The Rising Cost of Our Missile Wars

Israel’s economy weathered the Second Lebanon War and Cast Lead well, and will probably get through Pillar of Defense quite soundly too. But the future looks bleak.

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In spite of all the immediate drama– the booms of exploding rockets, the emotional interviews with victims, the firm declaration of our leaders and the threats served up by theirs – there is a deadening familiarity about the third missile war Israel has fought in six years.

Like the rounds with Hezbollah in 2006 and Hamas in 2008-2009, it will last three or four weeks and end inconclusively with a ceasefire and the two sides re-arming to fight again another day. At least we can find some succor knowing that the economy seems to take its regular spanking with equanimity.

Business information firm BDI Coface estimates that the current fighting is costing the economy about NIS 1.1 billion a week, but most of that is in direct military costs rather than from material damage or lost output.

If Pillar of Cloud lasts for three weeks, a reasonable estimate, that‘s cheap as wars go. Like the two previous conflicts, Israel’s economic heartland in the greater Tel Aviv area has been largely spared and in the south, which is feeling the brunt of the attack, Iron Dome is limiting the material damage compared to previous conflicts.

Indeed, it is heartening – from a purely economic perspective – to note that the Second Lebanon War had barely any impact on the economy. In the third quarter of 2006, which covered the period of the fighting, gross domestic product dropped a mere 0.8%, which was reflected mainly in lower exports and falling inventories. But the fourth quarter saw the economy rebound smartly.

The Second Lebanon War was comparatively lengthy (33 days), took more Israeli casualties (165) and shut down a larger part of the country (everything north of Hadera) than the next two conflicts. Yet the Bank of Israel estimated that the total loss of GDP amounted to about 0.7%. Tourism and manufacturing took time to recover but the high tech sector resumed and rebounded as if nothing happened.

Cast Lead was accompanied by a dip in economic output, but economically speaking it came at a troubled time. The U.S. mortgage market was collapsing, Lehman Brothers had just gone under and the lights were going out across Wall Street. Cast Lead did nothing to detract from the rapid recovery the Israel in economy made in 2009. GDP declined 1.5% in the first half of the year but grew 3.3% in the second half while unemployment dropped from its mid-year peak to 7.3% by December.

It’s no wonder that between trips to the bomb shelter, traders on the Tel Aviv Stock Exchange have been bidding up share prices. “Israel passed through the Second Lebanon War and Cast Lead, and investors have learned that they need to relate to events from an economic, not a security, perspective. Institutions acted maturely when they didn’t react hysterically to missiles falling on Tel Aviv,” Ronen Matmon of Excellence Nessuah told TheMarker this week, summing up the market’s wisdom of the moment. Prices for government bonds are being driven by low inflation rather than by worries about defense costs. All will be fine, so long as the war doesn’t last so long or Egypt doesn’t get involved.

A moment of rewritten history

The remarkably quotable George Santayana famously said that “Those who do not remember the past are condemned to repeat it.” Like most aphorisms of this sort, it seems to pack a lot of truth into remarkably few words, but under examination it doesn’t hold up well. Less famously, Santayana also said, “History is always written wrong, and so always needs to be rewritten,” which kind of takes the wind out of his first quote. So let’s try re-writing it.

The history of the last three missile wars can be summed up as a perpetual cycle of a Katyusha or Qassam for this and an air force sortie for that, followed by a ceasefire, a period of calm and then the next conflict. This time it will likely end that way, too, which is a good reason for the TASE not to be worried right now.

But from a broader perspective, this is a history of a constantly growing threat, and the next time around will be much more costly.

The other side is not only expanding its arsenal of missiles but their range, which means Israel will get rocked a little bit more each time. Most worrying of all, Tel Aviv and Jerusalem are gradually becoming enveloped in the fighting.

The one or two rockets that have reached the two cities in the first week of the fighting are not an aberration. They are a small taste of things to come.

A threat like that cannot be met by a ceasefire that will run its course in a couple of years. It can be addressed either by boots on the ground or by giving Gaza or Lebanon such a pummeling that Hezbollah and Hamas make a cost-benefit decision in favor of long-term quiet. But either scenario is a disaster economically. The first spells a lengthy and costly conflict, perhaps even an occupation; the second the risk of worldwide condemnation that may well give life to the boycott movement and create the kind of political risk that deters investors, businesspeople and tourists.

The threat is also one of geography and politics. If you are an optimist, the Arab Spring will usher in democracy and freedom to the Middle East; if you’re a pessimist it is already bringing nothing more than fanaticism and repression. The long-term verdict on this has yet to be reached, but for now the one thing that can be said for certain is that the Arab Spring has brought anarchy. Elections they have held, but Tunisia is struggling with Salafist unrest, Libya is effectively ruled by a plethora of militias and Egypt has lost control of Sinai. Syria is shattered by a civil war that shows no sign of ending and in Jordan, King Abdullah’s rule is cracking under popular opposition.

One can see in a year or two’s time, Israel surrounded by failed or semi-failed states where Islamic groups of one stripe or another are free to act like they do today in Lebanon, Gaza and Sinai, without any of the cares or responsibilities of a government in power. Israel is surrounded on every side by rockets and they are launched with alarming frequency in a multilateral war of attrition. Israel may be able to cope with such a situation militarily, but is hard to see how any economy, even one like Israel’s with its wherewithal, can ever do the same.

Missile strike in Rishon Letzion: The damage doesn't come cheap to fix, either.Credit: Nir Keidar
Anti-ballistic Iron Dome systems don't come cheap.Credit: Hadar Cohen

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