Reparations and Rehabilitation of Palestinian Refugees
The payment of reparations to Palestinian refugees2 has been widely recognized as an essential component of any resolution of the Palestinian-Israeli conflict. This article suggests a framework of analysis for a proposed package of such reparations. No paper on these issues can be free of basic controversial political assumptions, so they are better made explicit now. It is assumed that returning titles of ownership to refugees as a major form of reparations is impossible, which makes financial compensation the main form. Another assumption is that even after a peace settlement, the majority of refugees will not come to Israel, and their rehabilitation will occur in their present host countries, or in the Palestinian state. By the same token, most Israeli settlements in the West Bank and Gaza will be dismantled. It is further assumed that resettlement of refugees in other countries cannot form a major part of a reparation package. The solution of the refugee problem is viewed as a political, not humanitarian effort, hence we assume it will take place in the Middle East. Finally, this paper assumes that no external limitations will be put on the number of returnees to Palestine.
There are three central economic issues regarding reparations: the overall sum to be allocated, the types of expenditures to be financed, and distributive issues. This paper focuses on the first, and arguably most crucial3. There are several ways to estimate the overall sum required.
1) Availability of international funds: When I began studying the issue in 1997, estimates of available funds were extremely low - between US$1 and 2 billion. Since then, and particularly at the 2000 Camp David talks, President Clinton talked of US$10 to 20 billion, while sums up to US$40 billion have also been mentioned. The overall available amount is therefore not a constraint, thus availability will not be discussed further.
2) A need-based approach: Another approach is to sum up the "demand" for reparations by starting from a micro-base and asking: who is a refugee, what are their needs, and how much will it cost to meet them. With the exception of Lebanon, refugees are not very different from non-refugees in their employment, education and health standards4. Therefore their specific needs are limited to better housing for camp-dwellers and replacement of UNRWA expenditures on health, education, training and welfare.
3) Compensation for property loss: Taking past losses as a departure point to determine the overall sum of reparations is the most common, but also the most controversial approach. It requires heroic assumptions about the items to be included, the revaluation of the price of capital 50 years ago, and the discount rate to be used over these years.
4) Development requirements: Investment in the specific needs of refugees constitutes a part of the overall investment in each hosting country. Therefore, rather than consider it separately, this approach asks: what is the feasible overall amount of investment in each country, how much funding for this investment is supplied from other sources and how much is needed to complement it from reparations. This approach emphasizes the role of reparations not just for refugees, but rather in reducing poverty and in creating employment for the population as a whole. It involves an integral view of various sources of finance for overall investment: domestic savings, foreign loans and direct investment, and reparations.

A Need-Based Approach

The beneficiaries must be defined and here we adopt the official UNRWA definition. In June 1995, UNRWA estimated the total refugee population at 3.173 million, of which camp dwellers made up 1.044 million. Though both numbers were strongly challenged by researchers5 we take them, here, at face value.
Let us assume that improvements in housing, excluding land price, requires US$20,000-30,000 per household6, and is confined to camp-dwellers who are given title to the land. In many instances, this will mean compensating original owners, whose land was confiscated. At the moment we have no estimate of the division of camp-land ownership between the private and public sector. A clear distinction should also be made between transfer payments (such as owner compensation), which redistribute income or wealth but do not increase their overall amount, and real investment, which adds to overall wealth and requires labor and capital. Our estimates concern only the latter. Based on an average family size of 7.57, the total sum needed for housing rehabilitation of camp-dwellers alone is US$2.8 billion. This is probably an underestimate, as it does not include investment in infrastructure. Assuming the cost per unit to be US$30,000, this brings the sum required to US$4.2 billion.
This approach ignores migration to Palestine - if refugees move, they will require new housing. However, in this case they will be able to sell their former house, and use the compensation money for the construction of a new one. Furthermore, the vacant houses left behind may reduce the required investment in new houses in Jordan.

UNRWA Assistance

The main UNRWA services are health, education, vocational training, social welfare and food. Refugees in camps serviced by UNRWA are entitled to receive all services. Other UNRWA-registered refugees receive services depending on their need, family size, income, etc. UNRWA's total regular budget in 1994/1995 was US$323 million. Assuming a five-year adjustment period, plus service set-up costs for migrants, an order of magnitude would be US$1.5 billion. Here again few real resources are involved, but rather transference of financial responsibility for services already provided.

Compensation for Property Loss8

As early as 1949, UN resolution 194 III called for two types of reparations for refugees: a) for "choosing not to return to their homes in Israel", and b) for "loss or damage to property which under the principles of international law or equity should be made good by the governments or authorities responsible". In 1950 the UN General Assembly called on the Palestine Conciliation Committee [PCC] to set up a refugee office to make arrangements to assess and pay compensation. A committee of experts then estimated the overall value of abandoned property by calculating the worth of the total property of the Arab community in Palestine, as of November 29, 1947, and then taking three quarters of it as an approximation to refugee-owned property. They put the total value of abandoned property at 120 million pounds sterling at 1947 prices, equivalent to around US$1.85 billion in 19909. The PCC has not been officially dissolved, but ceased operations in 1957 after accomplishing two things: a global estimate of the value of Arab abandoned property, and the identification of valuable individual refugee property left in Israel.
Arab economists challenged this estimate, arguing that it omitted critical items such as human suffering, loss of capital and public property. New evaluations were done by Yusif A. Sayegh, and later by Sami Hadawi10.
Hadawi's estimate for abandoned property, exclusive of human capital, was 743 million pounds sterling for 1948 (6.2 times the UN estimate). After adding human capital losses, his total rose to 1.182 billion pounds sterling - nearly 10 times the UN estimate. There are therefore so many ways to calculate such an amount that the final sum will be determined by a compromise between the different criteria.

Development Requirements

The need to treat refugee employment as a separate subject arises only if their labor market status is unique - if they are denied access to certain jobs, if they have high unemployment, or if their typical occupations differ from those of the indigenous population. Otherwise the creation of jobs for refugees is inseparable from the job creation in general. Except in Lebanon, the labor markets of refugees and non-refugees are integrated11, hence there is no way of defining refugees' absorption needs apart from the general population. Reparations can therefore be viewed as a unique opportunity to combine personal compensation with a quantum leap in the economic progress of the region. To this end it is vital that personal compensation be channeled into investment, raising the per-capita income of the population as a whole. To the extent that refugees (including those already living in Palestine) choose to stay at their present locations, the framework of analysis is the economic development of the present host country, rather than specific refugees' needs.
Another issue is that of the resources needed for the economic absorption of immigrants to Palestine. Any immigration to Palestine also affects the labor markets of the host countries, and they may require resources to adjust, while differences in capital/labor ratios will affect the propensity to migrate. Jordan, where the majority of potential immigrants to Palestine live, is within commuting distance from Palestine, and absorption resources would be utilized more efficiently if labor mobility between the two countries is allowed.
Some 65 percent of refugees outside Palestine are to be found in Jordan, where they account for a third of the population12. Separating the Palestinian and Jordanian labor markets would therefore create a shortage of capital and a surplus of labor in Palestine, and the reverse in Jordan. Another imbalance is in relative salaries. Wage differentials by occupation/education are smaller in Palestine. Work in Israel has raised the wages of less skilled labor, while the small size of the public sector and lack of opportunities there have reduced the wages of professionals. If the Jordanian and Palestinian labor markets are separate, unskilled workers will be over-represented among immigrants. Therefore immigrants to Palestine should be allowed to continue working in Jordan, while Jordanians may be incorporated into the Palestinian and Israeli labor markets.
The World Bank has estimated the investment in productive (non-housing) capital needed to create a job in Palestine at US$33,000. Assuming 500,000 immigrants3 this will require US$16,500 billion just in non-residential investment in Palestine alone. If emigration from Jordan does indeed amount to a few hundred thousand, and they leave their present employment, a capital surplus will be created in Jordan, concurrent with a shortage in Palestine. This is a waste of resources: a joint labor market with Jordan requires less investment with fewer imbalances.

The Maximum Feasible Investment Aproach

The marginal cost of an economy's aggregate investment in housing, infrastructure and machinery in any given year increases because of shortages in capital and labor required to carry out investment. Too rapid an increase in the demand for investment goods without the ability to supply them can therefore cause inflation, and channel money into a rise in real estate prices, or into a massive import of durable consumer goods, with little left for investment. We want to find levels of investment consistent with economic stability. This approach does not provide an upper ceiling to the overall present value of capital accumulation, but suggests a ceiling on the maximum annual rates of investment in a 10 year period. The ceiling is not an absolute, yet international experience indicates that over a ten-year annual average, countries do not exceed a certain increase in overall investment activity.
Israel's annual rate of increase in gross domestic investment in periods of rapid population increase was 3.1 percent for 1950-1955, and 13.6 percent for the period of mass immigration from the former Soviet Union (1988-1992). This was followed by negative investment growth in subsequent years. For our calculations we assume 5 and 10 percent growth rates of real domestic investment (see Klinov, 1999). At a 10 percent growth rate of investment, the funding needed for the region for the coming decade is around US$10-15 billion. This approaches the maximal investment levels these economies can carry.
In summary, it seems the most reasonable approach to calculate the overall sum is the maximum feasible investment. The issues of its allocation among uses (consumption, housing, and investment), between the private and public sectors, and within each, are left for further discussion.


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1 Work on this memorandum was financed by the Institute for Social and Economic Studies in the Middle East, at the Kennedy School, Harvard University, in the framework of its Refugee Project. Thanks to Tayseer Abdel Jaber, Shmuel Amir, Isaac Diwan, Ephraim Kleiman, and Elias Tuma. Investment section modified in July 1999. All figures are for 1995.
2 The paper does not address the issue of reparations to Jewish refugees from Arab countries.
3 For a discussion of allocative and distributive aspects see Klinov, 1999
4 Klinov, 1999
5 See Efrat, (1993); Peretz, (1993); Weller, R. and Serow, W (1986), and Abu Lughood, Janet L (1980).
6 The hypothetical cost does not include land prices.
7 FAFO,1993, p. 364.
8 Don Peretz: Palestinian Refugees and the Middle East Peace Process US Institute of Peace Press 1993.
9 Peretz, op.cit. p. 88
10 Yousif A. Sayegh: The Israeli Economy 1966, Sami Hadawi: Palestinian Rights and Losses in 1948 London 1988.
11 Klinov 1999, appendix 1
12 This and the following sections are based on Abdel-Jaber and Klinov (1998)
13 Abdel-Jaber, 1996