The Middle East Channel

Gaza's tragically peculiar economy

Last week Palestinians marked the 1,000th day of the "siege" of the Gaza Strip. The continuing economic embargo, with its attendant social and economic effects on the more than 1.5 million Gazans, makes for a depressing story. Equally depressing is the extent to which this situation has somehow become accepted as normal and acceptable by much of the international community.

The "1000th day" is in some ways misleading, for Gaza has long endured economic restrictions. The Israeli military occupation after 1967 (or, for that matter, Egyptian administration before it) was never especially development-friendly. With the establishment of the Palestinian Authority in 1994 there was hope for future economic growth.  Instead, however, some incidents of terrorism led to a sharp reduction in the number of Gazans permitted to work in Israel-from tens of thousands in the early 1990s, to essentially zero today. Increasing limits on Gaza's imports and exports followed, and intensified with the eruption of the second intifada in late 2000. With Hamas' victory in the January 2006 Palestinian Legislative Council elections, as well as the seizure of IDF soldier Gilad Shalit in June of that year, the restrictions tightened still further in an attempt to unseat the Islamist movement.  When Hamas seized direct control of Gaza in June 2007, the Israeli government officially designated the territory as an "enemy entity."

Today, what is or is not allowed into Gaza is never entirely clear and can change from month to month. Broomsticks and chamomile have recently been permitted; toys, music, books, and shampoo with conditioner have been prohibited; and the importation of pasta required the direct intervention of US Secretary of State Hillary Clinton. Almost all of the materials needed for reconstruction after Operation Cast Lead last year have been blocked, although some imports of glass have finally been permitted after months of extended negotiation. As a result of this, there is little productive enterprise within Gaza today. It is only recently that Israel has started to permit limited exports of cut flowers and strawberries, for example, after seven months of blockage. The number of employees in the industrial and construction sectors has fallen from over 53,000 in 2007 to fewer than 3,000 today. According to the most recent report from the World Bank and PalTrade, 70 percent of industrial establishments are closed, 20 percent are operating at 10 percent capacity, and only 10 percent are working at 20-50 percent capacity. Even watching the otherwise beautiful sight of a Gaza sunset as I did recently, one is reminded of the restrictions in place by staccato bursts of Israeli naval gunfire warning Palestinian fishermen to keep their boats inshore.

In the absence of trade and a foundation of productive enterprise, Gaza's economic survival depends instead on four other supports. The first of these is the wages paid by the Ramallah-based Palestinian Authority to Gazan civil servants-who, in most cases, are paid not to work (for Hamas, that is).  The PA also pays to run some essential services and for fuel for Gaza's power plant.

Second, there are the funds that Hamas is able to secure from outside donors (Iran and sympathizers in the Gulf), which are then smuggled into Gaza to finance its political and administrative activities. According to the budget announced by the Hamas government in January (which may or may not reflect its actual income and expenditure levels), all but $60 million of $540 million in planned expenditures for 2010 will be financed from such "foreign aid."

Third, there is the employment, services, and food program run by the United Nations Relief and Works Agency. These are not, as Martin Kramer recently and rather bizarrely suggested, "pro-natal subsidies" that somehow artificially increase Palestinian birth-rates, but very real life-support to Gazans who would otherwise face serious malnutrition as a result of the embargo. UNRWA has also played a major role in reconstruction, albeit having to resort to mud bricks for housing when it was unable to obtain Israeli permission to import appropriate building materials for 4,036 homes damaged or destroyed during Operation Cast Lead.

Finally, there is the tunnel trade. The smuggling tunnels from Rafah into Egypt are not, of course, something that contributes to the Gazan economic growth. They are, however, Gaza's essential lifeline to the outside world.

When I was in Gaza in January I had an opportunity to both speak with tunnel operators and view the tunnels themselves. One can't help but be struck by how ubiquitous the tunnel trade has become. Most of what one buys in Gaza seems to have come through a tunnel: shoes, clothing, chocolate bars, utensils, appliances. Even fiancés, livestock, automobiles, and a lion have been brought into Gaza this way. (The drugged but uncaged lion, it seems, woke up part way across. After puzzling how to recapture it, smugglers built two halves of a makeshift cage, which were then separately lowered into the tunnel from the Gaza and Egyptian ends, and very, very carefully pushed together.)

There are hundreds of active tunnels, stretching from a two hundred meters to a kilometre or more under the border. One smuggler, who used to ply his business in the days of the Israeli occupation when a single shipment of weapons could earn him $5,000, bemoaned the fact that there were so many tunnels these days that he barely earned $50 per load. Indeed, some commodities are now actually cheaper than when they were imported from Israel, with the lower cost of goods originating from Egypt offsetting the cost of smuggling them in. On the days when the PA pays salaries and Gazans go shopping, some tunnel operators find it more profitable to drive a taxi.

Despite the melodramatic way in which the tunnels sometimes reported in the media, commercial smuggling is far from secretive. Indeed, on the Gazan side of the border it isn't really smuggling at all, but rather a more-or-less open business that is partly regulated by the local authorities. Many of the Gaza tunnels are within plain sight of Egyptian border posts, sheltered under tarps or sheds and surrounded by piles of discarded sand. The electrical connections are courtesy of Rafah municipality, to which the smugglers pay a license fee. Shops in the neighbourhood sell compressors, construction materials, and other tools of the trade.

It has become so crowded underground that tunnels sometimes run into each other, resulting in subsurface fist-fights. On the other hand, the proliferation of nearby tunnels has apparently made underground rescues easier, with the sandy soil of the area always prone to cave-ins. Many of the tunnel workers are teens, and the working conditions are far from safe. Recently, the Israeli human rights group B'Tselem distributed video cameras to Gazan youth to record their lives-one of the most interesting videos was about life working in the tunnels.

The intense competition has brought other complications. Smugglers have been known to inform on each other when contraband shipments (like drugs and alcohol) are involved, or to pour noxious substances in the tunnels of rivals. Tunnel operators alleged to have pro-Fatah political leanings are particularly vulnerable to harassment and dirty tricks.

One interesting question is the extent to which the tunnels have reshaped Gaza's local political economy. Some argued that they have, shifting economic power south to the border area, created a new class of wealthier smugglers and merchants. Others, however, suggest that it has had less substantial effects. With an average tunnel costing up to $100,000 to dig, tunnel operators need outside investors-typically, from the same merchant families that long held economic power in Gaza. The same merchants might also control extended supply and distribution channels. The investor relationship is usually at arm's length, often by mobile phone and money transfers, such that the investor and operator do not directly meet. This set the stage for a number of fraudulent schemes that came to light last summer, with Gazans of modest means investing in tunnels that turned out not to exist. Tens and possibly hundreds of millions of dollars were stolen in this way, and some suggested senior members of Hamas might somehow be implicated. The Hamas government arranged partial compensation of the victims.

It was difficult to get an accurate read of all of the possible intersections between the tunnel economy and Hamas. While direct extortion by local Hamas elements appears to be very rare, it has become good business practice to invite a Hamas cadre into the operation as a silent partner, thus providing a degree of political protection. Hamas sometimes requires the commercial tunnel operators to carry through special shipments-not weapons or cadres, but usually cement or construction materials. Indeed, I was told that the one commodity that most commercial tunnel operators dare not import these days is weapons: Hamas has tried to assert a monopoly over these, and views any entrepreneurial weapons smuggling as possibly benefiting its Fatah enemies. Hamas operates its own tunnels for this purpose, bringing in guns, ammunition, personnel, and money. These are deeper, longer, much more covert, and better built and equipped.

The proliferation of tunnels has had its effects on the Egyptian side. Smugglers routinely bribe Egyptian officials, soldiers, and police to look the other way. Egyptians rent their homes and sheds for use by smugglers. Indeed, there has been a small economic boom on the Egyptian side of the immediate border as goods are brought in to meet Gazan demand.

For a time, Egypt tolerated some of this and went after the tunnels only half-heartedly, calculating that they alleviated some of the humanitarian need and hence reduced the political pressure on Egypt to open its own borders. Opening the border to goods is something that Cairo is very reluctant to do, fearing that if it did Israel would permanently close all of its crossing points into Gaza and essentially throw the problem into Egypt's lap. (They're not wrong in fearing this, either: during the Gaza disengagement in 2005, some Israeli officials were quite open to me about this being a policy option.)

This situation has changed since Operation Cast Lead, amid increasing antagonism between Hamas and Cairo. Egypt sees Hamas' activities as a threat not only because of the potential for Israeli-Hamas military confrontation or because of Hamas' links to Egypt's Muslim Brotherhood, but also because of the domestic security implications of arms, money, and militant-smuggling networks stretching across Egyptian territory. Egyptian diplomats claim that some weapons have already leaked into local militant hands.

As a result, Egypt has undertaken construction of an underground steel wall intended to block the tunnels. While media accounts of this are varied, it seems to involve not only the placing of obstacles extending deep below the surface, but also the possible water-logging of these areas. This is the biggest worry, according to tunnel operators: while they can easily deal with physical obstacles, wet earth can be deadly underground. Ironically, the deeper, better-built Hamas tunnels may be much less affected than the commercial tunnels would be. Moreover, it is not clear whether the Egyptian policy really is politically sustainable. A complete termination of the tunnel trade would be devastating to Gaza, and many Palestinians and Egyptians alike would blame the Mubarak government for Gaza's starkly worsened plight.

What of the political effects of all of this on Hamas-the reason, after all, for the post-2006 restrictions and the current siege? It is hard to see that it has done much damage at all. The movement seems to be fully in control of Gaza, there are no serious local challenges to its rule, and local governance goes on despite economic need. The siege allows Hamas to blame Israel for Gaza's woes, obfuscating its own responsibility.

Indeed, in some ways the greatest political damage from the policy has been collateral. The PA is blamed by many Palestinians for failing to end the siege.  Egypt is viewed as complicit. Finally, there is substantial anger across the Arab and Muslim world for Washington's apparent support for the continued damage inflicted on Gaza's economy and society.

And yet, despite all that, the siege continues -- into perhaps its next thousand days.

Rex Brynen is a professor of political science at McGill University.

PATRICK BAZ/AFP/Getty Images

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