Economic cost of war (1) – Israel

How much does it cost to run a war? Over this and the next posting, I want to look at how much Israel and the Hamas sacrified financially over each other’s skies, whilst coldly and cruelly ignoring the human suffering.

Let’s start with Israel. The larger economy by far, member of the OECD and whose stock market is ranked in the main global listing, Israel is a recognised leader in several high tech fields, such as telecom, nanotech and solar energy. The WEF ranks Israel as second in the region for financial development. despite the continuing international recession, Israel’s economy is set to grow by around 3% this year and next year.

Allowing for lost production, repairs to infrastructure, lost sales, the cost of the Gaza war to Israel’s economy could reachUS$1 billion. This figure also accounts for costs to the country’s military infrastructure. For example, each rocket fired by the Iron Dome protection system is valued at around US$50,000, and hundreds were launched successfully to shoot down Hamas missiles. And consider the expense of calling up nearly 70,000 reservists for a week, when each individual is “charged out” at just over 100 dollars per day.

Israel’s two leading finance chiefs, the Minister of Finance and the Governor of the Bank of Israel, have both gone on record to say that the economy’s overall performance will not suffer. Stats registered after previous campaigns, such as Gaza in 2005 and Lebanon in 2006, suggests that the gentlemen may be correct. An interesting piece of anecdotal evidence already reveals that local retailers in those areas where rockets landed did much better than the larger chains. The reason is that people did not travel far to discount houses and were less interested in shopping at malls. Thus, one up for small business, always a vital part of a strong economy.

As the Financial Times newspaper notes, the Israeli economy is resilient to such events. After all, the stock exchanges and foreign currency rates barely moved this week afer the initial shocks were placed in perspective.

I would add a note of caution. During the previous economic quarter, the manufacturing index had shown an impressive jump of over 15%. However, once you drill down into the stats, you see that they were driven by an exceptionally strong performance from the high-tech sector. For each of the past two quarters, it has leapt forward by nearly 30%.

In comparison, the returns from the traditional industries – chemicals, plastics, food, etc – are in the minus zone. It is these sectors, where people are employed in mass. Their factories are often located in peripheral areas, such as in the south. And it is the south of the country where most of the 1,200 rockets fired by Hamas landed, causing production lines to cease working. It is here that the economic planners, located far away behind their desks in Jerusalem, need to focus their reconstruction efforts.


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One Comment on “Economic cost of war (1) – Israel”

  1. […] economy will shrink by 0.2% as a result of the recent fighting with Gaza. Last week, I detailed some of that potential impact. But what of Gaza? How can over 1.5 million people recover from the […]

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