The Price of Peace


Jun 24, 2015

What are the costs of the Israeli-Palestinian conflict?

Graphic adapted from: duncan1890/iStock (hand), and ayzek/iStock (flags)

A groundbreaking analysis reveals what's at stake for both Israelis and Palestinians.

The cost of ten more years of stalemate in the Israeli-Palestinian conflict: $173 billion.

Buildings destroyed and businesses ruined. Lost trade. Lost jobs. Lost lives. The economic deadweight of another decade of fear and uncertainty. One hundred and seventy-three billion dollars, forfeited.

We hoped RAND could provide, with its analytical methods, some kind of new perspective.

C. Ross Anthony, senior economist at RAND and coleader of the Costs-of-Conflict Study Team

It took a team of RAND economists and policy experts more than two years to come up with and verify that number, the first time researchers have managed to pin such a complete price tag on the conflict. Their aim was simple, even if their math was not: to show both sides how much they stand to lose from the enduring conflict, and how much they could gain in peace.

“We hoped RAND could provide, with its analytical methods, some kind of new perspective,” said C. Ross Anthony, a senior economist at RAND and who helped lead the Costs-of-Conflict Study Team that authored the report. “No one had ever done that,” added Charles P. Ries, vice president at RAND and co-leader on the project.

The team's findings shed new light not only on the possibilities of the future, but also on the knotted realities of the present.

The Israeli Economy Gains the Most from Peace with a Palestinian State

Two young men in Dheisheh refugee camp in the West Bank

Two young men in Dheisheh refugee camp in the West Bank

Photo by Juan Teixeira/NurPhoto/AP Images

For the Palestinians, the benefits of a new and independent Palestine, alongside but apart from Israel, are obvious: self-governance, freedom of movement, international trade, and an economic boom. But the RAND analysis found that, strictly in terms of dollars and cents, Israel stands to gain the most.

Ten years of peace with a Palestinian state would be worth $123 billion to the Israeli economy. Trade would surge in both areas as new markets opened to Israel across the Arab world; foreign investors would put their money into Israeli and Palestinian companies without fear of losing it to violence. Israel also would save hundreds of millions of dollars by withdrawing from its controversial West Bank settlements, a certain condition of any peace deal.

The Palestinians, meanwhile, would need heavy international private and public support to start growth in their new state. But the changes in their economy would be fundamental: $5 billion a year in new trade; $730 million in new agriculture made possible by unrestricted access to water. In all, ten years of peace would add $50 billion to the Palestinian economy, a transformative figure for an area with a struggling economy to start with.

A successful two-state solution “would be profoundly positive, for both sides,” Ries said. “There are not so many macroeconomic policies that countries can support that have that kind of impact.”

At the Individual Level, Average Palestinians Stand to Gain More Than Average Israelis

A Palestinian who offers donkey rides to tourists shares a laugh with an Ultra-orthodox Jewish man at the Mount of Olives

A Palestinian who offers donkey rides to tourists shares a laugh with an Ultra-orthodox Jewish man at the Mount of Olives

Photo by Oded Balilty/AP Images

All those billions of dollars in new trade and investment would add up to a per capita boost for the average Israeli of around $2,200—roughly equivalent to a 5 percent raise—after ten years. An average Palestinian in the West Bank or Gaza Strip, meanwhile, would see an additional $1,000 after ten years—and there, that's the same as a 36 percent pay hike.

Those percentages underscore an economic fact of the conflict: Palestinians have much more incentive to move toward peace. Israelis can better afford the status quo, especially given what they see as the tradeoff, entrusting more cross-border security to a fledgling Palestinian state in a region garrisoned by terrorist groups like ISIS and Hezbollah.

As a recent headline in the Jerusalem Post put it: “Will a peace deal bring a huge economic dividend, (or) will the only boom be that of rockets bringing down the economy?”

For the average Israeli, “the bottom line is, the economic benefits of peace may not be fully appreciated or sufficient to overcome the perceived costs,” Anthony said.

But that overlooks some very real economic dividends that peace would pay even at the neighborhood level, the RAND analysis concluded. All those billions of dollars coursing through the economy could fund tens of thousands of new homes and schools, greatly easing the persistent lack of housing that Israelis and Palestinians list as a top quality-of-life concern.

A Palestinian Uprising Carries Heavy Costs for Both Sides

A Palestinian uprising, a return to the violence of the past, spreading across Gaza and the West Bank, could drain the Israeli economy of $250 billion over ten years. But it also would shatter Palestinian society.

Israel's expected response to such an uprising—such as squeezing off the tax revenues it collects for the Palestinians and impeding their trade—would likely bring down the limited Palestinian self-government, the Palestinian Authority. Israel's military would level buildings and destroy infrastructure; and its almost certain move to cut off work permits would cut off the economic lifeblood of the Palestinians.

Total cost to the Palestinian economy: $46 billion over ten years. That translates into more than a 45 percent cut to the already-meager income of an average Palestinian in 2024.

Israel would lose five times as much—up to $45 billion some years, and $250 billion over a decade—as foreign investment, trade, and tourists flee the conflict and its own security costs soar. Israel also would have to shoulder much of the costs of health, education, and social welfare in Gaza and the West Bank after the collapse of the Palestinian Authority, a direct annual expense approaching $1 billion.

The RAND report sums up the outcome for both sides with two words: “profoundly negative.”

Neither Economy Gains Much from a Unilateral Israeli Withdrawal

Palestinian women passing an Israeli checkpoint in Al-Shuhada Street in Hebron in the West Bank

Palestinian women passing an Israeli checkpoint in Al-Shuhada Street in Hebron in the West Bank

Photo by Juan Teixeira/NurPhoto/AP Images

That has emerged as a possible solution to the continued deadlock in the peace talks. What if Israel just pulls back from some of the West Bank, without waiting for the creation of a Palestinian state? The answer, according to RAND's analysis: The economics don't add up.

Israel could save a little by evacuating its West Bank settlements. But decoupling from the Palestinians would also cost Israel a steady supply of cheap labor, nullifying any economic gains.

Even that assumes an orderly and slow withdrawal, with a carefully coordinated handover of territory to the Palestinians, and with international support and approval. Anything less would drive up Israel's security costs, leave it with the large expense of moving settlers, and likely damage its international image and trade.

The Palestinians would eventually see an additional $1.5 billion annually in expanded trade and economic opportunities if they went along with a coordinated Israeli withdrawal, as new opportunities open up in lands vacated by settlers. But the early years would be tough, as they race to take over responsibility for security from the departing Israelis.

Palestinians Can Make Israelis Pay Through Nonviolent Resistance, but at a Cost

Palestinian leaders have started to press the international community for formal recognition, as well as criminal investigations and boycotts against Israel. Earlier this year, Israel responded by freezing $127 million in tax revenue it collects for the Palestinians, putting the Palestinian Authority in an economic chokehold.

In an extended standoff, Palestinian-led boycotts could pare $80 billion from the Israeli economy over ten years, the RAND analysis concluded. In response, Israel might further freeze tax revenue, restrict the movement of Palestinians, and cut off work permits—costing the Palestinians $12 billion over ten years, a proportionally harsh blow given the smaller size of their economy.

That cycle of continued stalemate, resistance, action, and reaction appears to be the direction the conflict has taken in recent months.

The decisions needed to break through the impasse will only continue to get more difficult and expensive as the conflict drags on. But with the economic benefits of peace so large, and the potential costs of violence so deep, RAND researchers held out reason for hope.

“Even gridlocked highways,” they noted, “have exit ramps.”

Doug Irving