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Middle East Economy Under Fire

One of the immediate casualties of the conflict between Israel and Hezbollah is the Lebanese economy. Israel’s military offensive has already caused billions of dollars of infrastructure damage in Lebanon, which was expecting robust economic growth and a record tourist season this year. The violence is also harming Israel’s economy, while rising oil prices are affecting the global economy.

Israel’s bombing raids, and sea and ground blockades are crippling Lebanon’s economy, say most economists. Economic growth, they note, was finally picking up after a decade of reconstruction following a devastating and prolonged civil war. Persian Gulf money was flooding in, housing construction was booming and a recovering tourist industry all contributed to economic growth, which was projected to be at more than five percent this year. But many analysts say that Israel’s military campaign has delivered a crushing blow to Lebanon’s economic recovery.

Political analyst Hilal Khashan at the American University of Beirut says the damage inflicted on Lebanon’s infrastructure - - its main highway, sea port and bridges, its power grid, its only international airport and other assets - - are estimated at $3 billion.

He says,“The entire industrial sector has been brought to a standstill. Scores of factories have been destroyed. Traffic has been brought to a halt throughout the country, and the country’s service and banking sectors have practically stopped. Farms have been burned and crops have been left unattended. So the country has economically come to a standstill.”

Tourism Dissapears

Before the violence began, some 1.6 million tourists were expected to bring in several billion dollars in badly needed foreign currency this year. But now, most economists agree that Lebanon’s hope of being a resort destination for the Middle East is rapidly fading.

Peter Grimsditch, a long-time Lebanon-watcher at the London-based Oxford Business Group, one of Europe’s leading economic and political analysis firms, points out that Lebanon two years ago had a million visitors for the first time since 1974.

“They have all gone now”, he adds. “Nobody is going to come back this year and I very much doubt if they’ll come back next year either. It’s not so much what is going to cost to repair things. It is the income, more than replacing the infrastructure, that is more damaging.”

Peter Grimsditch forecasts other long-term economic difficulties for Lebanon. He says, “We’ve seen all the pictures and heard reports of Italians, British, French and Americans leaving the country. In fact, a lot of these people are dual nationality Lebanese and on the whole have the more responsible managerial and executive jobs in various companies. This essentially shuts the companies down. What will also be cut drastically is foreign direct investment. I think you will see a lot of businesses close down. I think you will see a lot of bankruptcies.”

In the meantime, many observers add, broken roads, blockaded ports and the damaged main airport are preventing supplies from coming into a country, which is a net importer of food and depends on trade for 97 percent of its oil needs. Lebanon’s wrecked infrastructure is also hampering humanitarian relief aid to hundreds-of-thousands of displaced and homeless civilians.

The Toll on Israel

The conflict has taken its toll on Israel’s economy as well. Business in northern Israel exposed to Hezbollah rockets has grounded to a halt. Just as significant is the price tag of Israel’s military operation, estimated at more than $2 billion dollars.

Still say most observers, including Nariman Behravesh, Executive Vice President of the economic forecasting firm Global Insight, Israel’s economy is much stronger than Lebanon’s.

But he also cautions, “Israel cannot sustain economically this level of conflict for very long. Israel’s economy also has had its ups and downs over the past few years, but Israel is certainly better able to withstand this kind of conflict than many of its neighboring countries. Economic damage has so far been limited to Israel and Lebanon, but this could change if the violence escalates," says analyst Behravesh. He notes the conflict has already affected the global economy through rising oil prices.

The Tipping Point

“There is no question,” says Behravesh, “that the fighting has created a great deal of uncertainty in financial and commodities markets, especially oil markets. The single biggest affect on the global economy is that it has pushed oil prices over $75 a barrel. Assuming it [i.e., the conflict] goes on for a few months, but doesn’t spread to, let’s say, any conflict with Iran, then the impact on the U.S. and world economy will be quite limited.”

Saad Rahim, strategic risk analyst at PFC Energy - - a Washington-based consulting company to the oil and gas industry - - agrees.

“The prices reacted obviously not to the fundamentals because not a single drop of oil was touched. But there is a risk that this can widen into a much larger conflict,” says Rahim.

He adds, “There are certainly voices in both the U.S. and Israel making the case that we should take this over to Iran, once and for all. If that happens it could impact on oil supplies. You could get as high as $100 a barrel. And, in fact, if you get an attack on Iran and you see disruptions in supplies, you are going to see much more than a $100 dollars [a barrel for] oil; you may even see $120.”

Analyst Rahim maintains that as long as the conflict between Israel and Hezbollah continues the price of oil will remain volatile. And many economists agree that $100 for a barrel of oil could tip the U.S. and global economies into recession.

This story was first broadcast on the English news program,VOA News Now. For other Focus reports click here.