Lebanon's torture is the GCC's challenge and opportunity

28 July 2006
Economists estimate Israel's war on Lebanon is costing its government more than $100 million a day and that Tel Aviv's total bill by the time you read this will be close to $2,000 million. The indirect costs are likely to be at least as much again. Hezbollah rocket attacks since 12 July had in the first 12 days killed 17 Israeli civilians and caused up to half the permanent population in affected areas to flee.

But the big impact will be psychological. This is no advertisement for investing in Israel. Net foreign direct investment has been rising by more than $2,000 million a year. Even if the fighting ends now, this figure could be halved in 2006. Israel's extreme response to Hezbollah is at least partly explained by the urgent need to
demonstrate that foreign money is safe in its
factories and hotels. Confidence may never recover.

The cost for Lebanon is ruinously high. Some estimate it will take $3,000 million to rebuild damaged roads and other infrastructure. This is equivalent to more than 10 per cent of forecast 2006 Lebanese gross domestic product (GDP). The loss of production caused by the flight of people from the south, and from Lebanon entirely, could be enormous. As many as 500,000 people have left their homes, equivalent to more than 10 per cent of the total population. The summer tourism season has been wrecked and the country is likely to suffer net foreign disinvestment in 2006.

If you take into account lost business and investment in the rest of the Levant, it is likely the war for Lebanon by the end of July will lose the region about $10,000 million, about half of that figure being borne by Israel. It demonstrates that the real cost of war is rising. For advanced economies such as Israel that have benefited from the easy flow of capital and high-skill labour, war is no longer a sane policy option.

But there are winners as well as losers. Saudi Arabia, the most powerful Arab state due to oil and money, is probably ahead. The war conflicts with its conviction that it is in everyone's interests for conflict to be resolved through negotiation and, where conceivably possible, compromise. Saudi Arabia, in the 1981 Fahd Plan, was the first Arab state to define the terms of a comprehensive peace with Israel involving the recognition of the Jewish state.

But Israeli occupation of Lebanese territory will oblige the kingdom to fall behind Syria and populist Arab governments sensitive to the mood on the street. This will hurt Riyadh's relations with the US, but it has been accepted before and will again.

The events since mid-July, however, have highlighted the value of moderates in Middle East affairs. The kingdom is uniquely placed to act as a bridge between the US and Syria, and even Iran. For helping get the West off the hook in
Lebanon by counselling Arab restraint, Riyadh will expect something in return. A new American attempt at Arab-Israeli peace has become more likely.

The five other GCC states are, to varying degrees, ready to fall into line behind Saudi Arabia as the wider region seeks to pick up the pieces once the latest Lebanese war ends. Their help is likely to extend from providing humanitarian aid to acting as a go-between with the Iranian regime.

This could be a opportunity for the GCC. Instability in the Levant and Mesopotamia has in the past 30 years benefited the southern Gulf, including Manama, Doha, Abu Dhabi, Dubai, Sharjah and Muscat. Record oil prices are filling GCC treasuries. Investing in the GCC has, by comparison with the rest of the region, never looked more attractive.

The GCC challenge is to step up to the mark when diplomacy takes over from guns. They may not yet be ready. But, perhaps, this summer's ultimate lesson is that the GCC model of stability and prosperity is the only compelling Middle East alternative to Islamic radicalism.

Farewell Bergkamp, hello
Emirates Stadium.

With le

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