Catastrophe in the Middle East!

An Analysis of the Economic Impact of the Israel-Palestine Skirmish of May 2021

Background:

The Israel-Palestine conflict has been the Middle-East's hot button topic since the First World War, when the British occupied the territory of Palestine. Palestine played host to a Jewish minority and an Arab majority, but tensions rose when Britain attempted to claim the region as the ‘National Home’ of the Jewish people. The Jews considered this their ancestral home, but Palestinian Arabs also claimed the land and opposed the move. The British, unable to come to an agreement with the increasingly violent sides, left in 1948, and what followed was the establishment of Israel and a war involving Israel, Jordan and Egypt. In the end, Jordan controlled the West Bank, Egypt occupied Gaza, and Jerusalem was divided between Israeli and Jordanian forces. Since there was never an official peace agreement signed - with each side blaming the other - there were dozens more wars to follow.

Indeed, this tense standoff has persisted for decades. The most recent breakdown of relations was in May 2021, when an Israeli Supreme Court Decision led to eleven days of heavy airstrikes and fighting between Gaza Forces and the Israeli State. Despite a peace being brokered by the 21st of May, the situation was never truly resolved.

Palestine - Short-Term Impacts and Damages in the Gaza Strip

The costs of this skirmish were catastrophic on Gaza's side. While Gaza did launch the first missiles, subsequent Israeli bombardment was far more destructive. Israel is estimated to have launched 4,360 rockets, of which 680 hit targets. Over 16,800 housing units, 53 schools, 6 hospitals and 11 clinics were destroyed or critically damaged. Israeli airstrikes also targeted more than 525 economic establishments, including 50 factories, the majority of which were crippled beyond repair.

Alongside the tragic loss of human life, the economy of Gaza is thus in disarray. The net damages have roughly been tallied to US$380 million in value, with the industrial sector being estimated to experience up to US$22 million in damages, while the agricultural and energy sectors being estimated up to US$27 million and US$22 million respectively. The loss of economic output (the value of output gained had sectors still been producing) from these industries elevated the total to a whopping US$540 million. This is devastating, especially from an economy still in the throes of the recession caused by the COVID-19 pandemic. In order to combat the impact of these damages, which include shortages of basic supplies such as food and medical aid, the government of Palestine may be forced to increase their already tight budget, hence leading to a potentially significant fiscal debt.

Overall, it is estimated that repair will cost over US$485 million in the first year alone, which will undoubtedly increase due to the ever-increasing costs of water, sewage treatment, electricity supply, and telephone grid maintenance. While the UNRWA (United Nations’ Refugee Agency for Palestinians) has sent US$38 million to attend to humanitarian needs, this is but a dent in the massive debt the region will undoubtedly rack up in the years to come.

Palestine - Long-Term Impacts

This conflict will not only create new problems, but will also exacerbate existing problems created by the ongoing Israeli siege on Gaza City. This siege has closed over 3,500 factories, creating monthly losses of up to US$70 million, with no opportunity presenting itself for authorities to begin the process of economic repair. This may hence cause additional effects of decreased economic certainty, reducing demand to dangerously low levels, and harming the long-term productive capacity of Palestinian Gaza industries.

Thousands of people are being laid off, and the unemployment rate has skyrocketed, to 49%, with youth seeing an almost 67% increase in unemployment. With the tertiary sector being devastated by bombing campaigns, destroying offices and hospitals, there remains little opportunity for youth to build up skills to replace their elder generations. More than one million Palestinians thus live in poverty, and as healthcare declines while the effects of the COVID-19 pandemic worsen, this number is unfortunately expected to rise significantly.

Economic growth has taken a massive hit following this attack. Gaza’s economy will likely shrink by 0.3% in 2021, in contrast to the pre-battle expected growth rate of 2.4%. However, a fall in the number of COVID cases and economic aid has increased the hope that there may be growth of 3% in late 2022. However, this growth is driven solely by the ‘West Bank’ region of Palestine, whereas the GDP figures of the Gaza Strip in particular remain stagnating in the long-term. More worrying is the budget deficit of Palestine - rising to US$1.36 Billion, the government is no longer able to borrow from domestic banks, and faces difficulty in repaying loans with interest.

Moreover, the long-term damages to the standard of living and quality of life are considerable. With the commercial sector, critical infrastructure and amenities in tatters, residents of Palestine in the Gaza Strip will have no choice but to grit their teeth and suffer through appalling living conditions, given the harsh emigration laws. The only aid they can hope for, at this point, is aid from the UN or various other humanitarian organizations, but many fear this will not be enough.

Israel - Short-Term Impacts and Damages

Israel has also suffered consequences. Even before this conflict, Israel's economy had shrunk by over 6.5% in the first quarter of 2021, overturning the original expectations of economic growth as Israel appeared to recover from COVID. The subsequent conflict in May has further damaged their chances of rapid economic recovery.

The rocket fire barrage from Palestine may have been smaller in volume, but was still debilitating in terms of its damages. Authorities estimate US$166 million worth of damages took place in the first two days alone, with factories damaged in the barrage suffering from reduced output and worker turnout. Israel reported over 3,424 claims of compensation for property damage, not including motor vehicles. Israel also suffered fuel shortages, as a pipeline belonging to an Israeli state-owned energy company was hit in a rocket attack, and several oil tankers had to be diverted to other ports, delaying the delivery of fuel.

It is estimated that Israel lost around US$61 million each day as a result of this battle, leading to a combined US$900 million in damages. The extended military conflict disrupted economic activity and reduced consumer confidence in the economy. Lastly, many international airlines suspended service to Israel as a result of the conflict, leading to a reduction in the number of tourists entering the country. This greatly reduced foreign spending, negatively impacting the economy.

Israel - Long term Impacts

Fortunately for Israel, the long-term impact was not as heavy in terms of damages as first predicted. This was likely thanks to the rapid vaccination rollout that promised an expansion in GDP in 2022, despite the contraction in 2021. The risk of recession was offset by a high level of tech exports, which helped appreciate the exchange rate. Government efforts to increase spending resulted in a 12% increase in consumption, and a 14% increase in exports. Private spending and investment also grew by 19.2% and 14.1% respectively, leading to a record-breaking 8.1% growth rate of the Israeli economy, the greatest it had been in 21 years.

However, Israel's continued intervention in Palestine does represent a long-term problem. Politics aside, Israel's claim to the West Bank gives them a responsibility to cultivate and maintain the area. For example, Israel has provided Gaza with over 5,000 vaccines as a response to COVID. Israel spends an average of US$24,000 per Palestinian settler, which is double the amount they spend on their own average citizen.

If this trend continues, by 2038, almost half of the Israeli government budget will be spent on Palestine. This represents an economic sinkhole, as spending on Palestine results in little to no income or usable economic output.

Lastly, military expenditure as a result of this conflict is greatly damaging the efforts to meet other economic objectives. Israel launched almost 4,500 rockets, which required an outlay of US$22 billion in 2020 and US$14 billion by 2021. This is almost 6% of their GDP; this money represents an opportunity cost that can be used to solve other economic objectives like income equality, or improve standards of living. Fighting with Palestine is a very costly endeavor, and one cannot help but think that this money has a more sustainable and effective use elsewhere.

Conclusion

In conclusion, the effects of this recent tussle between the perpetually warring states have damaged both economies, but it is clear to see who has been less drastically affected. However, this still only considers short-term impacts. If these hostilities continue at such a violent level, the economies of both countries may be locked in an endless economic, political and, of course, military conflict.

Written By: Aayush Dongre

Edited By: Yashas Ramakrishnan