Israel-Hamas War
The latest war in the Middle East is both a historical tragedy and an ongoing humanitarian crisis. At least 1,200 Israelis died during the attack launched by Hamas on Israel last Saturday; an equal number of Palestinians died in the first days of Israel’s retaliatory bombing. The death toll on both sides has only risen. The Israeli government has imposed a full siege on the Gaza Strip and called for more than 1 million civilians to evacuate the northern half of the territory. A ground invasion—involving many of the 360,000 Israeli reservists called to action—seems imminent.
How sustainable is Israel’s war effort, both domestically and internationally? What does it mean that Gaza’s economy has been in a state of “de-development”? And how does Hamas finance itself?
Those are a few of the questions that came up in my recent conversation with FP economics columnist Adam Tooze on the podcast we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. And go to Adam’s Substack newsletter for more details.
Cameron Abadi: With Israel explicitly on war footing now, I wonder how long that’s economically sustainable, both domestically and internationally?
Adam Tooze: I think, for clarity’s sake, we need to make sure that we have our comparisons and analogies properly aligned because in no way—not from a position of relative military power or economic effort or existential threat—is Israel’s situation that of Ukraine in the current moment. Israel has massive military superiority over Hamas. Its superiority over Hamas is far greater than Russia’s over Ukraine. Of course, after this horrific attack, Israel is grievously wounded. But we really are talking about a 9/11-style situation, not the situation facing Kyiv following Russia’s invasion. I mean, Hamas is a force of a few tens of thousands of fighters, lightly armed, and if they can mount a rocket barrage of 5,000 a day, it’s a huge surprise to everyone, because in previous assaults on Israel, they’ve been able to manage a couple of hundred, maybe 500, a day. Russia can hurl tens of thousands of military-grade heavy artillery shells at Ukrainian positions over weeks on end. So we’re talking about really quite fundamentally different situations here. The people who face a truly existential threat of the type the Ukrainians face are the Palestinians. But unlike the Ukrainians, they don’t have a hinterland to flee to, to get to safety from. The Israeli government is suggesting that they evacuate in light of the devastation that is to come. But, of course, there’s nowhere for them to evacuate to.
Now, this isn’t to diminish or to downplay the fears of annihilation that obviously circulate, and for good reason, in Israel’s historical consciousness. But we really aren’t in a situation like in 1973, where you had potent Arab states with major military forces on Israel’s borders. Syria right now is a basket case, shambles, and Egypt’s on the point of bankruptcy. So what we’re really talking about here is a gigantic counterinsurgency operation of a very, very bloody kind. Israel talks about war, but it also talks about crime. It talks about barbarity. And I think, in the end, the type of conflict that we’re dealing with here is better understood as a very large-scale urban counterinsurgency operation. And that’s shouldn’t be underestimated. Trying to erase, which apparently is the Israeli plan, and entirely destroy the military infrastructure of Hamas, which has dug in—it’s often said that Gaza is the most densely populated place on Earth. That’s not true. But there are two very major urban centers that are densely populated. Hamas has deeply dug into those, and destroying its military and rooting it out will be a hard task even for the Israeli military. It’s a grim, grim prospect that we’re looking at.
But the issue won’t be Israel’s scale of international support. To master the situation Ukraine is in, Ukrainians, unsurprisingly, are receiving tens of billions of dollars and would ideally like $100 billion and could probably use it. Israel receives several billion dollars, and the United States will ramp this up. But in general, I think it’s, broadly speaking, symbolic. If Israel does continue this effort over a period of months, it might run it, at an annualized basis, perhaps 5 to 10 percent of GDP. When it fought in Gaza the last time, in 2014, it’s estimated it cost Israel a fraction of 1 percent of GDP because the fighting was largely over in a matter of weeks. This is Israel’s choice. Israel is not under sanctions as Russia is, for instance. It can maintain this effort for as long as it needs.
The munitions the Israelis asking for from the United States include interceptors for the Iron Dome, which obviously makes sense in terms of Israeli self-defense against barrages of Hamas rockets. They’re asking for precision-guided munitions, which, frankly, is a mercy, because the more precision they have in the strikes they’re going to launch in Gaza, the better. But ominously, they’re also asking for artillery ammunition, heavy artillery ammunition. These are brutally destructive military-grade weapons, which are about leveling large pieces of an urban landscape. They’re combat weapons, not surgical strike assassination tools. And there’s a limited stock of 155-millimeter NATO-grade ammunition out there. And bizarrely, earlier this year, some 300,000 shells were moved from Israel to Europe and from there to Ukraine. So there’s a limited pool of this ammunition, and America is ramping up its production lines so as to be able to supply this.
But really, this is not going to be any kind of bottleneck on the Israeli operations. The last time they made a land incursion into Gaza, about 35,000 rounds of heavy artillery ammunition were fired into Gaza. Clearly the Israelis will be able to put their hands on enough to do the job this time round.
CA: Gaza has managed some kind of slow growth in recent years, despite Israeli blockades going on for years, but Israel has been described as putting Gaza’s economy in a state of de-development. What is distinctive about a policy of de-development versus kind of just imposed stagnation?
AT: Yeah, it’s a really gruesome laboratory of the modes of economic policy. It’s really a shock, frankly, to come to thinking about the Gaza economy from a more conventional economic policy background, because the range of options on the table is just so extreme. The phrase “de-development” was launched actually in work really from the 1980s and early ’90s on the Gazan economy. Because Gaza grows. I mean, you know, economies do grow. The Palestinians are extraordinary, resourceful, entrepreneurial people who are highly successful in business all over the world. There’s a huge Palestinian diaspora created by the displacement of Palestinians from Palestine in the 1940s and later. And so Gaza is strategically positioned between Egypt and Israel. And on the face of it, you’d think of it as a cheap labor pool available for the development of various types of low-level manufacturing on Israel’s border or even within Israel’s borders. And that is the kind of model of development that was actually going on from the late ’60s through to the 1980s.
But what critical observers noted was that the Israeli authorities tended to disfavor local economic development in favor of basically using the Palestinian population as a cheap labor pool for the Israeli economy. So de-development was an argument that said you could have growth, which Gaza in fact did experience from the late ’60s onward, because being attached organically to the much richer and more dynamic Israeli economy was good for goals and growth. But it did not lead to development because what the Israeli authorities were doing was in fact systematically discriminating against the development of local entrepreneurship and organic Gazan growth, if you like. So this is where the term originated as a way of saying, yes, there’s growth, but no, there isn’t development. In fact, there are systematic efforts to stop and de-develop Gaza.
And then things went from bad to worse from there on in, right? Because in December 1987, the First Intifada begins. The struggles between the Palestinians and the Israelis move into this persistent guerrilla war, essentially, that continues all the way through to the decision of the Sharon government to pull out of Gaza in 2005. And then Hamas takes over in 2006, which then led to an outright blockade of Gaza and a progressive deterioration, essentially, of Gaza’s opportunities for growth.
CA: Hamas is the ostensible government of Gaza, but does it primarily finance itself through tax revenue and other standard financial channels, or, rather, is it economically dependent on Iran? And, if it’s the latter, would that suggest Tehran is necessarily closely involved in its strategy?
AT: There’s no doubt that Iran is a backer of Hamas, but it shouldn’t be confused with Iran’s backing of Hezbollah, for instance, in Lebanon. Because Hezbollah is a very powerful, direct, and very immediate proxy of Iran, but Hamas is a much more arm’s-length relationship. It is, after all, a fervently Sunni Islamist movement, and Iran is a Shiite power, as Hezbollah is as well. So there’s an absolutely fundamental disagreement there. U.S. sources claim that Iran’s backing for all Islamist militant groups in the Palestinian territories runs to the tune of about $100 million a year. And Hamas itself has confirmed that it receives about $70 million from Iran. And that’s, on the one hand, a nontrivial amount of money.
On the other hand, if you are the administration of an urban area of 2.25 million people and are trying to run a paramilitary/military organization of a couple tens of thousands, $70 million doesn’t go a very long way. It provides you access to Iran’s mid- and low-tech weapon arsenal, which is extremely helpful for Hamas. And no doubt this is hard currency, which really helps. But that isn’t paying the bills. And I don’t think anyone seriously claims that it is. So it gains you sympathy; it gains you influence; it signals where you stand. But this isn’t the kind of money that means that, you know, it’s unthinkable that Hamas would have acted independently of Iran.
So where was the funding coming from? Well, there are other international backers of Hamas in the Gulf. Qatar is one of the places. It’s not, I think, large-scale official backing, but they were just sympathizers. Crypto apparently is one of the channels through which some of that money flows. The Wall Street Journal reported that Hamas has received about $41 million through various types of crypto wallets, and that’s quite typical actually of some of the Islamist radical groups in the region. But yet again, this is not really getting you to the kind of scale that we think Hamas operates at. Forbes estimated Hamas’s annual budget at around $942 million. Hamas has got some business enterprises, which it operates in the Palestinian diaspora in Jordan, in Turkey, in Algeria. Those are rated as having a balance sheet value of about $500 million. So again, balance sheet, $500 million, the revenue from that is not going to put you in the billion-dollar ballpark.
So I think, by a process of elimination almost, we arrive at the conclusion that it’s essentially the fragile economy of Gaza itself and the taxes that Hamas imposes on every single choke point in the Gazan economy that are supporting this effort to a considerable extent. Therefore, it’s local money circulating locally and is really about resource reallocation within the extremely fragile Gazan economy. But this means that we’re putting the military wing of Hamas—presumably its total budget is in the order of $300 million or $400 million per annum. Perhaps the share is larger, but that again gives you an idea of the difference in scale between the sort of threats that Israel faces from Hamas and the sort of threat Ukraine faces from Russia.
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CA: So, finally, I wanted to ask about the effects of this war on the broader international economy. The international oil markets have already shifted with oil prices going up since the start of this war. I’m curious why international oil markets would react in that way already. And secondly, how deep could the international economic fallout get, especially if the war continues or even expands to include Lebanon or even Iran?
AT: Yeah, I mean, oil remains as a concern. And whenever there’s trouble, whenever there’s disruption in the Middle East, of course, people start worrying about the interruption of global oil supplies. And the market in the recent months has, after all, been driving oil prices high. And that’s the result of deliberate strategy on the part of the Saudis and the Russians, who decided to dry the oil market out and let oil prices surge. OPEC, so far, at least in the form of the Emirati spokespeople for OPEC, has said it doesn’t engage in politics. But I think the big concern is that some disruption could happen that would further tighten the already tight market and further politicize an already highly politicized market—because, obviously, the Saudis are playing a multisided game in which, on the one hand, they negotiate with the Israelis and the Americans for some sort of Middle East peace deal and, on the other hand, they refuse all of the efforts of the Biden administration to keep petrol prices and gas prices down and align themselves essentially with the interests of the Russians while opening channels to negotiate with the Chinese.
So there’s a huge geopolitical game going on here. And one of the reasons why we believe the Biden administration is turning a blind eye to the increasingly elaborate, complex, and profitable trade between Iran and China in oil—notionally sanctioned oil—is that the more oil that China buys from Iran through those channels, the less pressure China exerts on the global oil market that Saudi Arabia and Russia are throttling supply into.
So the fear is that something could break in this incredibly fragile configuration, and that presumably would be a super aggressive strategy by either the Israelis or the Americans toward Iran at this moment. And then immediately you get into horror scenarios, which will be the closure of the Strait of Hormuz, through which 17 million barrels of oil a day pass. And we could be back in 1980s Iran-Iraq tanker war scenarios. But even if tensions were to escalate, the Americans have a serious interest in preserving the balance of the oil market because the last thing Biden wants going into an election year is an out of control oil price. And even if it were to come to that, the Saudis would have very large-scale additional capacity available to supply the market. So there are counterbalancing forces that I think make most people feel that the oil price will probably calm down again but is not going lower anytime soon. I think most people think it’s going to hover in this higher level that it’s been at for a while, which exerts a kind of continuous pressure on the world economy.