Israel Is Too Reliant on Its Start-Up Economy

Nearly two years ago, in the middle of the worst of the coronavirus pandemic, Israel found itself with an unexpected and rare problem: the average wage in the country went up. The first lockdown in April 2020 brought the average wage that month to a dramatic monthly peak of about $3,900 (NIS 12,590), up from about $3,200 (NIS 10,319) in January 2020. This seemingly laudatory achievement, however, did not reflect the reality of the Israeli economy, which included tens of thousands of closed businesses, entire industries shut down for months, many of the self-employed on the verge of bankruptcy, and over a million unemployed at the height of the crisis. The dramatic rise in wages turned out to be a mathematical artifact of the pandemic: those who had lost their jobs or been sent on leave were at the bottom of the income scale, while the employees with relatively higher salaries were much less affected by the crisis. Consequently, the average wage increased.

This one account illustrates a deep problem at the heart of the Israeli economy. On the one hand, Israel is considered around the world a remarkable economic success, having transformed itself in the last few decades from a developing country into a technological powerhouse sought after by nations and businesses throughout the world. It is a cliché now to refer to it as the “start-up nation,” but it is true—Israel ranks first in the world in the number of start-ups per capita and is a leader in global innovation indices. Yet these impressive achievements obscure the fact that the country has not one economy but two: the start-up nation, and, well, everything else. And if things don’t change soon, the start-up nation may start to melt away, and the rest of the economy won’t be strong enough to pick up the slack.

Israel’s start-up economy is English-speaking and fully integrated into the global economy. Since it operates in markets beyond Israel, its competitors are not local, nor are most of its sources of funding. It is flush with assets, enjoys rapid growth and expanding exports, and it has been carrying Israel forward for over two decades. It produces an estimated 15 percent of the nation’s GDP, and its exports constitute almost half of the whole country’s. Its employees receive high salaries, reflecting the considerable value they generate for their companies; 25 percent of all income tax paid in Israel is paid by high-tech workers, even as they constitute only 10 percent of the Israeli workforce.