Assaf Bondy and Adam Raz write:

When Hamas launched its attack on Israel on October 7, 2023, and Israel went to war, economists worldwide braced for a familiar pattern. History teaches us that wars devastate economies in predictable ways: people stop buying cars and furniture, businesses shut down, unemployment soars, and governments take over the economy by spending massively on weapons and military equipment.

Israel seemed destined for this classic wartime economic transformation. Defense spending has shot up by more than 50 percent since October 2023. The Israel Defense Forces (IDF) has called up hundreds of thousands of reservists, pulling workers out of offices, factories, and shops. International investors, many of whom expected the economy to crater under the weight of prolonged conflict, have grown nervous. Instead, something unexpected has happened.

Rather than collapsing, Israel’s economy proved remarkably resilient. While exports declined sharply and many core sectors — like tourism and construction — struggled, the overall economy has continued to enjoy modest levels of growth. The Israeli shekel has also remained strong against major currencies and the Tel Aviv Stock Exchange, defying gravity, continues to climb throughout the conflict. Most surprising of all: Israelis are still shopping.

The secret lies in a fiscal trick that most people — including many economists — initially overlooked. Israel didn’t just mobilize reservists; it paid them extraordinarily well. Between October 7, 2023, and May 2025, the government allocated sixty billion shekels (about $18 billion) specifically for reservist compensation. This huge amount, that since May 2025 has increased by billions — especially with the recent reenlistment of tens of thousands of reserve soldiers for the conquest of Gaza City — is equivalent to more than 1.5 percent of Israel’s annual GDP.

This is not military spending in any traditional sense but direct payment for participation in documented violations of international humanitarian law. The system has transformed military service from a civic obligation into economic opportunity. Reservists receive an average of nearly $8,000 per month — almost double Israel’s average salary and five times the minimum wage, supplemented by generous bonus payments and social services free of charge. [Continue reading…]