Since the Balfour Declaration in 1917, the Zionist project began taking shape—politically and economically—backed by major Western powers who saw the establishment of a Jewish state in Palestine as a solution to the “Jewish problem” in Europe. This colonial strategy involved displacing the native Palestinian population and encouraging global Jewish migration to the region.
With the declaration of the so-called “State of Israel” in 1948 on occupied Palestinian land, the Israeli economy was built on a calculated strategy—one combining Western support, militarisation, technology, modern agriculture, industry, immigration, and financial control.
For decades, Israel promoted its economic model as a symbol of “Jewish exceptionalism.” However, the prolonged war that erupted in October 2023, followed by the escalation with Iran, has pushed this model into crisis. This report explores seven foundational sectors of the Israeli economy and how they’ve been affected by the ongoing war.
1. High-Tech Industry
The Israeli tech sector constitutes roughly 20% of the country’s GDP and is the primary engine of economic growth. According to Reuters, it accounts for 53% of total exports, and nearly 25% of Israel’s income tax revenue comes from this sector. Tech companies employ 11.4% of the national workforce, as reported in Israel’s 2025 Innovation Authority report via Times of Israel.
Despite 600 new startups launched in 2023, total tech fundraising plunged by 55% compared to 2022, down to $8 billion. Israel hosts over 9,200 tech companies, employing around 400,000 people.
War Impact on the Tech Sector
- Brain Drain & Military Draft: Over 8,300 tech professionals left the country in the nine months following Israel’s assault on Gaza. Monthly departures doubled after October 7, peaking at 1,207 in a single month. At least 7% of the tech workforce was called into military reserves, hampering productivity (TRT Global, Arab Center Washington DC).
- Reputation Collapse: Amid global backlash over atrocities in Gaza, Israeli tech firms faced branding crises. An internal tech sector poll showed 65% of venture capital funds struggled due to Israeli affiliations, and 30% of startups moved operations abroad due to mounting international hostility.
- Capital Drought: War-related uncertainty devastated startup funding, with many once-promising ventures collapsing due to a lack of fresh capital (Haaretz). The sector, long reliant on recurring funding rounds, has seen a steep contraction.
2. Military Exports
Israel’s arms industry is a core economic pillar and one of the world’s top weapons exporters. It boasts a reputation for innovation in missile systems and military tech.
In 2024, defense exports hit a record $14.8 billion, doubling in value compared to five years ago. Air defense systems, missiles, and artillery accounted for 48% of those exports (Times of Israel, Israeli Ministry of Defense).
War Impact
Initially boosted by regional instability, Israel’s arms industry is now facing backlash. Western governments, particularly in Europe, are cancelling deals due to the humanitarian catastrophe in Gaza. For instance, Spain cancelled a $285 million anti-tank missile contract with a subsidiary of Israeli defense firm Rafael.
3. Industrial Sector
Beyond tech and weapons, Israel maintains a diverse industrial base. Key areas include:
- Diamond Industry: Israel was a global hub for diamond polishing and trade, exporting over $9 billion annually, with India as the main supplier and the U.S. as the largest customer. Israel’s diamond exchange handles a third of global rough diamond trade.
- Pharmaceuticals & Medical Devices: Home to 700 medical tech companies, Israel’s pharma sector includes major names like Teva, Taro, OrCam, and Kamada.
War Impact
- Diamond Trade Collapse: Exports of polished diamonds dropped 35.7% in 2024, falling to $1.87 billion, while rough diamond exports declined 24.1% to $635 million (Xinhua, Israeli Ministry of Economy).
- Pharma Disruption: Global flight suspensions, labor shortages due to reserve call-ups, and broken supply chains triggered deep disruptions. Teva announced 8% workforce layoffs by 2027 and a $700 million cost-cutting plan. The company’s stock fell 23% in early 2025, reducing its market value to $19 billion (Globes).
4. Energy Sector
Israel’s energy grid relies on natural gas and renewables, particularly solar. The country’s total installed capacity stands at 23.9 GW, with the private sector controlling 53.3% of production.
War Impact
- Oil Refining Shut Down: Iran’s retaliatory strike on Haifa’s Bazan refinery resulted in major infrastructure damage and three staff fatalities, prompting a complete shutdown (Reuters).
- Gas Field Closures: For security reasons, Israel halted production at both Tamar and Leviathan gas fields—the latter managed by Chevron and considered Israel’s largest offshore field (Bloomberg, Israeli Ministry of Energy).
5. Agriculture
Known for cutting-edge agricultural technology, Israel produces around 70% of its food needs and exports significant quantities of fruits and vegetables globally (Goethe Institute, Frankfurt).
War Impact
The war has led to what officials call the worst agricultural crisis since 1948 (El País). Crops were left unharvested, laborers—especially from Thailand, Nepal, and Gaza—either fled or lost permits. Israeli farmers were evacuated or conscripted, leaving vast tracts of farmland abandoned.
6. Tourism Sector
Tourism was once Israel’s fifth-largest export sector, earning over $10.7 billion annually. In 2019, Israel saw a record 4.9 million international tourists, fueling the hospitality and retail economy (Ynet News).
War Impact
Since October 2023, tourism revenues plummeted by $3.4 billion, and inbound tourism collapsed by over 90%. Hotel occupancy rates in key areas fell to 10%, compared to a pre-war average of 80% (Israeli Ministry of Tourism, Israeli Hotels Association).
7. Financial Services
Israel’s banking sector dominates local credit markets—handling 50% of corporate lending and 70% of household credit.
A report by the Bank for International Settlements notes Israel maintains low private debt-to-GDP ratios, providing some fiscal flexibility. However:
War Impact
- Plummeting Foreign Investment: Foreign direct investment dropped 29% in 2023, and global equity holdings in Israel hit their lowest point in a decade (IVC Research, The Worker).
- Credit Downgrades: Major rating agencies downgraded Israel’s long-term credit ratings, raising investor concerns. Bond yields rose to a 13-year high, indicating a perceived increase in economic risk.
Conclusion
The war in Gaza—and now with Iran—has not only battered Israel’s international reputation but shaken the foundations of its economic strength. While its arms exports initially saw gains, most of its key economic sectors—tech, tourism, agriculture, diamonds, pharmaceuticals, and energy—are now suffering deep, possibly long-term setbacks. The illusion of an invincible, resilient Israeli economy is cracking under the pressure of sustained war and growing global condemnation.
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