Imagine two Middle Eastern countries. The first is very unlike the rest of the region. It is economically highly productive, with a GDP per capita of $80,000—the highest in the Middle East. It has excellent universities and a highly developed technology sector. Its people do not agree on everything, but they are broadly supportive of liberal democracy.

The second is far more like its neighbors. A significant share of its population is not employed, and what jobs its people do have are often low-skill and pay poorly. At $35,000, its GDP per capita is less than half that of the first economy. The religiosity of its population ranges between traditional and deeply religious, and educational attainment is relatively low. Most of its residents seem indifferent to, or actively against, liberal values.

These two countries are, in fact, the same country: Israel. The state may be overwhelmingly Jewish. But it is Balkanized between a well-educated, high-earning population and an undereducated, low-earning one. The former group is responsible for most of the country’s tax revenues and wealth. It generally opposes Israeli Prime Minister Benjamin Netanyahu and his right-wing nationalist government. The latter is disproportionately made up of the ultra-Orthodox, who have the highest jobless rates in the country, and religious nationalists; both groups are heavily represented in the Netanyahu government.

This divide is already damaging Israeli society. It is part of why the country is so politically polarized and why its governments constantly fall apart. (Israel has had five elections in the last six years.) But as time goes on, it will only make life for the Jewish state harder. The share of the liberal, high-productivity part of the country’s population is shrinking, while that of the conservative, low-productivity part is growing. As a result, the Israeli tax base will erode. Far-right, religious politicians will continue to gain power. Israel, in turn, will become poorer and more repressive at home, and it is already becoming more aggressive abroad, as evidenced by the war it recently launched with Iran, in partnership with the United States. Israel’s military campaign in Gaza, deemed genocidal by many in the West, was another show of aggression. As are Israel’s increasing violent provocations in the West Bank.

These processes will also make Israel more like other countries in the region—including its archnemesis, Iran. Tehran’s decades-long hostility and aggression toward Israel is rooted in fundamentalist religious ideology. But Israel’s right-wing government is also in thrall to a messianic agenda, and it was eager for a full-scale war with Iran—and thrilled when U.S. President Donald Trump, by pledging American support, made it possible to wage one.

Israeli society is made up of a patchwork of different groups, each with distinct interests. But its divide is encapsulated by two communities. The first is composed of high-tech workers. They constitute roughly ten percent of Israel’s workforce, but they generate close to one-fifth of the country’s GDP—in large part because the tech industry is more than twice as productive as is the rest of the economy. This reflects the sector’s impressive human capital, its deep integration into global markets, and its strong research networks. The industry accounts for approximately half of Israel’s service exports and about a quarter of government tax revenues. It is, in other words, the primary source of the state’s fiscal capacity and external resilience. At the opposite end of the economy are the ultra-Orthodox. Only 54 percent of ultra-Orthodox men are employed. When they do work, it is mostly in low-skill occupations, and their earnings are on average only about half that of non-Orthodox Jewish men. Ultra-Orthodox women have an 81 percent employment rate, similar to non-Orthodox Jewish women, but earn on average a third less; many of the jobs they hold are low-skill and part-time.

Approximately one-third of ultra-Orthodox households live below the poverty line, compared with about 14 percent among other Jewish households. These unfortunate figures are partially the result of individual choices. But they are also the product of institutionalized arrangements. Ultra-Orthodox men, for example, are largely exempt from military service, which means that they skip participating in an institution that plays a key role in facilitating labor-market integration and social cohesion. The ultra-Orthodox are also segregated from Israel’s mainstream education system. Instead, they attend schools that prioritize religious studies and exclude core subjects such as mathematics, science, and English. This structure effectively channels large numbers of young men either into lifelong religious study or marginal employment. Ultra-Orthodox women bear an enormous burden, having to run large households and take on part-time work. Because ultra-Orthodox households earn relatively little, they pay few or no taxes and rely on public social spending and funding from ultra-Orthodox communities in New York and London.

Israel’s economic divide maps closely onto the nation’s political polarization.

The ultra-Orthodox are not the only Israeli demographic that struggles with low productivity. The country’s Arab minority, which makes up roughly 20 percent of its population, is also disproportionately employed in low-wage jobs. Unlike the ultra-Orthodox, Arab Israelis are not locked out of Israel’s advanced economic sectors because of their own decisions and community structures. Rather, they face such pervasive discrimination, and investment in their infrastructure is so poor, that they struggle to get high-quality education and high-skill employment. As a result, they do not have access to the same employment opportunities as do their Jewish counterparts.

The ultra-Orthodox are growing in their share of Israel’s population. Currently, they account for around 14 percent of Israel’s population, but the total fertility rate among ultra-Orthodox Israeli women is roughly 6.5 children, compared to only two among secular Jewish women and 3.7 for religious Jewish women, another fast-growing group. That means that ultra-Orthodox Jews are on track to make up more than one-fifth of the country’s population by the mid-2040s and close to one-third by the 2060s.

This trend will make it extremely difficult for Israel to sustain high levels of GDP per capita as time goes on. It isn’t hard to see why: a shrinking high-productivity group cannot indefinitely finance a rapidly growing low-productivity one. Eventually, the government will begin struggling to finance public goods—including educational institutions, the health-care system, physical infrastructure, and the military. Individuals and firms may well respond by relocating capital and labor abroad.

In fact, this shift is already happening. In 2023–24, around 100,000 Israelis emigrated; according to a recent study by the economists Itai Ater, Nittai Bergman, and Doron Zamir, many of those who left were high-skilled professionals in medicine, engineering, academia, and technology. Historical experience suggests that such losses will be difficult to reverse. (During and after its early 2010s debt crisis, for example, Greece lost nearly five percent of its population, much of which never came back.) The outward migration will compound Israel’s existing fiscal pressures by further eroding the tax base. Policymakers will have to impose higher taxes on the remaining workers, prompting more to depart. Credit-rating agencies might downgrade Israeli debt, leading to increased borrowing costs that further constrain Israel’s policy options. The result would be a classic vicious cycle of lower investment, slower growth, and declining living standards.

Israel’s economic divide maps closely onto the nation’s political polarization. Israelis in the high-productivity sector overwhelmingly support liberal democratic institutions, including an independent judiciary, free media, and constraints on executive power. In contrast, lower-productivity groups increasingly support parties that weaken these institutions and constraints.

The ultra-Orthodox parties have natural partners in Israel’s ultranationalist religious (but not ultra-Orthodox) parties. These parties represent roughly 15 percent of Israel’s population, a segment that is economically stronger than the ultra-Orthodox. They aim to replace the civil, secular judicial system by rabbinical courts, weaken judicial review, and expand Israeli control over the West Bank. Although these objectives are not the key ones for the ultra-Orthodox, who are more focused on entrenching exemptions from military service, expanding welfare transfers, and preserving their religious education system, they go along. Both groups benefit from weakening liberal-democratic institutions and centralizing power.

Netanyahu has connected these two groups. He has long-standing relationships with leaders from each community, and he has tried to advance their respective agendas. His current coalition features two ultra-Orthodox parties and two ultranationalist parties, the latter led by extremist figures. Since January 2023, they have been carrying out a coordinated attack on the judiciary, curbing checks on executive authority, and redirecting budgetary resources toward political supporters. They are, in other words, trying to systematically alter Israel’s constitutional balance.

Absent a dramatic change in course, Israel will become poorer, less democratic, and more fragmented.

This agenda has, naturally, outraged Israel’s moderates and liberals, who have repeatedly taken to the streets to protest. The demonstrators have exhibited commendable tenacity, and they have managed to delay many of Netanyahu’s bills. But the prime minister’s agenda feels increasingly inevitable. His government has steadily weakened Israel’s democratic institutions, and it is marching ahead with many of its most controversial laws. Even the October 7, 2023, Hamas massacre, which occurred under Netanyahu’s rule, hasn’t derailed this agenda. The prime minister’s popularity plummeted in the immediate aftermath of the attacks, but eventually, he managed to use the tragedy to consolidate power by mobilizing Israelis’ fear and anger and waging war in Gaza. He also kept his coalition together by acceding to demands from his extremist political partners and providing the ultra-Orthodox with large amounts of budgetary support, despite growing fiscal strain.

Indeed, in recent weeks and months, the protests have diminished and the government has pressed ahead with numerous parliamentary bills that erode democracy and that continue to use national resources to benefit the parties in the coalition. Meanwhile, a constitutional crisis is looming, as government ministers and the Knesset speaker, breaking with protocol and practice, no longer invite the president of the Supreme Court to key state events. Crucially, government ministers refuse to rule out the possibility of not abiding by Supreme Court decisions. To make matters worse, the government has tabled a new bill redefining the role of a vital civil servant, the legal counselor to the government, who is also the attorney general. The new bill effectively downgrades the role and strips it of independence by separating the attorney and counselor roles and by making the latter a purely political appointment. If the bill passes, it will remove the most important defense against democratic backsliding that has hollowed out Israeli democracy over the past three years.

Academic research shows that when electoral behavior is anchored in group belonging rather than policy evaluation—as it is in Israel—group loyalties and perceived status differences shape voters’ preferences more than economic circumstances. As a result, even as Israel’s economy grows worse, support for the country’s nationalist and religious parties will stay strong.

For Israelis, then, the future looks bleak. Absent a dramatic change in course, the country will become poorer, less democratic, and more fragmented in the years to come. It might also become more militaristic. As the country’s economy wobbles, its nationalistic politicians will be tempted to pursue ever more aggressive external policies as a way of rallying Israelis around the flag.

Indeed, Netanyahu will capitalize on the ongoing conflict with Iran to strengthen his coalition’s prospects in the parliamentary elections later this year. If public support for his coalition improves, he will seek to hold elections as early as June. If the coalition continues to trail in the polls, he may declare a state of emergency and delay elections. This is a classic case of a populist government using war for political survival—and destabilizing the region in the process.

Iran’s trajectory offers a revealing parallel. In terms of GDP per capita, Iran and Israel were relatively close in the 1960s and early 1970s. But after the 1979 Islamic Revolution, Iran experienced a sharp decline and prolonged stagnation as the Iranian leadership turned the country into a theocracy, diverted academic research and public resources to military issues, suppressed civil liberties, and destroyed the secular judicial system. Today, Iran has a tenth of the Israeli GDP per capita—and yet its political system has remained largely intact for 47 years. Iran’s experience thus demonstrates that incompetent regimes grounded in religious authoritarianism can persist, despite severe economic consequences. Israel, unbelievably, is now taking a similar path.

There is still hope for the Jewish state. Israel’s mass protest movement has demonstrated that the country retains a vibrant and powerful civil society, and that its people are capable of action outside formal electoral channels. Such engagement remains one of the few defenses against economic stagnation and a further descent into illiberalism. If Israel’s business leaders, especially in the high-tech sector, mobilize, they may be able to stop the slide downhill. Jewish communities around the world and liberal foreign governments may help, too. But this much is certain: Israel has a tough road ahead.

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