Despite concerns about Israel's financial standing, history proves optimistic - opinion

Moody’s report sparked a heated debate: Will the war cripple the economy, or could it propel it forward? The answer remains balanced on a knife’s edge, Yet, this past week presented us with a meaningful foresight as Israel orchestrated a debt issuance totaling NIS 4 billion with unprecedented demands, according to Accountant-General Yehli Rotenberg.

The war is casting a dark cloud over Israel’s economic future, raising concerns about a slowdown, halted investments, infrastructure damage, workforce disruptions, and soaring defense spending.

But there is still hope in Israel’s strengthened global position, the potential for a Saudi agreement, and an increase in the worldwide export of “blue and white” systems with battlefield-proven capabilities. Additionally, domestic consumption may climb. Will the war usher in an economic boom like the Six-Day War or a bust like Yom Kippur? There are arguments supporting both sides.

Wartime urgency can lead to innovation and evolution

During World War II, American industry underwent a transformative manufacturing revolution that played a pivotal role in the Allied victory. Industry giants shifted production from cars and consumer goods to vital war equipment. This was termed the “arsenal of democracy” by President Franklin Roosevelt as Ford, GM, and, for example, Chrysler morphed into factories churning out tanks, planes, and weapons in a historic production effort. Those rival producers of consumer goods united under Roosevelt’s director of war production, William s. Knudsen joined forces to create the “Arsenal of Democracy” initiative, sharing secrets to boost war production. Henry Ford himself spearheaded the transformation of his River Rouge plant, birthing B-24 Liberators at the staggering rate of one per hour. 

Even Roosevelt, who once opposed the “big industrialists,” shifted gears during WWII. The government fostered cooperation and eased regulations, boosting the United States’ industrial war effort. This turned the nation not just into a victor but also into the world’s leading military, industrial, and economic power. The revival of the US after Japan’s surprise attack on Pearl Harbor serves as an example of how a country can emerge stronger from a war.

In Israel, we are witnessing impressive collaborations too, whether with AI tools that companies are making available for free to anyone fighting antisemitism, or collaborations between start-ups and rival technology companies to create dedicated developments, such as among several Israeli companies creating tools to address the situation of abducted and missing persons.

However, opinions on the relationship between war and economic growth are divided.

AN ANALYSIS by the International Monetary Fund (IMF) discusses how wars such as Russia’s invasion of Ukraine reinforce previous negative global economic trends, including inflation and poverty. This analysis highlights the widespread economic disruptions caused by war, such as fuel and food shortages leading to worsening inflation. According to the analysis, while war may stimulate some economic activities in the short term, its long-term effects are generally negative and destabilizing for economies.

The European Center for Economic and Policy Research (CEPR) also discusses how military spending, like war spending, can provide a temporary boost to the economy, much like other types of government spending. This perspective is particularly relevant when considering the immediate economic impact of increased military spending. However, whether such spending leads to a boost in demand and net growth largely depends on the existing economic conditions, such as the level of slack in the economy – that is, the ratio between demand and production capacity. The CEPR cites World War II America as an example of massive military spending leading to a significant increase in productivity and employment due to higher unemployment during the Great Depression. However, the article points out that such spending is not the only way to stimulate economic growth, and that political support for non-military spending can achieve similar economic benefits without the devastating consequences of war.

This study reveals substantial GDP per capita losses within the countries where the battles are fought. Notably, this decline was not observed in conflicts occurring outside national borders. In this sense, although the October 7 disaster occurred within Israel and Hezbollah’s rockets and missiles are aimed at Israeli cities and communities, it is possible to say that the war is being fought outside of Israel since most of it takes place in Gaza. 

On the other hand, the study also indicates that while per capita income might eventually recover, there is an enduring economic and social scar that wars inflict on workforces and businesses. In contrast, we see that Israel’s hi-tech sector continues to act as an engine of growth even amid broader economic challenges, with its workers meeting deadlines set by global companies. Indeed, based on the studies, it is difficult to provide a definitive answer to the question of whether the significant economic growth triggered by wartime investments in the defense industry, and its subsequent ripple effects through related sectors, can truly outweigh the devastating economic toll of war itself.

George Mason University published a paper drawing on the post-WWII era, revealing a significant postwar increase in consumer spending and an economic recovery, challenging fears of an economic depression caused by the end of wartime production and spending. Contrary to predictions of economic collapse after WWII, the United States witnessed a boom. Consumption skyrocketed 22% between 1944-1947, and private investment, particularly in housing, soared sixfold. This prosperity stemmed, in part, from the remarkable adaptability of the market. Resources swiftly pivoted from wartime production to peacetime needs, showcasing the economy’s resilience following a significant disruption. Furthermore, the transition from the war-era, government-controlled system to a market-driven economy played a critical role in this remarkable recovery.

Every war, economy, and country is unique, and drawing definitive conclusions about postwar outcomes remains challenging. However, the broad cooperation between private companies and civil parties offers hope. Initiatives like the Innovation Authority’s recent hi-tech support programs showcase this positive momentum. Crucially, responsible leadership from state institutions, spearheaded by the Finance Ministry, will be essential for navigating this complex situation.

We already have the financial world support, let’s make sure we live up to it.

The writer is a leading hi-tech entrepreneur in Israel and an aerodynamics engineer.