The ongoing conflict in Israel and Gaza, which officially began on October 7th, 2023, can draw its origins many decades earlier and has been slowly brewing since the 1940s. Decades of tensions in the region have come to a head and are already leaving a legacy in the region as an unforgiving situation. This article will delve into the overall economic impact this conflict has on the world and how its influence can reach those who are seemingly uninvolved. People who do not even reside in the surrounding region have experienced its residual effects either directly or indirectly. It may be fair to assume that many people outside of the conflict do not realize that they have been affected by the destruction or are aware of how much they are being affected financially. Of course, every person is different, and factors like proximity, dependence on trade, investments, connections, and travel patterns.
Hamas-Israel War:
According to Brittanica, the state of Israel was created in 1948 on land that had been occupied by Arab Palestinians and Jews, which generated tensions over the territory and land claims. The fighting resulted in Palestinian displaced people, who fled to the Gaza Strip, which also came under Israeli control in 1967 after the Six-Day War of 1967. Brittanica also mentions that “Hamas is a pro-Palestinian militant group” which intended to generate a more aggressive solution to Israeli occupation by conducting a terror campaign to disrupt the “two-state solution” in the 1990s. Upon assuming control of the Gaza Strip, direct fighting between Hamas and Israel began in 2008. Complicating factors include the extensive tunnel system and high population density, which caught many Gaza citizens in the crossfire. However, “Israel was taken by surprise… “part of this was clearly due to a combination of Israeli complacency and hubris”, according to thenation.
Direct Costs:
Overall, the IMF is “concerned about the tragic loss of life in the epicenter of the war, but also the destruction and reduction of economic activity as a result of the war”, alluding to the damage to necessary infrastructure and homes in Gaza. Because many Palestinians need to flee the conflict, they end up flooding other countries that may not have the capacity to care for additional people if they can barely care for their own. Kelsey Norman, a fellow for the Middle East at Rice University, says the fact that “these countries simply don’t want the responsibility of caring for more Palestinian refugees” plays a part in not accepting them. It creates a crisis regarding healthcare and other public services where these countries are not yet equipped to handle such a large influx of refugees. This puts pressure on many of the surrounding countries to give adequate care, and this may cause even more instability in the region that is struggling. With countries beginning to reject refugees coming in from Palestine, they may start to reach Europe seeking safety and create pressure on those governments to provide adequate support.
Israel already dedicated a large portion of their GDP to military spending at 4.51% in 2022. Given this conflict and increased military aggression on their part, their spending has almost certainly increased by a large margin, due to their constant deployment of soldiers and need for ammunition and other supplies. This has then taken away attention from other potential avenues of economic activity. Israel’s major economic sectors are technology, manufacturing, and the diamond polishing and cutting industries, and the global market of these industries has taken its toll. Tourism also plays a big role in this region, and security concerns will drive many to avoid these areas while these conflicts occur. With Iran potentially entering the conflict as a major player against Israel, more of the region looks to be impacted by the conflict.
The stock market underwent periods of volatility in the US, as tensions in the region caused uncertainty for investors as well. According to CNN, “more than 100 Israeli companies are listed on US exchanges, with a combined market cap of more than $150 billion”, leading to a significant amount of companies potentially suffering from losses due to worries that the war reaches new levels.
Indirect Costs:
The fact that Israel is constantly under threat of being attacked and attacked every so often puts a damper on the prospects of increased investment in the country. Countries may not be willing to spend money on businesses if there is a higher likelihood of dangerous and life-threatening activities. If people are more worried about their safety, then how can we expect them to want to purchase anything that is not an absolute necessity? The cost of insurance also increases in these areas, as people understand that higher risk will likely drive up the cost of doing any business and having any goods travel to, through, and from these high-risk locations.
Most notably, the nations in this region are known for their oil reserves and oil production. Geopolitical instability in the region fueled by the conflict has the potential to impact oil prices and oil supply overall. As the surrounding countries are pressured to maintain security and to avoid conflict with belligerents in the fold, they must maintain higher defense spending. So much so that a country like Saudi Arabia, heavily invested in oil assets, was already in the top 5 of highest defense spenders in the world before the conflict, and is expected to increase spending as the conflict escalates.
Iran, a major oil producer in the world, will likely face trade sanctions as a result of their involvement and support for Hamas. Fox Business points out that Iran’s attack will likely increase prices per barrel even more, which is higher than what it was when the conflict started back in October and passed $92/barrel. The problem with oil is that it directly influences gas prices, causes inflation, and increases the cost of any imported good. Cargo ships rely on oil and thus increase transportation costs for goods traveling worldwide. Energy sources also rely on oil around the world, just leading to an overall increase in energy prices.
No end in sight:
As it crosses the six-month mark since the initial attack, what can we expect to happen in the future should the conflict continue? There is growing potential for additional countries to be dragged into the conflict, even after the US refused to participate in counter-strikes on Iran after Iran’s missile strike on Israel on April 13th. Iran has been allied with Hamas before, as well as throughout their conflict with Israel. Consequently, this has further dragged Iran into the dispute, as their involvement in the form of support for Hamas has led to their embassy council allegedly being targeted in attacks in Syria. Israel’s intention to retaliate is expected to further escalate this conflict, potentially dragging in others along with it, and creating even more crises in the region. Although Russia has its war it is focused on at the moment, its ties with Iran may eventually lead Russia to impose its will in the region by getting involved in the conflict. This is the situation that the world ultimately hopes to avoid, as it would unleash Pandora’s box of security and economic tensions around the world.