The issue of the Palestinian refugees raises, first of all,
political and moral questions. Thus, the impact of compensation for
the refugees on the Palestinian economy is neglected. Although it
is difficult to justify any particular set of principles for
calculating the value of the property and the suffering of the
refugees, estimations made lately by a Palestinian and Israeli team
showed that it is possible to reach a mutual understanding on a
fair compensation. They calculated the value of compensation and
investment needed for rehabilitation and resettling the refugees at
a level of approximately $80 billion.
In this article I wish to estimate the flow of capital into a newly
established Palestinian state as a result of the expected peace and
the compensation agreement, and to speculate on some of the
implications of this flow of capital on the Palestinian state. I
summarize the main principles that guided the estimations of fair
compensation, evaluate the expected choices of the refugees for
rehabilitation and resettlement and discuss some of the
consequences of the process on the future Palestinian state.
Emphasis is given to the evaluation of the expected economic growth
due to the direct and indirect multiplier effects of the flow of
the compensation capital into the Palestinian state.
Estimations of the Value of Fair Compensations
Several estimations have been made on the valuation of the
properties that Palestinians left behind in Palestine. They were
done by Israeli, Arab and international research centers and
governmental institutions. The differences between estimations are
tremendous. At one extreme, an Israeli investigation committee in
1948 estimated the value of lands owned by Palestinians at 81.5
million Israeli liras. At the other extreme was the Arab League
investigation committee in 1956, which estimated the losses at
around 1.9 billion Israeli liras according to 1947 values. Five
works may be mentioned in this respect.
The main reasons for the differences lie in the different attitudes
toward a whole set of questions. First, what kind of properties
should be included in the calculation? Differences focus on the
status of publicly owned lands, and on lands that were used by
private owners who had not officially registered their ownership
under the Ottoman regime, in order to escape taxes and military
service. Second, how should the value of movable equipment that had
not been officially registered - much of which was taken by Jews
during and immediately after the war - be calculated? Third, how
should the value of intangible assets like stock market shares,
reputation, etc. be estimated? Fourth, estimations differ in the
way they treat time. For example, the 1948 Israeli committee used
the year 1938 as the base for estimating property values,
justifying it with the argument that land prices rose artificially
due to high Jewish demand. Other committees calculated values from
the base year 1947. Another question with respect to time concerns
the value of the Israeli use of the property since 1948, and how to
calculate the added value of the property produced by Israel.
Since much of the property of the refugees was lost due to
destruction and plunder, and since the Israeli Absentee Property
Law did not manage the property for the benefit of the refugees as
required by law, Israeli sources that rely on Absentee Property Law
documentation cannot be considered credible for estimating the
value of the refugees' property. Arnon and Bamya (2007) suggest a
macro approach that tends to indirectly estimate the value of the
refugees' property. Based on this approach and comparisons among
the different direct attempts to estimate the value of the
property, they define the current value of full and fair
compensation. According to them, compensation for lost property
should reach the value of $15-30 billion, depending on personal
claims that can be verified, and $22 billion for the refugees'
suffering. In addition, between $20-30 billion will be dedicated
either for the rehabilitation of the refugees or their
resettlement. Much of this capital will be paid to the states that
will absorb them. This means that an average refugee family of
seven persons will be directly compensated by about $64,000, and
about $12 billion will be spent on building houses and
infrastructure and on creating jobs.
Where Will the Refugees Live?
The common estimate for the number of Palestinian refugees is about
4.5 million people. The two largest communities live in Jordan (1.8
million) and in Palestine (1.7 million), with about 1 million of
them living in the Gaza Strip. The rest live in smaller
communities. The two main ones are in Syria and Lebanon, with about
400,000 refugees each. Others are in a variety of Arab countries
(www.un.org/unrwa).
There are no sources from which to predict the migration patterns
of Palestinian refugees as a result of a peace agreement between
Israel and Palestine and the payment of compensation to the
refugees. However, some assumptions may be reasonable: First, no
significant number of refugees will return to the state of Israel,
even though Israel will have to take moral responsibility for their
refugee status. Second, the Palestinian state will pass a law
similar to the Israeli Law of Return, which will attract a large
number of refugees. Third, the number and the origins of immigrants
will be influenced by the ability of the Palestinian state to
develop and to provide a high quality of life to its residents.
Fourth, refugees from Lebanon and, to some extent, from Syria, who
are relatively deprived in their countries, will demonstrate a
higher tendency to emigrate to Palestine according to the law of
return. Some of the refugees from Jordan will also choose
emigration to Palestine.
The median estimate made by Arnon and Bamya in their AIX Group
report from 2007 argues that the number of refugees who will enter
the Palestinian state from abroad is close to 900,000. In addition
to the 1.7 million refugees who already live in Palestine, their
number will reach about 2.6 million, or 58% of the refugees who
will be compensated as part of the peace agreement. This means that
if the compensation plan and the plans for rehabilitation and
resettlement are implemented, more than half of the capital of the
$70-80 billion project will be transferred into the Palestinian
economy within 10 years after the implementation of the peace
agreement. The refugees, who will directly receive most of the
capital, will constitute more than half of the population of the
Palestinian state, thus challenging the social structure of the
society. The rest of the capital will be transferred to the
government and/or public institutions to be used to build basic
infrastructure for the developing state's economy.
The Economic Impact of Capital Flow into Palestine
Any attempt to estimate the impact of such a flow of capital into
the national economy cannot be exact. Yet a rough estimation is
important in order to raise awareness of the magnitude of the new
opportunities that will open up for the Palestinians, and the new
challenges that they will have to face in order to take advantage
of these opportunities. One can assume that every year over the
next l0 years, the Palestinian state and its citizens will receive
about $4 billion from the compensation fund. This amount is about
equal to the Palestinians' current gross domestic product (GDP),
and will double the flow of capital into the national economy in
the first year.
But we need to remember that the impact on the economy is more
complex. It depends on several characteristics of the national
economy and on decisions made by the economic leadership. For
example, any inflow of capital has a multiplier effect that is
dependent on the proportion between investment in further
development and consumption. The multiplier effect means that
direct investments cause a chain reaction of indirect effects on
the wider economy. A simple and rough multiplier model that may
suggest a rough estimation of simple economic growth patterns
assumes that the national product is a function of consumption,
investment and the multiplier effects. Residents spend some of
their income on buying local goods. In the less developed
Palestinian economy, which is closely connected to the Israeli
economy, I estimate that the propensity to consume locally reaches
about 50% of the income. The rest is invested in development
projects or on imported goods and services. Applying Samuel's
multiplier model leads to the conclusion that every $4 billion
import of capital produces benefits of $12 billion after five
years, when the effects of the multiplier will decline to marginal
level. This means that every year, such a multiplier will effect a
new investment of $4 billion for the next 10 years.
In addition to this mass flow of capital, one has to consider the
accumulation of capital in the newly growing economy that will be
reinvested in further growth. Based on Samuel's formula, I
calculated that after 15 years, the Palestinian GDP will have the
potential to grow to $100 billion, or $14,300 per capita per year,
due just to the direct and indirect impact of compensation for the
refugees. Further investments by wealthy Palestinians in the
Diaspora and by Arab countries that might be attracted to a
successful Palestinian economy could create even further multiplier
effects and economic growth. At the same time, the Israeli GDP per
capita could climb to $34,000 per capita per year, if the average
growth rate of the GDP reaches 2.5-3.0% annually. This means that
the economic gap between the two societies will be reduced from
1:25 to 1:2.4.
How much of this will flow into creating new jobs at the existing
standard of living and how much into an increase in the standard of
living? Today the Palestinian labor force includes about 1 million
people, of whom 300,000 (33%) are unemployed. It is assumed that
with a peace agreement, at least 100,000 workers will return to
jobs in the local economy, and the number of workers who will
commute to Israel will increase from 40,000 to about 100,000. This
means that unemployment will decrease to about 100,000 (l0%).
Natural population growth creates an annual increase of about
60,000 jobs - a number that will remain stable for the next decade
due to the slowdown in fertility rates in the last decade, which
will balance the growing number of fertile women due to high
fertility in the previous generation. Assuming that every year
about 90,000 refugees will enter Palestine and that 20% of them
will seek jobs in the labor market, 18,000 more jobs will have to
be created annually. There will be a need to create about 78,000
new jobs every year before the number of unemployed will fall below
100,000.
Such an economic growth rate and levels of investment - that, in
addition to the $4 billion in imported capital, will include at
least one-third of the annual added value to the economy from
internal sources - will enable the creation of new jobs for those
who annually join the labor market due to natural population growth
and immigration. It will also enable a shift in the economy from
unemployment to a shortage of workers within three years. The
greatest challenge the Palestinian society will face will be to
efficiently manage the huge flow of capital, and to find the right
balance between consumption, investments and savings, and between
investments in infrastructure, services and production. Currently,
infrastructure is almost completely absent. The electricity grid,
transport, and air, sea and land terminals have been destroyed, and
sewage systems need to be built anew. The construction of a modern
and highly developed infrastructure will be a critical condition
for a smooth expansion of the local economy. In addition, the
construction of infrastructure in the early stages that will suit
an economy of $100 billion GDP will reduce the cost of creating new
jobs, when the inflow of compensation and rehabilitation capital
stops 10 years after the agreement.
Socio-Political Implications
The most obvious implication of the implementation of a peace
agreement that includes compensation for the refugees is the rapid
development of the Palestinian economy. The Palestinian state will
enter a decade and a half of rapid economic growth that will help
Palestine escape the family of underdeveloped countries and join
the group of rapidly developing countries. Such an inflow of
capital will pose a real challenge to governance. The Palestinian
government will face risks of mismanagement, inefficiency and even
corruption that frequently characterize situations of rapid inflow
of capital. Another challenge will be how to keep inflation under
control.
A third challenge will be spatial planning. New construction and
the planning of new neighborhoods, industrial zones and
infrastructure will be needed, raising questions concerning the
spatial planning of the state. As a small, crowded and
environmentally sensitive country, intensive centralized
intervention in spatial planning will be required. The planning
authorities will be required to give answers to questions like
where to locate electrical and water desalination plants,
industrial zones, terminals, etc., without putting large
populations at risk, and without hampering the development of urban
centers. The planning authorities will have to decide whether to
build new modern cities or to expand existing ones, how to connect
them into one integrated system, connected by road and/or railroad,
etc. Another challenge will be the development of the Jordan
Valley, either as an urban and industrial center or as an
agricultural center that exports fresh vegetables to the Gulf
countries. Resources will have to be secured for such a
development.
The question of the resettlement of the immigrating and existing
refugees in a way that will help to integrate them into society
will also challenge the central planning authorities. Israel's
attempts to relocate the Jewish refugees in the newly developing
areas in the national periphery led to the institutionalization of
socioeconomic gaps among the populations. Can the Palestinians
learn from the Israeli experience and avoid some of these mistakes?
Another option is to use evacuated settlements in order to enlarge
the available stock of housing in Palestine, whether for the
refugees or for other people who will move to the evacuated
settlements and sell their former houses to refugees. Such an
approach will enable the transfer of more capital for
infrastructure and job-creating investments.
With the abundance of national challenges, there will be a need for
a strong and authoritative public sector in the young state. The
question is whether the public sector will have enough public
capital in order to meet the expected challenges. As we have seen,
between two-thirds and three-fifths of the compensation will be
transferred to private hands and only the remainder to the public
sector, while the balance between needed investments in
infrastructure - mostly financed by the public sector - and
productive and consumption investments is the opposite. The gap
will be partly covered by collecting relatively high taxes from the
economy as a whole, or from those who receive compensation, but
shortages in public investments in infrastructure may be a major
source of concern. This can lead to the channeling of private
capital to over-investing in consumption, like building houses,
instead of productive investments. Over-investment in consumption
will reduce the multiplier effect and slow down the growth of the
economy. Another risk is the outflow of capital by refugees who
receive compensation, which will hinder the economic development of
Palestine. Lessons may be gained from the experience of
compensation paid to Israel by Germany. Private citizens were
restricted by the government from exporting their capital abroad or
even consuming more than a certain percentage of it.
Yet another challenge will be the upgrading of the educational
system and the introduction of technological education. In order to
meet the demand of a developed economy, and due to the expected
shortage in the workforce, the development of the economy will be
dependent on the development of increasingly capital-intensive
jobs. If the production of one job in the current Palestinian labor
market costs about $20,000, it should increase to about $150,000 at
current prices 15 years later - half of the price of creating one
job in the Israeli economy today. Based on Samuel's model, the
Palestinian economy will have no difficulty investing these amounts
of capital in creating about 100,000 jobs. But the question is
whether the educational system would be able to supply the needed
expertise for the future job market that will require thousands of
engineers and experts in hi-tech industries, etc.
The intensive flow of capital to the refugees - who will constitute
slightly more than half of the population - will change the class
structure in Palestine. Many working-class and poor refugees may
find themselves in the upper strata of Palestinian society,
challenging the traditional elites. The Palestinian government will
have to deal with all these issues, while they may suffer from
shortages in capital to support a strong public sector.
The economic processes discussed here will also have significant
consequences on neighboring countries. About 1.5 million
Palestinians will live in the Kingdom of Jordan. Once they get
their share of the compensation and the government gets its share
of the rehabilitation money, about $25 billion will flow into the
kingdom within 10 years. With a $28 billion annual GDP, this amount
of capital will not restructure the economy, but it will
significantly boost economic growth.
Israel will also be significantly affected by the process. Israel
will have to pay more than half of the payments transferred to the
Palestinian state - the compensation for the property and the
suffering - while rehabilitation and resettlement payments will be
made by third parties. This may reach more than $2 billion annually
for 10 years. This economic burden on the Israeli economy will be
bearable only if it results in intensive importation from the
Israeli economy, an act that will return some of the multiplier
effects to the Israeli economy. This is important for the Israeli
economy, but it may be also beneficial to the peace process,
institutionalizing intensive trade relations between the two
states. One of the implications of this is that Israel must insist
in the peace agreement with Palestine on a commitment on the part
of the Palestinians to use much of the compensation capital for
making contracts with Israeli companies on development
projects.
Conclusion
The solution to the refugee problem may become a lever for
prosperity and rapid economic development in Palestine and Jordan,
in a manner that will reduce economic gaps between those countries
and Israel, thus opening new opportunities for cooperation among
these three countries. This is, of course, an added benefit to the
reduction of the refugees' long suffering.
Reference:
Arnon, Arieh and Saeb Bamya, eds. Economic Dimensions of a
Two-State Agreement between Israel and Palestine. The AIX Group,
2007.