Israel's economy: software exports and an army of reservists

How a rationed economy became a market one

The state began poor and crowded. It had to absorb hundreds of thousands of refugees from Europe and almost a million Jews from the Arab world after the war of 1948, and from 1949 to 1959 it ran a policy of austerity, with food, clothing and furniture rationed, high unemployment and scarce foreign currency. Money came from outside. Under the agreement of 1952 West Germany paid 3 billion marks over 14 years, reaching 87.5% of Israel's income in 1956; Israel Bonds, launched in 1950 for American and Canadian Jews, had raised more than $52 million by 1951; and American aid grew from the 1950s onward.

Britannica describes an early economy that ran largely through the government and the labour federation, the Histadrut, which was once among the country's largest employers and had sold most of its companies by the mid-1990s. Growth exceeded 10% a year in the first two decades. The years after the war of 1973 were a lost decade: growth stalled and spending rose, and by 1984 inflation was running at close to 450% a year. A stabilisation plan in 1985 brought it under control, and the new shekel replaced the old one in September 1985.

Two things then changed the economy's scale. More than a million immigrants arrived from the former Soviet Union from the 1990s, many of them scientists and engineers, and the peace process opened from the Madrid conference of October 1991 to the treaty with Jordan in 1994. Israel became a member of the OECD on 7 September 2010.

What Israel's high-tech sector actually sells

The Israel Innovation Authority's report for 2025, as summarised by the business paper Calcalist, puts high-tech output at about NIS 317 billion in 2024, 17.3% of GDP and almost unchanged from 2023. The sector employed about 403,000 people, around 11.5% of the workforce, a share that has not moved for three years after a decade in which employment doubled from 200,000 to 400,000. Research and development jobs fell by 6.5% in the first half of 2025.

What it sells has shifted from things to code. Software services made up about 72% of high-tech exports in the report's latest figures, against tangible products at 28%, which had been 60% in 2013. Cybersecurity drew about 30% of investment in 2024 and the first half of 2025. Only about 400 new companies were founded in 2024, almost half the average of the previous decade.

The money still comes. Israeli companies raised $10.6 billion in 2024 and $7.2 billion in the first half of 2025, and Google's purchase of the cloud-security firm Wiz for $32 billion in 2025 was the largest deal in the sector's history. Mergers, acquisitions and listings together reached $58.8 billion in 2025, up from $13.4 billion in 2024. The roots go back to the 1970s, when investment shifted from farming and infrastructure to industry and defence programmes; between 1991 and 2000 annual venture capital outlays rose from $58 million to $3.3 billion.

Britannica notes the limits common to every Israeli industry: few domestic raw materials, scarce energy sources and a small home market.

How the gas fields changed the energy bill

Israel imported almost all its energy for most of its history and spent more than 5% of GDP on energy imports in 2009, most electricity being generated from imported coal. A field of about 33 billion cubic metres was found off Ashkelon in 2000 and produced from 2004. In 2009 the Tamar field was found in deep water about 90 kilometres west of Haifa, with proven reserves of 223 billion cubic metres; it began production on 30 March 2013, after Egyptian gas supplies had been cut in the unrest of 2011. Surveys from 2010 confirmed an estimated 621 billion cubic metres in Leviathan nearby.

The fields turned Israel into an exporter. Jordan signed a 15-year deal worth $10 billion for 45 billion cubic metres from Leviathan, and gas now flows to Egypt through a pipeline built to carry Egyptian gas the other way. In 2016 natural gas generated 55.2% of electricity and coal 43.8%, the first year gas came first. The grid is an electricity island with no connection to its neighbours, and the Israel Electric Corporation's share of generating capacity had fallen to about 75% by 2015. In January 2026 Chevron and its partners took the final investment decision to expand Leviathan.

Sunlight was used before gas. A solar water heater developed after the oil crisis of 1973 is now used in over 90% of Israeli homes.

What Israel makes besides software

Chemicals are built on the Dead Sea. Israel Chemicals and its subsidiary the Dead Sea Works at Sodom produce potash, magnesium chloride, industrial salts and bromine; the chemical plants are concentrated at Ramat Hovav, Haifa Bay and the Dead Sea. Cut diamonds were the largest export product in 2016, at 23.2% of all exports, and the cutting and polishing trade is centred in Tel Aviv.

Defence is the other heavy industry. Elbit Systems, Israel Aerospace Industries and Rafael appeared on the Stockholm International Peace Research Institute's list of the top 100 arms producers in 2010, and Israeli defence exports reached $7 billion in 2012. Israel Aerospace Industries had an order backlog of $11.4 billion in 2017. Teva Pharmaceutical Industries, which makes generic and proprietary drugs, employed 40,000 people in 2011.

Agriculture produced 2.4% of GDP in 2017. Israel imports about 80% of the grain it eats and is largely self-sufficient in other foods; citrus remains the main farm export, alongside flowers, cotton and greenhouse produce. Britannica traces the water-saving methods behind it, drip irrigation above all, to the scarcity of water. Migrant workers, historically from Thailand and the Philippines, have long done much of the farm work.

Who buys what Israel sells

Total exports of goods and services were $102.3 billion in 2017 against imports of $96.7 billion. Israel usually runs a modest deficit in goods, buying raw materials, crude oil and consumer goods, and a surplus in services from software, engineering and research, which kept the current account in surplus at 4.7% of GDP in 2017.

The United States is the largest single trading partner. The two signed a free trade agreement in 1985 that removed tariffs on most goods over ten years, and Israel also has agreements with the European Union and Canada. By region the European Union takes the most: between October 2011 and January 2012 it bought $5 billion of goods, 35% of the total. Until 1995 trade with the Arab world was minimal because of the Arab League boycott, begun in 1945 against the Jewish community of Palestine. In 2012 ten companies accounted for 47.7% of exports, and the Bank of Israel and the Export Institute warned about that dependence.

The war has touched trade too. The Bank of Israel found a relative decline in 2025 in exports to European Union countries critical of Israel. The Houthi attacks on shipping almost shut the Red Sea port of Eilat.

What the war has cost the economy

The Bank of Israel's annual report for 2025 is the main account of the cost. Its central finding is that the war weighed on output mainly through labour supply: reservists away from their jobs, the halt to the entry of Palestinian workers, and lower participation among the young. Employment in the business sector was about 1.5% below its pre-war level in 2025, and the job vacancy rate was 4.5%. Wages in business rose fast, while public-sector wages fell in real terms.

The bank estimates the fiscal cost of the war at about NIS 350 billion over 2023 to 2026, before the campaign against Iran that began in late February 2026, with about NIS 116 billion spent in 2025. Roughly half was financed by borrowing. Tax measures worth about 1.5% of GDP took effect in 2025, and the central government deficit came in at 4.7% of GDP against a target of 4.9%. Defence spending in 2025 was only slightly lower than in 2024, and in March 2026 the government added about NIS 30 billion to the defence budget, bringing it to about NIS 112 billion.

The fighting shows in the quarterly figures. Output fell 2.8% in the last quarter of 2023 and, by the Central Bureau of Statistics' preliminary estimate, 3.5% in April to June 2025, during the war with Iran. Fitch downgraded Israel's credit rating in August 2024. The shekel then strengthened as the risk premium fell, helping bring inflation into the target range, and the bank cut its rate to 4.25% in November 2025 and to 4.0% in January 2026.

The OECD's survey of April 2025 projected growth of 3.4% for 2025 and 5.5% for 2026, and the bank expects the economic effects of the war to outlast it.

How investors read the risk

The capital markets have swung with the politics. When the judicial overhaul was pushed in early 2023, withdrawals from Israeli banks ran at ten times the normal rate, more than $4 billion left the country within a few weeks, and the shekel weakened against the dollar and the euro. After 7 October 2023 the stock market and the currency fell again. Both later recovered: Tel Aviv shares stood at all-time highs in July 2026, and the Bank of Israel found the Israeli equity market outperforming global markets in 2025 as the fighting eased, with corporate bond spreads narrowing to historically low levels.

Wealth moved out and partly back. The Henley and Partners report of 2024 counted about 1,700 millionaires who had left since 2023, while the number living in Israel rose 4.7% to 195,000 in 2025. In early 2026 the Finance Ministry raised $6 billion in its first international bond issue since the Gaza ceasefire, from about 300 investors in more than 30 countries.

The Tel Aviv Stock Exchange was founded in 1953. Britannica describes commercial banks that are privately owned and supervised by the Bank of Israel, which issues the currency, and a tax burden approaching two fifths of national product.

Who is left out of the labour market

Two groups sit at the edge of the labour market. Ultra-Orthodox men have low recorded participation in work, and the OECD's survey recommended removing benefits that discourage them from working and making school funding conditional on teaching the core curriculum. Arab citizens are, in Britannica's words, generally on the lower rungs of the economic ladder. Together, according to figures published by Ian Fursman, the two groups make up 25 to 28% of the population and 60% of poor households.

Housing is the cost most households feel. The planning authorities approved 223,000 housing units in 2025, about 80,000 homes were started, and prices fell for most of the year before rising again from October; rents rose 3.2% in 2025. About 7,400 homes in the north, the Gaza border area and the centre were still unusable in October 2025 because of war damage.