War of the Tunnels: Economic Aspects of the Israeli Attack on Gaza

Irrational War?

As the massive bombardment of the Gaza Strip continues into its second week, onlookers may wonder about Israel’s short memory, i.e., how little Israeli leaders have learned from the 2006 war against the Hezbollah in Lebanon.

Bewildered witnesses speculate as to what reason there could be for the massive destruction and widespread death and suffering that Israel is causing in Gaza.  Surely it is not pure sadism on the part of the Israeli authorities.  But what purpose could the attack possibly achieve?

From a military point of view, the attack makes little sense, as even Israeli military commanders acknowledge it is unlikely to end the firing of rockets against Israel.1

From a political point of view, the chances that the attack will overthrow Hamas are slim.  Even if the Hamas leadership itself is eliminated through violence, the Palestinians in Gaza, as well as in the West Bank, are unlikely to re-adopt the Fatah party — instead, they will seek out a more radical leadership committed to fighting the Israeli occupation.2

Yet from an economic point of view, the situation is more complicated and interesting.

The Israeli media has been quietly spreading the lie, today widely believed by most of the Jewish Israeli public, that Israel has been sending humanitarian aid into the Gaza Strip.  Through multiple uses of headlines such as “Israel to allow more trucks to enter Gaza,” the media has helped conceal the fact that the trucks are paid for by the UN and international donors, that no aid actually comes from Israel to Gaza, and that Israel actually profits from this aid.

Israel Profits from the Siege on Gaza

Israel’s continued occupation of the Gaza Strip no longer follows the classic colonial framework.  Palestinian labor and natural resources are no longer exploited by Israeli companies, but this doesn’t mean that Israeli exploitation of the Palestinian population has ended.

Israel found a way to exploit the Palestinians by taking a toll from the humanitarian aid efforts to Gaza (also to the West Bank, but let’s focus on the Gaza Strip right now).  The Gaza Strip is the most aid-dependent area in the world.  Without the ability to export and to import raw materials, without the needed infrastructure for local industry, the Gaza Strip is unable to generate sufficient local income to sustain its population and must depend on aid.  The Israeli siege thus creates the conditions for large amounts of aid to be sent to Gaza.

This aid must pass through Israeli ports and airports, with customs,3 storage fees, and transport fees ending up in the coffers of Israeli companies.  The limitations set by Israel on the number of trucks allowed to enter Gaza and the prolonged checks the goods must go through increase the transportation and storage costs dramatically.

Much of the aid comes in the form of products — food, animal feed, petrol, cooking gas, medicine, etc. — procured from Israeli companies.  These companies have thus been able to find a captive market in Gaza, get paid up-front (because checks from banks in the Gaza Strip aren’t accepted in Israel), and increase their sales.

Most importantly, this aid is funded with foreign currency (primarily Euros), but the goods come from Israeli companies which must be paid in Israeli currency.  The result is that massive amounts of foreign currency are converted at the Central Bank of Israel into Israeli shekels in order to fund aid, and the Central Bank of Israel gets to keep the foreign currency.

In effect, the Israeli siege of Gaza has transformed the aid industry into one of Israel’s biggest exports — companies that would normally provide domestic services have become sources for foreign currency, which contributes to Israel’s overall economic strength and has already eliminated Israel’s trade deficit almost entirely.

The Tunnels and the War

“Gaza Tunnel Trader Vows to Carry On,” Al Jazeera, 01.01.09

The Hamas party in Gaza was able to put some dents into the Israeli mechanism of exploitation.  By breaking through the fence to Rafah in early 2008, and later by importing goods from Egypt via underground tunnels to supplement the diet of beleaguered Gazans under siege, Hamas has been able to smuggle goods into the Gaza Strip without paying customs to Israel.  The goods, coming from Egyptian merchants, have become an unofficial import channel into the Israeli-controlled customs envelope, a channel through which Israeli foreign currency escapes (because Egyptian merchants are paid by Gazans, with Israeli currency, which is then exchanged for foreign currency from the Central Bank of Israel).

In fact, the source of these shekels used by Palestinians in the Gaza Strip to import was mostly the international community.  This is because civil servants of the Palestinian Authority kept receiving their salaries from the bank account of the Palestinian Authority in Ramallah, a budget heavily funded by the international community.  Gaza has been undermining Israel’s aid-profiteering system by turning aid money into customs-free imports.

Because Hamas didn’t pay customs to Israel, the flight of shekels affected the Israeli economy more than the (small) volume of imports would have indicated.  The threat of this trend becoming permanent, and perhaps expanding into areas of the West Bank, has caused significant worry to senior officials at the Central Bank of Israel.

This could partially explain why economic elites in Israel have refrained from criticizing the Israeli attack on Gaza, despite the economic damage that it causes to the Israeli economy.

Eventually, the bombing and ground invasion of Gaza may restrict trade through the tunnels and reassert Israeli controls over economic borders, but it cannot negate the economic burden of the occupation on Israel and the untenable nature of Israel’s policies in the long term.


1  Nevertheless, the Israeli military leaders support the attack, because otherwise they will be thought of as unprofessional and cowardly.  Further, the military leadership stands to gain from massive military actions even if they are unsuccessful in achieving long-term goals, because the immediate victory helps increase the prestige of commanders and paves the way for them to commence political careers following their military ones.

2  Nevertheless, the attacks are supported by a majority of the Jewish Israeli public, which pledges loyalty to its leadership, believing that if the “experts” support the operation, then it must be somehow justified.

3  Israeli is officially obligated to transfer customs levied from goods intended for the Occupied Palestinian Territories to the Palestinian Authority, but rarely transfers the full amounts.

Shir Hever is an economist, who works for the Alternative Information Center (AIC).   A different version of this article appeared in the AIC Web site on 5 January 2009 under a Creative Commons 3.0 license.