How do we rate the ability of the Israeli state to deliver basic goods and services to its population? Has there been economic decline? Has poverty increased? Has there been an uneven economic development? Has there been a flight of economic and human capital – a brain drain?[i]

My concern in the last section was with internal social divisions. But Israel is a social democracy with an extensive range of health and pension provisions for its citizens. However, it is not a healthy social democracy. The divisions between rich and poor are enormous. The numbers below the poverty line are staggering – one-third of Israel’s children. (See later.) “Social democracy is a system geared to secure for all its members a decent standard of living, to protect them against the harms of the free market, globalization and plutocracy, and to reduce socioeconomic inequality.”[ii] However, Israel is now predominantly a neo-liberal economy under which social and economic rights and services have suffered. So has access to housing and job protection.

As a post-industrial society, three quarters of Israel’s labor force is employed in services. Israel is a high-tech state. However, efforts to ensure its citizens good healthcare and social security benefits have not kept pace with its increased wealth.[iii] However, within the economic realm and the ability of the state to deliver basic goods and services to its population, look at all the ways in which Israel can be characterized as a successful state rather than a state headed towards failure.

Israel’s per capita income for 2023 is projected to be 58,273USD, an annual growth rate of over 5% per annum during two years of a general global downturn in the international economy. By 2027, it is projected that the per capita GDP of Israel will reach almost 70,000USD, America’s current per capita measure of productivity. When the very low productivity of the Jewish Haredim, the ultra-Orthodox population in Israel[iv], and the not significantly higher productivity of the Arab Israeli sector are subtracted[v], the GDP per capita would probably be much higher.

From a very different angle, the gap between rich and poor and the poverty rate suggest a different side to the same economic story. According to Israel’s National Insurance Institute, in 2021, 21% of the Israeli population lived in poverty while children living in poverty amounted to 28% – 1 in every 3 children. The poverty rate, though concentrated among the elderly, single mothers, Orthodox Jewish communities[vi] and Arab communities, also includes families that have fallen from the middle class. The situation has become significantly worse since the covid pandemic. Over 2.5 million Israelis, including 1.1 million children, currently live in poverty in Israel. For such a rich country, these statistics are appalling.[vii]

What is worse, the gap between rich and poor has been growing. Wealth inequality, the wealth gap, measures the distribution of wealth—essentially the difference between the richest of the rich and the poorest of the poor. The income of an Israeli in the 75th percentile is 2.81 times that of an Israeli in the 25th percentile.

Even among the top 10%, the gap is growing between the top 1% and the remaining 9%. Between 2015 and 2018, the income of Israel’s top 1%’ grew by 20% compared to 10% for the rest of the top decile. Israel’s top 1% make eight times more than the next 19%.

However, the best indicator of economic success may not be economic per capita GDP or disparities in wealth and income but in new opportunities for growth and economic improvement. If that is the measure, then Israel occupies a place on its own at the top. Israel has long been characterized as the “Startup Nation” since it is a country with the most new tech companies per capita. Relatively, Israel is a small country. Innovation and entrepreneurship have been its bywords. Israel has a highly technical and very mobile workforce in which the military not only plays a major role in stimulating the development of software, leadership, and communications skills, but in creating small communities of individuals who learn to work closely together and trust one another.  

However, the best indicator of economic success may not be economic per capita GDP or disparities in wealth and income but in new opportunities for growth and economic improvement. If that is the measure, then Israel occupies a place on its own at the top. Israel has long been characterized as the “Startup Nation” since it is a country with the most new tech companies per capita. Relatively, Israel is a small country. Innovation and entrepreneurship have been its bywords. Israel has a highly technical and very mobile workforce in which the military not only plays a major role in stimulating the development of software, leadership, and communications skills, but in creating small communities of individuals who learn to work closely together and trust one another.

Two seismic shifts are underway but in opposite directions. In one direction, “Israel has been transformed into the ‘Scale-Up Nation’. Israeli entrepreneurs are starting their second or third startups. Engineers, operators, and executives who spent the last decade working at global tech companies are leaving the corporate fold to become founders themselves. Venture capitalists from around the world are opening Tel Aviv offices or raising funds dedicated to Israel. The first half of 2021 registered a record capital amount raised by Israeli high-tech companies – $11.9 billion which exceeded the total capital raised in 2020 of $10.3 billion.  Thirty eight deals of over $100 million each accounted for 50% of the total capital raised during this period…Israeli tech companies are becoming massive global companies in record numbers; today there are 71 Israeli-founded unicorns, including private companies Gong, Orca Security, Rapyd and Snyk, while other Israel-born tech companies have gone public at multibillion-dollar valuations, including Hippo, JFrog, Lemonade and Monday.com. Israel is no longer just the birthplace of tech companies that open US headquarters and seek to quickly be acquired but  has become a crucible where multibillion-dollar global companies are created and grown.”^[i] 

The other seismic trend is more recent and has followed the installation of Israel’s most right-wing government in 2023 which immediately set out to implement an ideological agenda, not only to foster creeping annexation in the West Bank at an accelerated pace, but radical judicial reform. The result has been calamitous in terms of capital investment in Israel. As described above, Israel had become a magnet for attracting investment capital. However, capital has begun to move in the opposite direction, largely in reaction to the proposed judicial reforms.

Thus, because the market remains strong and the Israeli economy is in excellent shape, most institutional investments had remained in place. But institutional investors based this on a belief that a compromise will be worked out. And it may be. Or it may not. In mid-February 2023, according to Haggai Schreiber, Executive VP of Phoenix Holdings Ltd., “Although the media has really been highlighting the removal of funds and dollars from Israel, so far the numbers do not show a flight of foreign investors from here. On the margins, we can see that it might become harder to bring in money from abroad, from Silicon Valley and other places.”[viii]

Schreiber continued: “What we are seeing meanwhile is local people thinking that they’ll get ahead of the looming trend and are transferring funds from mutual funds and local exchange-traded notes abroad – but the institutional bodies are not part of this.” Indicators have quickly shifted. The withdrawal of capital may become part of this threatened stampede. A recent poll shows 17 percent of Israelis are considering moving funds abroad as a result of the proposed judicial overhaul. “According to one of the pollsters behind the survey, ‘if even a fifth of this will happen, it means total collapse’”^[iii] even without the withdrawal of corporate investment capital.[ix]

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[i] Israel would then be following the path of the other Middle East countries where the brain drain is very high in comparison to the rest of the world because of lack of employment opportunities for graduates, high unemployment, low level of investment in research, and is especially high in countries riddled with violence and conflict. (Rafik Hariri Center for the Middle East, Atlantic Council, February 28, 2023.) Faltering economies always incentivize the emigration of the young and skilled.

[ii] Op. cit.

[iii] “The most disadvantaged Israelis depend on the traditional, low-tech branches of the economy. Less than a third of hired employees are unionized…Poverty rates are staggering: 20% of families, 25% of individuals and 33% of children are officially below the poverty line. Half of the Arabs and half of the ultra-Orthodox are poor…State services are also in decline because of the right-wing government policies of privatization and deregulation, and the rejection of reduction of income inequality as a national goal.” Op. cit.

[iv] The ultra-Orthodox make up 12% of the Population of Israel and are projected to grow to 16% by 2030 and constitute 1/3^rd of the population by 2065 (40% of the Jewish population). Though the participation rate of ultra-Orthodox women in the workforce is reasonably high – 70% – the participation rate of males from the ultra-Orthodox community is less than 50%. Further, because the education they receive does not prepare them for high roles in the current economy, even when they participate, their earnings are significantly lower.

[v] The Arab Israeli sector, making up 18% of the Israeli population, suffers from an opposite problem to the ultra-Orthodox – a low participation of Arab women in the workforce. Female labour-force participation rate among Arabs may have more than doubled from approximately 6 per cent in the early 1970s, but it is still slightly less than 15 per cent compared to an overall Israeli rate of 65%.

[vi] The average monthly income of ultra-Orthodox households is 35% lower than the average income of other Jewish households. Because ultra-Orthodox families are much larger – almost 7 children per female versus 2.4 in the non-Orthodox community – in a comparison of per capita income, the comparative difference jumps to 171%. Further, income from work represents just 65% of ultra-Orthodox household income compared with 78% among other Jewish households. Benefit payments make up 24% of the income of ultra-Orthodox families. However, as a result of increased ultra-Orthodox integration into the workforce as well as increased government support, since 2002, ultra-Orthodox employment rates have increased from 35% of men and 50% of women to 52% and 73%, respectively. Currently, the number of Haredi below the poverty line now matches that of the Arab sector. But this trend stagnated in 2015 and 2016 likely a result of government reduced incentives to enter the workforce and increased support for full-time yeshiva students. (Dr. Lee Cahaner, Dr. Gilad Malch and Dr. Maya Chosen, “Statistical Report on Ultra-Orthodox Society in Israel,” December 31, 2017)

[vii] Cf. the Bank of Israel, the Central Bureau of Statistics (CBS) and the National Insurance Institute (NII).

[viii] When the Israeli branch of the Silicon Valley Bank closed following the bank’s collapse in California on March 10, 2023, Israeli start-ups faced decreased valuation, increased competition for funding and logistical challenges.  The bank had declared several billions of dollars in losses. The result: its shares immediately lost 60% with a by a further 20% in after market trading. Companies whose assets were frozen found themselves in a liquidity crunch. A decline in valuation of the hundreds of Israeli clients, start-ups and venture capital firms served by SVB is expected. But what followed immediately in the face of threatening immanent economic disaster was the usual reassurances and bleating of the leader of the country, Prime Minister Benjamin Netanyahu: “the Israeli economy that we have built here in the last 20 years is one of the most secure and stable economies in the world.” Finance Minister Bezalel Smotrich sounded more panickyespecially in the face of the threats to the economy from the proposed judicial reforms. “The collapse of the bank is a significant event for both the American economy and the Israeli economy…We promised to act so that the Israeli economy would be an island of stability and certainty in the turbulent economic waters of the world, and with God’s help, we will do so.” Many believe he will need God’s help.”

[ix] There have also been capital movements in the opposite direction. In reaction to the protests over the judicial reform proposals, Australian entrepreneur, Kevin Bermeister, increased his investments in Israel.