In Israel’s last major war, in 1973, 0.08 percent of Israel’s population was killed. During Israel’s last serious financial crisis, in the 1970s and early 1980s, its economy faced hyperinflation. In the four decades since, Israel’s casualty rates have declined while its real income, per capita, has risen. Israeli casualty rates as a result of the Arab-Israeli conflict were 0.03 percent in the 1980s, 0.004 percent in the ‘90s, 0.03 percent in the 2000s, and just 0.001 percent since 2010. Israel’s per capita income has grown from $3,500 in 1975 to $35,000 in 2015. Since the end of Operation Protective Edge in Gaza in 2014, Israel has had a casualty rate of 0.0004 percent. Its economy grew at 3-4 percent annually during this time, twice the average rate of the developed world. Since mid-2015, the Israeli economy has been outgrowing the developing world’s too.
It may be that Israel will continue this success in the years and decades ahead. But it may not. Israel might instead have to face new challenges to its economy and security, which are already becoming visible from afar.
One new challenge Israel may face comes from the development of software and devices that replace human labour. Thus far, labour and technology have been Israel’s twin competitive advantages. Part of the reason that Israel’s economy and tech sector have been growing is that Israel has a labour force that is far younger than those of Europe, Northeast Asia, or the United States. Soon, however, Israel may enter a phase in which, for the tech sector to continue succeeding, it will have to create technologies that will directly undercut Israel’s labour advantage. A glimmer of this future challenge can already be seen, for example in Intel’s 15.3 billion dollar acquisition of a driverless-car technology company, Mobileye, earlier this year. It was the largest windfall in Israeli hi-tech history—yet it could also put Israeli nahagim out of work.
A second threat to the Israeli economy may be climate change. Though it is very difficult to know when, what or even whether the impacts of climate change will be, it is obvious that the Middle East is not a part of the planet one would love to be living in if and when they do occur. As many in Israel must have been thinking during the recent spell of nearly 40 degree temperatures—especially inside Gaza, where electricity has been mostly unavailable—any future warming or drying in the Middle East is a frightening prospect.
Perhaps even more importantly, it is not certain to what extent Israel’s trading partners will decide to enact carbon tariffs in the coming years. Such tariffs could put Israel in a difficult position, as Israel relies on burning fossil fuels, particularly coal, to generate its electricity. Israel has actually benefited from this of late, since fuel prices have plummeted worldwide. But with the possibility of large countries deciding to enact tariffs on carbon (or methane) emissions, these energy sources represent a risk for the Israeli economy.
A third risk to the Israeli economy also comes from its commercial relationships with foreign countries. Israelis do a lot of business in the world; particularly in Europe, where Israelis live and work in countries like Germany while French and British Jews spend tourist and investment dollars in Israel. Israel imports more goods from German-speaking countries than from the United States. Israel also increasingly does business with Asia: Israel exports roughly half as much to Chinese-speaking economies as to the United States.
Today, however, Israel’s economic relationships with both Europe and Asia are at risk, at least in the short term, because of the slow economic growth in both those continents. Europe has barely grown in the past decade outside of Germany, and continues to suffer extreme unemployment in its Mediterranean countries. China, meanwhile, which was growing at over 10 percent just a few years ago, is now growing at just 6.5 percent. And that’s the official rate: most analysts guess China’s real rate is now only 3-6 percent.
Growth in European and Asian economies could bounce back, of course. But until it does, it bodes ill for Israel.
Most worrying for Israel should be Germany, which has thus far been the major exception to Europe’s economic and unemployment crises. Germany has lately shown signs that it may finally be on the verge of succumbing to Europe’s general sluggishness. Germany is an enormously export-driven country, but the economies it exports to are either struggling or, in the case of the United States, have been talking about raising tariffs on imports of German goods. Israel could be hurt if Germany falters, as it is Israel’s largest economic partner by far apart from the US. Lots of Israelis could flow back from Berlin, needing jobs.
Germany also shares a political trend with Israel: long-lasting leaders. Merkel is now in her 12th year as Chancellor and approaching her fourth election. Netanyahu is in his 11th year in office (when counting his previous three-year stint in the ‘90s), approaching his fifth election. As Ruchir Sharma, a top investor at Morgan Stanley, argues in his recent book, The Rise and Fall of Nations, countries with leaders who stay on too long past their “best before date”, like Bibi and Angela are doing, tend to watch their markets do relatively poorly over time. Time will soon tell whether or not Israel will conform to this rule. It already has done so once before (though perhaps coincidentally), when it struggled in the ‘70s after Labor’s long reign.
Finally, there is Israel’s security challenge. This has declined in the past generation, first because of Israel’s peace with Egypt and then because Israel’s rivals in Arabia and Iran became distracted by their own wars; notably the Iran-Iraq War (1980-1988), the long Iraq war (1991-2017), and now of course the Syrian war (2011-2017). Israel’s smaller but nearer rivals, chiefly Hezbollah and Hamas, have also been distracted of late. Hamas’ supporters—in the Brotherhood, Damascus, and lately Qatar—have weakened. Hezbollah has become directly drawn into the civil war inside Syria. More recently still, in mid-2015, energy prices crashed, weakening Israel’s historic rivals in the Arab world, Iran, and Russia all at once. Though it is not certain how much these events have caused Israel’s casualty rates to drop, they have possibly played a big part.
But Israel is not the only power in the Middle East that can withstand both cheap oil and crises in the Arab world. The largest economy in the region, Turkey, can also do so. Indeed, Turkey is now facing a power vacuum in every direction. To its east are the oil economies of the Gulf Arab states, Iran, and Central Asia. To its north is another oil economy, Russia, plus a divided nation in Ukraine. To its west, Greece is stuck in a Great Depression, the Balkans are divided, and the European Union has fractured politically. And to its south, Syria, Iraq, and Libya (and more distantly, Yemen) are all at war. At some point, assuming that oil prices do not rebound, it might be presumed that Turkey will take measures to fill this vacuum.
Turkey’ government, led by Recep Tayyip Erdogan, has been consolidating its own power domestically in the past two years. Erdogan’s three recent victories—in the election of 2015, the coup of 2016, and the referendum of 2017— has put him ahead of rival factions like Turkey’s secularists, Gulenists, and Kurdish parties. While Turkey’s relationship with Israel today is not too bad (they have put the Mavi Marmara incident of 2010 somewhat behind them) there is no guarantee what they will look like in the future. Turkey’s economy is now estimated to be 2.9 times larger than Israel’s, twice as large as Iran’s, 1.3 times larger Saudi Arabia’s, and even two-thirds as large as Russia’s. If oil stays cheap, Israel might soon find itself sharing the Middle East with a significant regional power for the first time since….well, since the Turks, a century ago.
Of course, this is taking a rather negative view of things. There are reasons to be hopeful about Israel’s future as well. The fact, for example, that fewer Israelis have been killed by Palestinians since 2002 than there were in just two years from 2001-2002, bodes relatively well for Israel and Palestine both. Between this reduction in casualties and the possibility of an eventual cease-fire in Syria (even if it is gained by way of a victorious Iranian-supported regime, or a Turkish invasion of Syria), the region might even find some peace.
More broadly, if the long, slow trend towards global peace, integration, and economic convergence, which began in 1945 and has (contrary to popular wisdom) continued since, is not derailed, Israel could be an ideal place to live. It is at the crossroads of Africa and Eurasia and of the Atlantic and Indian basins; it can speak English, Arabic, and Russian; it can attract Christian and Muslim pilgrims; and it has Jewish and Israeli connections globally. Israel could do well in a peaceful and equitable world, should such a world come to be.
On the other hand, history may not be so nice. Israel’s past forty years have been pretty decent, all things considered. But new challenges are coming. It is still not clear whether Israel will finally secure the peace and prosperity it has been labouring towards; or instead merely catch a glimpse of them from its current peak.
Future Economics 
I don’t want to get into a fight on an obviously emotive subject, but I would think the primary long-term problem for Israel would be the seemingly insoluble and growing impasse with the Palestinians. It is true that on, as it were, a tactical level, Israel’s massive advantage in military and economic force has for now subdued the direct violence on that front. But on the strategic level, the Jewish population is growing much more slowly than the Palestinian population (both inside and outside Israel’s legal borders). If the Israeli goal continues to be the total subjugation of their neighbours, it is hard to see how that could be accomplished, given an increasingly lopsided population disparity, without resorting to even more extreme measures than those that have already severely eroded political support for Israel around the world (which will in any case continue to decline with time, as the historically-justified carte blanche the West has effectively granted becomes seen as more and more anachronistic, and as pro-Israeli lobbies in the West become both demographically less significant and politically-culturally less affiliated with Israel over time). This is likely not only to eventually re-awaken the security issue, but also pose severe problems politically and economically.
Less emotively, I wonder how Israel will deal with the inevitability of rising oil prices, particularly given their reliance on imports. Specifically, I’m thinking of how dependent Israel is on imports of water (mostly in the form of water-intensive foods), the cost of which will rise as transport costs rise. Unlike other water-importing countries, like much of the EU, it’s hard to see rising transport costs leading to substitution by domestic agriculture, given the limitations of the climate.
Anyway, just some thoughts.
[Oh, and China isn’t suffering “slow growth”. Even if growth were only 3-6%, that would still be remarkably rapid growth! 3% is still twice the US growth rate. The US hasn’t seen 3% growth for 12 years! It hasn’t seen 6% growth for over 30 years – it’s only seen 6% growth four times since 1960! And btw, EU growth overtook US growth last year…]
A respectful Fisking?
“an obviously emotive subject”
Why is the emotion obvious? 10 x as many people died in Chicago this year by violence than the entire West Bank. There is nothing “emotive” about the minor border skirmish with her neighbors except for neurotic Ashkenazi Jews on the Left and supporters of Arab nationalism. But for the past decade the border skirmishes have had near-0 impact on the economy.
“Seemingly insoluble and growing impasse with the Palestinians.”
As described in the piece, deaths have been dropping. Palestinian influence on the Israeli economy is negligible. Impasse is shrinking (see the water deal signed yesterday in Jenin).
“Jewish population is growing much more slowly than the Palestinian population”
Total fertility rates converged at 3.1 per woman in 2015. Jewish TFR has been higher than the Arab rate for a couple of years and is bolstered by immigration. Arab population of Israel has dropped from 25% in 2000 to 17% today.
In the disputed West Bank the Jewish TFR is nearly double to the Arab rate. Open borders with West bank would result in Jewish majority in Palestine by 2025.
“If the Israeli goal continues to be the total subjugation of their neighbours, it is hard to see how that could be accomplished, given an increasingly lopsided population disparity”
Gaza entirely independent. Begging for Israeli involvement. Egypt allowed Israeli military into Sinai to fight Islamic State. Lebanon has maintained quiet border for over a decade. Syrians signing up for Israeli citizenship in record numbers. Jordan just signed Red-Med deal. Saudi opening direct flights. What “subjugation”.
Are Leftists emotional? Are American Jewish Leftists neurotic? Are Arab nationalists unrealistic and boastful? That’s been true since 2000 during which Israel doubled its GDP.
“The inevitability of rising oil prices, particularly given their reliance on imports.”
Inevitable? You should have a talk with the Saudis about the 2030 plan. They assume oil is over by 2030, but maybe you have better information. Fun fact! First Tesla Model 3 rolled out this week and the United States hit 2% solar (1% in 2015, .5% in 2013 – you do the math).
“How dependent Israel is on imports of water (mostly in the form of water-intensive foods), the cost of which will rise as transport costs rise.”
Another fact-free assertion.
“Given the limitations of the climate.”
You know it’s called the fertile crescent, right?
I agree with you of course, a main challenge for both Israelis and Palestinians will probably continue to be their relationship with one another. I didn’t go into detail on that subject mainly because I don’t know what will happen with it. I’m not particularly swayed by the population growth argument though, since I suspect it will not be too relevant whether one side ends up having, say, 60 percent of the population and the other 40 percent. It’s not clear to me that comparative population will really matter all that much.
I agree that if energy prices were to go way up, Israel would probably not be in a good position. But I’m not sure that it really is inevitable that they will. And for the time being, at least, they are fairly low.
It’s true that 3-6 percent growth would, from the point of view of a “developed” economy, be extremely fast. But that does not mean that 3 percent growth would be sufficient to maintain stability within a poor dictatorship like China. As Japan has showed, developed countries can grow at 0 percent for an entire generation and not really face any serious consequences. But for a country like China, slower growth might mean that hundreds of millions of people will realize that they are not about to escape poverty anytime soon. This might have political consequences in turn, which might risk a further economic slowdown, and so on in a downward spiral. I’m not saying that that’s what will happen, but it shouldn’t be a surprise if it does.
It’s also true that the EU had a pretty good year last year, relatively speaking, especially Spain. (Though Europe’s year in general was not as good, since the non-EU European oil exporters, Russia and Norway, didn’t do too great). But it may not be out of the woods yet; the consequences of its decade-long slump (notably, unemployment in countries like Italy, with elections approaching) still linger, and could present risks. For the most important economy, Germany, for example, there seem to be a number of risks. Germany’s exports to Italy are at risk because of the risk of financial or political problems there; Germany’s exports to Britain are at risk because of Brexit; Germany’s exports to Russia are at risk because of oil prices and politics; Germany’s exports to China are at risk because of its economic slowdown; and Germany’s exports to the US are at risk because of protectionism.