More than 40,000 people have died in the fighting in the Middle East triggered by the Hamas-organized attack on Israel one year ago on Oct. 7. That conflict has since spread beyond Israel and Gaza to include Lebanon and now Iran. Yet the economic effects have been highly concentrated, largely limited to the immediate participants in the war. Even oil prices have remained largely stable, unlike during other recent wars in the Middle East.

Why have the international economic effects of the conflict been relatively limited? Could economic pressure force Israel to end the fighting? And is it conceivable for Gaza to ever recover?

Those are a few of the questions that came up in my recent conversation with FP economics columnist Adam Tooze on the podcast we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. And check out Adam’s Substack newsletter.

Cameron Abadi: The regional and global economic effects of the past year of war seem to be pretty limited. Why exactly have the economic effects not spread more widely from this conflict?

Adam Tooze: Well, I think it’s itself a symptom of the dismal history of the region for the last half-century and more. The sad fact is that the idea of the regional economy is largely a myth. So decades of damage and isolation have meant that Gaza was an economic irrelevance long before the disaster of Oct. 7 and the subsequent Israeli response. The West Bank is more integral to its neighbors’ economy, notably Israel, but it, too, is tiny. It had a GDP before the crisis broke out of as little as $18 billion, and that subsequently plunged. Estimates are pretty difficult to come by, but we’re talking about a 20 to 25 percent fall, probably, in West Bank GDP.

So that’s a massive hit comparable to the worst periods of the COVID lockdown, something like that. A really, really devastating shock. Or an absolutely devastating depression. But both of these economies are tiny and not capable of destabilizing the big economies around them. Even if you add in the destruction in Syria, which is a 15-year catastrophe now, and the crisis in Lebanon, even if you allow for the fact that we’re talking, therefore, in the surrounding Arab states of a population of about 30 million people—that’s Lebanon, the Palestinian entities, and Syria added up—the devastation that they’ve experienced is just not registering on the economic Richter scale.

And, in part, it’s just to do with the disproportions, right? The Gulf states, the Gulf Cooperation Council, narrowly defined, has a GDP of $2.3 trillion. And if you add in Qatar, it’s closer to $2.5 trillion. Iran is largely insulated from its neighbors behind a variety of sanctions mechanisms. Iraq is a state in permacrisis, unhealthily dependent on its oil exports. And so we’re really talking about a totally disarticulated, incoherent zone rather than a really deeply integrated regional economy in which the Gulf states continue to generate huge revenue from fossil fuel exports, which are largely directed toward Asian markets, but the region as a whole is completely incoherent. The worst zones of crisis are quarantined. And really big, too big to fail states like Egypt are basically propped up by external support from the International Monetary Fund and very large injections of funds from the Gulf, whether it’s from the Emirates or from Saudi Arabia. And so this reality that you talk about is a disarticulated and incoherent one.

CA: Israel has been mobilized at war for the past year. What sort of economic pressure is Israel under? Are there factors in terms of international economics that may be pushing Israel toward finding an end to this war?

AT: This is where I would go back to an analysis I’ve pushed since the beginning of the crisis, which is that, you know, Israel’s current political economy was built for this. I think it’s not unfair to attribute to Prime Minister Benjamin Netanyahu the strategy that when the moment came to really expand the conflict and to try to deal in a quite fundamental way with various regional threats and to take on Iran and try to break them, that Israel will be prepared for that moment. Not in the position that it was in in the ’70s and ’80s when it was cripplingly dependent on external aid. So Israel is in the position of being a very rich economy. You know, before the crisis anyway, on certain measures it had a higher GDP per capita than Germany, which is telling you what a sophisticated place it’s become. Very different from the relatively poor settler colonial project of the ’50s and ’60s. But it is making the strategic gamble on an escalating war.

It’s a very, very long way from anything even remotely like the total war mobilization because, and this is the fundamental point, it is choosing to fight this war. It is not like in 1973 facing an existential threat. It is in a deliberate way escalating the destruction in Gaza and the effort to deal with Hezbollah in Lebanon. So this is expensive. According to the Israeli Central Bank, the current bill they think is going to come to $66 billion, which is about 11 percent, 12 percent, of Israeli prewar GDP. This is being spent over several years. So it’s not all at once. Even with U.S. aid, which comes to roughly $14 billion to $15 billion—so somewhere between 20 and 25 percent of that total—this is a strain. It’s also true that tourism to Israel has declined by 75 percent, perhaps not surprisingly, which is bad for business. It’s also true they’ve had to mobilize hundreds of thousands of soldiers as a matter of choice, right? This is a government choice to push this to a really large scale and wage a simultaneous campaign in Gaza and in Lebanon. This is obviously disruptive to Israel, with a population of 10 million. If you take that number out of the workforce, prime age, working young people, this is going to hurt. And then, of course, for security reasons but also political reasons, they’ve imposed a ban on migrant workers from the West Bank. It’s really difficult to get good data on this, but it’s somewhere between 80,000 and 150,000 workers who’ve lost their permits. There’s also a large informal sector. But there’s no question that this is really bad for Israeli construction. If you need your house repairing right now, it’s quite difficult to get a Palestinian worker to do it in Israel.

It’s also true that there is insecurity in global markets about Israel. It has for a long time been a very, very safe bet for financial investors. And obviously it’s forfeiting that status to a degree. It’s also not the attractive tech hub that it once was. So none of this helps. And it’s not surprising, therefore, that estimates of GDP growth have fallen from a relatively rapid rebound from COVID of 3 or 4 percent to closer to zero or maybe a half a percentage point in the near future. So Israel is growing slowly, and it faces a big surge in government expenditure, several percentage points, maybe as many as 10, of GDP being added. And so S&P and Moody’s, the ratings agencies, have downgraded Israel by several notches this year. But—and you can feel the but coming—Israel starts with a GDP per capita on the same par as Germany; and it starts with a debt-to-GDP level of 60 percent, which by some measures is half the debt-to-GDP level in the United States; and it starts as a country that for the last decade has borrowed on more favorable terms than the U.S. Treasury at a lower yield. And so the net effect of this extraordinary escalation of military violence against its neighbors is that its credit rating falls to several points within the investment grade zone, so Israel is in no risk of becoming junk, and its borrowing costs are now fractionally above those of the United States. That’s as much financial pressure as it’s actually under.

CA: Iran doesn’t seem capable or willing to match Israel’s escalation against its proxy Hezbollah in Lebanon. What should we conclude about Iran’s power, its economic standing? Is it too weak in some economic or political sense to lead a regional bloc in the Middle East at all?

AT: We’ve spoken about Iran a couple of times on the show. But for some reason I hadn’t clocked this basic fact that really brought me up short in doing the research for today’s episode, which is that Iran’s GDP, I think at just current exchange rates, is $380 billion. Only $380 billion for a population of 88 million people, compared with over $500 billion for Israel for a population of 10 million. And that’s, you know, an absolutely grotesque disproportion. Not that you’d expect, in per capita terms perhaps, Iran to have a higher GDP per capita than Israel. But you would expect the gap not to be that size. And that’s a reflection of the developmental problems of the Iranian regime since the revolution and before. But above all, also, it’s an immediate reflection of the sanctions that have hit Iran so hard in waves over time and most recently with the collapse of the nuclear deal in the Trump administration, this really powerful wave of sanctions that were imposed. So with that kind of GDP per capita, that kind of GDP in total, of course Iran has enough resources to give a couple of billion dollars to Hezbollah and to support Hamas. It can do that kind of low-tech, low-cost intervention.

With that kind of money, Iran can fund low-tech cruise missile programs and can fund at least one expensive program in the form of the atomic development program. Because $380 billion gives you a platform. But if you look at overall military spending and you look at, say, the SIPRI database on this, by their estimate, Israeli military spending right now is about four times larger than that of Iran. I mean, again, allow that fact to settle in. Israel’s defense spending is four times that of Iran and rising away from that of Iran. So there’s not this sort of escalating wave of threat but rather the contrary—an ever larger degree of dominance, which I think is much more helpful in trying to explain the aggression with which Israel is proceeding against the threats that it sees as surrounding itself.

The consequences for Iran of ramping up would be correspondingly much more severe than they are for Israel because if you were waging war as a surplus kind of activity, and there’s a much smaller margin of surplus in the Iranian economy than there is in the extremely affluent Israeli economy at this moment, you could say Iran is sanctions-hardened, which is true. They’re tough. They’re smart. They’ve been learning for decades how to get around sanctions. But still another wave of pressure would be terrible for them. You see that notably, for instance, in the currency, which since the collapse of the nuclear deal has plunged in value. In 2015, when the deal was signed, the rial was 32,000 to the dollar. It’s now 580,000 to the dollar. So that tells you how much depreciation there’s been and how the purchasing power of average Iranians has collapsed in global terms. This is not a society that’s in a place where it can easily absorb much pressure. Iranian politics, which are now not exactly pluralistic but at least contested and open to competition, revolve crucially around economic issues. And so a war would be expensive.

And how much leverage does Iran have in the oil market right now? Well, it’s a major supplier to the oil market. It accounts for about 4 percent of global output. And the Biden administration has in no way been kind to Iran, but it has at least turned a blind eye to quite a lot of oil export by Iran, hoping thereby to relieve pressure on global markets because the Iranians essentially serve as a unacknowledged but significant supplier to China, which helps the oil balance given the sanctions the West is trying to put on Russia. But from the Iranian point of view, that 4 percent gives them remarkably little leverage because it’s all really up to the Saudis, how far the Saudis will be willing in the event of a crisis to compensate for any losses of Iranian supply. And one thing that Tehran certainly can’t count on is a friendly attitude from the Saudi side.

CA: It’s been a year of war and unprecedented destruction in Gaza. Will Gaza ever recover from this?

AT: When I was thinking about the question, as you put it—I mean, I agree that we do have to go there—is “recover” the right word, right? I mean, is that even the right way to think about what’s happened here? Like the United Nations has done kind of ghoulish calculations of how long it would take to move the rubble around. They think it’s 40 million tons of rubble—but 40 million tons of rubble spiked with thousands of unexploded pieces of Israeli ammunition, much of it supplied and paid for by the United States, and thousands of bodies, unrecovered bodies, that would need to be given a decent burial, finally.

And I don’t really know how one talks about that. I mean, whether or not we want to use the “genocide” word, it’s clear that Israel’s intent is to, in its struggle against Hamas, render Gaza unlivable. That, at this point, is clearly an undeniable war aim—to permanently alter the circumstances of life and social organization and politics in that strip. And, you know, what does recovery mean against that backdrop? Because it can only happen through some kind of agreement. It can only happen as part of some regional deal. And there’s no suggestion really of any plan of that kind. And so I think this is the horror, right, of the situation. And you wouldn’t wish it on the poor Palestinian people to somehow go back and remake their lives. And on the other hand, if they leave, you know, it’s a de facto acceptance of an annexation and a further displacement. I mean, it’s a truly nightmarish impasse as far as I can see. And so, I mean, to be talking about recovery almost seems to be ignoring the the scale of this disaster, which obviously results, on the one hand, from the choice of Hamas on Oct. 7 to massively escalate and then this huge unleashing of violence on the part of Israel. That doesn’t really seem to offer a future for this strip inhabited by millions of people.