Speaker 1: Over the last three decades, Israel has seen its economy
Speaker 1: undergo a meteoric rise. Much of it has been fueled
Speaker 1: by the explosion of its startup and tech sector, including
Speaker 1: companies like the one where Tamar Saucerdoiti works. In the
Speaker 1: early days of October, Tamar was working as the chief
Speaker 1: of staff for a legal tech startup called Darrow, unaware
Speaker 1: of how radically her life was about to change.
Speaker 2: On October seventh, we all woke up to kind of
Speaker 2: a complete shock. I was in my apartment in Tel
Speaker 2: Aviv with my fiance when all of a sudden, sirens
Speaker 2: went off, and very quickly we realized that there was
Speaker 2: something big going on.
Speaker 1: Hama's militants had stormed across the border into Israel and
Speaker 1: carried out a series of attacks. Twelve hundred people were
Speaker 1: killed and over two hundred were taken hostage, according to
Speaker 1: local officials. As the news came in, Tamar started to
Speaker 1: worry about her colleagues.
Speaker 2: My job, as you can understand, as the chief of staff,
Speaker 2: is very wide, so I ideal with a lot of
Speaker 2: people and with all the different teams. So initially we
Speaker 2: just tried to make sure where everyone was and that
Speaker 2: everyone was okay all of the employees, while while also
Speaker 2: trying to personally deal with anyone who would potentially was
Speaker 2: in the area are affected. That was kind of the
Speaker 2: first day, and then the next week that ensued was
Speaker 2: a bit of structured chaos.
Speaker 1: Over the next few days, more than three hundred thousand
Speaker 1: Israelis were called up from the reserves to serve in
Speaker 1: the war. Among them were Tamar's company's CEO, half of
Speaker 1: the company's executive team, and dozens of other employees.
Speaker 2: It was just cut like they literally like, within twenty
Speaker 2: four hours were unavailable.
Speaker 1: So thirty five employees. How much of the company was.
Speaker 2: That about forty percent.
Speaker 1: As Tomorrow herself was quick to point out her company
Speaker 1: is just one of many that has had to rapidly
Speaker 1: and radically adapt to new wartime realities. Today on the show,
Speaker 1: what the war in Gaza means for Israel's startup ecosystem
Speaker 1: and how it may reshape the country's entire economy. I'm
Speaker 1: your host, Sarah Holder, and this is the big take
Speaker 1: from Bloomberg News. In the three months since the October
Speaker 1: seventh Hamas attack on Israel, Israel and Hamas have been
Speaker 1: at war and thousands of people have been killed. Israel
Speaker 1: has lost over twelve hundred victims in the attack itself
Speaker 1: and over five hundred soldiers. Since October seventh, according to
Speaker 1: the Israeli military, Gaza has lost over twenty five thousand people,
Speaker 1: mostly Palestinian women and children, according to the Gaza Health Ministry,
Speaker 1: which is run by Hamas. It needs to be said
Speaker 1: that while the economic toll for Israel is calculable right now,
Speaker 1: and that's what we're discussing in this episode, the toll
Speaker 1: for Gaza continues to mount. Their economy and their infrastructure
Speaker 1: are still being decimated by this war. This is a
Speaker 1: deeply important story and a developing one, and will cover
Speaker 1: it more in subsequent episode, but today we dive deep
Speaker 1: into Israel's economy. To understand the cost of this war
Speaker 1: to Israel's economy, we spoke to Kalite Olstein, who covers
Speaker 1: Israel's economy and government for Bloomberg from Tel Aviv. She says,
Speaker 1: to understand what's happening now, we need to go back
Speaker 1: in history. How would you characterize the Israeli economy at
Speaker 1: the time of the country's founding.
Speaker 3: So I'm not sure we would have to go back
Speaker 3: all the way to Israel's founding, which was in nineteen
Speaker 3: forty eight. But I think a good point, or a
Speaker 3: good time to go back to, would be the mid seventies,
Speaker 3: after the nineteen seventy three jong Kipuro in which Israel
Speaker 3: was taken by surprise attack from Egypt in the south
Speaker 3: and Syria and the north. So after that, Israel's defense
Speaker 3: spending sort as much as thirty percent of its GDP,
Speaker 3: and inflation also soared, so Israel's economy was much on
Speaker 3: the verge of collapse, I would say, in the mid eighties.
Speaker 3: And then what happened in nineteen eighty five was that
Speaker 3: a program was put into place. It was called the
Speaker 3: nineteen eighty five Stabilization Plan, and it included various steps
Speaker 3: like significant cuts in government expenditures, a significant cut in
Speaker 3: the government deficit in wages, price controls were put into place,
Speaker 3: fixed foreign currency rates were put in place, and so forth.
Speaker 3: And I think one of the most important steps that
Speaker 3: was put in place that year was the central banks,
Speaker 3: the Bank of Israel's ability to print money, or rather
Speaker 3: it was forbidden to print money from then on to
Speaker 3: cover government deficit. Right so until then, Israel's central bank
Speaker 3: could just give the government as much money as it
Speaker 3: wanted to spend. And that was a very significant plan
Speaker 3: that basically, to put it, simply saved the Israeli economy.
Speaker 3: And by nineteen ninety so five years after the Stabilization Plan,
Speaker 3: defense spending was way down to less than fifteen percent
Speaker 3: of Israel's GDP, and by twenty twenty it had gone
Speaker 3: down to Isliela's five percent of the GDP. Inflation was
Speaker 3: completely tamed.
Speaker 1: All of this opened up a new era of prosperity
Speaker 1: for the Israeli economy.
Speaker 4: It took us thirty years to become an instant success.
Speaker 1: This is Ari Strasburg, VP of Strategy at Startup Nation Central,
Speaker 1: a nonprofit organization that supports israel startup ecosystem. He joined
Speaker 1: us over Zoom from Home.
Speaker 4: It's been a very long road in developing and driving
Speaker 4: the economic engine of this country. It really started in
Speaker 4: the eighties when we had the turnaround of Israel's economy,
Speaker 4: and then in the early nineties when we had the
Speaker 4: immigration of over one million Jewish people from the Soviet
Speaker 4: Union after the Soviet Union collapsed. You had a series
Speaker 4: of events that basically generated the Israeli innovation ecosystem, the
Speaker 4: technology companies.
Speaker 1: Khalid also credits the emergence of a high tech sector
Speaker 1: to Israel's military service requirements.
Speaker 3: In Israel, everyone who's eighteen, both boys and girls, men
Speaker 3: and women, they go to the army for two or
Speaker 3: three years, and then what happens is they're involved in
Speaker 3: various some roles. Some of them are obviously combat roles, right,
Speaker 3: but then some of the other ones have to do
Speaker 3: with intelligence, with cybersecurity, cyber defense, etc. And then I
Speaker 3: would say that the Israeli Army in many ways nurtures
Speaker 3: these people and these talents who later become the brains
Speaker 3: behind the Israeli high tech and many you know, I
Speaker 3: wouldn't say that all, but a lot of Israeli high
Speaker 3: tech talent is nurtured in the Israeli Army, in the
Speaker 3: military establishment.
Speaker 1: And all of this, the turnaround of Israel's economy, the
Speaker 1: immigration from the Soviet Union, the nurturing of tech talent
Speaker 1: in the Israeli military has combined to create what Ari
Speaker 1: describes as a vibrant tech community in Israel.
Speaker 4: Today. You have about eight thousand startups in Israel, all
Speaker 4: the way from the early seed companies to unicorns who
Speaker 4: were one of the most dense areas in the world,
Speaker 4: with a number of unicorns and a lot of parameters
Speaker 4: that you look at from an innovation perspective, And he says.
Speaker 1: This growing Israeli startup scene also started to attract attention
Speaker 1: from companies outside the country.
Speaker 4: So over the last decade or two was a lot
Speaker 4: of multinational corporations coming to Israel and opening shop here
Speaker 4: and putting R and D centers innovation centers in Israel. Apple, Google, Microsoft,
Speaker 4: all of them have some of their most sensitive and
Speaker 4: important R and D centers that are basically responsible for
Speaker 4: their future growth as an organization, all here in Israel.
Speaker 1: This combination of Israeli startups and multinational corporations has really
Speaker 1: shaped Israel's economy.
Speaker 4: Innovation or technology is really our business plan. We're not
Speaker 4: that i versified as other mature economies are.
Speaker 1: Tech now accounts for about eighteen percent of Israel's GDP
Speaker 1: and more than half of its exports, and the sector
Speaker 1: has helped boost Israel's GDP per capita to what it
Speaker 1: is today, higher than that of France, the UK and Japan.
Speaker 1: But recently things started to shift.
Speaker 3: I would say since the beginning of twenty twenty three,
Speaker 3: it was starting to go into a slightly i would say,
Speaker 3: downward trend. Now this was because of several reasons. One
Speaker 3: of them, which I think is a global reason, was
Speaker 3: the high inflation, which you know, we signed many countries,
Speaker 3: in many Western countries, and the high interest rates that
Speaker 3: came with that. So that obviously put quite a bit
Speaker 3: of burden both on households and on Israeli businesses that
Speaker 3: had to pay more for funding, that had to pay
Speaker 3: more when they returned to OANs, their mortgages, etc. And
Speaker 3: at the same time, at the beginning of twenty twenty three,
Speaker 3: Prime Minister Benjamin Nataniao's sixth government came into power, and
Speaker 3: right away, right after they came into power in January
Speaker 3: twenty twenty three, they introduced a judicial overhaul, which was,
Speaker 3: to put it briefly, was aimed at weakening the power
Speaker 3: of judges, which the government thought was too much. And
Speaker 3: that brought on mass protests, and it actually brought to
Speaker 3: the establishment of Israel's largest ever protest movement. So Israel
Speaker 3: saw before October seventh, it saw mass protests every week,
Speaker 3: every Saturday night, sometimes even more than once a week
Speaker 3: on the streets, and that brought a lot of political
Speaker 3: turmoil and social turmoil, and a lot of uncertainty, which
Speaker 3: we know that the economy doesn't like. That, combined with
Speaker 3: the high interest rates, had already made things much charter,
Speaker 3: both for households and for businesses. After the break, with
Speaker 3: trouble brewing before the war, and now the cost of
Speaker 3: the war soaring, what comes next for Israel's economy. So
Speaker 3: I think the starting point when you look at Israel's
Speaker 3: fundamentals is an economy, it was pretty good. The depth
Speaker 3: to GDP ratio and parameters like that, they were pretty good.
Speaker 3: But then when you look on more specifically at how
Speaker 3: individuals or businesses were doing, they were starting to struggle.
Speaker 1: That's my colleague Galite Alstein talking about the status of
Speaker 1: Israel's economy through the early fall. That's how things were.
Speaker 1: But then there was the October seventh attack by Hamas
Speaker 1: and the subsequent war in Gaza. In the immediate aftermath
Speaker 1: of the attack, three hundred and sixty thousand reservists were
Speaker 1: called by Israel to certain that's nearly four percent of
Speaker 1: Israel's population and tomorrow Sacerdoti from Darrow says her company
Speaker 1: felt their absence so.
Speaker 2: Like people were afraid to leave the house during COVID,
Speaker 2: people were afraid to leave the house. Here in Israel,
Speaker 2: a lot of changes in the field. You can say,
Speaker 2: I became interim CEO within a day or two and
Speaker 2: we had fifty percent of our executive team was also
Speaker 2: caught up to reserve. So we need to make sure
Speaker 2: that our structure, our leadership structure, was in place. We
Speaker 2: had to make sure that our employees had a safe,
Speaker 2: comfortable place to work for an extended period of time.
Speaker 2: There was a lot of ambiguity of you know, where
Speaker 2: are we going, what's going to happen? How long is
Speaker 2: this going to take.
Speaker 1: The war has been going for over three months, and
Speaker 1: pulling so many people out of the workforce is having
Speaker 1: an impact on the economy. But recently the Israeli Defense
Speaker 1: Force announced that a portion of the reservists are being
Speaker 1: sent home to return to their families and to their jobs.
Speaker 3: Fredrek Mi.
Speaker 1: Da Tamar Ashavua Tomorrow told they've already seen the impact
Speaker 1: of those decisions. At the company she works for, darro.
Speaker 2: So, about half of them are back and in full capacity,
Speaker 2: and then I'd say another twenty five percent are back
Speaker 2: at like a fifty percent capacity, so a lot of comeback.
Speaker 2: We we do expect at some point in the next
Speaker 2: year for there to be additional absences. We understand that
Speaker 2: this is not something that's going to be just three
Speaker 2: months and that's it.
Speaker 1: Unfortunately, part of the reason for sending reservists back to
Speaker 1: work is war is expensive and the Israeli government is
Speaker 1: figuring out how to fund it. Israel's GDP was forecast
Speaker 1: to have fallen nineteen percent in the last quarter of
Speaker 1: twenty twenty three, and the government just passed a budget
Speaker 1: for twenty twenty four that assumes this war will last
Speaker 1: for at least the rest of this year. We ask
Speaker 1: Elite how much the government needs to come up with.
Speaker 3: The cabinet had already voted on a budget for twenty
Speaker 3: twenty four, but then it needs to be revised to
Speaker 3: accommodate a nineteen billion dollar which is seventy billion shekels.
Speaker 3: That's the surge and expenditure because of the war. And
Speaker 3: also at the same time, the government is experiencing revenue
Speaker 3: laws because of the war, and that is estimated to
Speaker 3: be about ten billion dollars or thirty six billion shekels.
Speaker 3: So the overall amount is when you combine these two
Speaker 3: is roughly thirty billion dollars that the government now needs
Speaker 3: to make up for in some sort of way. So
Speaker 3: the deficit, the state deficit, the target of the state
Speaker 3: deficit was raised to six point six percent of the GDP,
Speaker 3: which is among Israel's widest this century. It really swelled,
Speaker 3: and the government did make adjustments in this revised budget,
Speaker 3: meaning it cut spending in some ways, and it also
Speaker 3: put in place some revenue increasing measures which to put
Speaker 3: simply a new taxes, and these all total at about
Speaker 3: seventeen billion shekels to accommodate everything that I meant.
Speaker 1: With no clear end insight to this war, a huge
Speaker 1: amount of uncertainty also remains where the country's economy. I
Speaker 1: ask Ali what economic indicators shall be watching for next?
Speaker 3: We talked about the state deficit in the budget that
Speaker 3: was stolen to six point six percent for twenty twenty four,
Speaker 3: and growth is expected to go down to one point
Speaker 3: six percent in pointy twenty four, and it's interesting to
Speaker 3: see whether these numbers are sustainable. They're not very optimistic
Speaker 3: numbers and all the same deficit during the year could
Speaker 3: still swell, growth could still be lower than that one
Speaker 3: point six the finance some ministry estimates, and these are
Speaker 3: things to look out for because they will not only
Speaker 3: have an impact on future fiscal policy, but also in
Speaker 3: Israel's monetary policy that has to do with the fiscal policy,
Speaker 3: and they're both affected by one another. All three big
Speaker 3: credit trading agencies have put Israel on some kind of
Speaker 3: negative rating review or negative review watch. I would say
Speaker 3: that markets have factors Israel's current risk fact so maybe
Speaker 3: it won't be such a big change there. And yet symbolically,
Speaker 3: to have Israel's sovereign credit rating lord for the first time,
Speaker 3: by the way, since it started being rated, would be
Speaker 3: definitely a point in time that would mean something, and
Speaker 3: especially see where it goes from there. So that's another
Speaker 3: thing to look out for. And the last thing I
Speaker 3: think I will mention Israeli high tech is almost too
Speaker 3: big to fall.
Speaker 1: As fighting continues and deaths mount, what happens next for
Speaker 1: Israel's economy is just one part of the story. We'll
Speaker 1: keep following the foul out of this war in the
Speaker 1: coming weeks. Thanks for listening to the Big Take from
Speaker 1: Bloomberg News, Sarah Holder. This episode was produced by David Fox.
Speaker 1: It was edited by Caitlin Kenney and Jordan Fabian. It
Speaker 1: was mixed by Alex Ubiura and Blake Maples. It was
Speaker 1: fact checked by Adrianna Tapia. Our senior producers are Naomi
Speaker 1: Shaven and Jildo Di Carli. We get editorial direction from
Speaker 1: Elizabeth Ponso. Sage Bauman is our executive producer and head
Speaker 1: of Podcasts. Special thanks to galat Alstein and Israel Bureau
Speaker 1: Chief Ethan Brawner for the reporting that inspired this episode.
Speaker 1: You can read Ethan's piece on Bloomberg dot com. Thanks
Speaker 1: for tuning in.