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Palestinian Losses in 1948: Calculating Refugee Compensation

Source: Center for Policy Analysis on Palestine
2425-35 Virginia Avenue, NW
Washington, DC 20037
Tel: 202.338.1290
Fax: 202.333.7742

By Atif A. Kubursi

Information brief,
Number 81, 3 August 2001

Overview : Since 1987 almost every major peace agreement signed has included provisions for the return of displaced persons. Compensation for lost property and opportunity has been recognized as essential in the reconciliation process. Compensation and the right of return are increasingly seen as complementary, not as substitutes for one another. Restitution of property and compensation for lost opportunities are primary components of the rights of refugees, regardless of whether they choose to return to their homeland. Compensation generally covers at least six situations: (1) refugees choosing not to return; (2) returnees who lost movable or immovable property or suffered material damage to property; (3) incomes derived from the use of refugee property; (4) lost income streams, pensions, insurance, and deposits; (5) collective goods, such as infrastructure and natural resources; (6) non-material damages, such as psychological injuries.

Compensation estimates are only meaningful within the overall context of the empowerment of refugees and the preservation of their options and choices. Not all aspects of the loss of a homeland can be measured in monetary terms. The argument here is that acceptable monetary value may be assigned as fair compensation for property losses. For Palestinians, compensation would be a partial payment, at best, for the enormous losses and suffering endured for more than 53 years.

Finding a Formula: There are several precedents delineating compensational losses and the financial values assigned them. The documentation used by Jews in their submissions for compensation to Germany for the crimes of the Nazis is part of the basis for the values and estimating procedures used here.

The Palestinian economy, which Israel replaced, was a viable one with a significant flow of output and income that sustained a growing population of approximately two million people in 1948. In 1944, national income at market prices was estimated at L123 million ($496 million dollars). Although inflation in the 1940s was high, it does not account for the full increase in national income between 1939 and 1944. Given the prevailing real interest rate at the time (4 percent), it is legitimate to claim that the total wealth in Palestine in 1944 was around L3.075 billion ($12.4 billion). The Palestinian share of this wealth was roughly 51.2 percent, given the estimate of Palestinian net domestic product of L63 million ($256 million) in 1944. This translates into L1.575 billion ($6.4 billion).

Since non-property income then constituted about 50 percent of total income, the value of "human capital" of the refugees given that they represented 55 percent of the Arab population of Palestine would be L433 million (or $1.745 billion) in 1944 prices. Indeed, this is a maximum figure, because part of the human wealth was carried with the refugees. A good part of it was also lost because of the disappearance of complementary inputs. Most of the refugees were engaged in farming, so when they were deprived of their land, their human capital was lost. Refugees who were not farmers lost their value as labor through unemployment. They were confined to camps by the sheer economic force of being excess labor in labor-saturated economies.

Since prices and quantities in 1948 were higher than in 1944, an upward adjustment of the 1944 figures is needed. If real growth is 4 percent per year-a modest figure in historical perspective-and if prices are assumed to rise at the modest inflation rate of the United States, the refugees' loss in human wealth at 2000 prices would total $102 billion. If these losses are adjusted for inflation only, they total $13.2 billion. An alternative accounting method considering the full range of assets at their 1944-1948 market values estimates full compensation for Palestinian material losses at $743 million ($2.994 billion) in 1948 prices. In 2000 prices (adjusting for inflation between 1948 and 2000) they total $22.5 billion. The inclusion of human capital losses raises compensation to $35.7 billion. If a modest real rate of growth of 4 percent is included, these numbers rise to $173 billion and $275 billion, respectively. Indeed, the inclusion of compensation for psychological damage and pain, following German compensation schemes, would raise this total to $327 billion.

Payment Schemes : Designing a fair and affordable compensation regime that refugees may be willing to accept and funders willing to pay is not a simple matter. The most difficult issues are the following: (1) Equity-Should all refugees receive the same amount? (2) Universality-Should all refugees be compensated? (3) Sustainability-Should refugees receive a lump sum in cash or shares in an investment fund? (4) Host-country concerns-Should payments to refugees be invested in the host country where they are welcomed and where they choose to stay?

Different compensation regimes will emerge depending on the answers to these questions. There are two equity perspectives: horizontal equity stipulates that people in the same situation should receive similar treatment, but vertical equity stipulates that people in different circumstances be treated differently. The per capita compensation approach provides refugees with a wide degree of flexibility, is easy to administer, requires little documentation, and militates against the undesirable consequences of re-creating the property and gender inequities of the past. Alternatively, it may not take full account of the dynamic circumstances that different people face. Compensating a single-parent family in the same manner as a two-parent family is perhaps not equitable. Moreover, Palestinian refugees in Lebanon have typically faced different circumstances, constraints, and costs than those in Jordan, Syria, and the West Bank and Gaza and thus feel they should be compensated differently than their counterparts in these areas. While per capita payments can be adjusted to take differences into account, it is also possible to preserve the principle that all Palestinian refugees suffered equally the pains of separation from their homes and land, so compensation must be universal and include all of them. Also, separating compensation packages from property and physical claims liberates these claims from being contested by counterclaims for which the refugees bear no responsibility.

Who will be compensated? The universality principle suggests that all should be compensated for the standard pains of losing their homeland, even when they appear that they do not need it. Otherwise, pitting the interest of those to be compensated against those who will not receive compensation will create tension and diminish the acceptability and efficacy of the program. There is considerable evidence that universal programs (e.g., Canadian medical insurance) create a sense of common ownership and buy-ins for society at large. This explains perhaps the tenacity with which different people hold to these programs even when some of them appear not to need them and can easily do without them.

How should compensation be paid? While Israel is fully responsible for the restitution of the property of the refugees and for compensating them for all their material losses and psychological pain, it is practical and highly likely that other parties may be willing to pay or help in raising funds for compensation. A lump sum cash payment for each refugee may be the easiest and cheapest way to administer the program. Yet there are serious concerns about the sustainability of such programs and the possibility that payments will be wasted or quickly consumed. Privatization programs in many transition economies have shown that the establishment of investment funds to oversee the management of these payments may generate the income flows targeted by the compensation regime. Equally important is the fact that these investment funds can be organized to invest the compensation monies in Palestine and host countries, whose interest in cooperating or accommodating the refugees' choices may be raised by the investment of these funds in the countries' economies.

An ideal compensation package is not a reasonable expectation and compromises must be made. Nonetheless, the more equitable, universal, and sustainable a program is, the more durable and acceptable it is likely to be.

Atif A. Kubursi is Professor of Economics at McMaster University. The above text may be used without permission but with proper attribution to the author and to the Center for Policy Analysis on Palestine. This Information Brief does not necessarily reflect the views of the Center for Policy Analysis on Palestine or The Jerusalem Fund.

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