The Hidden Treasure of the Palestinian Economy: The Economic Implications of Refugee Compensation
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 (
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.


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.


Arnon, Arieh and Saeb Bamya, eds. Economic Dimensions of a Two-State Agreement between Israel and Palestine. The AIX Group, 2007.