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The war in Gaza, which has paused under a ceasefire deal, continues to leave deep scars on the region. Although fighting has paused, the humanitarian crisis persists, with tens of thousands of civilian casualties, hundreds of thousands injured, and over a million displaced. Reconstruction remains a challenge and the economic effects of the war are still being felt, impacting industries throughout the Middle East.

Find out more about the ripple effects of the conflict by clicking through this gallery.

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The conflict between Israel and Palestinian militant groups in Gaza has had severe economic repercussions for Palestinian territories, Israel, and the wider region. The war has not only devastated life in Gaza, but has also had broader regional economic impacts, affecting trade, investment, and stability in neighboring countries.

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Located on the Eastern Mediterranean, Gaza has been a major site for trade between routes for over 5,000 years. It was under Ottoman rule for just over 400 years until it was taken over by the British Mandate in 1917. In 1948, the British withdrew, as the state of Israel was formed.

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At that time, approximately 80,000 Palestinians lived on this small strip of land. The formation of the State of Israel caused many Palestinians to flee. Over 150,000 refugees from surrounding cities and towns sought refuge in Gaza. This sudden, major increase in population gave birth to one of the most densely populated places on Earth.

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By the 1967 Arab-Israeli War, Gaza’s population hovered around 394,000, of which 60% consisted of refugees. At that time, a formal border was erected between Gaza and Egypt, while the Gazan and West Bank economies were generally integrated into the Israeli economy.

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Due to significant differentiations in wages, 45% of working Gazans were employed in Israel, albeit as low-wage workers.

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Following the emergence of the First Intifada, Israel began seeking low-wage laborers from abroad. Within a three-year period, 80,000 foreign workers were imported from Southeast Asia and Eastern Europe.

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Although there were checkpoints and other military infrastructure in place between Gazan cities and towns and Israel, in 1994 Israel began to install a border wall to establish a clearer separation between Palestinians in Gaza and Israel.

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By the early 2000s, following the Second Intifada, Gaza’s fishing industry took a massive hit. The Israeli navy capped the local economy’s main activity at a few nautical miles.

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Following Hamas’ election in 2006, Gaza was placed under complete blockade by Israel and Egypt, which continues until today. The siege not only barred Gazans from movement, but also from the ability to export, plus creating very limited conditions for what can enter.

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Building materials, such as concrete, are strictly forbidden. Throughout different periods dry goods, certain household items, and even paper were banned from entering Gaza.

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The West Bank, on the other hand, was not isolated in the same way. Although it also is subjected to rigid import and export conditions, the conditions in Gaza are much more severe. This differentiation also gave birth to two different rates of economic development between the two Palestinian territories.

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Adam Tooze, historian and director of the European Institute at Columbia University in New York, refers to Gaza’s process as "de-development," a concept coined by political economist Sara Roy, which describes a process that undermines the ability of an economy to grow. Gaza’s economy has barely grown since the First Intifada, and has experienced no growth since the 2006 blockade began.

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Before the war began, poverty and unemployment rates in Gaza were well above 50%, one of the highest in the world. Its per capita GDP, local investment, and foreign aid support were consistently declining, particularly after the US and the UN's World Food Programme drastically reduced their support for assistance programs beginning in 2017.

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Under the Paris economic agreements of 1994, Israel often withholds Palestinian tax revenue, placing further pressure on local investment possibilities.

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Compounded with the physical, economic, and social isolation that Gaza experiences under siege, the damages suffered under the current war make the possibility of returning to the bleak pre-war conditions impossible to imagine.

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According to the United Nations, an additional 1.74 million Palestinians were pushed into poverty since the beginning of the war. Given the prolonged nature of the conflict, these conditions have created a significant development crisis that will affect many generations to come.

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In Gaza, 96% of agricultural assets have been completely destroyed, causing a humanitarian disaster of mass famine, with the economy shrinking to a sixth of its pre-war size.

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The United Nations notes that the unprecedented levels of destruction sets progress in Gaza back by 44 years, with infrastructural damages equivalent to Palestine’s total GDP and, therefore, leading to being fully dependent on external assistance.

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In Israel, the cost of war rises. By August 2024, the economic cost of war hovered around US$67 billion (approximately 12% of Israel’s pre-war GDP), with the Bank of Israel warning of spiking costs, requiring Israel to seek additional assistance from its allies. The US awarded Israel $22.76 billion just in military operation support, the highest amount in the allies' history.

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Former chief economist at the Israeli Finance Ministry Yoel Naveh notes that immediate action is needed to stave off an impending recession, which may place the nation at further security risks.

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During the second quarter of 2024, Israel’s economy grew by less than 1%, nearly one-third less than forecasted. Its budget deficit was already at US$3.22 billion, with a deficit to GDP ratio of -8.3%, compared to its pre-war ratio of 60%. Israeli political economist Shir Hever argues that the economic crisis that Israel is facing is only set to worsen, without much prospect for recovery.

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The backlash of the internal push for the continuation and widening of military activities is evident in the sheer number of Israelis leaving the country in fear of their personal safety and in facing an economic crisis that is gravely affecting the standard of life.

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More than 46,000 businesses have experienced bankruptcy, while larger entities, primarily in the technology sector, are shying away from continued investments given the risk of operating in a country at war.

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Tourism in Israel, a major source of domestic revenue, has plummeted 75%, as travel advisories and safety concerns deterred visitors, and with many of its workers forced to serve in the military.

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Compensation for damages and the economic impact of disrupted livelihoods for Israelis living along border regions have added to the Israeli government’s financial strain.

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Mobilizing the Israel Defense Forces (IDF) during periods of conflict is a costly endeavor, requiring substantial financial investment in maintaining and upgrading defense systems. For example, one of Israel’s most used tools is the Iron Dome missile defense system, which intercepts incoming rockets. Each missile interception costs approximately US$50,000.

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Israel’s credit rating dropped several points within the investment grade zone, meaning high borrowing costs. These conditions make international investment risky.

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Facing additional pressure from international entities and human rights organizations to mitigate the humanitarian impact of its military actions, Israel’s foreign policy and efforts to maintain international support for its security needs have become further complicated.

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The challenges Israel faces as a result of the war in Gaza are multifaceted, extending beyond military costs to include economic disruptions, societal impacts, and diplomatic pressures. The ongoing need for extensive defense spending places significant strain on Israel's economy and government resources.

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While Israeli, Palestinian, and other regional economies have faced serious consequences due to the costs and consequences of war, investors in weapon stocks have enjoyed record gains over the last year. Military support aid packages have driven stock indexes up, outperforming projections.

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For Palestinians, the economic fallout from the war has been profound, furthering widespread poverty and extensive dependency on aid. Without a lasting resolution, these economic challenges are likely to worsen, causing unprecedented humanitarian crises.

Sources: (United Nations) (Watson Institute for International and Public Affairs) (Foreign Policy) (The New York Times) (The Cradle) (CNN)