Israel Must Consider the Economic Consequences of Occupying Gaza
Photo by Jamal Awad/Flash90
As the State of Israel approaches the two-year anniversary of the October 7, 2023 vicious attack by the Hamas, it is facing a monumental decision concerning the endgame for Gaza. Although the government has yet to release its plan for the “day after,” the IDF has begun the process of conquering Gaza City, and government leaders appear to be planning for the full conquest of the Gaza Strip. Without weighing on the strategic military calculus, our purpose here is to highlight some of the economic costs of occupying Gaza, which should be taken into consideration before making such a fateful decision.
The State of Israel today faces existential challenges on a scale we have never known. Nearly every aspect of life is under threat, as Israel’s international isolation deepens and the internal rift tearing society apart grows wider. Against this backdrop, the conquest of the Gaza Strip, home to more than 2 million people, would not be “just” another stage in a long and bloody conflict. It could mark a dangerous turning point with far-reaching consequences—for Israel’s citizens, for social cohesion, and for the Jewish people in the Diaspora. This is in addition to the grave human cost of endangering the lives of civilians, soldiers and the hostages.
A proper assessment of the consequences of occupying Gaza requires a comprehensive analysis of the interconnections between security, political, social, and economic dimensions. Yet despite the critical importance of the economic implications, for this course of action and for alternative strategic directions, decision makers have largely ignored them. No demand has been made for a rigorous professional economic analysis, and no meaningful debate has been held in public. This article focuses on the economic sphere—our field of expertise—in the hope of stimulating discussion and transparency with the Israeli public, which will ultimately bear the burden through higher taxes and through further deterioration in government services.
Under the Geneva Convention of 1949, an occupying power is responsible for restoring order and ensuring the humanitarian needs of the population under its control. For Israel, direct control of the Gaza Strip would mean shouldering at least part of the costs of rehabilitation and the provision of basic services to its population.
The World Bank, the UN, and the EU estimated in February 2024 that rebuilding Gaza’s housing, infrastructure, and economy would cost some USD 53 billion (about 180 billion shekels). Since then, the scale of destruction has only grown, pushing the true cost even higher. Given international opposition to Israeli control of Gaza, much of this burden could fall directly on Israeli taxpayers—an unprecedented burden on an economy already struggling with the costs of two years of war since October 7, 2023.
Beyond the one-time reconstruction bill, Israel would also face ongoing costs of providing civilian services across the board: food and fuel supplies, healthcare and epidemic control, electricity, housing, sanitation and waste removal etc. The minimal annual cost of such services is estimated at about 10 billion shekels. A prolonged stay in Gaza would also require establishing a military and civilian administration, which the defense establishment has previously estimated at more than 20 billion shekels annually.
On top of this come the costs of large-scale military-reserve mobilization and the intensified use of weaponry inherent in an occupation—massive one-time expenses combined with high recurring expenditures, added to an already swollen defense budget.
To these direct financial costs, we need to add the broader economic effects of the Gaza campaign. The high-tech sector, Israel’s growth engine, would be hit especially hard—both because of the wide-scale mobilization of its relatively young and well-educated workforce, and because the potential negative effects on the availability of financing. The economy as a whole will suffer from the international repercussions that could inflict significant damage arising from cancellation of trade agreements, as the EU has already discussed; restrictions on exports and imports; and even possible sanctions deterring foreign investors. In the international financial markets these developments are likely to raise the risk premium that is assigned to the Israeli economy, thereby bringing about further downgrades of its credit rating and rising interest rates.
Equally damaging could be the mounting cost of Israel’s international economic and political isolation. Until early 2023, Israel was an attractive destination for investors, tourists, scientists, and for international collaborations in academia, culture, and sports. We were a model of innovation and technology, and as a result the international credit agencies have consistently upgraded our ratings. But the judicial overhaul that began in January 2023, followed and aggravated by the prolonged war that broke out in October 2023, and now the plans to occupy Gaza threaten to reverse the positive trajectory.
The consequences are already visible. A few weeks ago, the Norwegian sovereign wealth fund—the largest in the world—announced its decision to divest from some Israeli companies and was reviewing its holdings in others. Many investment funds might follow. Calls for academic and scientific boycotts are also gaining ground in Europe and the United States. Such measures would be devastating, given that international research cooperation and funding are vital for Israel’s scientific and technological progress and the foundation of its high-tech sector.
In practice, a “silent boycott” is already underway. Israeli researchers struggle to secure international collaborations, attract visiting scholars and obtain research grants. Student exchange programs have been cut back, and cultural and sports boycotts are spreading as well. In addition, there is already some evidence of cases in which some Israeli companies are being snubbed and rebuffed by clients and suppliers abroad. This deepens Israel’s isolation and feeds the deplorable trend of rising antisemitism worldwide. These facts are alarming, yet to date the government has offered little serious response.
This scenario of Israel’s economy being battered on multiple fronts would have unprecedented consequences for citizens. Debt and interest payments would rise sharply, economic growth would falter, the cost of living would climb, and living standards would decline. The tax burden would increase, falling disproportionately on the segment of the Israeli taxpayers which is already carrying most of the load; many of these have attractive alternatives abroad raising the risk of a brain drain and of a reduction in the flow of immigration from the Diaspora.
In view of the budget constraints, public spending on civilian services—already among the lowest (as a percentage of GDP) among OECD countries—will need to shrink further, with direct negative consequences for education, healthcare, and infrastructure. Israelis would face shorter school hours, longer waits for medical care, and deteriorating public services across the board.
Given the magnitude of the costs we have outlined here, it is difficult to understand why no comprehensive strategic economic discussion has taken place, including a rigorous economic analysis and transparent presentation of the data to the public. If such discussions occur, they are being conducted behind closed doors, without input from professionals and without alerting the citizens of their implications.
Israel has yet to pay the full price of the current war. A decision to occupy Gaza would impose an additional economic burden of unprecedented proportions, that will shape Israel’s future for decades. Such a decision must be made with full transparency, a thorough cost-benefit assessment, and careful weighing of all economic and political risks.
Responsible policy requires that the economic considerations be an integral part of the security and political decision-making. Ignoring them could gravely undermine Israel’s economic resilience and the well-being of its citizens. The stakes could not be higher.
Prof. Karnit Flug served as governor of the Bank of Israel from 2013-2018 and is the Israel Democracy Institute's William Davidson Senior Fellow for Economic Policy and the president of the Israel Economic Association
Prof. Jacob Frenkel served as governor of the Bank of Israel from 1991-2000, is a laureate of the Israel Prize in Economics, and is chairman of the Frenkel-Zuckerman Institute for Global Economics at Tel Aviv University. He is the former Chairman of JP Morgan International
This article was published in the Jerusalem Post