Israel’s Economic Divide: A Threat to Democracy & Security

TEL AVIV — In the wake of the October 7th Hamas attacks and the subsequent war in Gaza, Israel faces a deepening internal crisis that threatens its long-term economic and democratic prospects. The country is increasingly divided between a highly productive, globally integrated high-tech sector and a rapidly growing, largely low-skilled ultra-Orthodox population, a disparity that is reshaping Israeli society and politics.

Israel boasts the highest GDP per capita in the Middle East, at approximately $80,000. This wealth is largely generated by its thriving technology industry, which accounts for half of the country’s service exports and a quarter of government tax revenues. Though, this economic success is masking a growing imbalance. A significant portion of the population, particularly within the ultra-Orthodox community, struggles with unemployment and low wages.

Only 54 percent of ultra-Orthodox men are employed, often in low-skill occupations earning roughly half the income of their non-Orthodox Jewish counterparts. Approximately one-third of ultra-Orthodox households live below the poverty line, compared to 14 percent of other Jewish households. This economic disparity is compounded by institutional factors, including exemptions from mandatory military service and a segregated education system that prioritizes religious studies over core subjects like mathematics and science.

This economic divide is fueling political polarization. Israel’s high-productivity sector generally supports liberal democratic institutions, while lower-productivity groups increasingly back parties advocating for policies that weaken those institutions. Prime Minister Benjamin Netanyahu’s current coalition, comprised of ultra-Orthodox and ultranationalist parties, has been actively pursuing a legislative agenda aimed at curbing the power of the judiciary and centralizing executive authority since January 2023.

The ultra-Orthodox are not the only demographic facing economic challenges. Israel’s Arab minority, comprising roughly 20 percent of the population, is also disproportionately employed in low-wage jobs, facing discrimination and limited access to quality education and employment opportunities.

Demographic trends are exacerbating the problem. The ultra-Orthodox population is growing rapidly, with a total fertility rate of 6.5 children per woman, compared to 2 among secular Jewish women and 3.7 among religious Jewish women. By the mid-2040s, ultra-Orthodox Jews are projected to constitute more than one-fifth of Israel’s population, and nearly one-third by the 2060s. This growth will place increasing strain on the country’s fiscal capacity, as a shrinking high-productivity workforce struggles to finance a rapidly expanding low-productivity one.

In 2023-2024, approximately 100,000 Israelis emigrated, many of them high-skilled professionals in fields like medicine, engineering, and technology. This exodus, reminiscent of Greece’s experience following its debt crisis, further erodes the tax base and could trigger a vicious cycle of lower investment, slower growth, and declining living standards.

The current government’s actions are raising concerns about the future of Israeli democracy. Recent legislative proposals, including a bill redefining the role of the government’s legal advisor, aim to further weaken checks and balances and consolidate power. Government ministers have even signaled a willingness to disregard Supreme Court rulings, raising the specter of a constitutional crisis. The V-Dem Institute’s 2026 Democracy Report highlights a global trend of democratic backsliding, and Israel appears to be following a similar trajectory.

The situation echoes the experience of Iran, where a shift towards religious authoritarianism after the 1979 revolution led to economic stagnation and a decline in living standards. While Iran’s political system remained stable despite economic hardship, Israel’s internal divisions and weakening democratic institutions suggest a potentially more volatile future.

Despite the bleak outlook, Israel’s mass protest movement demonstrates a continued commitment to democratic values. However, the government remains steadfast in its agenda, capitalizing on the ongoing conflict with Iran to consolidate power and appeal to nationalist sentiments. As of this week, the Knesset is scheduled to vote on the bill redefining the role of the government’s legal advisor, a move that could further dismantle the safeguards protecting Israeli democracy.