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The Funding of Palestinian Refugee Compensation

Source: FOFOGNET Digest (revised version, March 1996)

by Rex Brynen, McGill University

Compensation has been almost universally seen by analysts of the Arab-Israeli conflict as a central and necessary feature of a final settlement of the refugee issue. Estimates of compensation amounts, however, have been driven by calculations of Palestinian property losses in 1948, together with a possible component for human capital losses and moral reparations. In the early 1950s, the UN Conciliation Commission for Palestine estimated the value of lost Palestinian property at £122 million, or approximately $1.85 billion 1990 US dollars. At that time the Arab League countered with its own estimate twenty times greater, worth over $35 billion in 1990 dollars. Yusif Sayigh estimated lost Arab property at £757 million in 1948 ($11.5 billion).[1] Atif Kubursi and Sami Hadawi calculate 1948 losses--including material losses, human capital losses, and psychological damage--at up to $92-147 billion in 1984 prices.[2] Rashid Khalidi cites a possible figure of $40 billion, based on an assumption of $20,000 for each of 2 million eligible refugees.[3]

In practice, however, the amount made available for refugee compensation may depend less on the valuation of Palestinian losses in 1948 than on political circumstances and the availability of regional and international resources. This paper attempts an exploratory examination of the issue of resource availability. In doing so, it ignores the moral imperatives of historical justice--imperatives which, this author believes, require that Israel offer substantial redress for the refugee displacements and property seizures of 1948 and 1967. Such an investigation is, of course, a highly speculative undertaking. Nevertheless a preliminary exploration highlights the potential financial and political difficulties posed by resource scarcity, and suggests an agenda for further reflection, study and political action.

The primary source of funds anticipated by most analyses of the Palestinian refugee issue is Israel. This source is anticipated in United Nations General Assembly Resolution 194 (1948), which states that “compensation should be paid for the property of those choosing not to return and for loss or damage to property which, under principles of international law or in equity, should be made good by the governments or authorities responsible. [emphasis added]” This position has been implicitly reiterated in a host of subsequent UN resolutions, and represents the current stance of both the Palestinian Authority and other Arab governments. It has also been reflected in most scholarly analyses of possible final status arrangements for the refugee issue. Shlomo Gazit, for example, suggests that there are “positive political and pragmatic considerations in favour of Israel paying compensation to the Palestinians.” Indeed, he argues, “the process of paying compensation to refugees is likely to be of great psychological value in contributing towards normalization.” He has proposed an amount of $5-10 billion.[4]

It is by no means clear, however, that Israel will offer substantial amounts of compensation. Mark Heller and Sari Nusseibeh, for example--while agreeing with Gazit that “even a nominal disbursement of financial compensations in this context may be of important psychological value”--note that “a comprehensive program would be extremely costly and would depend on the active participation of the international community. [emphasis added]”[5] Compensation may be seen as implying moral responsibility for the refugee issue, something that Israeli spokespersons (including Prime Minister Peres himself) have frequently denied. Any Palestinian compensation claims against Israel will likely be met by Jewish claims for former properties seized in the Arab world. According to the World Organization of Jews from Arab Countries, the value of these properties is about five to ten times greater than the value of properties lost by Palestinians in 1948. In addition, the WOJAC estimates that Israel itself spent $11.5 billion on the absorption of Jews from Arab countries.[6] In recent discussion of damages arising from the occupation of the West Bank and Gaza, the Israeli cabinet discussed but largely rejected the establishment of a compensation fund. The government’s position--that each side should compensate its own--received near-unanimous editorial support in the Israeli press, not to mention from the opposition.[7]

There is now way of knowing, of course, how Israeli public and government attitudes might change in the context of final status arrangements. Consequently, it is possible that the current reluctance to offer compensation may erode over time. It is also possible, however, that it will remain, or even increase. Israel will likely face substantial short-term defence and redeployment costs in the course of final status arrangements, which may make it less willing to contribute funds for compensation.

Whatever the future may bring in turns of attitudes and resource availability, it is likely that an inverse correlation will continue to exist between the financial and normative (“admission of guilt”) components of possible Israeli compensation. In other words, the less compensation looks like reparations, the more likely Israel may be to offer funds. Consequently, it may be desirable to have Israeli donations made through some form of regional development or “peace” fund, thus disconnecting Israel from actual refugee claims. At a minimum, such contributions might total a few hundred million. The drawback, of course, is that this will be less acceptable for Palestinians, for whom the normative component is quite important.[8] Another possibility is to tie Israeli contributions to such a fund to Arab contributions, with the latter used to compensate Jewish refugees.[9]

Israeli settlements can also be considered as a potential part of an Israeli contribution to a compensation package. The potential value of ex-settler housing stock is uncertain, depending on the outcome of territorial negotiations, the number of settlers electing to remain in the West Bank and Gaza, and the method used to value housing stock (purchase price? potential selling price? Israeli government compensation amounts for settlers? house construction or replacement costs?) Back-of-the-envelope calculations suggest that this might be worth between $280 million and $1.4 billion, providing housing for between 84,000 and 210,000 returnees.[10] A further difficulty of using housing stock is its “lumpiness” and non-fungibility: the resource cannot be used to compensate diaspora Palestinians, and even the upper estimate only provides enough housing for roughly a quarter of likely returnees. Other Israeli “investments” in the West Bank and Gaza--the value of which Peretz[11] puts at “tens of billions [of dollars]”--are even more problematic, since it is unlikely that Palestinian refugees would consider such collective goods as power lines or roads (built on expropriated land!) as representing any meaningful form of compensation.

A second major source of potential refugee compensation derives from the wind-down of UNRWA as part of any final resolution of the refugee issue. At present UNRWA has an annual budget of $360 million. However, it is highly unlikely that, in an era of growing financial austerity, donors will continue to maintain this level of contribution to the refugee issue once UNRWA is dissolved. More likely is a commitment to maintain UNRWA-levels of funding for a refugee package for a discrete period of time, say five years.

This is the assumption used by Mark Heller.[12] Updating his estimates to reflect the current level of UNRWA funding, one arrives at a total of $1.8 billion available for a UN assistance program. Of this, Heller suggests, approximately $673 million would be required for the maintenance of existing WBG refugees, $746 million for diaspora and yet-to-be repatriated refugees, leaving $376 million in investment funds for the rehabilitation/compensation of 750,000 returnees.

If anything, this estimate lies at the upper level of possible resource availability. To start with, the Palestinian Authority would be required to bear to cost of (ex-)refugee maintenance after the end of the five year period, thus imposing a significant burden on its resources. Second, host countries are likely to claim some of a “UNRWA dividend” as their own, arguing that they will face a continuing “burden” of unrepatriated refugees. Indeed, one alternative calculation of possible UNRWA resources available for compensation/returnee integration estimates the amount at $200 million.[13]

International Donors

Existing WBG Aid
A third possible source of funding is contributions from international donors. To date, $2.5 billion has been pledged in assistance to the West Bank and Gaza for 1994-98. However, prior to agreement on final status arrangements, funding for refugee related projects cannot and will not be regarded as representing part of a compensation package (although some might be directed towards the absorption of “displaced persons” allowed to return to WBG under the Quadripartite process). Thus, were agreement to be reached on refugee compensation in mid-1997, approximately $750 million might remain. In theory, refugees might be expected to benefit from this in proportion to their share of the WBG population (presently 53%), or even disproportionately given their relatively poorer socio-economic circumstances--thus suggesting some $400 million. In practice, however, the front-loading of the grant component of the 1994-98 assistance program, start-up and administrative costs, and the in-stream cost of non-refugee, non-compensation projects would likely reduce this amount by half or more, to under $200 million.

New International Financing for Compensation
In addition to the redirection of some of the existing WBG aid into refugee compensation, additional and continuing contributions might also be sought from international donors above and beyond the redirection of (ex-) UNRWA funding. It must be recognized, however, that most Western and Arab aid budgets are now facing substantial contraction. Moreover, there are other demands on international donors, notably from Bosnia which may require in excess of $1 billion per year in reconstruction funds during approximately the same time period.[14]

Given this--and given that only $2.5 billion was available for the far more urgent and strategically important need for transitional assistance to the West Bank and Gaza--it is likely that additional international assistance specifically for refugee compensation and rehabilitation will likely total under $700 million, and possibly less than half that amount.[15]

The figures presented above are, at best, very rough estimates, based on tenuous assumptions about unpredictable future developments. They do, however, point to what appear to be potentially serious shortfalls in the level of resources available for refugee compensation (see Table 1).

TABLE 1: Potential Compensation Resources

SOURCE upper range estimate lower range estimate
regional development/peace fund
transfer of settlements

$10,000 m

$1,400 m

$200 m
$280 m
UNRWA: wind-down funding $376 m $200 m
International donors
existing WBG aid
contributions to compensation fund

$400 m
$700 m

$200 m
$300 m
per capita*
per household**
per claimant***
$12,896 m
$1,180 m

*(based on projected 3.3 million refugees in 1997)
**(based on average household size of 6.5)
***(based on PCC estimate of 711,000 1948 refugees)

The “high” estimate presented herein ($12.9 billion) falls below almost all Palestinian assessments of refugee compensation claims, and far below the highest such figures. Moreover, more than three-quarters of the high estimate is based on the (far-from-certain) assumption of Israeli willingness to directly fund substantial amounts of refugee compensation. The low estimate ($1.2 billion)--based on less optimistic but perhaps more realistic political assumptions--is far below the minimum level of compensation required, amounting to the clearly inadequate sum of $358 per UNRWA-registered refugee, or approximately $2,324 per household. These figures, moreover, assume that such amounts are wholly available for compensation, rather than some funds being diverted to non-compensatory rehabilitation costs.

If a shortfall does indeed exist--and especially if it is of the potential magnitude suggested by the lower range estimates--this poses a severe challenge to final status negotiations on the refugee issue. This is particularly true if an individual claims-based model is used. Consequently, it becomes important to think about ways of both increasing potential resources and delivering/packaging available funds in ways that increase their real and apparent benefit. This suggests a variety of possible areas for future research and dialogue:

Israel: To what extent can existing Israeli taboos against compensation payment be minimized within the Israeli polity? Is there a role for public dialogue on this issue? Can Jews displaced from Arab countries be transformed from opponents of Palestinian refugee compensation to potential allies in the quest for a regional arrangement? What is the actual extent and possible valuation of housing stock in Israeli settlements? In what ways can a compensation fund be structured and labelled so as to maximize Israel’s willingness to contribute substantial funds? The preceding analysis strongly suggests that the resources available for refugee compensation will be highly inadequate unless Israel assumes a substantial portion of the compensation burden.

International Donors: How can Arab and international support for compensation be increased? Can the “wind-down” allocation from UNRWA be extended? Can UNRWA itself be utilized as the mechanism for compensation payments, thereby increasing the likelihood of extended funding? To what extent can existing WBG aid be used to assist in the development/rehabilitation of existing refugee populations and the integration of returnees? To what extent can the later (1997-98) tranches of WBG aid be used for compensation purposes? Can debt forgiveness be used as a mechanism for compensating host governments for services to remaining diaspora communities, thus freeing up cash resources for compensation payments to the PA and/or individual claimants?

Mechanisms: Is it necessary to use individual and claims-based models of refugee compensation, or are there viable collective and entitlement-based models? If so, what might they look like? Can the amounts of compensation be increased by stretching contributions and disbursements over an extended period? Can the effectiveness (and apparent magnitude) of compensation be increased by making a portion of it available as medium-term loan or loan guarantee funds at concessional rates? Are there potential non-monetary components of a compensation package? If so, what might these be?

To the extent that these issues are addressed in advance of final status negotiations--and positive and creative methods are found for dealing with the problem of potential resource scarcity--the prospects of reaching a just and mutually acceptable solution for the Palestinian refugee issue will be substantially enhanced.

[1] Don Peretz, Palestinian Refugee Compensation Information Paper 3 (Washington, DC: Center for Policy Analysis on Palestine, May 1995), pp. 14-15.

[2] Sami Hadawi, Palestinian Rights and Losses in 1948: A Comprehensive Study (London: al-Saqi Books, 1988), p. xvii. A lower figure of $25 billion results from directly converting the 1948 assessment of £1.18 billion using the rates adopted by Peretz.

[3] Rashid Khalidi, “Toward a Solution,” in Palestinian Refugees: Their Problem and Future Special Report (Washington DC: Center for Policy Analysis on Palestine, October 1994), p. 24.

[4] Shlomo Gazit, The Palestinian Refugee Question, Final Status Issues Study 2 (Tel Aviv: Jaffee Centre for Strategic Studies, 1994), translation from Hebrew by Mira Sucharov. Gazit’s proposal that Israeli compensation could be paid from future (East) German holocaust reparations seems politically highly questionable.

[5] Mark Heller and sari Nusseibeh, No Trumpets, No Drums: A Two-State Settlement of the Israeli-Palestinian Conflict (New York: Hill and Wang, 1991), p. 96. Elsewhere they note competing Jewish compensation claims, and the need for Arab financial assistance to fund Palestinian repatriation/resettlement (p. 130).

[6] Don Peretz, Palestinian Refugee Compensation, Information Paper 3 (Washington DC: Center for Policy Analysis on Palestine, May 1995), p. 11.

[7] See, for example, Hatzfoeh, 2 January 1996; Ha’retz, 3 January 1996; Davar Rishon, 3 January 1996; Ma’ariv, cited in Reuters World Report, 3 January 1996. Within cabinet there was some support for the establishment of a fund for “exceptional cases”, notably from Moshe Shahal, David Libai and Michael Ben-Yair, when it was suggested that a blanket refusal to pay compensation might not survive a challenge in the Israeli courts.

[8] See, for example, Khalidi,”Toward a Solution,” in which he stresses that “there must be some symbolic recognition by Israel of the hurt that was done to the Palestinians made refugees in 1948.” (p. 24).

[9] Here the major problem is Arab responsibility: the Arab countries which account for the bulk of forced Jewish migration are either relatively poor (Yemen, Egypt) or politically unwilling to participate (Iraq). None of the oil-rich Gulf states had large pre-1948 Jewish populations, and hence might be reluctant to contribute.

[10] The upper estimate assumes a full withdrawal of 140,000 settlers from the West Bank and Gaza, but none from Jerusalem, thus making available approximately 28,000 housing units valued at $50,000 each. The lower estimate assumes that Israel annexes 10-15% of the West Bank (containing 70,000 settlers), and that 20% of remaining settlers elect to remain under Palestinian sovereignty, leaving approximately 11,200 housing units valued at $25,000 each. Resettlement figures assume a Palestinian household size 1.5 times larger than that of Israeli settlers.

[11] Don Peretz, Palestinians, Refugees and the Middle East Peace Process (Washington, DC: United States Institute of Peace, 1993), p. 85.

[12] Mark Heller, A Palestinian State: The Implications for Israel (Cambridge MA: Harvard University Press, 1983), p. 93. Heller’s original 1980 figures have been multiplied by 1.7 to reflect the 1996 UNRWA budget.

[13] Rex Brynen, “Refugee Compensation: comments,” posted to FOFOGNET Digest listserv, 4 November 1995. This is based on the assumption that: 1) $2 billion is available from the wind-down of UNRWA; 2) that two-thirds of Palestinian refugees remain in the diaspora at the end of five years, thus requiring that a proportional amount be devoted to services and “compensation” for host governments; 3) and that approximately two-thirds of the remainder is required by the PA to maintain services in the WBG.

[14] Indeed, Bosnian Prime Minister Hasan Muratovic has noted that Bosnia and the PA are “competitors for reconstruction aid.” The World Bank has estimated Bosnia’s aid requirements as totalling $5.1 billion over 3-5 years. United Press International, 24 January 1996; Associated Press, 24 January 1996; Reuters World Report, 4 February 1996. To date, $510 million has been raised for 1996.

[15] This is based on an informal survey of Western aid and foreign ministry officials, whose estimates have run from $750 million to zero. Some added that the Palestinians already enjoyed a disproprtionate share of UN spending on refugees--$120 per capita, compared to around $66 per capita for refugees in the Balkans, and even lower amounts in Central Africa--and that this could not be expected to continue.

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