“History doesn’t repeat itself. But it often rhymes.”– Mark Twain
At Technion’s S. Neaman Institute, I am blessed to work with a number of colleagues who served their country in senior military and civilian positions, dating back to the 1967 Six Day War. They are keenly aware of the many pitfalls Israel has stumbled into in the past, as they lived and breathed them and navigated through them. And they are deeply distressed that we may be repeating past blunders. When you forget history, you tend to repeat it.
One of them is Giora Shalgi, formerly CEO of Rafael Advanced Defense Systems. His 44-year tenure at Rafael, beginning in 1960, concluded in 2004 when he retired. Shalgi led the crucial phase of Rafael’s reinventing itself from a Defense R&D Department managed by the Defense Ministry, mired in red ink, to a profitable government-owned defense industry. His book The Organizational Compass (in Hebrew and English) is a compelling account of crisis management. Among many, many other superb innovations, Rafael is the creator of Iron Dome.
I spoke with Shalgi regarding his deep concern that Israel may be repeating the boom-bust cycle of defense spending that followed the 1973 Yom Kippur War.
History does rhyme. Past, present, and future.
Past
Shalgi: “The roller coaster of investments in defense spending after the Yom Kippur War, and the major defense cuts that occurred in the 1980s, led to painful and expensive crises in the defense industries.
"The crisis in Rafael was existential, lasted for over 10 years, accompanied by traumatic layoffs of almost half its employees and losses of about $700 million [several times more in today’s dollars] that had to be covered by the state budget. Our crisis at Rafael could have been significantly reduced if we had placed before our eyes the expected truth – that the illusion of ‘at any cost’ would end! As in reality it did, with an axe. We must prevent the recurrence of a similar upheaval.”'
The Kingda Ka Roller Coaster, at Six Flags, New Jersey, was for years the world’s highest – a terrifying 456 feet (140 meters). The graph of Israel’s defense spending as a percentage of GDP looks like Kingda Da.
Defense spending in 1952 was only 5% of GDP, but it rose rapidly, to a staggering 30% in 1974. It remained above 20% until 1982, causing economic stagnation because growth industries lacked resources. There followed a long period of decline, down to a low of 4.4% in 2022. Then, in the wake of October 7, 2023, defense spending has soared.
Hebrew University Prof. Esteban Klor, quoted by the business daily Globes, recounts the history of Israeli roller-coaster defense spending:
“After the Six Day War in 1967, defense spending as a proportion of GDP shot up to 19.7%, and for two years following the Yom Kippur War of 1973 it reached 28.7%, after which it constantly declined. That led, in the 1970s, to the lost decade because the economy could not support such high costs.
“To avoid a lost decade, the government must divert resources to growth engines.”
Present
The Stockholm International Peace Research Institute (SIPRI) carefully tracks global defense spending. A recent SIPRI report notes: “With a jump of 65% [in defense spending] in 2024, amid a multi-front war, Israel’s defense budget boost was the largest in the world. Israel’s defense spending as a portion of GDP was second-greatest in the world, second only to Ukraine. Israel spent $46.5 billion on defense in 2024, of which $5.7 billion was spent in December alone.”
Currently, the Israeli cabinet has instructed the IDF to launch a full-scale offensive in Gaza. According to the daily Haaretz, the cost of this operation will be NIS 25 billion ($7 billion) for only three months. And in 2025, the defense budget will skyrocket to NIS 160 billion ($45 billion).
There is a bright side. Israel’s defense exports are soaring. As Europe awakens to the Russian invasion and rearms, Israel has high-quality arms that Europe desperately needs and wants, as does India.
According to Haaretz, “Israel’s defense exports hit a record $13.1 billion in 2023, of which a third comprised air defense systems. In the last five years, Israel’s defense exports doubled, and the record of exports was broken each year.”
Israel has three main arms exporters. Israel Aerospace Industries (IAI), founded in 1953, employs some 15,000 and has revenues of over $5 billion. Elbit Systems, founded by Uziah Galil in 1966, has some $7 billion in revenues and employs 18,407 people. Rafael has revenues of some $5 billion, net income of $150 million, and employs about 10,000.
Employing a total of some 43,000 people, these industries are part of Israel’s hi-tech growth engine. They are driven by exceptional innovation.
Future
Shalgi observes: “Signs of the illusion ‘at any cost’ are repeated in the current conduct of Rafael, which announced the absorption of 1,800 employees in 2024, representing an annual increase of about 20%. Like what happened at Rafael about 40 years ago and contributed to the existential crisis of the 1990s.”
In The Organizational Compass, Shalgi recounts: “An indication of the inefficiency experienced by Rafael is reflected in the numbers. At the beginning of the crisis, Rafael, with about 7,000 employees, sold about $300 million. At the end of the 10-year crisis, about 3,500 employees generated sales of about $500 million, with much greater value to customers.
The dramatic leap was a clear product of budget cuts that led to an existential war that forced us to reinvent ourselves.”
Prof. Klor counsels, “To avoid a repeat of the lost decade [1970s], it is important to know what to do with civilian spending. Where should the non-defense expenditure in the budget be directed, so that we will be able to afford the defense expenditure – but also, ensure the growth of the economy, which will ensure the existence of the state. If we raise the defense budget disproportionately and don’t direct resources to growth engines, we will get into an unstable and dangerous economic situation.”
In October 2024, the Times of Israel quoted experts who noted that “since Hamas sparked the ongoing war with its October 7 onslaught last year, over 20,000 rockets and missiles have been fired at Israel from Gaza and Lebanon.”
Imagine, first, that Rafael had not developed the Iron Dome. Imagine the huge damage those rockets could have done to Israeli houses, factories, schools, kindergartens, hospitals.
Second, consider the economics. Assume that half, or 10,000 enemy rockets, showed on radar that they would smash into Israeli homes and buildings. Suppose 10,000 Iron Dome interceptors were launched. The cost of this armament alone: 10,000 x $50,000 = $500 million. Half a billion dollars.
It is true that in 2016, the US committed to providing $3.8 billion a year to Israel in financial military aid for 2019 through 2028. Israel’s three-tiered air defense system (Iron Dome, David’s Sling, Arrow 2 and 3) was developed and produced jointly with the US defense companies. But the bulk of Israel’s defense burden falls on its budget and its taxpayers.
The former Jewish mayor of the Brazilian city Curitiba once said that if you want true creativity, slash two or three zeros off your budget. Why? Too often, money replaces inventiveness and destroys it.
Israeli scientists and engineers in our defense industries have shown incredible creativity. We need the same creativity that generates magical technologies in order to strategize our defense spending over the long term.
We will not succeed in slashing zeros from our defense budget. But hopefully, we will learn from history, learn from the 1970s and, as Shalgi counsels, avoid the boom-bust cycle that crippled our economy for years.
Economic growth is itself a key part of national defense. A growing economy reduces the relative size of the defense burden. We need competent leaders and managers who are able to wisely allocate our resources and balance the needs of defending the country against the vital need to grow and develop our economy.
Do we have such leaders?■
The writer heads the Zvi Griliches Research Data Center at S. Neaman Institute, Technion. He blogs at www.timnovate.wordpress.com.