Deutsche Bank: Israel is among the three economies in the world most exposed to AI disruptions
According to a recent Deutsche Bank report, Israel is one of the three economies most vulnerable to AI-driven service disruptions due to its heavy reliance on high-tech service exports.
Israel is one of the economies in the world most exposed to service disruptions by artificial intelligence (AI), according to a report recently published by Deutsche Bank. The report examined two things: what share of the workforce is employed in AI-based professions, and to what extent the country's foreign trade relies on the export of AI-based services.
According to the study, Israel and the UK are two economies where there is an unusual combination of a labor market highly exposed to AI and a high dependence of foreign trade on the export of these services. In most European countries, a large share of the workforce is exposed to AI-based professions, but their foreign trade is not overly based on them. In India and the Philippines, a small share of the workforce is employed in such professions, but the countries' external balance relies heavily on the export of these services. Very few developed economies are as dependent on sectors that the AI revolution is about to directly impact as Israel.
Out of the thirty economies examined, Israel ranks first in net service exports (exports minus imports) of services that the bank classifies as AI-exposed — about 8% of GDP (followed by the UK with about 7% of GDP). The reason for this is clear: for two decades, the Israeli economy has undergone a dramatic structural change. It has transformed from an economy that exports more goods to an economy that exports more knowledge, software, and R&D services.
Economic Implications: Risks and Opportunities
As of today, high-tech accounts for 18.3% of Israel's GDP, but is responsible for 50% of its growth. In the negative scenario, Deutsche Bank economists suggest thinking about a world where intensive use of AI dramatically lowers the marginal cost of the knowledge economy. Code, financial analysis, consulting, design, translation, or research that today take hundreds of work hours could be done in the future in a fraction of the time.
In such a situation, a large part of the economic value may shift to those who own the chips, data centers, and the models themselves, while countries that make a living from exporting knowledge may suffer. Therefore, for Israel, the impact could be much greater than just layoffs in the high-tech sector. It means less revenue from exporting technological knowledge, fewer dollars entering the economy, and pressure for the shekel to depreciate.
At the same time, the average wage will be lower, households will consume less, real estate purchases will decrease, tax revenues will decrease, and capital gains will decrease. All this means a hit to growth. High-tech in Israel employs about 10% of the workers in the economy and is responsible for more than a third of income tax revenues. Therefore, a shock in the industry affects the entire economy.
On the other hand, the positive scenario could be no less dramatic. Deutsche Bank outlines an alternative scenario in which an Israeli engineer capable of producing three or five times more with the help of AI in an hour of work creates a software company that develops a new product in three months instead of a year, or a startup that reaches sales of hundreds of millions of dollars with hundreds of employees instead of thousands. In this scenario, Israel's unusual structure makes it one of the biggest winners. Countries that already have a comparative advantage in services may use existing knowledge and expertise to increase exported quantities faster than the decline in prices.
Deutsche Bank researchers emphasize that it is impossible to know in advance which scenario will materialize, but their contribution is to outline the range between the positive and negative scenarios. In the case of Israel, this range is the largest of all. Therefore, the important question for Israel is not how much of the work is exposed to AI, but how much of the Israeli value comes from work that can be replaced and how much comes from ownership of technology that can be empowered.
