The economics of Gaza

Hamas launched a surprise attack on Israel, initially with a barrage of around 3,000 rockets, followed by a dramatic breach of the fence surrounding Gaza, by land and air on the morning of Saturday 7 October 2023. 

These attacks targeted some military infrastructure and personnel, but the majority of the 1,400 casualties were civilians. In addition to reports of atrocities committed, Hamas took an estimated 200 hostages into Gaza.

This article is a transcript of an episode of James Meadway's podcast, Macrodose.

Gaza itself has been under Israeli blockade since 2006, and Palestinian territories illegally occupied since 1967, but deliberate attacks on civilians cannot be justified.  

Dreadful

Israel has responded with a full-scale siege of the territory - an indiscriminate arial bombardment combined with shutting off water, fuel, electricity and food to all two million people in Gaza, almost half of whom are under 18 years old, and all of whom have been imprisoned in what the UN has called the world’s largest open air prison. 

Israel has, in addition, ordered the forced displacement of one million Gazans from the North to the South of the strip. The United Nations commissioner for human rights has warned this may constitute a war crime, and at least 4,000 Gazans are reported to have been killed so far. 

At the time of writing, Israel’s threatened ground invasion has yet to be launched, with 100,000 reservists massed on the edges of the Gaza Strip, but it is clear that an incursion would dramatically worsen the already dreadful situation for refugees, putting enormous pressure on Egypt in particular, and potentially leading to a further response from Hezbollah to Israel’s north. Israel has already threatened the “destruction” of Lebanon should this happen.  

Catastrophe

The difference in relative military strengths here is overwhelming. Hamas may have been able to launch a murderous surprise attack, but it is Israel that has the vast, modern army, and total superiority in terms of conventional warfare.

Israel had dropped 6,000 bombs on Gaza in the first week: for comparison, in the fight against ISIS in 2014-19, the US and its allies dropped no more than 5,000 bombs a month across the whole of Syria – a figure I’ve taken from military journalist Wesley Morgan.  

Beyond the immediate human catastrophe, we’ve seen a wider geopolitical and economic fallout.

Oil prices have already shot up to above $90 a barrel, reflecting a belief amongst oil traders that what is currently an appallingly brutal but geographically contained dispute could spiral into a wider regional conflict.  

Oil

Despite US Secretary of State Anthony Blinken’s rush around the capital cities of the Gulf, the conflict has effectively broken the Biden administration’s strategy for the Middle East.  

This was a policy that which sought to “normalise” relations between the Gulf states and Israel by building on the 2020 “Abraham Accords” and persuading Saudi Arabia and Israel to establish diplomatic trade relations - and was effectively extended from the Trump era.

A deal between its two most important regional allies would, the US hoped, consolidate its power in the region and squeeze out the growing influence of China.  

The People’s Republic of China is becoming increasingly active across the Middle East. China and Saudi signed a “strategic partnership” agreement at the end of last year and China is increasingly supplying the Gulf states with advanced technology, like 5G infrastructure.

Saudi has begun buying some military equipment from China, too, although the bulk of its arms purchases come from its historic supporter, the United States.

Context

The longer term hope for normalisation was that this would allow the US to wind down its various diplomatic and military commitments to a part of the world that was becoming, in Washington’s eyes, less critical than China itself and the so-called Indo-Pacific.

I think it’ will be useful to put this current conflict into the context of a changing global economy. For decades now, the Middle East has been the resource tap of the world economy.

With the twin price shocks of the 1970s, created by OPEC, we had an extraordinary demonstration of just how vital oil is to global capitalism. But decarbonisation has already begun to shift this centre of gravity.

Instead of a major region, critical because of its ability to supply a single, dominant commodity, we are moving towards a world where a variety of fundamental raw materials matter, from scattered locations across the globe: copper from Chile, lithium from Bolivia, cobalt from Congo.

Obviously, there is still a very long way to travel here. The last 18 months have shown us that disruptions to fossil fuel supplies can still have an extraordinary impact. Threats by OPEC+, now including Russia, to reduce oil production have driven up global energy prices already this year.  

But I think it’s under-appreciated that, thanks to the fracking boom, the US has gone from decades as being an oil and gas importer to becoming a major exporter of fossil fuels.

Allies

That means that the world’s largest economy is no longer dependent on the Middle East for an essential resource.

For China, looking to leap beyond the fossil fuel economy and become the world leader in decarbonisation, its concerns naturally spread much wider, to Africa and South America where the Belt and Road Initiative has been installing the infrastructure of mineral and natural resource exploitation for the last decade.

This is a shift measured not in days but in decades.

It works far more slowly than the horrible drama of the last weeks, but the direction of travel is clear, and the Middle Eastern states are responding to it, seeking to diversify their economies and looking, as Saudi and UAE have in particular, for new allies.  

Attempts at “normalisation” between Saudi and Israel have to be seen in this context - of the winding down of US economic interests in the region, and attempts to consolidate a stable geopolitical position.

Devastation

The two weeks have almost certainly brought this process grinding to a halt. 

Reports now say that Saudi has decided to “pause” its negotiations with Israel over normalisation, which was not denied in an interview by US National Security Advisor, Jake Sullivan. The question is how long for, and whether this “pause” becomes permanent.

The immediate response to this conflict from both the US and EU has been full support for Israel. This week has seen this rebalance somewhat as the extent of the devastation in Gaza has become clearer, and warnings have grown about the legality of Israel’s actions.

Protests for Palestine across the world have been the largest for at least a decade. With its economic ties in the region changing, and its geopolitical strategy under severe strain - the pressure is mounting on the US to attempt some restraint on its closest Middle Eastern ally.

Whilst US economic aid to Israel had fallen to nothing by the late 2000s, its military aid to Israel still runs consistently at $3billion to $4billion a year, or about 12-15 per cent of Israel’s $23billion military budget, and double the amounts given to any other recipient.  

Restraint

These pressures for restraint may be playing out - It’s clear from reports that Anthony Blinken’s mammoth nine-hour meeting with Israel’s war cabinet was largely aimed at cautioning restraint and easing the all-out blockade.

There are new reports that the planned ground invasion may not be the full-scale assault once feared. 

It is at this point that international opinion can come to matter decisively: and as the very large demonstrations and the desire for restraint expressed by other major powers, like China, suggest, this will not grant Israel’s government the free hand it’s been wishing for. 

This Author

Dr James Meadway is an economist and former political advisor. This article is a transcript of an episode of James Meadway's podcast, Macrodose.