended now that the "war is over." They expect rapid recovery, the return of those who left, a quick demobilization of the military and diverting the resources to civilian projects. All these expectations are detached from reality and when the truth becomes apparent, the economic crisis will hit with full force.
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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