For Hamas, an end to Gaza's tunnel trade may be only the beginning

Under the watchful eyes of both Egyptian border guards and Hamas tax collectors, more than 1,000 tunnels snake below the border between Egypt and the Gaza Strip. Since Israel and Egypt imposed a blockade on Gaza after Hamas took control in 2007, the tunnels underneath Rafah, a chaotic border town, have helped bring in everything from snack food and cement to a lion for the zoo.

Without this underground highway system, Gazans say they would not have survived the past three years of sanctions.

But the tunnel trade may be nearing its end. Trade has slowed considerably since June, when Israel began allowing more consumer goods into Gaza. Now Rafah's remaining smugglers mainly bring in cement, cars, and construction materials that remain banned. Once-busy tunnels sit unattended; the plastic tents that used to hide them have become tattered and flap in the wind.

Though the blockade was designed to weaken Hamas and its ability to strike Israel, it's now clear that the blockade helped the group strengthen its grip on Gaza. In addition to providing much-needed goods and supplies, smuggling provided tax revenues for the government. The result is a Hamas government that remains firmly in control.

“The Hamas government and movement have benefited from the siege,” says Mkhaimar Abusada, a professor at Gaza’s Al Azhar University. He adds that economic sanctions rarely succeed in dislodging unfavorable governments, citing US embargoes against Fidel Castro’s Cuba and Saddam Hussein’s Iraq.

According to Mr. Abusada, the blockade has benefited Hamas in two ways: by generating international sympathy, especially from Arab and Muslim countries, and shifting the economy to the black market that it largely controls.

While the new flow of legal imports challenges Hamas's control of the market, Abusada says Hamas is now so firmly entrenched here that loosened import rules pose no threat to its authority.

“Whatever you do to Hamas, it is a win-win situation,” he says. “If you keep the siege going, then Hamas will still be able to portray itself as a victim, and if you ease the siege, they win a political victory.”

Life remains difficult

If Hamas has benefited from the siege, that does not mean that it has governed successfully. Many residents of Gaza describe it as "one big prison." Even with the loosened restrictions, life remains difficult.

According to the United Nations Relief and Works Agency, the UN provides services to 1.1 million refugees in Gaza, about two-thirds of the population. Of those receiving UN assistance, 675,000 live beneath the poverty line. Many are also homeless. Operation Cast Lead, Israel’s 22-day Gaza offensive that began in December 2008, damaged or destroyed 60,000 homes. Bans on cement and other construction materials have made it impossible for residents to rebuild or repair their homes.

Poverty and the blockade have also depleted Hamas's coffers. Hatem Oweida, director general of the Economy Ministry, says that Gaza operates with an enormous monthly deficit. Monthly expenditures average $30 million, while intake from taxes and fees amount to only $5.26 million, one-quarter of which comes from taxes levied on cigarettes and fuel smuggled through the tunnels.

At this point, it remains unclear how loosened restrictions will affect Hamas's tax revenues. For the time being, cigarettes and fuel remain in short supply, so Hamas continues to collect taxes on what is smuggled in.

Much of the budget shortfalls are made up by donations from abroad, including Iran, the international Muslim Brotherhood, and some Gulf Arab nations.

“We depend on help from the outside,” says Mr. Oweida. “Where else would we get it from?"

Widespread poverty a hurdle to development

Without external support, Gaza's widespread poverty would stop many residents from access to most basic services like healthcare and electricity. Officials at Gaza’s electric company say they cannot afford to buy more fuel for the power plant in part because so few Gazans can pay their utility bills. The plant’s fuel shortfall has made daily 8-hour rolling blackouts a fact of life.

Likewise, Mahmoud Zahar, Gaza director of the World Health Organization, says a shortage of medicine and medical supplies – everything from cancer treatments to the antidote for scorpion poison - is partially caused by the cash-strapped government’s inability to pay for them.

“People don’t have the means to pay their bills or their taxes and donations from the international community cannot pay for everything,” he says.

Building an economy without Israel

Over the years of blockade, Hamas has tried to create what its leaders call a “resistance economy” to break Gaza’s cycle of economic dependence on Israel, which long treated it as a captive market and source of cheap labor. The strategy seems to be equal parts smuggling tunnels and date palms, planted in anticipation of a future free from the blockade’s ban on exports.

Oweida says the government has urged farmers to cultivate land in Gaza’s former Israeli settlements, evacuated under Israel's 2005 disengagement plan. The plan is to fill the abandoned settlements with 250,000 date palms whose fruit – less costly and water-intensive than Gaza’s traditional cash crops of strawberries and flowers – can someday be exported to countries like Egypt.

Until the export ban is removed, smuggling remains the centerpiece of the resistance economy.

Amr Hamad, Executive Director of the Palestinian Federation of Industry, says the tunnels were Gaza’s economic “backbone," allowing imports of both consumer goods and raw materials that kept 20 percent of the local industries humming. Nevertheless, he says, in the long run they've done more harm than good to the economy.

“It has created a new layer of illegitimate and irresponsible businesses who have replaced legitimate businesses,” he says, estimating that 200 to 300 Hamas members have become prominent businessmen during the siege. “The legitimate men no longer control the economy.”

Those few hundred Hamas members have made some savvy investments, say business leaders, including in real estate, seaside hotels, cafes and recreation areas, and Gaza Mall, a small shopping center in Gaza City. Backing for many of these ventures is believed to come from two valuable Hamas-linked financial institutions, the Al Multazim insurance company and the Islamic National Bank, which was hit with US Treasury sanctions in March.

It remains to be seen whether Hamas's resistance economy can successfully pull Gazans out of poverty and put the government on solid footing, but some here think that may not be the point.

“Hamas is deepening its roots in the economy,” said one business leader who asked not to be named for fear of reprisals. “If in the future Hamas is ever being eliminated politically, it cannot be eliminated economically.”