Paying for War

Written By Brian Hicks

Posted August 15, 2006

After days turned into weeks, we have now come to the close of a full month of high-intensity conflict between Israel and Lebanese militia Hizbullah. As the armies cautiously tiptoe back to previously held positions, residents and businesses in two countries must start the financial tally of reassembly.

In Lebanon, whose 1975-1990 civil war devastated the previously strong Mediterranean economy, the situation is unfortunately not new. The ruins of collapsed buildings and bomb-strewn highways will have to be cleared before a thought can be given to new construction.

Even in America’s New Orleans, Hurricane Katrina’s detritus is still visible throughout the area. Lebanon will require an even more intensive makeover, especially as measured in terms of the national economy.

Lebanon’s infrastructural damage alone has been estimated at $2.5 billion, and that figure came out at the end of July. Given the intensified and broadened scale of Israeli operations since that time, especially in the run-up to Monday’s cease-fire, I would add at least another billion dollars to the toll. That is a hefty bite out of a $24 billion current total economic size, a number that will dwindle at next count.

And the infrastructural damage does not include opportunity cost of business operation, the Beirut Stock Exchange’s cessation of trading through two weeks of battle (though it bravely maintained operation for much of the period), and the $1 billion of Lebanese foreign currency holdings that were spent to maintain the stability of the Lebanese pound.

Almost immediately following the initial casus belli, the Hizbullah kidnapping of Israel Defense Forces soldiers (whose fate is still unknown) from across the Lebanese border, Defense Minister Amir Peretz declared, "If the abducted soldiers are not returned, we will turn Lebanon’s clock back 20 years."

If this was the goal, it may well have been achieved, and Lebanon will hopefully not be plunged anew into the political and sectarian abyss in which it was found in 1986. That was the height of the civil war – a bleak period that no one in the region should want to revisit.

Stiff-Necked North

In Hebrew, the home-front command is referred to as pikud ha-oref. The word oref is also the word for the back of the neck, which stiffens under shock.

Israel’s northern communities, from Haifa in the southwest to the Golan Heights in the northeast, have been hunkered down since Hizbullah’s Katyusha rockets began to crash into the area by the hundreds per day.

In my article from July 11, From the Western Wall to Wall Street, I wrote about the exciting potential of Israeli life science technology and business-savvy scientists I had met at a June conference here in Baltimore.

That was one day before the Hizbullah kidnappings, when the walls came tumbling down.

Trendlines, the Israeli consultancy responsible for the Maryland gathering, is headquartered in the northern Israeli town of Misgav. I have spoken with my associates there off and on since the flare-up turned into a conflagration, and they are safe.

Safety is not business, however, and even the most flexible, internet-based job cannot entirely withstand the isolation and productivity loss of life in a bunker. Israel’s Industrial Manufacturing Association, many of whose constituents are based in range of the Katyushas, estimates that northern industries have lost around $1.3 billion, extrapolating a GDP decline of almost 2%.

Lebanese economists, meanwhile, forecast Lebanese GDP growth of 0% for the next year.

The Beirut Blackboard

It seems that, due both to internal animosity and in large part to regional chess, Lebanon is the Middle East’s blackboard. Iran and Syria clearly have doodled their plans for what Lebanon should look like, as those countries’ ruling Shi’a communities support their Lebanese brethren, who are themselves part of a tripartite government (comprising Shi’a Muslims, Sunni Muslims, and Maronite Christians).

Israel would like Lebanon to be prosperous, but does not want that prosperity to act as a veil for stockpiling and plotting by non-state actors (i.e. Hizbullah). The Lebanese government, meanwhile, has turned from a shining light of US-backed independence during last year’s purging of Syrian troops to a US-tossed model of national futility, blamed for its accommodation of Hizbullah as the Beirut bureaucrats carefully trod the tightrope away from all-out civil war.

The immediate effects of this war – whose very name is still yet to be written – are and will continue to be scarcity, hardship, and displacement. In the Lebanese case, more than 900,000 citizens fled their homes, while over 60,000 foreign nationals were evacuated from the country.

Millions of lives have been destroyed, and the fiscal price tag of war is only the coldest reckoning we have to contemplate the human catastrophe. But it may be the most productive way to think about the future. Black market peddlers and international aid organizations will provide a frayed lifeline for a while, but full recovery may be another two decades away.

The most troubling aspect of all is that no one thinks this is over. A shaky stoppage of shooting has left both sides claiming victory, ready with their chalk to step up to the tablet. Once the slate is set, it may be erased yet again soon after.

For the latest news and commentary on geopolitical events and how your money is affected, click here to sign up for your FREE Orbus Intel e-letter.

Angel Pub Investor Club Discord - Chat Now

Brian Hicks Premium