By: Parisa Chatrath; Edited by: Shagun Khetan
The Israel-Hamas conflict re-emerged in the dark of 7th October 2023 and has sustained its presence to date, prompting the question of how this war acts as a confounding variable in the presence of a macroeconomic audience. Is it right to speculate this is a proxy war perpetuated by Iran, treating Israel and Palestine’s economy as collateral damage?
This article will comment on the nature of war economics and question the commonly found belief that ‘wars are a costly business’. Additionally, recounting the repercussions of the escalation of war to the Middle East on the global economy with a focus on its potential ramifications for the Indian economy.
War & Wealth:
“Wars are a costly business”...but for whom?
Wars are comprised of cost-bearers and beneficiaries; and more often than not, nations directly participating in war assume the position of cost-bearers. While the narrative of the cost-bearers is more apparent and widely discussed in media, the beneficiaries hide collected profits in ambiguous political dialogue. The beneficiaries are more commonly called war profiteers. War profiteering is an activity of extracting unreasonable gains from funding military operations by selling defense commodities to nations at war.
The United States is well-known for large sums of its defense budget to securing military contracts to obtain weaponry and services from defense contractors, intended to contribute to US stockpiles and aid allies.
The US has cultivated a habit of finding opportunity in adversity. As uprisings of international conflicts are detected, the US government showcases its solidarity with its allies by funding war, earning billions of dollars from assuming the role of a major arms supplier. Such protocol was detected not too long ago, amidst the Ukraine-Russia conflict as the US provided Ukraine with $44.2 billion as military assistance to retaliate against Russian attacks. A similar courtesy was extended to Israel in the recent past as the US supplied 26 billion dollars out of which $18 billion are translated to arms for retaliation against Hamas.
The Biden administration is quietly fulfilling Israel’s requests for ammunition and has made more than 100 military sales just below the dollar amount for a formal notification to Congress regarding such actions. Biden is also attempting to make exceptions to Section 12001 of the Department of Defense Appropriations Act, lifting restrictions on weapons stockpiles for Israel.
Iran Introduces Proxy Wars:
It is fair to say that, war is a multiple-agent game, where the Nash equilibrium is not the loss of one nation and the gain of another, it is the benefit of the majority of nations complicit to war. Detecting the US as the sole beneficiary of this conflict is misleading as Hamas’s long-term supporter, Iran has been collecting gains of its own in the shadows of violence.
US and Iran’s involvement in the Israel-Hamas conflict highlights hopes for gain and a deeply rooted power struggle between the nations. The beginning of the conflict is marked by speculations of Iran’s resistance to the imminent normalization deal between Saudi Arabia and Israel, as they fear isolation by other Islamic countries in resistance towards Israel.
Searching for Iran’s footprints in the conflict could be considered a red herring, yet its celebration of Hamas's brutality on Israel cannot be denied. Hamas has been observed to rely on Iranian funding for material support and the construction of a missile arsenal coupled with its coordination with the Iranian Revolutionary Guard Corps. Statements from Iranian officials do not indicate direct involvement with Hamas’s military operations yet fully envision the 'eradication of Israel by the hands of Palestinian people'.
While there is direct evidence of the US’s motives of war-profiteering, Iran plays an intricate game of proxy wars with Israel presenting Hamas as its ultimate martyr, paying the cost of this play in loss of physical and human capital in Gaza and its economy in shambles. Gaza’s conflagration is shown in its shrinking economy as observed in Q4 of 2023.
Iran has collected economic gains through actively participating in a globally undersupplied oil market, leveraging the state of the market since the Ukraine-Russia conflict. Largely driven by Chinese demand, Iranian oil exports achieved a 5-year high as oil output is up by 20%, accounting for 3.3% of global supply. In the short term, in the midst of geopolitical tensions, Iran stands to profit from surge pricing in oil markets as their energy outputs shoot up. Nations expect Western sanctions to be placed on Iran’s oil supply yet in the absence of information directing its ties to the Israel-Hamas conflict, no such sanctions have been established.
At present, one can conclude that the US earns itself economic gains by funding Israel’s military operations while Iran solidifies a position of economic and political gains by dampening the Saudi Arabia-Israel normalization deal as well as derailing Israel’s international positioning as it assumes the role of inflicting inhumane brutalities upon its opponent. These repercussions can isolate Israel from normalizing ties with Saudi Arabia and other countries in the Middle East.
The fact that the US and Iran are complicit in the Israel-Hamas conflict cannot be denied as they present a prime example of war profiteering.
Can War make countries rich?
The widely perpetuated belief of the cost-bearer’s plight in wartime is discussed time and again, yet can the cost-bearers ever become the beneficiaries of war?
Wars lead to the destruction of physical and human capital yet their impact on GDP per capita remains unclear. From one lens of analysis, it is right to claim that GDP per capita increases as unemployment reduces due to the shifting concentration of human capital from non-market activities to wartime production. GDP does not account for the destruction of physical and human capital as a reduction to the metric yet acknowledges the development of such capital.
Thus, when rebuilding and development initiatives of physical capital are taken up post-war, this shows an addition to the national income accounting. Therefore, numerically, one may detect an increase in national income while there is no true increase in economic output. This makes GDP calculations during wars a classic example of the broken window fallacy in accounting.
Even though empirical evidence on the impact of war on GDP has been inconsistent, it is imperative to recognize the reductions in GDP due to lowering labor and total factor productivity and decreased gains from trade due to geopolitical tensions.
Impact on the Global & Indian Economy:
The impact of the Israel-Hamas conflict becomes apparent when threats of war spread to the Middle East especially Iran and Saudi Arabia, as they are the largest oil and energy suppliers globally. As oil prices surge, further disruptions in supply push up crude oil prices indefinitely creating a chain reaction of negative economic repercussions for India.
Expected higher crude oil prices due to deficit supply hurt currency stability as imports become more expensive, leading to the depreciating Rupee and coupled inflation. Higher spending on oil imports brings forward a troubled fiscal deficit financed by expectations of increased excise duty and taxation.
As policymakers and economists scramble to curb inflationary pressures, they need to strike a balance between deflationary measures and the creation of recession stimulus. Deflationary measures taken up will sustain the presence of the current ‘higher for longer’ interest rate scenario in the Indian and global economy as banks elevate interest rates to lower money supply.
Surprisingly, the war has left India's trade with Israel unaffected,yet looming expectations of elevated shipping costs persist. Israel reportedly imports about $5.5-6 billion in refined hydrocarbons from India and sustained imports as India provided $8.4 billion worth of exports in FY23.
Conclusion:
A detected struggle for economic and political gains leaves Iran scrambling to hide its motives for participation in the Israel-Hamas conflict, with the US confirming its position as a war profiteer of the existing violence in the Middle East. Humanitarian beliefs and ethics are forgotten in the tracks of war, as Israel and Hamas avenge themselves for the violence they perpetuate, both losing the battle in the field of economics, with shrinking economies, backsetting development by numerous years, and plummeting employment rates.
The triggers of war are experienced across the global village with oil price surges, inflationary pressures, and cries for a ceasefire in Gaza.
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