Saturday, September 02, 2006

The Economics of War In Lebanon

War Is The Health of the State.

The conflict in the Middle East is no far-off war. For businesses around the globe, the warring parties are trading nations, sources of labour, supply, natural resources and food. Not for nothing were thousands of foreign workers doing business in Lebanon. Not for nothing are major western nations investing in the region. Lebanon: history and global impact

And in this case the State of Israel could afford to attack Lebanon. It also had too attack its major Port competitor, whose production and economy was begining to boom, threatening competition with Israels export market. Hezbollah was the pretext for a bit of
good old fashioned capitalist punishment.

Israel economy should weather Lebanon war, for now
"War is unpleasant, but if Israel could have chosen the economy's best point for being attacked, this is the best timing because it is facing this challenge from very, very solid ground," said Ella Fried, head of research and development at financial information publisher Dun & Bradstreet Israel.Israel's war with Hezbollah guerrillas in Lebanon should not derail the Jewish state's robust economy as long as fighting ends soon.The $130 billion economy has ridden a wave of positive sentiment since 2004 and is headed for a second straight year of growth above 5 percent on strong exports, a revival of consumer spending and heavy foreign investment.Foreign investors have not been deterred. Financial markets have been fairly stable with stock prices and the shekel only down slightly since last Wednesday. Those that are selling are Israelis, not foreigners. The Finance Ministry said even if it needed to boost defence spending, it would do so within the budget framework since Israel is running a surplus so far this year.The credit rating agencies agree Israel is in a good position to overcome a short-term conflict with Hezbollah.

In a joint statement issued by D&B Israel and the Purchasing and Logistics Managers Association it was noted that the fall in the index was attributed to the war in Lebanon, which slowed down domestic demand for Israeli products, and caused a sharp drop in employment and output. The statement also noted that the Procurement Managers Index will drop further in August 2006, and will indicate continued economic slow down. However, according to D&B Israel, the expected continued growth in export demand should bring about a reasonable optimism about Israeli manufacturing recovery later this year.

Merrill Lynch: Shekel reflects economy's strength
In a report on prospects for the shekel, US investment house Merrill Lynch gives a generally positive assessment of the Israeli economy in the wake of the fighting in Lebanon. However, the report does point to certain worries, which it says are liable to cap any upside in the shekel. The report recommends long positions in Israeli inflation-linked Galil bonds, but also recommends investors to hedge foreign currency exposure.

"We believe that the shekel’s recent resilience in the face of the Israeli war against Hezbollah in Lebanon points to the country’s underlying economic strengths," Merrill Lynch analyst Mehmet Simsek writes. "The slowdown in domestic demand is likely temporary, inflation looks contained, external balance is healthy, and fiscal deficit is likely to remain below 3.0% of GDP."

Nevertheless, Simsek sees three clouds on the horizon. "First, investors are concerned about the impact of the war on political stability. Second, there is uncertainty as to whether the government will be able to maintain its pre-war fiscal stance. Third, strong domestic and external demand has underpinned solid economic performance. A slowdown in US activity may reduce external demand."

Israel is reconstructing despite the rocket attacks, which ended up as weak attacks, creating small scale fires more than any major damage to infrastructe. Unlike the economic effects of the Israeli airwar on Lebanon. Which was not collatoral damage but a deliberate and successful attack on Lebanese capitalism. An attack on a competitor nation.

Lebanon: Deliberate destruction or "collateral damage"?
The widespread destruction of apartments, houses, electricity and water services, roads, bridges, factories and ports, in addition to several statements by Israeli officials, suggests a policy of punishing both the Lebanese government and the civilian population in an effort to get them to turn against Hizbullah. Israeli attacks did not diminish, nor did their pattern appear to change, even when it became clear that the victims of the bombardment were predominantly civilians, which was the case from the first days of the conflict.

Blogger Aqoul noted that durining the hieght of the war the Lebanese domestic economy was in a desperate straight as dollars fled the economy. What the heck did you think was happening with the mass exodus of refugees. They may have left goods, relatives, and pets behind but they emptied their bank accounts.

Aqoul: The Economic Side of the Lebanon War

Building off of the desperate spin by Lebanon's Central Bank Governor, Riad Salameh (who seems to be doing a yoeman job in the face of disastrous circumstances, the article notes an emerging (as of one week ago) dollar shortage and attempts to keep the psychology in play by noting US protection:

"The dollars are going to be brought in by sea with international agreement, under US protection," said Mr Salameh.

The governor played down reports of pressure on the Lebanese pound, saying the central bank, which has about $13bn (£7bn, €10bn) in foreign exchange reserves, was committed to the currency's stability and would maintain the confidenceof the markets. Lebanese nationals tend to dump the Lebanese pound and shift into dollars during political crises.

It should be noted that Lebanon's banking system is already heavily dollarised (it is not common in region to be able to withdraw foreign currency from ATMs, as one can in Leb Land), and doubtless part of the shortage was (and is) because of the Israeli blockade, as well as panic dumping of Lebanse livres.

More interesting, however, are the seat of the pants figures cited here:

The central bank does not disclose the amount of money that it has used to prop up the Lebanese Pound. The English language Daily Star newspaper quoted a trader as saying $500m on the first day of the fighting and thereafter gradually less. Foreign reserves may have been depleted by$1bn-$2bn.

The time frame for the USD 1 billion is not clear, but let's say first week cost CB Lebanon USD 1 billion, second week almost that. Assume downward pressure will resume with the collapse of ceasefire talk and the open hostility between the Lebanese government - well the whole world really - and the US over its increasingly irrational position. One billion a week is obviously not sustainable, unless of course the Gulf comes to the rescue - which is very, very possible but obviously has its own costs.

Sad note to add:

The outbreak of the fighting found Lebanon in a relatively strong economic and monetary position, with a "historically high level of foreign reserves and foreign holdings", said the governor. The balance of payments surplus is estimated atabout $1.8bn.

Rather obviously the past month has not helped that.

At the end of the war and with the current dismal ceasefire, which allows Israel to continue to blockade Lebanon, the Lebanese economy has gone down the toilet.

Lebanon: Reconstruction and Rivalry
August 30, 2006 22 24 GMT
Lebanese Finance Minister Jihad Azour warned Aug. 30 that the country could sink into a recession in the wake of $15 billion worth of destruction wrought by Israeli bombing during the 34-day conflict with Hezbollah and the continuing Israeli blockade. As Lebanon is rebuilt, an array of regional rivalries will emerge as Saudi Arabia, Qatar and Iran shop for influence in the country.Even before the war, Lebanon was struggling to pull itself out of a massive debt that stood at $38.6 billion -- 183 percent of the country's gross domestic product. Current Lebanese estimates of the economic impact of the war are as high as $9.5 billion. U.N. estimates put the number even higher, around $15 billion. In an economy where value-added taxes from trade (Beirut's port earned the government $5 million a day before the war) and tourism (mainly from Gulf Arab nations) made up 37 percent of annual Lebanese government income, relieving the debt will not be easy. The Israeli blockade -- intended to cut off arms and supplies to Hezbollah -- and tourists' travel fears have all but eliminated these sources of revenue. This is where the regional jockeying comes in.

And the attack on the Lebanese power station not only has an impact on the environment of the Medditeranian , it also directly impacts Lebanese fishing and tourism industries.

An Environmental crisis at the door: Impact of the war on Lebanon

Impacts on Tourism
The tourism industry has badly suffered. Beach-based tourism was a major economic
activity in Lebanon and constituted a major part of the Lebanon’s gross domestic product
(GDP). Many public and private beaches have been heavily affected including fishermen
and leisure boats/ships and yachts. It is well known that he Lebanese harbors host
leisure and tourists’ yachts and boats from all over the Arab and Mediterranean
countries. The time needed to clean up the sand, the rocks, the shallow reef and the marine
ecosystem as a whole, is long to impact the tourism industry chronically.

Impacts on Biodiversity & the Fishing Industry
The fishing industry is suffering from both the siege on Lebanon by the Israeli army and
the oil spills that killed the living creatures and fishes in the nearby breeding areas.
In addition the Lebanese coastline is made up of mainly rocky shores. The initial
estimates show that the mortality of limpets and other herbivores is high. Further
detailed studies need to be carried out to assess the true scale of the damage.

While Israeli tourist resorts, while suffering a decline in tourists due to the war, are not devasted and destroyed. In fact even after the Hezbollah rocket attacks manufacturing in the North of Israel was minimally affected.

Fog of war dissipates: Finance Ministry puts total damages at NIS
About one week ago, the socio-economic cabinet announced an NIS 100 million grant to local government in the North. This followed NIS 50 million which had been transferred in an emergency measure two weeks earlier. The Interior Ministry press release announcing the funding said division would be determined by a professional committee headed by Belinkov. State officials believe a total of NIS 2 billion in aid will be transferred to local governments and emergency services in the North.

The treasury is currently focusing on limiting the damage to the 2006 state budget. According to treasury budgets director Kobi Haber, the day after the war is over, the treasury will begin to deal with the 2007 budget. Haber estimates that instead of an economy that had been expected to grow in 2006, according to all the usual indicators, by 5.2-5.5 percent of GDP, 2006 will end with less than 4 percent economic growth.

The allocation table for the NIS 100 million about to be distributed to northern towns, has created great confusion and resentment. It appears that the key criterion was the number of rocket strikes in a given jurisdiction. As a result, large regional councils that stretch across thousands of dunams, will get larger grants, even if their population is smaller and they need fewer services than more urban neighbors. Galilee authority Shagor is slated to receive NIS 1 million in aid, while neighboring city Nazareth will receive only NIS 765,000. In addition, the 240,000-dunam Mateh Asher, with a population of just 18,000 people, is entitled to NIS 3.3 million, just a little less than the four Haifa suburbs the Krayot will get to serve their collective population of 163,000.

In contrast, Kiryat Shmona mayor Haim Birbibai says, "we got 25 percent of the rockets from the Hezbollah, but only 3.8 percent of the compensation from the state."

After the end of the last Israeli occupation Hezbollah rebuilt Southern Lebanon while the crony capitalism of Rafik Hariri rebuilt Beirut and northern Lebanon. With his assasination it remains to be seen if his family and corporation can do the Lebanese miracle twice.
Impact of the War on Terror on Certain
Aspects of US Policy in the Middle East

The early and mid-1990's marked a period of
economic promise. Several trends and events combined to offer hope that a
much-needed regional economic takeoff was finally under way. They included
the end of the Lebanese civil war; the onset of the Oslo peace process with its
promise of eventual peace and Arab-Israeli joint venturing in trade and
investment; relatively stable oil prices; significant progress on the part of
important Arab economies such as Egypt's in debt-restructuring and budgetary
rationalization; and the emergence of several viable local stock markets that
encouraged private sector capital formation and inflows of foreign investment on
the back of a promised wave of privatization of public enterprises

Certainly the attempt by the central government to match and beat Hezbollahs generosity in rebuilding homes, Hezbollah have give each Shia $12, 000 US Dollars ( ironic that, US Dollars, petro-dollars from Iran) , with a promise of $40,000 for Lebanese home and business owners , will put the economy in the tank.

Along with the need for massive expenditures in rebuilding roads, schools, the power station, hospitals, all the infrastructure of civil society, the politics of outmatching Hezbollah in generosity are poorly thought out. But given the chance to bribe the Lebanese with their own money, the state acts in its short term political interests rather than the long term economic interests of capitalism in Lebanon.

The irony here is that Lebanons benefactors are Arab nations like Saudi Arabia, who if they were any other capitalist state could sue Israel for its destruction of civilian infrastructure. They can't because they don't recongize the State of Israel. Opps.

Israel will benefit from increased US investment after this war. Already the American Jewish lobby is gathering support funds and business in Israel has not been as badly damaged. The use of anti-personal cluster bombs helped the US eliminate some of its excess military inventory which it could not legally use. Putting dollars in the hands of the US who badly need it due to their extended wars in Iraq and Afghanistan.

The use of the cluster bombs also was a deliberate attempt by Israel create a situation of very real economic insecurity, to delay the reconstruction of Southern Lebanon. One cannot rebuild as quickly if one is clearing away cluster bombs.

The continued illegal blockade of Lebanons ports also allows Haifa and other Israeli ports to open in advance of their Lebanese competitors. They are less concerned with humanitarian aid or even weapons getting in then they are about exports getting out.

It is Israeli state policy to attack the economic base of its competitors; whether Lebanon or Palestine.

ei: Economic Update: Westbank and Gaza

It follows that suspending revenue transfers, constraining Palestinian movement and access and reducing aid flows would cause severe economic damage if the available tools were employed with sufficient vigor. Second, the impact of the suspension of clearance revenue transfers and restrictions on movement and access would be much greater than the impact of reduced aid flows.

The relative impact of GOI and donor actions is borne out by the economics of the second intifada--a period in which the various restrictions placed on the movement of people, labor and goods, and on the transfer of revenues collected by GOI on the PA's behalf, led to a contraction in real personal incomes of almost 40 percent between the third quarter of 2000 (Q3/2000) and Q3/2002--despite a doubling of annual donor disbursements in the same period.

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