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How the war in Gaza is taking a toll on Israel's economy

STEVE INSKEEP, HOST:

Israel's army says it is pulling thousands of troops out of Gaza and sending them home to their families, as well as their jobs in civilian life. Military spokesman Daniel Hagari said the reasons were not just tactical.

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DANIEL HAGARI: (Through interpreter) This will significantly ease the burden on the economy and allow them to gather strength for the upcoming activities in the next year as the fighting will continue and they will still be required.

INSKEEP: Ease the burden on the economy. The most developed economy in the Middle East has been losing a lot of its civilian labor force for the war. NPR's Frank Langfitt reports from Tel Aviv.

FRANK LANGFITT, BYLINE: Raz is an upbeat 29-year-old who works here as a software engineer in an office of glass walls that looks out towards the Mediterranean. He's also a member of the Israeli army special forces reserves, which gives new meaning to the concept of multitasking. Early on in the Gaza War, Raz was on a call with an overseas customer discussing a software project.

RAZ: Meanwhile, I was at my base preparing for a mission. I had to juggle between those two, and I remember it being super, super hard.

LANGFITT: In part because Israeli aircraft were firing guns overhead.

RAZ: One of the customers asked me, what is this noise? And I had to explain that this is shooting sounds.

LANGFITT: Raz's unit forbids him from giving his full name for security reasons. He's spent the last three months splitting his time between military missions, training and developing software.

RAZ: Being a soldier is harder than being a software engineer. I also think that preserving the high-tech sector in Israel is a very important mission.

LANGFITT: Israel is home to one of the world's top tech sectors. Think products such as Waze, the driving directions app. But tens of thousands of Israeli tech workers, such as Raz, are also reservists, which means tech has faced a major labor shortage since the war began. Dan Ben-David teaches economics at Tel Aviv University.

DAN BEN-DAVID: High tech is Israel's most productive sector. It employs only 10% of the workforce, but it accounts for half of Israel's exports. And many of these people serve in the reserves, and their absence from the economy is disproportionate.

LANGFITT: At the beginning of the war, the Israeli army said it was mobilizing 360,000 reservists, more than for any previous war this century. The Bank of Israel estimates the war will cost about $58 billion and that the economy shrank by 2% in the final three months of the year.

BEN-DAVID: So while it's common to talk about the international pressure that's increasing on Israel to reach a cease-fire, there is also going to be increasing internal pressure by people who need to work.

LANGFITT: Rami Ben Efraim has felt the labor pinch. He's a retired Air Force general and tech firm owner. More than half of the workers at Planet Nine, one of his companies, are reservists, including the firm's chief operating officer, who flies an F-16, leading a group on bombing missions and close air support. Ben Efraim says when the war started, his message to his COO was simple.

RAMI BEN EFRAIM: Just go to the Air Force. You are under the Air Force right now. I'll call you once a week. I'll tell you what's happening here. You don't have any tasks.

LANGFITT: Another employee serves in a cyber unit. He splits his seven-day workweek between the company and the military, including night shifts.

BEN EFRAIM: I'm just trying to make sure that they're not exhausted. I'm telling them again, the military is more important than us right now. If you have some extra time, please come and help us here.

LANGFITT: The company's had to push back some projects, but Ben Efraim says he's made adjustments, and his business is growing well. Things are much harder for some newer firms. The war has spooked some foreign investors, and some early-stage startups are at risk of shutting down. The government says it's offering a total of $100 million in funding to help keep them afloat. Dror Bin runs the Israeli Innovation Authority, a government agency.

DROR BIN: If the company is successful, they will pay us back the loan as a royalty from their revenues. And if they fail, the money is gone. This is the risk that we are taking.

LANGFITT: The war is just the latest drag on tech investment. Last January, the government launched plans to reform the country's judiciary. Many Israelis saw it as an attempt to undermine democracy and took to the streets. Foreign investors worried about the country's rule of law. Gigi Levy-Weiss is a leading tech venture capitalist.

GIGI LEVY-WEISS: Founders that started companies were told by their investors that they should form the companies outside of Israel because if Israel has no independent court system, then you want the companies to be incorporated elsewhere.

LANGFITT: Instead of launching 13 or 1,400 new companies annually, as it typically does, Israel's tech sector only formed about 400 last year, Levy-Weiss says.

LEVY-WEISS: Which is the same number we've had in 2003, so that's like going 20 years backwards.

LANGFITT: In the wake of the Hamas attack on October 7 and the subsequent war in Gaza, the Israeli government says it's shelved its judicial reform plans for now. Tech leaders are bullish on the sector's resilience, but Levy-Weiss still has concerns.

LEVY-WEISS: I worry that unless we create full certainty, many investors that loved investing in Israel are going to say I need to see for a second what's happening. I need to see that the war is really over. I need to see that there's a solution for Gaza. I need to see that there isn't a reform anymore.

LANGFITT: As for Raz, the software engineer, the army released him from reserve duty this month. He's moving to Southeast Asia and excited about a new job as a project manager, still with an Israeli company, working full time.

Frank Langfitt, NPR News, Tel Aviv. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Frank Langfitt
Frank Langfitt is NPR's London correspondent. He covers the UK and Ireland, as well as stories elsewhere in Europe.