Israelis Stand to Gain $120 Billion, Palestinians $50 Billion in Two-State Solution Over Next Decade

For Release

June 8, 2015

The Israeli economy stands to gain more than $120 billion over the next decade in a two-state solution, a possible resolution of the long-standing conflict between Israelis and Palestinians in which the Palestinians gain independence and relations between the Israelis and their neighbors normalize, according to a new RAND Corporation study. Palestinians would gain $50 billion, with average per-capita income rising by about 36 percent.

A return to violence, by contrast, would have profoundly negative economic consequences for both Palestinians and Israelis over the next decade, with the Israeli economy losing some $250 billion in foregone economic opportunities. The Palestinians could see their per-capita gross domestic product fall by as much as 46 percent under this scenario.

The estimates are part of a systematic effort to quantify the likely economic and security costs and benefits of five alternative futures for the conflict relative to present trends. RAND researchers also estimate the costs likely to be borne by the international community and consider intangible dimensions, such as perceived security risk and sovereignty aspirations, suggesting how such factors might affect the course of the conflict and efforts to resolve it.

“We hope our analysis and tools can help Israelis, Palestinians and the international community understand more clearly how present trends are evolving and recognize the costs and benefits of alternatives to the current destructive cycle of action, reaction and inaction,” said C. Ross Anthony, co-leader of the study and director of RAND's Israeli-Palestinian Initiative.

Besides the two-state and return-to-violence scenarios, RAND considered three additional alternative futures: a coordinated unilateral withdrawal from the West Bank by Israel, uncoordinated withdrawal where Palestinians do not cooperate with Israeli unilateral moves, and nonviolent resistance by Palestinians. Unless withdrawal were coordinated, the cost of moving Israeli settlers from the West Bank would impose large economic costs on Israel.

In the nonviolent resistance scenario, Palestinians would take actions to put economic and international pressure on the Israelis — a scenario some observers note may already be unfolding. In this event, Israelis could lose $80 billion and Palestinians could lose $12 billion relative to current trends. But compared with a two-state solution, losses from the non-violent resistance scenario become even more dramatic: about $200 billion for the Israelis and $60 billion for the Palestinians.

The implications of a unilateral withdrawal by Israel of West Bank settlers would depend greatly on the degree of coordination. If the Israelis were able to coordinate with both the Palestinians and international community, the overall impact on the Israeli economy would be negligible and the Palestinian economy would benefit from an economic dividend of nearly $8 billion over a 10-year period. However, with no coordination, the Israelis would stand to lose $20 billion.

“A two-state solution produces by far the best economic outcomes for both Israelis and Palestinians,” said Charles Ries, co-leader of the study and vice president, international at RAND, a nonprofit research organization. “In a decade, the average Israeli would see his or her income rise by about $2,200, vs. a $1,000 gain for Palestinians, compared with our projection for present trends. But that only works out to 5 percent for each Israeli, vs. 36 percent for the average Palestinian, meaning Israelis have far less and Palestinians far more economic incentive to move toward peace.”

Calculations of the economic costs and benefits of each scenario rely on an innovative “Cost of Conflict Calculator.” The calculator provides itemized cost breakdowns of the economic costs and benefits of each scenario, and allows users to change assumptions in order to investigate a full range of policy scenarios. In analyzing each alternative future, researchers relied on historical precedent, published data and interviews with subject matter experts.

Noneconomic factors also constitute powerful barriers to resolving the impasse. Besides the perceived security risk and sovereignty aspirations, these include the significant power imbalance between Israel and the Palestinians, as well as a lack of political consensus on both sides, as deep political and religious divisions make it more difficult to garner popular support for compromises. One of the most powerful intangibles is the clash of each side's historical narrative, researchers say. While the narratives bear some similarities (feelings of isolation, victimization, mistrust and betrayal), they are in fundamental conflict.

The study was reviewed in draft form by a dozen experts including Israelis, Palestinians and specialists from other countries. Its other authors are Daniel Egel, Craig Bond, Andrew Liepman, Jeff Martini, Bradley Stein, Shira Efron, Steven Simon, Lynsay Ayer and Mary Vaiana.

The study is dedicated to the late visionary philanthropist David K. Richards, who sponsored it with his wife, Carol.

About RAND

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