Palestinian Losses in 1948 in 1999 Dollars

Atif Kubursi
McMaster University

1.0 Introduction

The Palestinian economy, which Israel usurped, was a viable economy with a significant flow of output and income that
sustained a growing population of approximately 2 million people in 1948.

A homeland is much too precious to be assigned a monetary value. No financial award, however large, could compensate
fully for its loss. However, the Arab wealth in Palestine in 1948 which was confiscated by the Zionists was substantial,
and an accurate assessment would serve, at least, to indicate the magnitude of the losses and the difficulties the Palestinians
had to endure in its absence. It also helps define the range of values that might be considered as basis for compensation
should they choose this alternative. Estimate of losses and the discussion of compensation do not override the basic issue,
which is the right of return of the refugees. Compensation estimates are only meaningful within the overall context of the
empowerment of refugees and the preservation of their options and choices. Surely, not all aspects of the traumatic loss of
a homeland can readily be measured in monetary terms. The argument here is that monetary values may be assigned to
these losses that might be acceptable to those who suffered as fair compensation. There are many precedents that can be
used to delineate the range of values to put on such losses. We have opted to use the special documentation that was used
by Jews in their submissions for compensation to the Federal Republic of Germany under the terms of the
Wiedergutmachung programme, Wiedergutmachung meaning ' to make something good again' for the crimes of the Nazis.

Use of the Jewish submissions are based on many considerations but primarily on the fact that the Palestinian submissions
to Israel for compensation cannot legitimately be dismissed by the same party that used them to get compensated.
Moreover, the Jews were successful in their bid for compensation for psychological suffering under the
Wiedergutmachung; a precedent of considerable importance to the many Palestinians who suffered severe psychological
and other non-property related hardships. In fact, the psychological and human suffering of the Palestinians are assigned
monetary values using the same estimates and rules that governed the compensation of Jews by the Federal Republic of
Germany under the terms of the Wiedergutmachung programme. The following passage is a quote from the
Wiedergutmachung document that deals with the need to consider compensation for non-property losses.

...After the war, the occupation powers in Germany enacted laws in their individual zones which restored property
confiscated by the Nazis to the original owners (mainly Jews). These laws were restricted to real property. They did not
encompass personal damage to the victims of Nazi persecution -- physical and psychological suffering, or unjust
deprivation of freedom, or injury to a person's professional or economic potential. Nor did these laws provide for
assistance to the widows and orphans of those who had died as a result of Hitler's policies. 1 The parallels with the Palestinian situation are evident. It is easy to see that if for ' victims of Nazi persecution', ' victims of Zionist persecution'
was substituted a similar situation should apply to the Palestinians. The German basis of compensation was all-inclusive
and that is the precedent that is relevant and should form the basis of our estimates of Palestinian losses.

This paper has a number of objectives but its main purpose is to assess both the physical and psychological Palestinian
losses in 1948 and to convert these values into current dollars. Although, this is not the first such attempt, it is the most
comprehensive and precise assessment, based on valuation methods, data, and procedures that were not available to
previous studies.

1.1 The Theoretical Basis for Compensation

Economics is based on the fundamental postulate that human beings when unimpeded would seek to arrange their economic
affairs in such a way as to obtain the greatest possible satisfaction. Any arrangement that does not produce this outcome
is inadequate and will soon be displaced by one yielding a higher level of satisfaction (or 'utility'). That is, individuals will
take advantage of any opportunities for exchange to achieve the greatest possible satisfaction where their willingness to
trade is matched exactly by their opportunity to do so. Circumstances outside the objective conditions of the market that
preclude such an outcome imply lower levels of utility -- loss of welfare, as it is usually called. The size of this loss is
indicated by the difference between the levels of satisfaction attainable in the two circumstances. Alternatively, it is equal
to that monetary compensation that would permit the higher level of utility to be realized.

This conception of economic loss also suggests that social losses are the sum total of individual losses. This is true,
however, only if all goods are private goods (those goods any individual's consumption of which reduces what is available
to others in the market). In the case of public goods (those goods of which one individual's consumption does not
diminish their availability to other members of the society), special adjustments would have to be made.

Essential to this analysis is the specification of each individual utility function and the determination of the effect on utility
of the forced or imposed situations that lead to loss of welfare. Individual utility indices differ not only with respect to the
arguments that define them, they also differ with respect to their nature. Typically all things that contribute to utility are
included as arguments of those indices. This would make the list too long for any useful analysis. Alternatively, we may
group these arguments under the following headings: private goods, public goods, individual psychological needs, and social
psychological needs. Private goods include all the commodities and services desired and purchased by consumers; public
goods include education, health services, etc.; individual psychological needs cover a wide spectrum comprising
tranquillity, safety, absence of pain, family cohesiveness, etc.; and social psychological needs include national identity,
cultural activities, etc.

Another widely used approach to measure the losses of injured parties is predicated solely on the income streams that
would prevail in the absence of the injury as compared to that existing stream. This restricts the losses to purely income
losses and diminishes the range of injuries and the way different people respond to them. The utility analysis is more
general, allows for different valuations and is more inclusive. It is predicated on two main assumptions:

   1. Individuals shall be considered better off if they are in a position of their own choosing. Since we define utility as that
which individuals attempt to maximize, it follows that they will choose rather more than less utility. An increase in utility
can then be regarded as synonymous with being better off.

  2. An individual utility depends entirely on the volume of commodities and services they consume and on the needs they
satisfy. They will always be assumed to choose to consume more, or at least not less, of a commodity and to satisfy more
of their needs rather than less.

This manner of defining the welfare function severely limits the form which social value judgements can take. If the
welfare of society is held to depend upon the utility level of the members of society, and upon nothing else, then the only
further social value judgements to be made concern the welfare significance of each individual's utility index. In a totally
egalitarian society each person's utility would count equally, though some form of interpersonal compatibility of utility in
cardinal terms would be necessary to give substance to the judgement. Alternatively, it might be held that some members
of society are more deserving than others, and their utility indices would be weighted more heavily in the welfare function.

Whichever form is specified for the social welfare function, it is clear that individual losses are translated into social losses
and the social welfare function can be used to assign valuation of these losses. The concept of compensation as developed
by Hicks and Kaldor is a case in point.3 The concept underlying the compensation principle is that if a change in a
situation would result in some persons being better off and others worse off, those who gain could compensate the losers
in such a way that on balance everybody would be better off.

Consider the representation of an individual's utility map in Figure 1. The numeraire (or money) is measured on the
vertical axis and the commodity X on the horizontal. Consider first an individual who receives income OM2 and purchases
OX1 of X at price P2, and attains equilibrium at point A on U1. If price is reduced to P1, he will purchase OX4 of X, and
be in equilibrium at point B on U11 is the increase in his satisfaction; the problem is to express this in money. Seen
differently, the individual is maximizing his utility at point B and a forced situation (a more binding budget constraint) is
imposed on him which forces him to point A on U1. His loss of satisfaction is the difference between U1 and U11 and the
challenge is to assign a dollar value to this loss. This can be done easily along the following lines developed by Hicks.

Figure 1: The Principle of Compensation
Construct a line with slope P1 tangent to U1 (at D) to intersect the ordinate at M1. If the individual income is reduced by
M1M2 at the same time as the price is reduced, he will be just as well off at D as he was at A. The amount M1M2 is
therefore a monetary measure of how much better off he is if the price falls and there is no change in his money income.
Alternatively, M1M2 represents the financial compensation to be paid to the individual to take him back to his original
utility level before the new imposed situation. M1M2 is called the 'compensating variation' for the price fall or for the
forced situation.

Compensation is, therefore, synonymous with indemnification in the legal meaning of the undoing of damage done and
losses suffered. Total indemnification means in essence, a return to a situation which existed before the loss was incurred.
If it is done by way of restitution, the old situation is restored in specie. If it is done wholly or partially by way of
compensation, the consequences of the damage are liquidated although the old situation is not restored in the true sense of
the word. 4. It is clear, however, that such a return to the old situation is possible only by way of total restitution or total
indemnification and only when changes in the general financial, economic, social, and demographic situations are taken into

1.2 Previous Valuations of Palestinian Losses and their Deficiencies

A list of Arab losses in Palestine should include the following items:

A. Immovable property (real estate)
This includes all types of land (rural and urban) whether privately or collectively owned, publicly recorded premises
(airports, harbours, railways, buildings, school, etc.), churches and mosques, etc.
B. Movable property
This includes a wide spectrum of commodities and assets ranging from consumer durable (appliances and furniture) to the
tools and implements of industry, to human skills and education.
C. Lost opportunities
The income forgone due to loss of jobs and complementary inputs over a finite horizon constitutes a legitimate grievance
that should be included in a comprehensive assessment of losses.
D. Psychological damage
Of special concern to human welfare are security, safety, identity, and self-realization. Any denial of these psychological
'commodities' would diminish the individual's equilibrium and happiness. In technical economic jargon it would force
individuals to lower levels of utility.

The United Nations Palestine Conciliation Commission attempted to assess these losses; but it considered
only a very small sub-set of these losses, and assigned the meagre sum of about £P 120 million in 1951.5 It is desirable and
necessary, therefore, to re-examine the methodology used by the UN Land Specialist in 1951 and the work of the UN Land
Expert in 1964,6 and to re-evaluate these losses, adding to them the major components identified by broader
considerations. We are emboldened to use this approach by a number of considerations:

    a) the economic theoretic justification along the lines of the Hicks-Kaldor compensation principle noted above;
    b) the settlement of Jewish claims by the Federal Republic of Germany, which included compensation for psychological damage and for denial of social needs.

Several other attempts have been made to identify and assess Palestinian losses. The UN Land Specialist's evaluation was
indeed a major contribution to this literature. However, it was, as noted above, restricted to a small sub-set of the losses
and assigned exceptionally low values to them. 7 There is also the study of the Arab Higher Committee(AHC)
which was first published in Cairo in 1955 under the title Palestinian Refugees: Victims of Imperialism and Zionism and
then in Beirut under the title Statement in 1961. The AHC assessments were substantially higher than those of the UN
study and included several additional non-real estate assets (e.g. factories, jewellery livestock, public transport facilities,
etc.). Nevertheless, these estimates failed to include lost opportunities of income generation, the depletion of human
capital stock, innumerable public and private assets (schools, airports), and private and social psychological damage.
While it represented an improvement on the UN Land Specialist's study, it fell short of computing the full range of losses
and used below-market indices in the evaluation of real-estate losses. 8. A third assessment was carried out by the
Arab League Expert Group and produced similar results to those of the AHC. Finally, Professor Yusif Sayigh
attempted to redress some of the omissions in the preceding assessments in his book The Israeli Economy (1964). His
coverage was more extensive, his indices more realistic and generally in conformity with economic principles, and his
analysis was more perceptive and original than all the preceding attempts. Again Professor Sayigh's estimates, although
more extensive than preceding studies, did not cover the full range of lost assets and missed opportunities, and disregarded
psychological damage, etc. Besides, some of the figures used by Professor Sayigh were pure estimates that needed
confirmation by collation with the results of hard surveys, particularly those relating to real estate.

1.3 Plan of the Paper

A brief outline of the rest of the paper is sketched here to set the tone for the development of our conclusions. The next
section provides a detailed review of all past attempts at evaluating Palestinian losses, followed by a general overview of
the Federal Republic of Germany's repatriation and compensation schemes for the victims of Nazi persecution as well as a
reworking of the present value of these schemes in terms of today's prices. A special section is devoted to the examination
of the typology of Palestinian losses excluding land, while a total section is devoted exclusively to the evaluation of rural
and urban lands and housing. This is our major contribution and it was, therefore, felt necessary to devote a special section
to the subject. Finally, we conclude with an overall estimate of the losses and an analysis of their significance and the way
they differ or relate to earlier estimates.

1.4 A Synopsis of the Results

Full compensation for Palestinian material losses would amount to a sizeable total of £P743 million in 1948
prices. Translating this total into 1998 prices in United States dollars brings it to $140 billion. The inclusion of
human capital losses raises the total compensation to $223 billion. Indeed, the inclusion of compensation for
psychological damage and pain, following the FRG compensation schemes to Jews, would raise this total to
a staggering $271 billion.

2.0 The Topology of Palestinian Losses: A Re-evaluation

The Palestinian economy which Israel usurped was a viable economy with a significant flow of output and income that
sustained a growing population of approximately 2 million people in 1948. In 1944, national income at market prices was
estimated at £P123 million. In Tables 2 and 3 we present estimates of national income at different periods. It is clear from
these tables that national income in Palestine was significant and growing fast. Although inflation in the 1940s was high, it
does not account for the full increase in national income between 1939 and 1944, as is clear from the data in Table 3

Given the prevailing real interest rate at the time (4 per cent), it is legitimate to claim that the total wealth in Palestine
(physical and human) in 1944 was of the order of £P3.075 million. The Arab share of this wealth is roughly 51.2 per cent,
given the estimate of Loftus1 of Arab net domestic product of £P63 million in 1944. This translates into £P1,575 million.2

Since non-property income (labour income) then constituted about 50 per cent of total income the value of non-human
wealth should be around £787.5 million. The refugees represent 55 per cent of the Arab population of Palestine and, on
the basis of this proportion, their share of non-human wealth would be £P433 million in 1944 prices. Indeed, this is a
lower bound (minimum figure) because part of the human wealth was lost as refugees lost the complementary inputs.
Most of the refugees were engaged in farming.4 When they were deprived of their land, their human capital was lost too.
Refugees who were not farmers lost their labour skills through unemployment. They were confined to camps by the sheer
economic force of being excess labour in already labour-surplus economies.

If lost opportunity and deterioration of human capital, through lack of use or absence of complementary inputs, were to be
valued, another £P300 million would have to be added to the losses of the refugees, bringing the total to £P733 million in
1944 prices.

Since prices and quantities in 1948 were higher than in 1944, an upward adjustment of the 1944 figures is needed. If real
growth is put at 4 per cent per year (a modest figure in historical perspective), and if prices are assumed to rise at the
modest rate of 6 per cent year, the refugeesÕ share of property wealth in 1948 would have totalled £P634 million and of
total wealth £P1,073.2 million. In 1984, these values would have risen to £P19,600 million and £P33,200 million
respectively (using an interest rate of 4 per cent and an average annual inflation rate of 6 per cent). The US dollar
equivalents of these amounts are $79,000 million and $133,800 million, respectively.

Table 1: National Income of Palestine, 1939, 1942, and 1943 (£P million)

1939 1942 1943
________________________________________________________________________________
Agriculture, fishers and forests 5.97 18.51 20.20
Manufacturing, mining, and private utilities 5.97 14.72 21.70
Contract building and construction 1.84 5.82 5.70
Housing 3.40 4.25 4.80
Transport and finance 4.59 9.33 11.00
Hotel, restaurant and domestic service 1.50 2.50 3.00
Other services 1.75 7.98 9.60
Government 3.47 5.81 7.20
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Total 30.04 75.89 90.00
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Source: Robert Nathan et al., Palestine: Problems and Promise, an Economic Study, Public Affairs Press 1946, Washington,
D.C., p. 156.

Table 2: National Income of Palestine, 1944 (£P million)

------------------------------------------------------------------------------------------------------------------
Agriculture and livestock 28.257
Fisheries .850
Manufacturing and handicrafts 28.233
Housing 6.149
Building and construction 5.655
War Department airline employment 3.914
Palestine troops 2.270
Transport and communications 8.247
Commerce and finance 19.700
Government and local authorities 7.501
Hotels, restaurants, and cafes 3.069
Domestic and other services 6.831
Overseas income 2.000
______ Total 123.023
------------------------------------------------------------------------------------------------------------------
Source: R. Loftus, National Income of Palestine, Government Printer, Jerusalem, 1944, p. 1.

Table 3: Inflation and Real Rate of Growth of GNP in Palestine, 1939 to 1944
------------------------------------------------------------------------------------------------------------------
Year Price Nominal national Real national income
income in 1939 prices
_____________________________________________________________________
1939 100 30.04 30.04
1940 131 -- --
1941 166 -- --
1942 211 75.89 35.97
1943 230 90.00 39.13
1944 248 123.02 49.61
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Source: The price index is the cost of living index for Arabs and Jews from Palestine Year Book, p. 162. Nominal national
income figures are from Tables 19.1 and 19.2 of this section. Real national income is calculated by dividing nominal NI by
the price index.

Taking the lower of these figures as the working value of lost assets, a rough value of $79,000 million is required to
compensate the Palestinian refugees for their loss of these assets and to put them in an economic position equivalent to
that before they were driven out of their homeland in 1948.

It is useful to make a simple comparison of this value to the amount received by Jews and others from the FRG as
compensation for Nazi persecution. Our figures showed a total present value of DM347,000 million. In US dollar
equivalents this is approximately $116,000 million, slightly less than the compensation required to settle the overall
Palestinian claims. The major difference between the two measures is due to the long period that has elapsed since the
Palestinian losses. While the Germans dealt directly and promptly with their victims, the Israelis have shrugged off their
responsibility.

The detailed enumeration of property losses by type of asset and by value is undertaken in the following sections. We
begin with capital.

2.1 Ownership of Capital

There are a few countries for which estimates of national wealth have been compiled and few of them claim that they are
anything more than rough approximations. Palestine is numbered among those countries which have not attempted a
complete enumeration of national wealth. Nevertheless, certain basic information is available and will be presented here.5
Special care must be exercised to distinguish the shares of Arabs and Jews.

The additional problem of separating the relative shares of the two broad groups of the population in the wealth of the
country has involved additional difficulties which have been overcome only by the use of the methods of approximation
which must further widen the margin of error that limits the value of all such estimates.6
The enumerated capital includes: rural and urban land; industrial capital; agricultural capital; livestock; commercial and
private vehicles; commercial assets; financial assets; private and personal wealth; infrastructure; forestry; natural resources.

Rural and urban lands are the main capital. Their valuation was realized through a thorough and detailed analysis, and a
complete section is therefore devoted to this assessment. The remaining assets are assessed below.

2.1.1 Industrial Capital

The Palestine governmentÕs Census of Industry in 1943 covered a total of 3,470 establishments, of which 1,558 were Arab
and non-Jewish interests. Of the five concessions which existed then, three were Jewish-owned: Palestine Electric
Corporation, Palestine Potash Ltd., and Palestine Salt Co. The other two were Arab-owned: Jerusalem Electric and Public
Service Corporation and Shukri Deeb and Son, Ltd.

The census did not cover the entire industrial sector but excluded, notably, small enterprises in printing and publishing,
garages, laundries and small workshops which were predominantly Arab-owned. The findings of this census are presented
in Table 4.

Net output in manufacturing, mining, and private utilities was estimated in 1943 [see Table 1] to exceed £P21.7 million.
The difference of about £P6.9 million between the national accounts estimate and that of the census may be accounted for
entirely by the exclusion of small businesses from the 1943 census. Using an average capital-output ratio for Arab
establishments of 1.197, we obtain a value of £P8.3 million as additional Arab industrial capital in this sector. This brings
the total accumulation of capital invested in the industrial sector to about £P28.7 million. The Arab share works out as
follows: £P2.1 million of capital invested in the census-included establishments; £P8.3 million of capital invested in the
census-excluded establishments; £P2.5 million in the Arab-owned concessions. This gives a total of £P12.9 million in 1943
prices.

The 1948 value of Arab capital in industry, assuming a 10 per cent nominal growth rate per year between 1943 and 1948,
is estimated to be approximately £P20.7 million.7 The share of the refugees is again put at 55 per cent of the total,
resulting in an approximate value of £P11.4 million.

Table 4: Ownership of Industry in Palestine, 1943

_______________________________________________________________________
Item Arab & other Jewish Concessions Total
non-Jewish
______________________________________________________________________
Establishments No. 2,558 1,907 5 3,470
Capital invested £P 2,064,587 12,039,929 6,293,681 20,452,197
Horse power 2,625 57,410 133,673 194,708
Gross output £P 5,658,222 29,040,679 2,131,467 36,830,368
Net output £P 1,724,793 11,487,843 1,631,474 14,844,110
Persons engaged No. 8,804 37,773 3,400 49,977
Capital-output ratio 1.197 1.053 3.857 1.378
------------------------------------------------------------------------------------------------------------------
Source: A Survey of Palestine, p. 567.

Agricultural Capital

Three types of agricultural capital are to be distinguished here: first, agricultural implements of all sorts; second, the stock
of livestock maintained by the farmer; third, rural fixtures and houses (a special section will be devoted to that category).

The survey of Palestine values Arab agricultural capital at £P13.100 million in 1942 prices, divided as follows:8 Arab
rural housing £P9 million; Arab agricultural implements £P1 million; Arab livestock (at pre-war prices) £P3,1000 million.
This gives a total of £P13.100 million.

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