The Economic Pain of Israel's Conflict

Media accounts of the savage, two-year war between Israel and the Palestinians inevitably focus on the enormous human costs exacted by the ongoing strife but there is another facet of the struggle that may do even more lasting damage: its destructive effect on the two societies' economies. The devastation to the Palestinian economy has been well documented, including a recent United Nations report. Yet the intifada's toll on Israel's economy has gone largely unnoticed. Israel has no natural resources; whatever economic strength it has is based on guts and brains. The power of hope and determination cannot be calculated in numbers but its people's high education level is manifest. The intelligence and technological know-how of native Israelis and the 1m immigrants from the former Soviet Union position Israel well for a post-industrial world.

Throughout the 1990s, with peace in the air, foreign investment rocketing and the high-technology sector booming, gross domestic product grew at an average annual rate of almost 5 per cent. During this period, Israel's per-capita GDP surpassed that of countries such as Spain, Portugal and Greece.

Today's numbers are very different. GDP will have contracted by almost 6 per cent between 2000 and 2002. Unemployment, a respectable 8.8 per cent in mid-2000, increased to 10.6 per cent of the population in the first quarter of 2002.

Inflation, which used to be a severe problem in Israel, nearly disappeared in the late 1990s thanks to tight monetary and fiscal policy. But increasing government spending to counteract the recession and fight terrorism is expected to raise inflation to almost 13 per cent this year.

Most worrying, perhaps, Israel's high-tech industry, one of the economy's principal drivers, has buckled. At its height, the high-tech industry accounted for 17.5 per cent of Israel's business-sector product and 70 per cent of the country's exports.

Most countries have other industries to fall back on; but suicide bombers have crippled the other engine of Israel's economic growth: consumer spending. The country's restaurants, bars and clubs, and shopping centres that popped up during the 1990s boom, are struggling to stay afloat -- any public place is a potential target for suicide bombers. In total, consumer-led growth contracted more than 75 per cent in the 12 months to the second quarter of this year. Tourism, a key component of consumer spending, has decreased almost 60 per cent in the past year alone.

It would have been difficult for Israel's economy to weather the continuing violence without any downturn but since its founding Israel has had to cope with economic strife caused by war and terror. Its reliance on the high-tech industry is a new thing, however, and may yet exacerbate the recession into a depression.

Israel could have shielded itself better against the collapse of the high-tech sector. No country should rely on one industry alone but Israel forgot the lessons learnt from cash-crop economies and neglected to diversify its own economy sufficiently. Economic planners acted as though the high-tech boom would last for ever and now they are paying a heavy price.

The continued recession in Israel and the Palestinian territories is exacerbating the horror of the terror and violence, making the lives of everyday people yet more miserable. As the intifada enters its third year, more than 2,500 people have been killed. The economies of Israel and the Palestinian territories are another kind of victim. There is nothing more sacred than life but the human consequences of economic strife cannot be overlooked.