Saturday, 17 February, 2018

How much will an attack on Iran cost?

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The cost of a month-long general war, which includes massive missile fire against all of Israel, could reach tens of billions of shekels.

 

Are Israel’s leaders taking into account the economic cost of military actions? Imagine the following scenario: the prime minister, sitting in his room, bowing under the weight of the responsibility of a fateful decision whether to attack Iran, weighing the pros and cons, and tells his advisers, “I understand that this is an expensive proposition. Will someone please tell me how much it will cost?”

To the best of my knowledge, this is a fantasy. Usually, calculations of the economic cost of wars - even preventative wars - are made after the fact. It is known that war is costly in blood and tears, but there is an avoidance of trying to estimate the economic cost of a war. It seems that the planning of an attack on Iran’s nuclear facilities is no different.

There are several reasons for this. There is an axiom that national and military interests, especially existential interests, cannot be measured in money. In other words, they are worth any price. There is also uncertainty about how a war will develop and how long it will last, factors that affect its cost.

In the case of an attack on Iran, these uncertainties are especially great. How would Iran respond? Would it respond directly or through proxies, such as Hizbullah and Hamas? Would it be a focused and painful response, or prolonged actions?

Despite the uncertainties, I will try to provide a conceptual structure of the expected costs.

First, it must be stated in all honesty, that the costs of an attack on Iran’s nuclear facilities should be presented together with the costs of the alternative. In other words, the cost of not attacking Iran and its success in developing an arsenal of nuclear weapons. The reality of a nuclear Iran would have far-reaching economic consequences for Israel.

I will break down the cost of attacking Iran and the resulting war into several layers.

The first layer is defense spending on equipment and munitions. The 2006 Second Lebanon War provides an indication of these costs. For this limited conflict, the defense establishment received NIS 8.2 billion to refill its bunkers and buy new equipment. In addition to this expense is the future growth in the defense budget, as happened in the case of the Brodet Report that followed the Second Lebanon War.

The second level is the repair of damage to the home front from missile strikes. This item cost Israel NIS 2.5 billion in the Second Lebanon War, in the form of property tax reimbursements, and an additional NIS 4.5 billion to reinforce the north. These figures can be considered as the starting point of the cost in a general war, given that the other side has greater quantity of means of destruction.

The third layer is loss of production during the fighting. Israel’s GDP per day is NIS 3 billion. Assuming that, during a war in which the home front is attacked by hundreds of missiles a day, schools are closed, and people don’t go to work, GDP per day will be halved. This means that a 30-day war will cost NIS 50 billion in lost GDP, which will slash tax revenues and send the budget soaring.

The fourth level is the long-term effects on the economy. An open economy can respond to crises and recover very fast. On the basis of economic indicators, such as exchange rates, GDP growth, and stock prices on the Tel Aviv Stock Exchange (TASE) before and after the Second Lebanon War, it is hard to see that there was a war here at all. This was also the secret of Israel’s ability to withstand the global economic crisis of 2008-09.

The fifth level, which is relevant in the case of Iran, is the impact of an attack on its nuclear facilities on the global economy, and therefore the repercussions on the Israeli economy as a small and open economy with substantial imports and exports. This is the place to discuss the effect of a surge in the price of oil and drop in global growth, given the current fragile state of the global economy, especially in Europe.

Tens of billions of shekels

In conclusion, when making a decision of such importance as an attack on Iran’s nuclear facilities, the economic aspects of an attack cannot be ignored, just as the economic aspects of not attacking and a nuclear Iran cannot be ignored. This is only one of many considerations, and while it is definitely not the most important factor, neither can it be ignored.

The length and intensity of a war has dramatic economic effects on its economic costs and the price that the economy is liable to pay in the long term. It is possible to estimate the boundaries of the costs based on different attack and response scenarios.

The cost of a month-long general war, which includes massive missile fire against all of Israel, could reach tens of billions of shekels. This figure does not even take into account the war’s effect on the price of oil and the global economy. A longer war, such as a war of attrition, could have a much higher cost and longer negative long-term effects on the economy.

The author is chairman of Lavi Capital Markets Ltd. and a former director general of the Ministry of Finance.

http://www.globes.co.il/serveen/globes/docview.asp?did=1000737959

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