Israel’s Economic Divide Threatens Its Future | Foreign Affairs

The Two Israels: A Nation Divided by Productivity and Values

Israel presents a paradox. It’s a nation boasting a highly productive, high-tech economy and a commitment to liberal democracy, existing alongside a segment of its population characterized by lower skills, lower earnings, and a growing embrace of conservative values. This internal division, officials said, is not merely a social issue but a fundamental threat to Israel’s future stability, economic prosperity, and democratic character.

The country, while overwhelmingly Jewish, is increasingly Balkanized between a well-educated, high-earning population and an undereducated, low-earning one. The former drives the nation’s tax revenues and wealth, generally opposing the current right-wing nationalist government, while the latter – disproportionately comprised of the ultra-Orthodox and religious nationalists – are heavily represented within it. This divide is already contributing to political polarization and governmental instability, with Israel having held five elections in the last six years.

The Productivity Gap: A Core Divide

At the heart of this division lies a significant productivity gap. Roughly ten percent of Israel’s workforce is employed in the high-tech sector, yet generates nearly one-fifth of the country’s GDP. This sector’s success is attributed to its highly skilled workforce, global integration, and robust research networks, accounting for approximately half of Israel’s service exports and a quarter of government tax revenues. Conversely, the ultra-Orthodox community faces significant economic challenges. Only 54 percent of ultra-Orthodox men are employed, often in low-skill occupations with earnings roughly half that of their non-Orthodox Jewish counterparts. Approximately one-third of ultra-Orthodox households live below the poverty line, compared to 14 percent among other Jewish households.

These disparities are partially the result of choices and institutional arrangements. Ultra-Orthodox men are largely exempt from military service, hindering labor market integration and social cohesion. They also attend segregated schools prioritizing religious studies over core subjects like mathematics and science, effectively limiting their access to high-skill employment. Ultra-Orthodox women, while having a higher employment rate, often hold low-skill, part-time positions and earn significantly less than their non-Orthodox counterparts.

Adding to the complexity, Israel’s Arab minority also experiences disproportionately low-wage employment, facing discrimination and limited access to quality education, and opportunities. However, unlike the ultra-Orthodox, these challenges aren’t self-imposed but stem from systemic barriers.

Demographic Shifts and Economic Implications

The ultra-Orthodox population is growing rapidly. Currently representing around 14 percent of Israel’s population, their total fertility rate is 6.5 children per woman, compared to two among secular Jewish women and 3.7 for religious Jewish women. Projections indicate that ultra-Orthodox Jews could comprise over one-fifth of the population by the mid-2040s and nearly one-third by the 2060s.

This demographic shift poses a significant threat to Israel’s economic sustainability. A shrinking high-productivity workforce will struggle to finance a rapidly growing low-productivity population, potentially leading to strained public finances, reduced investment, and declining living standards. In 2023-24, approximately 100,000 Israelis emigrated, many of them high-skilled professionals, a trend that could further exacerbate these economic pressures.

Political Polarization and the Erosion of Democracy

Israel’s economic divide closely mirrors its political polarization. Those in the high-productivity sector generally support liberal democratic institutions, while lower-productivity groups increasingly favor parties that weaken these institutions. The ultra-Orthodox and ultranationalist religious parties have found common ground in weakening judicial independence, expanding control over the West Bank, and consolidating power. As described in a recent review, this polarization makes sustaining democracy increasingly difficult.

Prime Minister Benjamin Netanyahu has capitalized on this dynamic, forging alliances with leaders from both communities and advancing an agenda that systematically alters Israel’s constitutional balance. His current coalition is actively curbing checks on executive power and redirecting resources to political supporters. Despite widespread protests, the government continues to push forward with controversial legislation that erodes democratic norms.

A Trajectory Towards Illiberalism?

The situation evokes parallels with Iran’s post-1979 trajectory. Following the Islamic Revolution, Iran experienced economic decline and stagnation as its leadership prioritized religious ideology and military spending over economic development and civil liberties. Israel, the report suggests, is now following a similar path, potentially leading to a more authoritarian and less prosperous future.

The ongoing conflict with Iran, officials said, is being exploited by Netanyahu to consolidate power and rally support, potentially delaying elections and further destabilizing the region. The government’s actions, including disregarding protocol with the Supreme Court and proposing legislation to weaken the independence of the legal counselor to the government, signal a deepening commitment to eroding democratic institutions.

While a vibrant civil society and potential mobilization of business leaders offer some hope, the outlook for Israel remains challenging. Absent a significant change in course, the country risks becoming poorer, less democratic, and more fragmented. The V-Dem Democracy indices ranked Israel as a “flawed democracy” in 2023, highlighting the existing vulnerabilities.

The future of Israel, it appears, hinges on its ability to bridge the widening gap between its two distinct societies and reaffirm its commitment to the principles of liberal democracy and inclusive economic growth.