Profits of war in the Israeli-Palestinian conflict

By Khaled Diab

The economic rewards of peace are supposed to lure Israelis and Palestinians away from conflict. But what if war is its own reward?

January 2009

The heart-wrenching carnage and humanitarian catastrophe in Gaza – and the mass fear in southern Israel – is made all the more tragic by the fact that it seems to follow a well-rehearsed script of tense silences followed by sudden, spasmodic eruptions of violence.

Just as the war against Lebanon in 2006 was as shocking as it was sudden and was triggered by the flimsiest of pretexts, the reinvasion of Gaza has also struck like a whirlwind. And just like Lebanon in 2006 and 1982 – as well as the reinvasions of the Palestinian territories following the outbreak of the al-Aqsa intifada and the election victory of Hamas – the current campaign is unlikely to bring Israelis anything more than a little tense respite.

Like Hamas, which seems incapable of realising the futility of armed struggle and declaring a non-violent peace movement, Israel appears to be completely beholden to the logic of the battering ram. This raises the question of why it is that, despite all the evidence that overwhelming force simply does not work, Israel still has not abandoned its prized “deterrence” policy.

The tragedy in Gaza could be seen as a desperate bid by Israel to reassert its sense of lost deterrence, or simply as another cynical bid by the Kadima leadership to boost their ailing popularity before next month's elections.

But there are many other factors at play, too. In the past, I've explored the role of ideology, including what I call the ‘God veto', political fragmentation and psychological barriers in perpetuating the conflict. In addition to these, there is an increasingly prominent economic dimension.

At one time, war for Israel meant economic paralysis and crisis, but was sustained by a mesmerising ideology, the fresh memory of persecution and a large array of potentially frightening enemies. But even with Israel as the undisputed regional military superpower and its former enemies falling one by one by the wayside, Israeli violence has risen significantly in recent years, especially towards the Palestinians.

This is partly because a durable peace with the Palestinians requires more fundamental compromises than with the Egyptians and Jordanians as a fair settlement raises issues that strike at the heart of Zionism. Another reason is that, after so many generations, conflict has not only become intrinsically interwoven into Israel's social fabric, it has also become hardwired into its economy.

During the Oslo years, Shimon Peres – who favoured a “peace of markets” before a “peace of flags” – and the Labour party were backed by influential members of the business community who were lured by the peace dividend Israel could earn from a resolution to the conflict. But under rightwing stewardship in recent years, the Israeli economy has been profiting from its own and global conflict and insecurity.

In fact, for the past few years, Israel has enjoyed one of the highest economic growth rates in the world, and is still registering healthy growth even as western economies falter. Much of this growth has been fuelled by the high-tech ‘Silicon Wadi' sector, much of it security-related technologies, and arms.

According to the Israel Export and International Co-operation Institute, security and homeland security exports reached $3 billion in 2005. In 2007, Israel overtook Britain to become the world's fourth largest weapons exporter, selling a total of $4 billion in arms.

On top of that, since the bursting of the dot-com bubble, Israel has boosted its military spending, partly to help salvage high-tech firms. Last year, proved to be yet another record year, with the country's defence budget subsuming a massive 16% of government spending and 7% of GDP. Add to that, the average $3 billion in military aid which Israel receives from the United States each year, and you have a truly staggering economic dependence on the way of the gun.

This is not to say that this is necessarily a war dividend for Israel as a whole, but those involved wield a powerful lobby. In addition, Israel does not seem to be paying a massive war premium. High-tech industries do not require Israel to be on good terms with its neighbours, while with most western economies, it's business as usual, regardless of the political situation on the ground. The EU, as a whole, remains Israel's main trading partner, with bilateral trade at around €20 billion, followed closely by the United States.

Moreover, low-intensity flare-ups seem to give the markets some welcome jolts. Between 27 December, when the Gaza offensive began, and 5 January, the benchmark TA-25 stock index climbed an impressive 8.7%. Similarly, the index gained 3.6% in July 2006 during the Lebanon campaign. In addition, Israel and the occupied territories are slowly being transformed into macabre showcases for security products.

Israel has even managed to wean itself off its dependence on Palestinian labour, with the massive influx of Russian Jews who arrived in massive numbers in the 1990s. This has enabled Israel to close off the Palestinian territories without feeling major economic pain itself. In contrast to Israel, the massive economic deterioration – along with the political deadlock – triggered by the mass closures that began in the Oslo years, suggested to many Palestinians that the quest for peace would not deliver them a dividend, a frustration which culminated in the second intifada.

In addition, while a small elite profits from the political instability and insecurity, the ongoing conflict serves the additional purpose of distracting ordinary Israelis from the growing levels of poverty into which they are descending – much like Arab leaders have exploited the demise of Palestinians.

In conclusion, a sort of alignment of convenience has emerged between influential segments of Israel's economic elite and ideological opponents of the peace process. Add to that, the revolving door between the military and the upper echelons of politics and industry, and the “war economy” locomotive appears even harder to derail.

This column appeared in The Guardian Unlimited's Comment is Free section on 11 January 2009. Read the related discussion.