While the United States pours billions of dollars in annual aid into Israel, such generosity is quietly undermining Israel’s economic autonomy. For decades, mainstream urban economics has followed William Alonso’s Bid Rent Theory. This theory argues that land value and the cost of living are a function of accessibility to the city center and productivity. In an ideal, frictionless world, the gradient of living costs should show a positive correlation with the income levels of local residents and labor productivity. Traditional urban economic theory holds that the cost of living is determined by productivity levels, agglomeration effects, and resource scarcity. This framework has been proven valid in the axis cities of the North Atlantic, such as Zurich, London, and New York.
However, in the 2025-2026 Numbeo Cost of Living Index, the data from Asia obviously does not fit with this theory. The most expensive city in Asia is not Tokyo (54.2), Singapore (87.7), or Hong Kong (75.2), which possess extremely high total factor productivity. Instead, it is Tel Aviv (91.4), a city that is deeply mired in the vortex of geopolitical conflict. Furthermore, among the seven cities with the highest cost of living in the Asian region, Israeli cities occupy six spots.
This means that even though Israel possesses strong macroeconomic indicators, huge foreign exchange reserves, and a strong currency, its citizens are bearing one of the highest costs of living in the OECD. The cost of living index in Tel Aviv has even surpassed that of many core Western cities. This kind of “wealthy poverty” is the direct product of the interaction between American structural power in security and the highly concentrated production structure within Israel.
To understand why a war-torn city is more expensive than Tokyo, we must turn to the lens of International Political Economy. Susan Strange defined “structural power” not merely as the ability to coerce, but as the power to decide how things shall be done—the ability to set the framework. In the U.S.-Israel relationship, American structural power in the security dimension determines the allocation of Israeli resources.This is the “security rent” that it must bear as a country garrisoning US troops in the Middle East; correspondingly, the huge military aid has also led to the “Dutch Disease” effect in economics.
The “Dutch Disease” is originally describing the Netherlands in the 1960s, it refers to an economic paradox where a boom in one specific sector (usually natural resources like oil) leads to a massive influx of foreign currency. This causes the local currency to appreciate sharply, which in turn makes other export sectors less competitive and drives up the domestic cost of living. US military aid to Israel is the largest cumulative foreign aid project since World War II. According to the third ten-year Memorandum of Understanding (MOU) signed in 2016, the US committed to providing a total of $38 billion in aid between fiscal years 2019 and 2028, of which $33 billion is “Foreign Military Financing” (FMF) and $5 billion is for missile defense. This aid is not merely a physical transfer of weapon systems, but a huge financial intervention. Funds from traditional economic aid are often used for infrastructure or development projects, whereas US aid to Israel goes directly through the defense budget. This releases domestic resources that should have been used for military expenses, and at the same time, the FMF capital flows provide Israel with a stable expectation of dollar inflows.
International capital markets view this security commitment as an implicit guarantee, lowering Israel’s risk premium and encouraging foreign investment, particularly in the tech sector. This influx maintains the Shekel’s strength. However, contrary to the Balassa-Samuelson effect—where productivity growth leads to real exchange rate appreciation—the Shekel’s strength has not lowered inflation via cheaper imports. Instead, it has mirrored the resource curse, the currency appreciation pressures the non-tech export sectors while the influx of capital causes the price of non-tradable goods (housing, services) to skyrocket relative to tradable ones. The state is wealthy, but the “welfare” of cheap imports is never passed down to the household.
If the currency is strong, toothpaste and cereal in Tel Aviv should theoretically be cheaper than in Europe. Yet, they are often double the price. The disconnect lies in Israel’s domestic market structure. A report by the State Comptroller highlights extreme concentration in the food and consumer goods markets, where ten suppliers control over 54% of the market share. This oligopoly is protected by a legal framework that has long favored “exclusive importers”—companies holding sole distribution rights for global brands like Gillette or Barilla. While the U.S. aid lowers the cost of purchasing dollars for these importers, the lack of competition allows them to keep shelf prices high, capturing the difference as monopoly rent. American taxpayer money effectively subsidizes Israeli oligarchs, not the Israeli consumer.
The conflict erupting on October 7, 2023, and the subsequent multi-front war have only exacerbated this structural contradiction. The economic toll is staggering, with direct war costs and reconstruction for 2024-2025 estimated at 250 billion NIS, or over 13% of GDP. While the $14 billion emergency aid package passed by the U.S. Congress in April 2024 stabilized Israel’s national balance sheet and prevented a currency collapse, it also masked a deepening fiscal crisis. It allowed the government to maintain massive expenditures without immediate, painful structural reforms.
For ordinary Israelis, the war has brought the obstruction of Red Sea shipping caused by Houthi attacks, the stagnation of the construction and agricultural sectors caused by the ban on the entry of Palestinian labor, and the evacuation of local agricultural belts (the Gaza periphery and the northern border). Consequently, the costs of vegetables, fruits, and housing construction have surged. In order to cover the war deficit, the Israeli Ministry of Finance raised the Value Added Tax (VAT) from 17% to 18% in the 2025 budget. VAT is a typical regressive tax, and its impact on low-income groups is far greater than on the wealthy class. Furthermore, many large food companies exploited public panic regarding wartime supply shortages. During the 2024-2025 period, they engaged in price hikes that exceeded the magnitude of cost increases, further squeezing household disposable income.
This situation is not an accident of history but a legacy of Cold War strategy. Since the Reagan administration, the U.S. has viewed aid to Israel through the prism of its own global strategy—specifically, the “rollback” of Soviet influence and later, the securing of Middle East hegemony.Looking back at the period of the Fifth Middle East War, after Reagan resumed the strategic offensive against the Soviet Union, the battlefield of the US-Soviet game expanded from the traditional rimland of the Eurasian continent to multiple hotspots on a global scale. This became the stage where the US “containment strategy” extended its front lines most broadly during the entire Cold War. Among these regions, the Middle East served as the Waterloo that led to Carter’s downfall, so Reagan naturally dared not slack off. One of the key applications of his “rollback strategy” against the Soviet Union was directed at the Middle East.
Then-Secretary of State Alexander Haig assessed that the Middle East was the region facing the greatest Soviet threat, and was also the area where the layout of the US-Western camp was weakest. Then-West German Chancellor Helmut Schmidt criticized the American approach as “arrogance based on power and moral superiority”.In the early post-Cold War period, Israel’s status in US Middle East strategy declined for a time. The precondition for the US promotion of the Greater Middle East Initiative was that it must not harm US interests. In the process of pursuing its strategic goals in the Middle East, foreign aid served as an important instrument of US intervention policy, which aligns with a global strategy based on its own power. From the Gulf War to the Iraq War, the logic of the US government in solving Middle East peace issues underwent a change; it believed that the relationship between the Iraq issue and the Israeli-Palestinian issue was no longer parallel, but rather sequential.
The United States regards national interest as the foundation of US-Israel cooperation. That is to say, US aid to Israel is primarily established on the basis of strategic necessity; the level of aid reflects the intensity of the US strategic need for Israel, as well as the degree of intimacy in their relationship. Therefore, American security guarantees and dollar inflows indeed seem to provide a cornerstone for Israel’s survival. However, in the absence of effective domestic competition and redistribution mechanisms, this external power is transformed into internal distributive injustice. The strong currency has become an ATM for the elites, while ordinary people, in a market controlled by monopoly capital, are forced to pay a “war premium” and a “monopoly tax.”The irony is palpable: Israelis are safe, but they can barely afford to live. For this, they may not be thanking the Americans anytime soon.
