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For Israel, Current Flare-up Costs Little but Greater Conflict Takes Heavy Economic Toll

For Israel, Current Flare-up Costs Little but Greater Conflict Takes Heavy Economic Toll

If recent riots aren’t a wake-up call for greater integration of Arab citizens, this too will exact a heavy financial price, says expert

On Wednesday, the latest round of fighting between Israel and the Palestinians in Gaza entered its 10th day, as rockets continued to rain on Israeli communities, and the Israeli military persevered in its aerial attacks on Hamas and Islamic Jihad assets in the Strip. Many believe the flare-up is nearing its end. However, the cost to Israel’s economy, only just reopened after a year under COVID-19 restrictions, is not going anywhere.

Following a successful vaccination drive, Israel’s economy is in advanced stages of resuming its normal activity. Accordingly, 2021’s first quarter saw a jump in state revenue of almost 20%.

However, following a year of increased government spending and COVID regulations, the country’s public debt rose to 73% of gross domestic product, after reaching a record low in 2019.

In addition, the political instability that has seen four election rounds end inconclusively, with a fifth likely around the corner, and has blocked the path to an approved state budget, adds to the pressure on the Israeli economy. On a positive note, the international credit evaluation agency S&P Global Ratings (previously Standard & Poor’s) stated last Friday that the country’s credit score will remain “AA-,” and its expectation for economic stability also did not change.

An article in the Israeli financial paper Calcalist on Wednesday listed the cost of Israel’s military actions. Notably, an hour’s flight by an air force jet – 160 are taking part in the hostilities – sets the state back $46,000. Every Iron Dome interception costs Israel $80,000 to $90,000, according to the newspaper.

The IDF says that Hamas and Islamic Jihad have fired approximately 3,750 rockets toward Israel, 550 of which fell short, within the borders of the Gaza Strip. Of the remaining 3,200, some hit outside populated areas, and Iron Dome attempted to intercept the rest, at a 90% success rate. That adds up to a hefty sum.

However, Prof. Joseph Zeira, an expert on the Israeli economy at the Hebrew University, says the direct economic costs of the fighting will not be that bad. The costs are difficult to estimate at present, and such data is not available to the public, but Zeira told The Media Line that “the cost won’t be very high. If we look back at similar operations, they didn’t add to the security expenses significantly, 1% of the GDP at most … that isn’t much.”

In tandem with the Israel-Gaza conflagration, riots have engulfed Israel from north to south, leading to tensions between the Jewish and Arab populations. “It’s likely that these confrontations, which occurred during the night, didn’t hurt economic activity too much,” says Zeira.

Still, the professor says, “Don’t forget that we’re in a recession at present, because of COVID-19. We haven’t put COVID’s recession behind us completely.”

Events such as those that have plagued the country recently do have a tendency to harm economic activity, and if this materializes, it will lengthen Israel’s recession and affect the pace at which it exits this situation, he says.

Prof. Elise Brezis of Bar-Ilan University’s Department of Economics and director of the Azrieli Center for Economic Policy, agrees that the days of fighting have not damaged Israel’s reviving economy too significantly.

“With regard to us not working another week … that’s not a big deal,” she told The Media Line.

Brezis says the current issues will show their impact in the long run. The question is “what happens with the Arabs in Israel,” she says.

If these past few days act as a wake-up call that will lead to greater integration of Arab citizens into Israel’s society and economy, then the events may actually have a positive influence over the country’s financial prospects in the long run. However, if the Arab sector and the state do not heed the warning whistle sounded, and Israel’s Arab population sets out on a separatist path of isolationism, growing extremism, and less pursuit of academic education, “we’re in very bad shape,” the professor says.

“The only solution is [developing] human capital,” says Brezis.

The Bar-Ilan economist also warns of Hamas’ persevering belligerence, constantly advancing in sophistication. Its present activity is insignificant economically, she explains, but if, for example, its rockets’ accuracy improves considerably and they manage to bypass the Iron Dome system, the organization could cost the Israeli economy dearly.

Zeira stresses that measuring the heavy toll that such rounds of hostilities, and the larger conflict, take on the Israeli economy requires a wider perspective as well.

The professor has tracked the conflict’s cost to the country’s economy for years and estimates that Israel’s GDP would be a whopping 26% higher – at least – if it were not for the Israeli-Palestinian conflict.

The damage is caused by the higher risk premium demanded by investors, which in turn means that less money flows into the economy. Potential investors are aware of the added risk of investing in Israel, caused by the conflict, and so they require a higher return on their money when considering an investment.

“This will certainly not benefit from this escalation; quite the opposite,” says Zeira.

In fact, Israel’s political instability, its absent state budget and its inner tensions all send a message of risk and uncertainty, one which carries a considerable price tag.

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