Israeli tech rebound hinges on judicial reform

Al-Monitor Pro Members

David Rosenberg

Israeli reporter specializing in business, economics and politics

Feb. 27, 2023

The downturn in Israeli high-tech is likely to deepen this year as start-up funding continues to decline. The sector’s strong human-resource assets, looser monetary policy and a renewed global appetite for innovative technology should lead to a recovery perhaps as early as the second half of 2023. However, the government’s judicial reforms and hardline Palestinian policies and a resulting upsurge in violence may delay or weigh down on the rebound by undermining business sentiment.

Scenario 1: Sector rebounds amid compromise on judicial reform

The government compromises on enough provisions in its judicial plan to assuage the tech sector’s most serious concerns. However, hardline policies in the West Bank inflame tensions and violence continues to grow, short of an intifada. Netanyahu has signaled a willingness to back down on judicial changes in the face of opposition from high-tech and other business sectors. Under US pressure, he may also moderate West Bank policies, reducing the risk of widespread violence. The US Federal Reserve’s monetary-tightening policy is expected to wind up by mid-year. Under these conditions, foreigners shouldn’t be deterred from investing in Israel and local business sentiment should remain positive. The Israeli tech sector will thus follow global trends and begin enjoying a rebound late in the second half of 2023.

Scenario 2: Unfavorable domestic conditions hamper tech recovery

The government pursues its judicial overhaul unchanged. The consequences will take time to manifest themselves in terms of politically tainted courts and government corruption, but passage of the measures is enough to cause high-tech investors and entrepreneurs to hesitate about entering into deals and starting companies. More capital, start-ups and (in the worst-case scenario) engineers and entrepreneurs leave the country as the business environment deteriorates. An upsurge in Palestinian violence exacerbates the situation. The Israeli industry shows some recovery, but even with interest rates heading lower and global stock markets recovering, Israel lags behind the global rebound. Netanyahu is well aware of the threat to the tech industry and therefore is unlikely to insist on the judicial overhaul being enacted in its current form.

Scenario 3: Upsurge in Palestinian violence

The government abandons the legal reform plan, at least for now, but the retreat forces Netanyahu to adopt a harder line on the Palestinians and settlements to ensure the loyalty of his far-right partners, exacerbating violence in the West Bank. The tech sector weathers such conditions, as it has in the past, and the industry recovery proceeds in tandem with a global one.  However, if the violence grows, reaching inside Israel and provoking a strong Israeli crackdown, the sector will struggle to ride a global recovery, even if conditions worldwide turn favorable. This scenario is less likely to happen because the government is too invested in the judicial overhaul to jettison it.

David Rosenberg has more than 30 years experience reporting, commenting and speaking on business, economics and politics in Israel and the Middle East. He has worked for Reuters, The Jerusalem Post and Dow Jones, and was bureau chief for Israel for Bloomberg News. He is the author of two books (Cloning Silicon Valley, 2001, and Israel’s Technology Economy, 2018) and has been published in The Wall Street Journal and Foreign Policy. He now writes commentary for the Haaretz daily.