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This paper concentrates on the economic consequences of different political scenarios resulting from the Middle East peace process on the future - 15 years hence. Two major "extremes" or polar scenarios are specifically used, albeit with a mid-range of possibilities outlined between them. While alternative quantitative forecast outcomes will be based on these, any point on the spectrum is a possible scenario and in quantitative terms has its outcome sealed between them (ranging from extreme "pessimism" to extreme "optimism").
The forecasting methodology used is a combination of (1) explanatory forecasting which leads from the present along probable lines of development if certain actions are taken and certain policies pursued; (2) normative forecasting starts at some desired or possible state in the future in order to derive consequences and possible remedial action in the present; (3) extrapolative forecasting involves extending existing trends into the future; and (4) intuitive forecasting utilizes specialist knowledge and expert opinion. The procedures used involve a combination of several techniques - both "objective" and "subjective."
The forecasts were partially dependent on the much-used Cobb-Douglas production functions to generate internally consistent "National Accounts" at whose core is the gross national product (GNP). The Cobb-Douglas functions were applied to national economic data, in order to arrive at quantitative values for economic indicators for the main alternative scenarios - namely, status quo ante (SO) versus a wholly comprehensive peace (PO).
The main objective of the paper is to assess, in quantitative terms, whether peace pays, i.e., whether there is a significant peace dividend for Israel. While many theoretical futures (or a range of alternatives) may be generated by the peace process between Israel and the Palestinians, and other Arab states, this paper will concentrate on the two extremes of status quo ante with a cancellation of Oslo (and the possibility of a new war), and a really comprehensive peace with all regional states and an independent Palestinian entity cooperating with Israel. Since there are, of course, variations on these options - in fact, a spectrum of possibilities - we deal with other possibilities in an indirect manner. While our model(s) generate two alternative sets of data for the two "extremes" agreed upon, with a much more positive, better future for the peace option, we postulate that the other options benefit in proportion to the place they occupy on the "peace spectrum."

Range of Alternative Outcomes of the Peace Process

With very few exceptions, it was agreed that peace pays in a variety of ways. We identified six intermediate stages between the two extremes:
1.Status quo ante - Possibility of war, return to pre-Oslo;
2.Status quo - No war, continuation of present, ongoing crises;
3.Allon-Plus Plan (the Netanyahu plan) - Peace frozen, Palestinian cantonization and their rejection of the plan;
4.Beilin/Eytan plan (MKs Yossi Beilin of Labor and Michael Eytan of Likud) - Limited autonomy, most settlements annexed to Israel, no Syrian peace;
5.Beilin/Abu Mazen concept (as proposed by Beilin) - Limited Palestinian state, more favorable to Palestinians than Beilin/Eytan plan, possible Syrian peace; and
6.Independent Palestinian state--- Peace with Syria and Lebanon but
not all regional powers.
A 15-year period (post-1997) was chosen for alternative projections as it allows small annual differences to accumulate to significant data and highlights the results. Thus, the two opposing peace process political scenarios generate quantitative social and economic differences to the year 2012. These are shown in Table 1 and explained in the next section.
While Table 1 shows the cumulative difference for the two extreme scenarios for 2012, say for the GNP, the annual difference generated equals $60.6 billion. If the relation is linear, each scenario for the six intermediate ones (seven spaces) is "responsible" for one-seventh of the $60.6 billion (or $8.66 billion). This can be applied to any option/scenario and for any social/economic parameter. The mid-point of theoretical benefits generated falls between the Allon-Plus Plan (Netanyahu's approach) and the Beilin/Eytan plan. Thus, in the linear model, there are twice as many additional benefits to comprehensive peace on this option compared to the status quo ante with possibility of war (if exponential, possibly four times as much).
It is really difficult in a short paper to assign probabilities for each of the alternative scenarios on the spectrum, so no attempt will be made to do so.

Social-Economic Comparison of Extreme Projections to 2012

This section is mainly based on Table 1. It concentrates on the two extreme options of status quo ante with possibility of war, and a really comprehensive peace with all Israel's neighbors, including with an independent Palestinian state.
The table shows the estimates for the national accounts data for Israel this year [1997] in terms of 1996 US dollars. Note also the population and employment data (numbers of residents employed and labor hours).
In mid-1997, there were 5.82 million residents in Israel of which there were 1.14 million Arabs, including 160,000 East Jerusalem Palestinians and 16,000 Golan Druze. Thus Arabs accounted for nearly one-fifth of Israel's population in 1997. The Jewish sector's population (including non-Jewish Russian immigrants) is, therefore, some 4.68 million.
The average Israeli Palestinian household has 5.3 persons (some 215,000 families), while the average Jewish household has 3.3 persons (some 1.415 million families). The average Palestinian household has over 60 percent more persons per family than the Jewish one. With the slack not being taken up by numbers employed, this is one cause of the different per-capita incomes.
There are some 2.02 million residents employed in Israel, of whom 260,000 are Israeli Palestinians and 1.76 million Jews. In addition to resident employment (2.02 million), there are an additional 60,000 from the West Bank and the Gaza Strip (WBG), when no closures are imposed, and 90,000 official foreign workers. In addition, there may possibly be another 100,000 unofficial foreign workers. The proportion of the population among the Palestinian residents who are employed is 22 percent, while for the Jews it is 37.6 percent. As stated earlier, this generates a familial income differential. In addition, the Palestinians, being less educated and facing discrimination in many employment areas, also earn on average less than the Jews. If we assume, at best, that their earnings reach to three-quarters of the majority of Jewish workers, then it is calculated that the average per-capita income of the Jewish population is 2.2 times that of the Palestinian population. Note that this is up to three times the per-capita income in the West Bank and Gaza. The per-capita income of the Jews is some $18,600, while for Palestinians, some $8,400.

Population

The population of Israel in the non-peace option will grow (including the Palestinian population of East Jerusalem) at 1.4 percent per annum, of which the Jewish rate is 1 percent and the Palestinian rate 3 percent, and will reach 7.2 million in 15 years. For the peace scenario, the population will grow at 1.5 percent, of which 1.4 percent is Jewish and 2.8 percent is Palestinian (excluding Palestinian East Jerusalem), to reach 7.5 million. In the non-peace scenario, the Palestinian population approaches one-quarter while in the peace option it will barely exceed one-fifth. For those Israelis who are concerned with a Jewish state, this could be crucial.
The greater Jewish population growth rate (peace scenario) will be due to both a higher net migration balance and a larger natural increase. In the case of the Palestinians, the marginal decrease could come from an increased standard of living with a lower birth rate. The changes suggested are modest and in reality could be greater.
In the status quo option, domestic (residential) employment will grow at 2 percent per annum, increasing to 2.72 million, with working hours increasing at the same rate (37 hours per week average). In the peace scenario, employment will increase at 2.5 percent, with hours increasing at 3 percent to a 39.7 hours per week average.
The greater increase in labor, especially in working hours, would come from reduced military reserve duty and possibly a smaller standing army (shortened obligatory army duty); larger Jewish population of working age; more full-time employment; less unemployment; and, in general, the growth of the economy. The difference of over 13 percent hours employed between the two scenarios helps generate the additional gross domestic product (GDP), assisted by the additional capital stock (some 10 percent), and new investment (some 65 percent), cumulated over 15 years.
The GNP generated over the next 15 years, allowing for losses from a possible war in the non-peace scenario, will average only 2.5 percent growth per annum. In the peace scenario, the growth rate based on conservative projections will be 5 percent per annum. The difference in the GNP between the two scenarios, in the year 2012, would be some $60 billion or nearly 44 percent more.
The military expenditure is conservatively estimated to grow at 4 percent per annum in the status quo scenario and 2 percent in the comprehensive peace scenario. In the latter, it will be $8 billion and 25 percent less, while the gross civilian product (GCP) will be $68 billion or 64 percent more.
In terms of consumption - private and government civilian consumption - the peace differences generated are $2 billion per annum for government (social spending) and a massive $36 billion (44 percent) for private consumption. This is based on a 4.5-percent private consumption growth rate, versus a 2-percent rate.
The Palestinians should benefit an even higher percentage for consumption than the rest of the country, as they can more easily integrate with neighboring countries and benefit more from the peace process. This may reduce the differential gap somewhat, although it is impossible to quantify.

Peace Pays

The greatest difference is generated in new investment, which may grow at 6 percent per annum versus 2.5 percent for the non-peace scenario. The difference generating some 65 percent or over $21 billion per annum, is the result of both new opportunities and additional sources. The investment will be both for infrastructure and the productive sectors, especially hi-tech export-oriented industry. The Palestinian sector should benefit greatly from this additional investment--- in fact, a larger than average proportion should go to that sector.
In per-capita terms, the peace scenario generates improvements as is shown in Table 1. The per-capita improvements of the Israeli Palestinian population should be even greater.

Summary and Conclusion

There is a range of peace-oriented options, open mainly to Israel. These range from the status quo to a full comprehensive peace with all its neighbors. In the event Israel takes the peace option, it would achieve many gains after 15 years (see Table 1).
The population, excluding Arab East Jerusalem, would be greater as would working hours (some 13 percent). Capital stock would increase by 10 percent and the gross national product (e.g., wealth produced) by 44 percent. Military expenditure would be reduced and private consumption would be some 43 percent greater. As for investment, it would increase by 65 percent, while the import surplus would be halved.
These figures prove that peace pays and there is really a peace dividend for Israel and, we assume, for the region. And choice is possible.

This article is an abridged version of a recently completed working paper, "The Peace Dividend," commissioned by and printed here by kind permission of the American Friends Service Committee (AFSC), Philadelphia. The original research paper is one of a series of regional papers for the AFSC's Middle East International Affairs Program.

Table 1
1997--2012 Alternative Forecasts for the Israeli Economy
Item
1997
2012 Status Quo Option(SO)
2012 Peace Option(PO)
2012% Diff.PO/SO
     
     
%growth rate
Projection
%growth rate
Projection
     
Population (Thousands)
5,820
1.4
7,200
1.5
7,250
3.3
Domestic Employment (Thousands)
2,020
2.0
2,720
2.5
22,8702
5.5
Working Hours (Thousands)
74,700
2.0
100,540
3.0
113,890
13.3
Capital Stock ($US Million)
190,000
2.2
263,340
4.4
362,460
10.0
1996 $US Millions
     
     
     
     
     
     
Gross Domestic Product (GDP)
98,000
2.5
3142,120
5.0
202,720
42.6
Net Factor Paid Abroad (NF)
2,000
3.0
3,120
3.0
3,120
---
Gross National Product (GNP=GDP-NF)
96,000
2.5
139,000
5.0
199,600
43.6
Military Expenditure (D)
17,500
4.0
331,520
2.0
23,550
-25.3
Government Civilian Consumption (G)
11,000
2.0
14,800
2.8
16,650
12.5
Private Consumption (P)
60,000
2.0
80,750
4.5
116,120
43.8
Investment (I)
22,500
2.5
32,590
6.0
53,920
65.5
Resources (D+G+P+I)
111,000
2.5
159,660
3.4
210,240
31.7
Import Surplus (IS=R=GNP)
15,000
2.2
20,660
1.4
10,640
-48.5
Gross Civilian Product (GCP=GNP-D)
78,000
2.1
107,480
5.5
176,050
63.8
Per Capita
     
     
     
     
     
     
GNP Per Capita ($Thousands)
16,500
1.0
19,300
3.5
27,530
42.6
GDP per Employed Person ($Thousands)
48,500
0.5
52,250
2.6
70,630
35.2
Private Consumption per Capita ($Thousands)
10,300
0.5
11,210
3.0
16,020
55.5
Capital Stock per Employed Person (Thousands)
94,000
0.2
96,820
2.0
126,290
30.4


1.Population in the peace option excludes (160,000 [1997]) East Jerusalem residents and their increase in population.
2.Local employment (number employed) excludes up to 40,000 from East Jerusalem.
3.Includes possibility of war.

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