Peace would pump billions into Israeli economy, new study shows

Two-state deal would put extra $120 billion in Israeli coffers, while Palestinian economy would grow by $50 billion, Rand report says, but absence of deal could cost country billions

Raphael Ahren is the diplomatic correspondent at The Times of Israel.

A woman wearing a Muslim headscarf in Jerusalem, April 23, 2013. (Nati Shohat/Flash90)
A woman wearing a Muslim headscarf in Jerusalem, April 23, 2013. (Nati Shohat/Flash90)

Israel stands to gain some $120 billion (NIS 460 billion) over the next decade from a peace agreement with the Palestinians based on the two-state solution, according to an extensive new study from an American think tank.

The Palestinians would gain $50 billion (NIS 193 billion) from such a deal, according to the Rand Corporation, which measured current GDP growth rates, population growth rates and other factors to come up with the figures, released Monday.

The Palestinian gain would mean an average per capita income increase of about 36 percent, the group said in Jerusalem, while Israel, which has a larger economy, would see a more modest per capita gain.

On the other hand, the study found that the status quo or a deterioration of the security situation would dramatically worsen both societies’ economic standings. Even without the resumption of violent conflict, the international anti-Israel boycott movement alone could cost Israel about $50 billion in the next 10 years.

Rand, a nonprofit global policy research institute, analyzed the potential financial outcomes of five different scenarios: a peace accord and the implementation of a two-state solution; a unilateral Israeli withdrawal coordinated with the Palestinians and the international community; an uncoordinated unilateral withdrawal; nonviolent resistance, including Palestinian unilateral steps at international bodies; and the resumption of violent Palestinian uprisings against Israel.

“Obviously the number one takeaway [from our research] is that a two-state solution provides the best economic outcome,” said Rand’s vice president, Charles Ries. Bloodshed in the absence of a peace deal, on the other hand, would be extremely damaging to both parties, he added. “The economic impact of a return to violence is very clear and very disturbing.”

Charles Ries, vice president of the Rand Cooperation, presenting a study on the impacts of a possible peace agreement on the Israeli and Palestinians economies, in Jerusalem, June 8, 2014 (photo credit: Michal Fatal)
Charles Ries, vice president of the Rand Cooperation, presenting a study on the impacts of a possible peace agreement on the Israeli and Palestinians economies, in Jerusalem, June 8, 2014 (photo credit: Michal Fatal)

According to the study, the Israeli economy would lose about $250 billion “in foregone economic opportunities,” while the Palestinians would be likely to see their per capita GDP almost cut in half.

“Israelis gain substantially more from the two-state scenario and lose substantially more from a return to violence, in absolute terms. But both of those scenarios matter more, proportionally, to the Palestinians, because they have a smaller economy,” Ries said at a press conference hosted by the Jerusalem Press Club.

“Both the coordinated and the uncoordinated unilateral withdrawal really don’t have a huge economic effect on either side,” said Ross Anthony, an economist who directs Rand’s Israeli-Palestinian Initiative.

The California-based Rand Cooperation, which seeks to help “improve policy and decision-making through research and analysis,” had several economists work for several years to complete the study, conducting interviews with experts in the region and analyzing massive amounts of publicly available data on the local economy.

The study, which is more than 250 pages long, was recently presented to Israeli and Palestinian government authorities. Its authors will spend the next few days presenting it to various audiences in Ramallah, Brussels, London and Washington.

In order to compute the potential costs and benefits of a peace agreement, Rand’s researchers used past trajectories of GDP and population growth rates, as well as other factors, and calculated how they would likely develop under the various scenarios.

In a possible two-state peace agreement Israel would maintain the major settlement blocs but withdraw some 100,000 settlers from more isolated West Bank settlements. The international community would cover two thirds of the costs for the resettlement of the evacuated Israelis. Some 600,000 Palestinian refugees would be allowed to enter the new Palestinian state.

Under this scenario, the Arab world would normalize its trade relations with Israel. “Israel’s security is guaranteed by the international community, and investment in both Israel and Palestine is forthcoming to take advantage of a new stable climate and opportunities that peace bring,” the study reads.

“Our analysis suggests that as a result of the effect of changes and direct and opportunity costs on GDP in the year 2024, Israel’s GDP would increase by $23 billion over what it would have been if present trends had continued, while the GDP in [a new Palestinian state in the West Bank and Gaza] would be $9.7 billion larger.”

The average Israeli would see his or her income increase by $2,200 — about five percent — while the average Palestinian income would dramatically rise by $1,110, or 36 percent.

On the other hand, a violent uprising — a scenario that would see the collapse of the Palestinian Authority and Israel having to take over its responsibilities — would lead Israel’s GDP to decrease by $45 billion, according to the study. “Israel’s drop in GDP stems from effects of increased security costs and the effects of an unstable environment and investment and tourism.”

The authors of the study acknowledge that there are several important non-economic factors that have prevented Israelis and Palestinians from reaching a peace agreement. These include regional instability, lack of political consensus and trust in the other side, perceived security risks and a clash of historical narratives, according to the study.

In their research, Rand’s economists estimated that the Boycott, Divestment and Sanctions movement could lead to a 2 percent decrease in the country’s GDP “as result of financial sanctions and limited restrictions on exports to Israel.”

In case no peace agreement is signed and Israel does not withdraw from the West Bank, leading the Palestinians to take to nonviolent resistance, BDS would cost Israel about $9 billion yearly.

“The accumulative number in our estimate, is $50 billion over a 10-year period,” Rand economist Daniel Egel said.

The lion’s share of BDS’s economic damage, Ries added, would result from “investment flows” — decisions by capital funds, banks and so on to restrict the amount of money flowing to Israel. “Relatively little of that 8.7 billion would be actually from trade boycotts directly, because while they get a lot of publicity they actually don’t have as much effect as the impact on the capital count.”

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