The Economics of the Gaza Cease-Fire

Article Summary
Hamas claimed victory following the cease-fire with Israel, but the fighting dealt Gaza a considerable economic blow. Alex Zabezhinsky writes that the high costs of reconstruction might end the rapid economic growth that Gaza has undergone in recent years.

The argument surrounding whether it was right to stop the operation in Gaza is taking place in terms that are ideological, military, political and more — but deals less with the economic considerations of the other side. One of the most important aspects relating to Hamas’ desire and ability to maintain the cease-fire with Israel will be economic. The declaration of victory by Hamas may boost the organization’s morale, but when it starts surveying the financial damage caused by the IDF’s actions, it may be less happy to have entered the confrontation in the first place. The accelerated economic growth that had been taking place in the Gaza Strip in the last two years is likely pass, and turn into a protracted and expensive process of repairing the damage.

The precedent of the Second Lebanon War could give an indication of the chances for the cease-fire to hold in the long term. In 2006, Hezbollah also declared victory, and it seemed like the high morale it presented to the world would quickly lead to a second war. But that hasn’t happened in the six years since. The economic rationale makes the reasons for this clear.

Israel’s economy at the time sustained relatively very moderate damage from the war. The growth in the third quarter of 2006, during which the war took place, did drop by 0.7%, but growth amounting to almost 8% was recorded in the following quarter. The high growth helped pay for the increase in security expenses, and the war left almost no hole in the government budget.

The Lebanese economy, on the other hand, was severely damaged. Lebanon started the first half of 2006 with a growth rate nearing 6%, but in the second half, growth sharply fell, such that the year on the whole finished with zero growth. The economic damage in Lebanon from the destruction left by the war was estimated at some $3.6 billion, with that estimate including only direct damage.

The Lebanese economy, of which between 10% and 12% percent of growth comes from the tourism industry, has taken an ongoing hit in subsequent years. Lebanon’s debt-to-GDP ratio, which stood at an average of 160% between 2000 and 2005, jumped by 180% after the war — much more than Greece’s present ratio. Many efforts and resources were invested in repairing the destruction. Promised Iranian money did not exactly manage to fund the needs of Lebanese citizens after the war, and the country had to largely rely on aid from European sources.

Ultimately, the economic implications of the Second Lebanon War for Israel are ancient history, while Lebanon to this day is dealing with the damage caused to it. Hezbollah is no longer a rebellious guerilla group. Since 2008, the organization’s representatives comprise roughly one-third of the Lebanese government. At present, in addition to the ideological and religious aspirations of the group, Hezbollah is responsible for the country’s economy and its residents’ welfare. Therefore, the decision to pursue another military adventure against Israel entails heavy political considerations.

Hamas has something to lose

Hamas, which has ruled in Gaza since 2006, also has something to lose from wars with Israel, beyond just the risk to its rule. There are not yet official estimates regarding the damage of the war to the Gazan economy, but according to reports, the Israel Air Force caused major destruction to physical infrastructure in the Strip. The Gazan reality may be complex, but Hamas seems to be the political organization that “controls the level of the flames,” and is responsible for the economic situation in the Strip.

Gaza is still amongst the poorest entities in the world. However, starting in 2008, the economy of Gaza grew at a very fast pace, especially between 2010 and 2011. The growth accelerated after Israel partially lifted limits on the entry of goods into the Strip. Growth in Gaza was much faster than in the West Bank. In 2011, production in Gaza increased by 23%, with the construction sector growing by 154% and the agriculture and fishing industries growing at a rate of 57%. The GDP per capita is still less than $1,000, but it grew at a double-digit rate in 2010 and 2011. The rate of unemployment dropped in two years by 10%, reaching 28%, the lowest rate in the last decade. More than 200 projects in different sectors are taking place in Gaza, some internationally funded.

The last round of fighting is likely to have halted a large portion of the advances that were made, especially in infrastructure. Repairing the destruction will require extensive resources that are not abundantly available, and which could have been used for other purposes. Hamas is likely to find itself, like Hezbollah and the Lebanese government, dealing for a long time in repairing the damage. Maybe this — as was the case in the Second Lebanon War — will preserve the quiet, since violating it exacts such a high price.

The author of this article is the head economist for DS Investment.


Found in: security, palestinian, lebanon, lebanese economy, israel, hezbollah, hamas, gaza, economic

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