Summary of Key Points
During the nearly three years of conflict, Israel's economy has exhibited a clear "polarization" effect. On one hand, the war has increased fiscal costs (35 billion shekels in military expenditures) and the debt ratio (rising from 60% pre-war to 68.5%), putting pressure on traditional industries (such as catering, tourism, and agriculture) as well as on the general public. On the other hand, Israel's military exports (19.2 billion dollars in 2025, a 30% increase) and financing and acquisitions by security technology companies (for example, Google's 32 billion-dollar acquisition of Wiz) have reached record levels. This contradiction stems from the global demand for security technologies created by the war. Israel, leveraging its advanced technological foundation, capability to integrate military and civilian sectors, and deep integration into the U.S. capital system, has turned some of the war's demands into industrial gains. However, this has come at the long-term cost of reduced innovation diversity and a brain drain of local talent.
I. The "Outward Costs" and "Hidden Costs" of War: Money Spent, but No Long-Term Value
The direct costs of war for Israel are evident: the government must fund the purchase of interceptors, pay reservists, and provide for the relocation of displaced residents, with most of these expenses coming from borrowing (half of the 35 billion shekels in military costs). More hidden costs include:
- Opportunity Cost: By allocating funds to defense, the government reduces investment in education, healthcare, and civilian innovation. For instance, the money that could be used to build a university laboratory might be spent on purchasing missiles, which are quickly expended, while the laboratory could have cultivated valuable talent.
- Impact on Livelihoods: Thirty thousand reservists frequently leaving their jobs result in revenue losses for businesses, and the decrease in Palestinian labor affects agriculture and construction. The decline in tourism and catering activities due to security concerns leads to reduced income for ordinary households.
- Brain Drain: There has been a significant increase in the number of high-tech professionals leaving the country, and for the first time in a decade, the number of local researchers has decreased by 3,500.
These hidden costs may not be immediately reflected in GDP but will gradually erode the economy's long-term vitality.
II. The "War Bonuses" for the Security Industry: Practical Experience Makes Products Valuable
The war has actually benefited Israel's security-related industries for two main reasons:
- Practical Proof: Military products are highly valued for their real-world performance. For example, Israel's air defense systems have intercepted missiles in Gaza, and its radars have been tested in complex environments—these are not just claims in promotional materials. Other countries are willing to pay more for weapons that have been proven in combat, which explains the record-high military exports in 2025, with half of the orders worth over 100 million dollars each.
- Surging Global Security Demand: The war has raised concerns about cyberattacks and missile threats, leading countries to increase their security budgets. For instance, with the rise of AI, cloud security has become a necessity, and Google's investment in Wiz reflects this trend. The demand for identity security (to prevent account theft by hackers) has also increased, as seen in Palo Alto's acquisition of CyberArk. Israel, possessing these technologies, has naturally secured these contracts.
III. Why hasn't U.S. Capital Fled? Israeli Tech Companies Are Already Globalized
Contrarily to what one might expect, when a country goes to war and its sovereign rating declines, investors usually withdraw. However, Israeli tech companies have received more funding because:
- Cross-Border Operations: Israeli tech companies are no longer solely domestic entities. Their research and development take place in Tel Aviv, their customers are primarily in the U.S., and their financing comes from New York, with employees distributed globally. While missiles can destroy office buildings, they cannot destroy code, patents, or remote teams. Even if founders are conscripted, overseas teams can continue operations.
- Integration into the U.S. System: U.S. capital views Israeli security companies as global assets, focusing not just on Israel's national risks. For example, the high valuation of Wiz is due to the popularity of AI and cloud security technologies, and the war has only accelerated this demand. U.S. capital is willing to invest in these mature technologies.
In short, Israel's security technology is closely linked to U.S. capital and markets, and the war has not severed this connection.
IV. Hidden Concerns Behind the Prosperity: Narrowing of Innovation Paths, Potential Issues in Peace
Although the security industry seems prosperous, underlying issues are emerging:
- Narrowing of Innovation Focus: Funds and talent are being directed towards security, leaving behind areas like agricultural technology, climate technology, and medical innovation. Israel used to be known for its entrepreneurial spirit and innovations in irrigation and medical devices, but now only security-related industries are thriving.
- Weakening of Local Foundations: The growth rate of high-tech jobs has slowed from 6% to 2.5% in the past decade, and the number of local researchers has decreased. Companies are moving operations and even R&D overseas. Although they are still listed as "Israeli tech companies," their employment and tax contributions may no longer be locally based.
- Post-War Risks: If the war ends, security demand will decline, affecting military orders and the valuation of security technologies. Civilian innovations, which have been suppressed for years, will struggle to recover quickly, much like a tree that grows only one branch and takes a long time to regenerate if other branches wither.
Conclusion
The war has not made Israel wealthier; it has only offset some of its losses. The experience of these three years shows that a small country with a strong technological foundation, the ability to integrate military and civilian sectors, and deep ties to the U.S. can turn war-related demands into industrial gains. However, the cost of this is a disruption to the overall economic balance, with the burden falling on taxpayers and ordinary households, while the benefits remain with the military and security technology industries. Surviving the war is one thing, but maintaining innovation vitality in peacetime is the true challenge.