Continuous Economic Strain and Lost Opportunities

Stunted Economic Potential: The conflict imposes a hidden tax on Israel’s economy – not just through defense spending (covered above), but through opportunities lost. In a more peaceful Middle East, Israel could trade freely with all its neighbors and integrate into regional markets, unlocking huge growth. Instead, many economic opportunities have been missed or delayed. For example, Israel’s relations with the Arab world were largely frozen for decades due to the conflict, costing countless trade and investment deals. Only recently have some ties normalized (UAE, Bahrain, etc.), but even those remain limited as new fighting (like the Gaza war) threatens to scuttle budding partnerships. The constant state of alert also scares away some foreign investors and tourists. Investors crave stability – countries perceived as war zones struggle to attract long-term capital. Tourism, a major industry, sees wild swings: record highs in calm years, then crashes when violence flares. Over time, this instability means Israel’s economy likely grew less than it could have in a peaceful scenario.

War Disruptions to Growth: Beyond lost opportunities, actual conflict events directly harm economic activity. Businesses in rocket range must halt operations during escalations, workers get called to reserve duty en masse (pulling them out of the labor force), and consumer spending dips as people stay home or as confidence falters. Following the October 2023 Hamas attack and subsequent war, Israel’s economy shrank by 5.6% in the last quarter of 2023, the worst among OECD countries at the time.[1] Although there was a partial rebound afterward, the full-year growth for 2024 was only ~1% (down from over 6% in 2022).[2] Each conflict similarly depressed economic performance – for instance, the Second Intifada (2000–2005) caused a recession in the early 2000s. The start-stop nature of Israel’s economy (boom during peace, slump during conflict) hinders long-term planning and deters some entrepreneurship. Moreover, government funds get diverted to emergency needs (compensation for damaged property, etc.), meaning development projects get postponed. Foreign investors take note of these risks: indeed, after the 2023 war began, ratings agencies put Israel on watch and some investors began pulling money out of Israeli stocks and bonds, citing geopolitical instability.[3][4] Over decades, the compounding effect of these slowdowns and withdrawals is a smaller economy than otherwise possible.

Peace Dividend vs. Conflict Cost: Numerous studies have tried to quantify what Israel loses by not having peace. A landmark RAND Corporation study found that ten years of a two-state peace would likely boost Israel’s GDP by $123 billion (from new trade with Arab states, increased foreign investment, and reduced military burden). Conversely, a continued stalemate was projected to cost around $173 billion over the same period in forgone growth.[5] In essence, Israel’s prosperity is held back by the conflict – a peace agreement could unleash economic dynamism, whereas perpetual conflict acts like a brake. We see echoes of this in real life: after the Oslo peace process began in the 1990s, Israel’s tech sector and foreign investment surged; when it collapsed into violence, the economy sputtered. Or consider how normalization with just a few Gulf states in 2020 immediately led to multi-billion-dollar deals – imagine the gains if Israel were at peace with all its neighbors and the Palestinians. Israeli business leaders often speak of a “peace dividend” that the country has been deprived of. High-tech CEO Yossi Vardi once quipped that Israel could be “the Singapore of the Middle East” if it weren’t perpetually at war. In short, the conflict carries a huge opportunity cost: money that could be enriching Israeli society is instead spent on or lost due to conflict.

Socioeconomic Trade-offs: The financial burden of conflict also forces painful trade-offs in Israeli society, especially as costs mount. With defense and security gobbling a large share of the budget, other public services suffer. Israel has relatively high poverty rates for an OECD country and hospital overcrowding and teacher strikes are perennial issues – issues that could be better addressed if billions weren’t tied up in military needs. As wars become more expensive (see above: 250 billion shekels for Gaza war through 2025),[6] the government may face tough choices: raise taxes, cut welfare or education spending, increase deficits, or some combination. Any of these responses carries long-term negatives (e.g., higher taxes can dampen growth, underfunding education can hurt future human capital). Thus, the socioeconomic health of Israel is indirectly but significantly harmed by the protracted conflict. The average Israeli citizen pays a price – not just in security fears, but in shekels – via higher taxes or reduced services due to the defense burden. This can fuel domestic discontent and inequality. Wealthier Israelis can cope (some even profit if they are in defense industries), while lower-income communities feel the pinch of neglected social spending. Over decades, a society that spends too much on war and too little on welfare can fray internally, creating divisions and instability from within. In summary, the long-term economic sustainability of Israel is intertwined with the conflict: peace would remove a heavy shackle, whereas endless conflict is like a slow bleed on the nation’s wealth and well-being.

Data and Sources

  • Israel’s Q4 2023 GDP fell 5.6% following the October war with Hamas, according to AP analysis.[1]
  • Times of Israel reported full-year 2024 economic growth near 1%, a sharp slowdown from prior years.[2]
  • Reuters noted credit rating agencies placed Israel under review in late 2023 due to rising geopolitical risks.[3]
  • Reuters also reported outflows from Israeli stocks and bonds amid investor nervousness.[4]
  • RAND Corporation’s study projected $123B in GDP gains from peace and $173B in lost opportunity from continued conflict.[5]
  • Estimated cost of the 2023–2025 Gaza war: over 250 billion shekels, per government figures cited by Reuters.[6]

Image courtesy of Wikimedia Commons, licensed under CC BY-SA 4.0. Image: Obverse and reverse of Israel’s 1000 Sheqalim note, 1983.

References

  1. AP News, “Israel's Economy Shrinks After October War,” 2024.
  2. Times of Israel, “Economic Growth Slows Post-War,” 2024.
  3. Reuters, “Ratings Agencies Put Israel on Watch,” 2023.
  4. Reuters, “Investors Exit Israel Amid Conflict Fears,” 2023.
  5. RAND Corporation, “The Costs and Benefits of a Two-State Solution,” 2015.
  6. Reuters, “Gaza War to Cost Israel 250 Billion Shekels,” 2024.

This article was updated on May 28, 2025