Over the last three decades, Israel has seen its economy undergo a meteoric rise. Much of it has been fueled by the explosion of its startup and tech sector, including companies like the one where Tamar Saucerdoiti works. In the early days of October, Tamar was working as the chief of staff for a legal tech startup called Darrow, unaware of how radically her life was about to change.
On October seventh, we all woke up to kind of a complete shock. I was in my apartment in Tel Aviv with my fiance when all of a sudden, sirens went off, and very quickly we realized that there was something big going on.
Hama's militants had stormed across the border into Israel and carried out a series of attacks. Twelve hundred people were killed and over two hundred were taken hostage, according to local officials. As the news came in, Tamar started to worry about her colleagues.
My job, as you can understand, as the chief of staff, is very wide, so I ideal with a lot of people and with all the different teams. So initially we just tried to make sure where everyone was and that everyone was okay all of the employees, while while also trying to personally deal with anyone who would potentially was in the area are affected. That was kind of the first day, and then the next week that ensued was a bit of structured chaos.
Over the next few days, more than three hundred thousand Israelis were called up from the reserves to serve in the war. Among them were Tamar's company's CEO, half of the company's executive team, and dozens of other employees.
It was just cut like they literally like, within twenty four hours were unavailable.
So thirty five employees. How much of the company was.
That about forty percent.
As Tomorrow herself was quick to point out her company is just one of many that has had to rapidly and radically adapt to new wartime realities. Today on the show, what the war in Gaza means for Israel's startup ecosystem and how it may reshape the country's entire economy. I'm your host, Sarah Holder, and this is the big take from Bloomberg News. In the three months since the October seventh Hamas attack on Israel, Israel and Hamas have been
at war and thousands of people have been killed. Israel has lost over twelve hundred victims in the attack itself and over five hundred soldiers. Since October seventh, according to the Israeli military, Gaza has lost over twenty five thousand people, mostly Palestinian women and children, according to the Gaza Health Ministry, which is run by Hamas. It needs to be said that while the economic toll for Israel is calculable right now, and that's what we're discussing in this episode, the toll
for Gaza continues to mount. Their economy and their infrastructure are still being decimated by this war. This is a deeply important story and a developing one, and will cover it more in subsequent episode, but today we dive deep into Israel's economy. To understand the cost of this war to Israel's economy, we spoke to Kalite Olstein, who covers Israel's economy and government for Bloomberg from Tel Aviv. She says, to understand what's happening now, we need to go back
in history. How would you characterize the Israeli economy at the time of the country's founding.
So I'm not sure we would have to go back all the way to Israel's founding, which was in nineteen forty eight. But I think a good point, or a good time to go back to, would be the mid seventies, after the nineteen seventy three jong Kipuro in which Israel was taken by surprise attack from Egypt in the south
and Syria and the north. So after that, Israel's defense spending sort as much as thirty percent of its GDP, and inflation also soared, so Israel's economy was much on the verge of collapse, I would say, in the mid eighties. And then what happened in nineteen eighty five was that
a program was put into place. It was called the nineteen eighty five Stabilization Plan, and it included various steps like significant cuts in government expenditures, a significant cut in the government deficit in wages, price controls were put into place, fixed foreign currency rates were put in place, and so forth.
And I think one of the most important steps that was put in place that year was the central banks, the Bank of Israel's ability to print money, or rather it was forbidden to print money from then on to cover government deficit. Right so until then, Israel's central bank could just give the government as much money as it wanted to spend. And that was a very significant plan that basically, to put it, simply saved the Israeli economy.
And by nineteen ninety so five years after the Stabilization Plan, defense spending was way down to less than fifteen percent of Israel's GDP, and by twenty twenty it had gone down to Isliela's five percent of the GDP. Inflation was completely tamed.
All of this opened up a new era of prosperity for the Israeli economy.
It took us thirty years to become an instant success.
This is Ari Strasburg, VP of Strategy at Startup Nation Central, a nonprofit organization that supports israel startup ecosystem. He joined us over Zoom from Home.
It's been a very long road in developing and driving the economic engine of this country. It really started in the eighties when we had the turnaround of Israel's economy, and then in the early nineties when we had the immigration of over one million Jewish people from the Soviet Union after the Soviet Union collapsed. You had a series of events that basically generated the Israeli innovation ecosystem, the technology companies.
Khalid also credits the emergence of a high tech sector to Israel's military service requirements.
In Israel, everyone who's eighteen, both boys and girls, men and women, they go to the army for two or three years, and then what happens is they're involved in
various some roles. Some of them are obviously combat roles, right, but then some of the other ones have to do with intelligence, with cybersecurity, cyber defense, etc. And then I would say that the Israeli Army in many ways nurtures these people and these talents who later become the brains behind the Israeli high tech and many you know, I wouldn't say that all, but a lot of Israeli high tech talent is nurtured in the Israeli Army, in the military establishment.
And all of this, the turnaround of Israel's economy, the immigration from the Soviet Union, the nurturing of tech talent in the Israeli military has combined to create what Ari describes as a vibrant tech community in Israel.
Today. You have about eight thousand startups in Israel, all the way from the early seed companies to unicorns who were one of the most dense areas in the world, with a number of unicorns and a lot of parameters that you look at from an innovation perspective, And he says.
This growing Israeli startup scene also started to attract attention from companies outside the country.
So over the last decade or two was a lot of multinational corporations coming to Israel and opening shop here and putting R and D centers innovation centers in Israel. Apple, Google, Microsoft, all of them have some of their most sensitive and important R and D centers that are basically responsible for their future growth as an organization, all here in Israel.
This combination of Israeli startups and multinational corporations has really shaped Israel's economy.
Innovation or technology is really our business plan. We're not that i versified as other mature economies are.
Tech now accounts for about eighteen percent of Israel's GDP and more than half of its exports, and the sector has helped boost Israel's GDP per capita to what it is today, higher than that of France, the UK and Japan. But recently things started to shift.
I would say since the beginning of twenty twenty three, it was starting to go into a slightly i would say, downward trend. Now this was because of several reasons. One of them, which I think is a global reason, was the high inflation, which you know, we signed many countries, in many Western countries, and the high interest rates that
came with that. So that obviously put quite a bit of burden both on households and on Israeli businesses that had to pay more for funding, that had to pay more when they returned to OANs, their mortgages, etc. And at the same time, at the beginning of twenty twenty three, Prime Minister Benjamin Nataniao's sixth government came into power, and right away, right after they came into power in January twenty twenty three, they introduced a judicial overhaul, which was,
to put it briefly, was aimed at weakening the power of judges, which the government thought was too much. And that brought on mass protests, and it actually brought to the establishment of Israel's largest ever protest movement. So Israel saw before October seventh, it saw mass protests every week, every Saturday night, sometimes even more than once a week on the streets, and that brought a lot of political turmoil and social turmoil, and a lot of uncertainty, which
we know that the economy doesn't like. That, combined with the high interest rates, had already made things much charter, both for households and for businesses. After the break, with trouble brewing before the war, and now the cost of the war soaring, what comes next for Israel's economy. So I think the starting point when you look at Israel's fundamentals is an economy, it was pretty good. The depth to GDP ratio and parameters like that, they were pretty good.
But then when you look on more specifically at how individuals or businesses were doing, they were starting to struggle.
That's my colleague Galite Alstein talking about the status of Israel's economy through the early fall. That's how things were. But then there was the October seventh attack by Hamas and the subsequent war in Gaza. In the immediate aftermath of the attack, three hundred and sixty thousand reservists were called by Israel to certain that's nearly four percent of Israel's population and tomorrow Sacerdoti from Darrow says her company felt their absence so.
Like people were afraid to leave the house during COVID, people were afraid to leave the house. Here in Israel, a lot of changes in the field. You can say, I became interim CEO within a day or two and we had fifty percent of our executive team was also caught up to reserve. So we need to make sure that our structure, our leadership structure, was in place. We had to make sure that our employees had a safe, comfortable place to work for an extended period of time.
There was a lot of ambiguity of you know, where are we going, what's going to happen? How long is this going to take.
The war has been going for over three months, and pulling so many people out of the workforce is having an impact on the economy. But recently the Israeli Defense Force announced that a portion of the reservists are being sent home to return to their families and to their jobs.
Fredrek Mi.
Da Tamar Ashavua Tomorrow told they've already seen the impact of those decisions. At the company she works for, darro.
So, about half of them are back and in full capacity, and then I'd say another twenty five percent are back at like a fifty percent capacity, so a lot of comeback. We we do expect at some point in the next year for there to be additional absences. We understand that this is not something that's going to be just three months and that's it.
Unfortunately, part of the reason for sending reservists back to work is war is expensive and the Israeli government is figuring out how to fund it. Israel's GDP was forecast to have fallen nineteen percent in the last quarter of twenty twenty three, and the government just passed a budget for twenty twenty four that assumes this war will last for at least the rest of this year. We ask Elite how much the government needs to come up with.
The cabinet had already voted on a budget for twenty twenty four, but then it needs to be revised to accommodate a nineteen billion dollar which is seventy billion shekels. That's the surge and expenditure because of the war. And also at the same time, the government is experiencing revenue laws because of the war, and that is estimated to be about ten billion dollars or thirty six billion shekels.
So the overall amount is when you combine these two is roughly thirty billion dollars that the government now needs to make up for in some sort of way. So the deficit, the state deficit, the target of the state deficit was raised to six point six percent of the GDP,
which is among Israel's widest this century. It really swelled, and the government did make adjustments in this revised budget, meaning it cut spending in some ways, and it also put in place some revenue increasing measures which to put simply a new taxes, and these all total at about seventeen billion shekels to accommodate everything that I meant.
With no clear end insight to this war, a huge amount of uncertainty also remains where the country's economy. I ask Ali what economic indicators shall be watching for next?
We talked about the state deficit in the budget that was stolen to six point six percent for twenty twenty four, and growth is expected to go down to one point six percent in pointy twenty four, and it's interesting to
see whether these numbers are sustainable. They're not very optimistic numbers and all the same deficit during the year could still swell, growth could still be lower than that one point six the finance some ministry estimates, and these are things to look out for because they will not only have an impact on future fiscal policy, but also in Israel's monetary policy that has to do with the fiscal policy,
and they're both affected by one another. All three big credit trading agencies have put Israel on some kind of negative rating review or negative review watch. I would say that markets have factors Israel's current risk fact so maybe it won't be such a big change there. And yet symbolically, to have Israel's sovereign credit rating lord for the first time, by the way, since it started being rated, would be definitely a point in time that would mean something, and
especially see where it goes from there. So that's another thing to look out for. And the last thing I think I will mention Israeli high tech is almost too big to fall.
As fighting continues and deaths mount, what happens next for Israel's economy is just one part of the story. We'll keep following the foul out of this war in the coming weeks. Thanks for listening to the Big Take from Bloomberg News, Sarah Holder. This episode was produced by David Fox. It was edited by Caitlin Kenney and Jordan Fabian. It was mixed by Alex Ubiura and Blake Maples. It was fact checked by Adrianna Tapia. Our senior producers are Naomi
Shaven and Jildo Di Carli. We get editorial direction from Elizabeth Ponso. Sage Bauman is our executive producer and head of Podcasts. Special thanks to galat Alstein and Israel Bureau Chief Ethan Brawner for the reporting that inspired this episode. You can read Ethan's piece on Bloomberg dot com. Thanks for tuning in.