Israel-Hamas War: A Middle East Marshall Plan to help Israel's economy - opinion

Israel entered the current war in a very strong economic position. Its GDP, a major global economic indicator, has been growing steadily, despite the slowdown in so many other markets, with 2.8% growth in the last quarter, according to the Bank of Israel.

The labor market was in a full employment environment prior to the war. In addition, a very responsible fiscal policy brought the economy to a very low and desired debt to GDP ratio of around 60%, much lower than many Western economies. And strikingly, inflation in Israel is lower than in most OECD countries, with a current annual rate of only 3.7%, according to Israel’s central bank.

However, every military conflict has its own consequences, and the war in Gaza is no exception. As soon as the war started following the October 7 massacre, capital markets declined sharply, the shekel depreciated much more than in previous conflicts (although strengthened since), and the budgetary costs of the war are expected to total 10% of GDP.

Israel’s military spending before the war was only 4.2% of total expenditures and has been in decline, reflecting a perceived improvement in Israel’s security status. About 15% of the workforce has been part of the security and military efforts, impacting many companies across all sectors.

The Israeli economy, though, traditionally recovers quickly after geopolitical conflicts, and we already see with respect to this conflict positive projections from Israeli and international institutions, including 2% GDP growth and 1.5% export growth in 2024, according to the Bank of Israel. Even inflation is expected to decline significantly to 2.4% in 2024.

While this pre-war context and the ongoing conflict reality present a very optimistic and resilient view, companies and corporate executives operate in a highly politically charged environment that requires a nuanced decision-making process that would shape commercial success and prosperity during and after the war. Private and public sectors’ leaders would have to show leadership and resistance against various populist voices.

The current crisis in the Middle East brings back an old tune – the impact of business on politics, and politics on business. As a truly global economy, Israeli companies develop and sell around the world, including to nations that showed a limited level of support to Israeli interests post October 7.

Moreover, the tech sector is uniquely exposed to this reality due to its disproportional role in the Israeli economy. Some 40% of the business GDP growth over the last five years came from the tech sector, 17% of Israel’s GDP is created by tech companies, and more than half of Israeli exports is attributed to the hi-tech sector, which comprises 17% of Israeli employees. The sector has already experienced a global tech crisis this past year, with tech investments continuing to decline globally and locally. Selling in the global marketplace and raising capital from international investors often require facing geopolitical headwinds.

Business leaders and policy makers explore many avenues behind the scenes, from boycotting certain markets and products, to economic warfare. Should political and diplomatic considerations be part of Israel’s commercial landscape under the current conditions and post-war?

Engaging non-commercial considerations may have the opposite effect. Start-Up Nation Central recently showed that the Israeli economy came back very quickly to its pre-crisis status following previous conflicts, such as in 2006 and 2014. Since in many sectors it takes significant time to regain one’s market share once one pulls out of a market, it is in Israel’s interest to keep its engagement in challenging markets, as the crisis may end sooner than we think.

In addition, there is a growing trend globally of differentiation between economic and political diplomacy, where many countries chose to adapt themselves to the new fragmented world, where they can choose their losers and winners, regardless of historical political and security blocks. Several Israeli examples and their old and new trade partners come to mind.

Several key economies have continued to expand their commercial relationships with Israel in recent years, despite mixed policies toward the Middle East conflict. India, the largest nation in the world today, with one of the fastest-growing economies in the G20 group, has always maintained close ties with the Arab world, including Iran.

Gulf states are often used as a base for export to India, and Asia more generally. Yet, India strategically has increased its bilateral trade with Israel in recent years, especially in areas such as defense and agriculture, and during the current conflict avoided clear anti-Israeli statements and United Nations resolutions. India’s experience with its own home-grown terrorism and a new version of Indian nationalism have contributed to this pragmatic approach.

Similarly, despite Japan’s historical neutral approach to the Arab-Israeli conflict, Japan has been accelerating its bilateral investment and trade with Israel, including in sensitive areas such as technology and homeland security. Since the days of prime minister Shinzo Abe, Japan has improved its long-standing relationship with Israel. In fact, as many Western economies reduce their interdependence on Chinese foreign investment for geopolitical reasons, Japan is stepping in and replacing China as a large investor in many of these economies. Israel is a good example for that, and Japanese companies bid on tenders that used to be a traditional Chinese territory.

Also, Israel and its companies never truly eliminated trade with Russia completely, even during the peak of the Russia-Ukraine war. While many companies transferred their employees to other neighboring countries, Israel does not have a sanctions regime similar to the one adopted by the US government, or even the European Union.

This multi-polar approach can also help the Israeli leadership to better deal with the “day after” and the rebuilding efforts of the Gaza Strip once the war is over. There is no doubt at this point that any restructuring efforts will engage diverse governments from around the world and multilateral institutions. Keeping trade and investment relations with governments with mixed views toward the region will help in creating the alliances needed to raise the critical capital for this “Middle East Marshall Plan.”

Also, the UN and other multilateral institutions, such as the World Bank and the IMF, will be an important part of the recovery story. The many claims about anti-Israeli bias within the multilateral system are well known and documented, including during the current conflict.

The Israeli government has been very clear over the years that, while the political security agencies are being perceived as one-sided, there is a huge potential for Israel to play a growing role on issues related to economic development and innovation. Today it is much more common to see senior Israeli diplomats and other officials play a key role in the work of many of these agencies. Israeli expertise and professionalism find their way into the mainstream of work of many of these multilateral organizations.

More importantly, it would offer many Israeli public and private companies the opportunity to gain access to projects which otherwise would be considered off-limits due to their political nature. Many of these companies have already contributed to rebuilding crisis areas around the world, and they could collaborate with other institutions in the post-conflict era, if the new accepted leadership in Gaza would allow that on both sides of the border.

The current war, then, on the one hand shares a lot with many previous conflicts economically, and there are many reasons to see bright lights ahead. But on the other hand, as the world has been changing dramatically on so many fronts, it requires a more nuanced and courageous political and business leadership to deal with the challenges ahead. ■

Efraim Chalamish is a professor at New York University and a senior adviser at Kroll, a global financial and risk management firm.

‘The economy is strong and steadfast’

Prime Minister Benjamin Netanyahu made these remarks at a cabinet meeting on November 27 ahead of the approval of an updated budgetary framework for the 2023 fiscal year:

Upon the outbreak of the war, I directed that all of the taps be opened, and that everyone be looked after. This is what we have done since, and this is what we are doing now. Today, we are submitting a giant, approximately NIS 30 billion, budget for a month and a half for all of the war needs. I will detail: For the IDF; the police; the families of the hostages; the wounded; the fallen and those who were murdered; the families who were evacuated to hotels; small businesses; reservists; the Tekuma Authority; the rehabilitation of the home front; the emergency squads; health needs; social welfare; education; and more.

The first item for discussion by the government is the appointment of the governor of the Bank of Israel. We will extend the tenure of Governor Amir Yaron, who is doing excellent and important work. This is part of the stability of the Israeli economy, which has been proven to be very strong and steadfast.

We have challenges ahead, but since we have built a strong economy here, we’re able to do what we’re doing today – passing a NIS 30 billion budget for military and civilian and social needs; and, of course, we will prepare for an additional budget later. At the moment, this is a necessary step. – Government Press Office