Economic possibilities for Gaza

It doesn't hurt to dream of better days.

Fortunately, reports that Israel bombed a hospital in Gaza and killed 500 people turned out not to be true. But it is true that Israel is dropping many bombs on the territory, and that many innocents have already been killed, and many more will be killed in the days to come. Few people seem to care much about the 2 million people of Gaza — not Hamas, who tries to provoke brutal reprisals to win international support for their cause, not Israel, which talks of collective punishment and has blockaded Gaza for decades, and not Egypt or other Arab countries, who have refused to take in Gazan refugees. The Gazans are isolated and alone, stateless and forsaken by basically the entire planet.

At a time like this, some people might see it as dismissive or callous to talk about the long-term economic future of Gaza. Perhaps it takes a terminal case of Economist Brain to look at a land in the grip of endless war and say “You know what this place needs? Some GDP!”. But I think it’s an important exercise, because economic development provides a nation with a purpose other than the catharsis of violence. And having that long-term vision fixed in place helps to make decisions about leadership in the present, too, because it allows people to ask “Which leaders will get us closer to that bright, prosperous future?”.

Nor is it unrealistic to think that in half a century’s time, Gaza might be an economically flourishing place. Large swathes of Hanoi were flattened by American bombs in the 1960s and 70s, but fifty years later it looks like this:

"Hanoi skyline at night" by Ntml4507, CC BY-SA 4.0

In fact, many of today’s rich countries had periods in their history over the last century where they were laid waste by war and hobbled by repressive governments. They escaped those bad times, and perhaps Gaza can too.

Of course, that sort of development requires national self-determination, an end to major external conflicts, and long-term political stability. I’m not sure anyone knows how to get those things for Gaza right now. But I think it’s important to have a picture in mind of what the benefits might look like.

So here’s a quick sketch of a vision for the economic future of Gaza. It starts with a quantitative goal: raising per capita GDP to $10,000 in PPP terms. I then speculate on a few industries that Gaza could target, using some other countries as comparisons. And I talk a bit about how migration could play a significant role. I don’t mean to present this vision as an exclusive one — there are plenty of alternative approaches and goals, and this is far from a detailed road map in any case. But I hope this post will be enough to jump-start some thinking about better days.

A concrete goal: Raise Gazan per capita GDP (PPP) to $10,000

A lot of people, especially on the left of the political spectrum, criticize GDP’s usefulness as a measure of human welfare. And sure, there are plenty of important things GDP leaves out (leisure, inequality, political freedom, life expectancy, education, and so on). But GDP is strongly correlated with broader measures of well-being like the Human Development Index, and with median levels of consumption. If you increase GDP, your country is highly likely to be healthier, longer-lived, better-fed, better-educated, happier, and so on.

It’s difficult to find estimates of Gaza’s per capita GDP right now, because it’s usually combined with the West Bank in most data sets. The CIA World Factbook lists Gaza’s per capita GDP at $5600 in 2021, which is somewhere in the neighborhood of Myanmar or Cambodia. Extreme poverty is very low, but poverty rates are extremely high when defined at the World Bank’s threshold of $5.50 per day in 2011 international dollars, with current estimates typically around 65%. Poverty is high because of 1) restriction of electricity, fuel, food, and medicine by the Israeli blockade, and 2) unemployment rates of over 50%.

The first of these — lifting of the blockade — is essential for developing the economy of Gaza. It’s not clear what Israel thinks it can accomplish by blocking Gazans from importing food, energy, and other commodities, but it’s clear that if this doesn’t end, Gaza can’t grow. But while lifting the blockade will be necessary for growth, it won’t necessarily be sufficient. Without domestic industries, Gazans will be forced to rely on foreign aid for their sustenance; foreign aid is fickle, and it’s unlikely that aid can be doubled sustainably. And if most Gazans are unemployed, whatever money is coming in via foreign aid will be harder to distribute broadly among the populace.

Thus Gaza needs more industries; it needs to produce things, and that means GDP growth. The goal of raising GDP from $5600 to $10,000 isn’t actually that ambitious — it’s just a 78.6% increase, not even one full doubling. To accomplish that over ten years would require an annual per capita growth rate of about 6% — high, but not especially high as poor countries go. To do the job over 20 years would require only 3% annual per capita growth — not much higher than a developed country.

In purely economic terms, this is an eminently realistic, feasible goal, even though the political barriers are very high.

Easy wins: tourism, tax haven, and natural gas

So if political stability were established and the blockade lifted, what could Gaza do right away that would raise its GDP rapidly? In an earlier post, I suggested that tourism could provide a big boost. After all, Gaza is known for having some pretty nice beaches, even if they do tend to get pretty crowded:

Gaza also has plenty of history — mosques, churches, ancient tombs and other buildings, and so on. Hamas’ takeover largely put a halt to tourism in the mid-2000s, but all these things might become a big draw if they were allowed to.

Tourism alone can’t sustain an economy, but it can give it a big shot in the arm. A comparable country might be Tunisia, with its Mediterranean beaches and rich Muslim and Arab history. 14% of Tunisia’s GDP comes directly or indirectly from tourism, according to some estimates, or about $1850 per Tunisian at PPP. Another roughly comparable country might be Bahrain, a densely populated island in the Persian Gulf, where tourism receipts totaled $3.86 billion in U.S. dollars in 2019. That same amount in Gaza would add up to $1930 per Gazan in U.S. dollars, or even more once you allow for purchasing power parity.

In other words, even if reviving Gaza’s tourism industry only generated half as much income per capita as Tunisia or Bahrain, it could get Gaza more than 20% of the way to the goal of a $10,000 per capita GDP. And it could do so without the need for a huge investment boom, a massive increase in education, foreign direct investment, building manufacturing expertise, or any of the other laborious processes typically associated with industrial development. Another analogy might be Spain, whose tourism industry helped it recover from Franco’s regime and approach developed-country status after the country returned to democracy in 1975.

A second way Gaza could boost its economy quickly and easily would be to become a tax haven. We in the developed world tend to frown on tax havens because they cheat our governments of corporate tax revenue. But it’s hard to deny that the strategy yields results for the small countries that help our companies dodge taxes — a 2005 paper by Jim Hines found that “per capita real GDP in tax haven countries grew at an average annual rate of 3.3 percent between 1982 and 1999, which compares favorably to the world average of 1.4 percent.” Boosting growth by 2 percentage points would dramatically speed up Gaza’s climb to $10,000 per capita.

Tax havening is a popular economic strategy in the Middle East. Most of the Gulf states (UAE, Bahrain, Qatar, etc.) have zero or almost zero personal income tax, and Jordan and Lebanon have low rates. The Gulf states also tend to have very low corporate taxes. A stable and peaceful Gaza could copy this strategy and become a haven for businesses and rich individuals from around the Muslim world, or even from Europe.

A third easy win for Gaza, though a small one, is natural gas. Gaza has a large offshore natural gas field called Gaza Marine, which Chevron was developing until Israel shut down the project. The deposit is fairly modest in size — only about 28 cubic kilometers — but could still give a minor bump to Gazans’ income — especially if the proceeds were broadly distributed instead of poured into war efforts.

So Gaza wouldn’t have to wait until it built up a development state or human capital to get started boosting its income. It can use some tried-and-true get-middle-class-quick strategies used by other small countries in the Middle East.

Diaspora: the release valve

One big problem with making Gaza rich is that it has a lot of people in a tiny strip of land — the whole territory is about as dense as London, and pockets are as dense as downtown Hong Kong. Agriculture is really off the table for Gaza; even under the best of circumstances it’s going to have to end up importing much of its food. Compounding this problem is population growth; the CIA reckons Gaza’s fertility rate at 3.34, well above the replacement rate, and 41% of the territory’s population is under the age of 15.

In general, a rapidly growing population is not a bad thing for a developing country, because people produce things, and they create a large domestic market for investment. But the “quick start” industries I mentioned in the last section — tourism, natural resource extraction, etc. — don’t really take advantage of population size. Instead, these are basically just lumps of money that have to be distributed among the population to consume, and the larger the population, the thinner those resources get stretched.

Thus, it would be better for the economy of Gaza in the medium term if some people left — if the “capita” in per capita GDP went down a bit. Currently, lots of Arab countries are shutting their doors to Gazan refugees — ostensibly because they think it would encourage Israel to expel Palestinians permanently, but more likely because these countries think Palestinian refugees would destabilize their politics. But Canada, Australia, and other rich nations could take in some large number of Gazans without really breaking a sweat (assuming that domestic politics allowed it, of course). This would provide Gaza with a sort of release valve, to avoid the danger that population would swamp living standards before development really got going.

The most famous historical parallel here is probably Ireland, which has sent about twice as many people overseas since 1700 as currently reside in the country. (The political parallels between Gaza and Ireland are also notable here.) But the Palestinian diaspora itself is already quite large, with over 6 million worldwide. Increasing that number by a couple hundred thousand wouldn’t change much about the geopolitical situation, but it could bear big dividends for Gaza.

Besides meaning fewer mouths to feed in the short term, an increased Gazan diaspora could also benefit the people of Gaza in various other important ways. First, there’s remittances; Gazans could send money back to their relatives, boosting consumption and alleviating poverty. Globally, remittances are far larger than foreign aid, and for many countries they provide a startlingly large percent of people’s incomes. Remittances are already in the neighborhood of 20% of the GDP of Palestine (the West Bank and Gaza combined), about $4 billion in 2022; if more Gazans went to work overseas, more cash would come in.

But the most important benefit of an increased Gazan diaspora would be human capital. Diasporas tend to learn economically useful skills and forge important human networks overseas. Sometimes people return to their country of origin or their ancestral country, bearing investment capital and foreign expertise. But even if they don’t personally return, they can help direct international business toward that country. Fang and Wells (2022) survey the field of diaspora economics, and write:

[We find] that modern technological advancements in communication and transportation are emphasizing the importance of global connections, leading to diaspora populations gaining increased importance in areas such as international trade, foreign policy, and economic development. For many countries, remittances from their diaspora abroad are a key source of capital for development…There is evidence showing that members of diasporas are critical to the formation of international entrepreneurial and commercial networks, owing to their ability to help overcome linguistic or cultural barriers. Governments that are best able to effectively harness the economic potential of the diaspora are the biggest winners.

An increased Gazan diaspora would be especially useful in building up the skills and capital necessary to develop high-value export industries, especially in the software and finance sectors.

Longer-term goals: software and finance

Eventually, if Gaza is to get all the way to $10,000 per person and beyond it will probably need more advanced industries; the simple “quick fix” solutions I’ve mentioned so far are limited in how far they can take a country. Manufacturing will be difficult in Gaza, because of space constraints, because the Middle East really isn’t much of a global manufacturing cluster, and because industry is hard to develop for any country. A more promising route is to focus on high-value services — in particular, software and finance. These industries depend strongly on clustering effects, meaning Gaza’s population density actually makes it a prime candidate.

Information technology services are a major source of export dollars for a number of successful small countries, including Ireland, Israel, Hungary, and — surprisingly — Kuwait. Since software and other IT services can be shipped anywhere for free, it’s an easy way for countries that aren’t close to major manufacturing clusters to interface with rich nations and get some foreign exchange. Remember that Gaza will need a lot of foreign exchange in order to import food and energy.

Finance is another industry where Gaza could conceivably shine. Arab countries are a big market, with about $3.5 trillion in GDP. Currently, the Gulf Countries and Israel are the main financial hubs for the Middle East, but Gaza could ultimately challenge their dominance. It could be a gateway for investment in countries like Egypt, Syria, Lebanon, and Jordan, using its cultural affinity to cut Israel out of the loop.

Software and finance take a lot of skills, and Gaza will need a big increase in education to master these complex, high-value industries. But Gazans overseas can take advantage of already-existing education systems in rich countries, and learn practical business skills from working at foreign companies. These skills could then be transferred back to Gaza, along with investment capital, to create software and finance industries in the territory.

In any case, it’s a bit of a pipe dream to look at the devastation and dysfunction of today’s Gaza and imagine that one day the strip could be a wealthy hub of software and finance. But it’s exactly that sort of pipe dream that makes stability, peace, and good government worth fighting for in the present.

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