Straits of Hormuz
The Straits of Hormuz. If Iran blocks them, the price of oil will soar. Photo by Reuters
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Economically speaking, what do you think our next war -- that is the one we may be fighting with Iran and its allies anytime after tomorrow -- will look like?

Take your pick.

Will it be brief and glorious affair like the Six Day War, a short and heroic round of fighting followed by an economic resurgence led by newly confident Israelis secure in their country’s survival? Or will it be more like the 1973 Yom Kippur War, a long and drawn out conflict that cost the country dearly in human life and material goods, exacerbated by a sharp and sudden rise in energy prices and a worldwide recession?

Or perhaps it will look like the 1991 Gulf War, one which technically speaking we didn’t participate in -- a few missiles, followed by a peace process and another round of economic growth and an effervescent high tech sector? Or maybe it will resemble the 2006 Lebanon War – a lot more missiles this time, but just a mere blip on the economic EKG before prosperity resumed and a model for Israeli wherewithal in the face of crisis?

Generals, those poor devils, are routinely lambasted for fighting their wars according to what prevailed in the last war. They learn too much from history. Economists, businesspeople and for that matter pundits should be careful not to make the same mistake.

War has certainly changed a lot in the last half century, as any general will tell you, and so has the foundations of economic activity and growth, even more so for Israel.

Wars used to be fought by young men who died in the trenches or in tanks while back in the relative safety of the home front dads helped make guns and ammunition, mothers prepared care packages and girlfriends wrote love letters. Economies were much more physical and immobile. They had factories and farms to turn out goods and when they didn’t, the people who worked in them had nowhere to turn but the unemployment office. There was trade and cross-border investment, but at nothing like the size and pace of today’s globalized economy.

That is why looking at past wars for their impact on the economy isn’t too instructive.

Forecast: Shower of missiles

No one knows for certainly what the next war will look like. But conventional wisdom isn’t always wrong and it quite reasonably says that Israel will be sprayed by thousands of rockets with warheads of a half-ton each. Unlike the Lebanon or Gaza conflicts, this time those projectiles could reach Tel Aviv and the heart of the economy. It’s not that the people sweltering in bomb shelters in Sderot or Kiryat Shmona are less important, but the fact of the matter is those vice presidents for finance, senior bankers and high-paid, high tech project managers we love to loathe are what keep the economy running. The shutdown could go on for days or for weeks and quite possibly be followed by a war of attrition of terror attacks like the one in Bulgaria last month.

The cost, not counting human life? Israel generates about NIS 3 billion of output every day, so that, for argument’s sake, if half of the country is shut down for 10 days, that will add up to an output loss of NIS 15 billion, or $3.75 billion. As Bibi said in so many words, that seems a reasonable price when measured against the threat of a nuclear-armed Iran.

Two months under these conditions and lost output of NIS 90 billion starts to look less attractive.

To their credit, the Home Front, Defense Ministry and the leading industrialists have been working on how to cope with plans to protect critical facilities like natural gas installations and those that risk environmental hazards, such as chemical plants. They want to make sure the Tel Aviv Stock Exchange keeps trading, that automated teller machines are filled with cash and that bread is baked. Lists of essential workers exempt from reserve duty are being drawn up as are protocols for coordinating with emergency services. The Bank of Israel is keeping watch on its foreign-currency reserves hoard of $75 billion-plus, which we might need to draw on.

These are all necessary preparations, but they inevitably smack of fighting-the-last-war syndrome. They worry about making sure infrastructure is protected and the economy is functioning as best it can. But the challenges they don’t address – and for all practical purposes, can’t address – are of an equal magnitude.

For one, even if Israel is the only one directly engaged in the conflict with Iran, the world economy will almost certainly feel its impact because Iran has threatened to block Gulf oil deliveries. Even if it isn’t entirely successful, the intermittent disruption and the threat could be enough to lift prices to levels that send the already shaky world economy into recession. Israel would follow.

But just as critically, it is hard to imagine Israel bouncing back from a conflict with Iran like it did in 1967 and in 2006. Perhaps it will be a short war with a decisive conclusion, but it is just as likely to turn into a long and drawn out conflict, with the most serious blows at the start followed by a steady, economically painful low-flame conflict that saps business confidence and national morale. In this scenario the global economy is already in recession and world public opinion blames Israel for causing the trouble. Foreign investment is already slack and as a high security risk Israel is on most people’s off-limits list. Export-oriented businesses move production abroad because customers are worried their orders won’t be filled. High tech entrepreneurs look for quieter places to start up companies. Defense costs rise while the tax base shrinks.

In other words, the next war would start looking economically like 1973 all over again.