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How much did the Israeli war really cost?

Swetha Meenal argues about the various visible and hidden costs of the Israeli war through an effort to link the economic impacts of the war to every violation of a constitutional right. Thereby, she also exposes certain aspects that have been completely ignored by the western media…

“Families are being wiped out in such massive numbers. There’s the Al-Batsh family who lost 18 members in an airstrike last week. I went to (near) Beit Hanoun in the north the other day where a family—eight of them were killed while they were sitting, watching TV when a tank shell, an artillery shell, hit their home, so—while they were watching TV. This is the kind of tragedies that we hear almost on a daily basis here in Gaza. So this is a very—this is a war on civilians. Civilians are paying the very highest of prices for this. And the killing doesn’t seem to stop.”

                                                            -Sharif Adbel Kouddous, on the Israel-Gaza Massacres.

When I say the word “Israel”, probably a few things like the Countless war crimes, human rights violation, intolerance towards other religions, undeterred series of attacks on the neighbouring countries, the non-cooperative attitude towards cease fire regulations (quite a few issues that have been dominating the news for a while now), would pop up in your brain. But to an economist, a war is more than just the episodes of blood-bath, civilian casualties or the post-war trauma in the society. Rather, s/he is examining the economics hidden behind co-lateral repercussions of the war-emigration, the ebbing support for Netanyahu’s actions and a near loss in the election, people’s preferences and needs over the security issues. They’d be able to tell you why a renewed sense of belonging spurred by a left-wing ruler would help the economy, why religious radicalization or a hundred obstacles to movement in the cities or that extra security measure to ensure safety in the public transport[1] or accidental civilian casualties[2] affect the economy in the long run.

flight israel
A sign pointing to a bomb shelter at Ben Gurion International Airport. One of the hardest hit sectors was tourism. Several flights were cancelled and the number of foreign tourists plummeted by 25%. Source:

Ever wondered how every restriction on the civilians’ freedom or every temporary[3] confiscation of a constitutional right could affect the economy? Say you’re on a bus to your school/ college, and the bus has to stop at five different check points, because the state’s regulations subject vehicles travelling from certain places to security measures. This lengthy ordeal doesn’t just result in you missing a lecture or two. It also subjects you to blatant abuse and humiliation by the state’s military forces. The trauma you go through then, stops you from going to college, further traumatizes sensitive seers and alerts the parents about the occurrence.

This is a typical occurrence in the conflict driven areas of Israel where the motive of the army is to repress the education of Palestinians in the country.

Result- Intensified drop-out rates.

Collateral damage- Significant number of Jewish students drop out too.

A study conducted in 2000, before the recent escalation in violence, found that fear of violence in school or on the way to and from school often led students to avoid attending school. The period saw 15.7% of elementary students, 6.5% of junior high students and 4.6% of high school students avoiding school. Also, the average spending per student is $6,823 for primary education, which is $1,473 below the OECD average[i]. The country is ranked 29th out of 36 countries in terms of investment in education[ii]. And it is reasonable to assume that the chronic dropout rates and poor spending in education, pose a threat to future economic development of the country.

Surprisingly, in 2014, Israel was still tied with Japan for second place in the list of world’s most educated nation. How, one might think, is the country doing well despite the perpetual conflict and the war against the neighboring nations, that ought to be economically taxing for the state? For the simple reason, that the record encompasses only upper secondary and tertiary education, while the elementary education, which is well below the OECD average, is not reflected in the ranking list. But today, even the country’s college drop-out rates are as high as 40%. Besides, the compulsory military service for 18-21 has now made Israel the fourth highest, in the number of uneducated 15-19 year olds[iii]. These dropout rates bear negative impact on the academic institutions, with the diminishing revenue that these institutions receive, making it harder to rebate money to the investors. This creates shortages in the number of people “adequately” prepared to enter the labor force and soon, there will be a mismatch between the types of jobs available and the skills and education of people in the labor force of Israel.

Palestinian school girls walk between cement blocks at a newly erected checkpoint in Jerusalem's neighborhood of Jabal al-Mokaber
Palestinian school girls walk between cement blocks at a newly erected checkpoint in Jerusalem’s neighborhood of Jabal al-Mokaber on October 19, 2015. Israeli police began erecting a wall in east Jerusalem to protect a Jewish neighbourhood subject to firebomb and stone attacks launched from an adjacent Palestinian village. Photo by Mahfouz Abu Turk

Moreover, apart from education, people have difficulty getting to work; the sick and the injured have difficulty getting to the hospitals. The heavily armed Israeli troops enter civilian cities in tanks and armored vehicles to ensure that inhabitants stay inside, for weeks or months at a time, only broken by infrequent hour long respites, allowing the residents to obtain food. And with obstruction of movement across the country affecting the service economy, and entrepreneurs (and international companies like the IBM) shutting down their business owing to increased regulations and taxes, the accessibility of markets to the people is obstructed and thus, the rate of financial transactions could plummet gradually if the situation persists. The economic implications extend to a lowered credit card usage by 11%, which are more than just a convenient medium of transaction[4]. With more people leaving the market, there are issues of rising income inequality, and fewer people dominating the market.  Prices go up because productivity is affected. The restrictions on freedom of movement, affect the household’s income. 53% of the households in a survey[iv] reported that they had to borrow money to purchase food. Subsequently the households also reported a decrease in spending on such higher-priced food items, leading to the shutting-down of more restaurants[5], who couldn’t cope with an 80% decline in sales[v].

For more such reasons, Israel could be facing another economic recession soon, with unemployment rates higher than what is being portrayed by the western media that clearly doesn’t account for the Jewish immigrants or the 26.2% of the population that live below the poverty line[vi]. Further, the unemployment rate among Israel’s Arab men is twice that of the Jewish men, and rising. Arab women are three times less likely to have a job than Jewish women. Right to bodily autonomy snatched from the women (Human rights violations on the Arabs), can result in more than just a social impact and the oppression of women in the society. The Arabs constitute one-fifth of Israel’s population and still earn less than half of what their counterparts do. As a consequence of such ghettoization, the income inequality gap augments, costing the country more than 1.3% of its GDP and disintegration of the group, leading to emigration of one million Israeli citizens, who now live abroad.

Thus, arrogation of the civilians’ freedom of movement is hinged on to so many other subtleties, the other invisible compartments that fabricate themselves, every time a complication arises. The fluctuations that then ensue in the per capita formation, which constitute the standard of living and affect the entire population, strongly influence emigration. At the moment, 140,323 Israeli born-people live in the U.S., and unless they send remittances back home, there is a huge net loss to the economy. A conflict situation often acts as a push factor, hemorrhaging the scarce talents, pushing the most “capable” people out of the country. With no mechanism to facilitate coordinated return, the country is losing out on the consumption front that could boost its economy and sustain short-term demand in the economy. Conversely, the local laborers in the country accommodating the migrants, crowd out and the country faces a 3.5% decline in the share of the poor people, for every 10% increase in the per capita official remittances.

If per capita consumption is a major push factor, the government should have to tackle the same by facilitating foreign companies to sell their goods in Israel. Further, the monopoly of the markets caused by a few players will have to be stopped by offering incentives to small business owners and by reducing regulations. The government can do this by either providing tax-exemptions to the business that are at the risk of closure or lower the interest rates to ensure circulation of money in the economy and bolster up the economic sector. But on the flip side, lower interest rates would discourage the foreign investors and would lower the currency exchange rate, given that the country’s political and economic stability is low and demand for goods and services isn’t that high either, with restrictions to movement. With exports constituting one-third of the country’s GDP, the country is already struggling as exports fell by 14% in 2014 and a further 3% by 2015. This would take its toll on the country’s exchange rate, coming back to the fact that low interest rates aren’t the best situation at the moment. Besides, the government has already initiated talks to impose a negative tax rate for the poor, to rescue the economy.israel gdp

Moreover, lower interest rates would encourage people to borrow more. The cheap credit would be channeled towards personal utility, the first step towards a country’s economic actualization. Purchasing a property is currently an endless journey for the young Israelis. One needed the equivalent of 109 monthly salaries to afford a home in 2010, whereas today, a similar purchase would take the equivalent of 142 monthly salaries[vii]. This is an increase of more than 31% in the cost of a home. But, at the given economic trend, borrowing would not be a problem, thus propelling the demand for properties. The high real estate prices in such a situation would land the country amid another real estate bubble.

The economic costs of the war are estimated upwards of $2.9 billion, and already the war has soaked 1.2% of the GDP[viii]. In the event that quiet prevails after a ceasefire is reached, the Israeli economy is resilient enough to withstand the costs of this operation.  The country further requires $1.6 billion for compensation related to civilian damages and is under an obligation to fulfill the defence ministry’s demands, that would extract another $3 billion to the money already allocated, and this could be very expensive for a country even like Israel whose economy is comparatively booming, amidst an on-going war; the country managed to achieve a 5% annual growth regardless. Thus though it does seem that the country is doing well[6], it is important to recognize  the fact that the country has experienced a significant fall in the FDI and GDP during the second and third Intifada.[7] Hence, despite its relatively high growth rate, it may suddenly and not gradually, plummet to very low levels in the event that the intifada continues, and this can have deleterious financial and psychological impacts on Israeli citizens.

Swetha Meenal is a student of Jindal Global Law School, JGU, Haryana

Footnotes and References

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