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
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
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
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
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
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
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
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
13 Abdel-Jaber, 1996