Gaza in flames; army camps springing up in the Golan Heights; a spy satellite monitoring Iran and Syria; war with Hezbollah a hair trigger away; a scandal-plagued political class facing a total loss of public faith.

At a glance, things aren’t going well in Israel. So why, in the midst of such volatility, is the Israeli economy booming like it’s 1999, with a roaring stock market and growth rates nearing China’s?

Thomas Friedman recently offered his theory in the New York Times. Israel “nurtures and rewards individual imagination,” and so its people are constantly spawning ingenious high-tech start-ups. After perusing class projects by students in engineering and computer science at Ben Gurion University, Friedman made one of his fake-sense pronouncements: Israel “had discovered oil.” This oil is located in the minds of Israel’s “young innovators and venture capitalists, ” too busy making megadeals with Google to be held back by politics.

But Friedman left out the backstory. In the 1990s, Israel was in the vanguard of the information revolution. After the dot-com bubble burst in 2000, Israel had its worst year since 1953. Then came 9/11, and new profit vistas opened up for any company that claimed it could spot terrorists in crowds, seal borders from attack and extract confessions from closed-mouthed prisoners. Within three years, large parts of Israel’s tech economy had been radically repurposed. Put in Friedmanesque terms: Israel went from inventing the networking tools of the “flat world” to selling fences to an apartheid planet.

The key to Israel’s supergrowth is not mysterious. Many of the country’s young entrepreneurs are using Israel’s status as a fortressed state, and its occupation of Gaza and the West Bank, as a kind of twenty-four-hour-a-day showroom—a living example of how to enjoy relative safety amid constant war. Now Israel is exporting that model to the world.

Discussions of Israel’s military trade usually focus on the flow of weapons into the country—US-made Caterpillar bulldozers used to destroy homes in the West Bank and British companies supplying parts for F-16s. Overlooked is Israel’s huge and expanding export business. Israel now sends $1.2 billion in “defense” products to the United States—up dramatically from $270 million in 1999. In 2006 Israel exported $3.4 billion in defense products—well over a billion more than it received in US military aid. That makes Israel the fourth-largest arms dealer in the world, overtaking the Britain.

Much of this growth has been in the so-called “homeland security” sector: high-tech walls, unmanned drones, biometric IDs, video surveillance, air passenger profiling systems, the training of border guards and interrogators. Before 9/11 “homeland security” barely existed as an industry. By the end of this year, Israeli exports in the sector will reach $1.2 billion—an increase of 20 per cent. Israel has turned endless war into a brand asset, pitching its uprooting and occupation of the Palestinian people as a half-century head start in the “global war on terror. ”

It’s no coincidence that the class projects at Ben Gurion that so impressed Friedman have names like “Innovative Covariance Matrix for Point Target Detection in Hyperspectral Images” and “Algorithms for Obstacle Detection and Avoidance.” Thirty homeland security companies were launched in Israel in the past six months alone, thanks in large part to lavish government subsidies that have transformed the Israeli army and the country’s universities into incubators for security and weapons start-ups.

Next week, the most established of these companies will travel to Europe for the Paris Air Show, the arms industry’s equivalent of Fashion Week. One of the Israeli companies exhibiting is Suspect Detection Systems (SDS), which will be showcasing its Cogito1002, a white sci-fi security pod that asks air travelers to answer a series of computer-generated questions, tailored to their country of origin, while they hold their hand on a “biofeedback” sensor. The device reads the body’s reactions to the questions and certain responses flag the passenger as “suspect.”

Like hundreds of other Israeli security start-ups, SDS boasts that it was founded by veterans of Israel’s secret police and that its products were road-tested on Palestinians. Not only has the company tried out the biofeedback terminals at a West Bank checkpoint; it claims the “concept is supported and enhanced by knowledge acquired and assimilated from the analysis of thousands of case studies related to suicide bombers in Israel.”

Another star of the Paris Air Show will be Israeli defense giant Elbit, which will showcase its Hermes 450 and 900 unmanned air vehicles. As recently as May, according to press reports, Israel used the drones on bombing missions in Gaza. Once tested at home, they are exported abroad: the Hermes has already been used at the Arizona-Mexico border; Cogito1002 terminals are being auditioned at an unnamed US airport; and Elbit, one of the companies behind Israel’s “security barrier,” has partnered with Boeing to construct the Department of Homeland Security’s $2.5 billion “virtual” border fence around the United States.

Since Israel began its policy of sealing off the occupied territories, human rights activists have often compared Gaza and the West Bank to open-air prisons. But in researching the explosion of Israel’s homeland security sector, a topic I explore in greater detail in a forthcoming book (The Shock Doctrine: The Rise of Disaster Capitalism), it strikes me that they are something else too: laboratories where the terrifying tools of our security states are being field-tested. Palestinians are no longer just targets—they are guinea pigs.

So in a way Friedman is right: Israel has struck oil. But the oil isn’t the imagination of its techie entrepreneurs. The oil is the war on terror, the state of constant fear that creates a bottomless demand for spying devices and containment walls, whether in Gaza, in Baghdad or at the US-Mexico border. Israeli entrepreneurs have discovered, just as US politicians did after 9/11, that fear is the ultimate renewable resource.

Naomi Klein

Naomi Klein

Naomi Klein is the award-winning author of the international bestsellers, The Shock Doctrine: The Rise of Disaster Capitalism and No Logo: Taking Aim at the Brand Bullies. She writes a regular column...