bob looney teaches economics at the Naval Postgraduate School in California.
Published January 4, 2022
From 1955 to 1975, Lebanon was widely acclaimed to be the jewel of the Middle East — its capital, Beirut, a wealthy cultural and financial center that invited comparisons with Paris and St. Tropez. Today, after decades of civil war, ineffectual government and rampant corruption, comparisons with Gaza and Libya are more common. Conditions have become so dire that a July 2020 petition to return the country to a French colonial mandate garnered 50,000 signatures in 24 hours.
Tale of Two Calamities
Countries with Lebanon’s pre-1975 level of economic development rarely retrogress, with perhaps Argentina the only high-profile exception. Argentina’s decline stemmed from toxic interest-group conflict and opportunistic policies starting with the right-wing populist Juan Peron (1946-52) that locked the economy into cycles of stagnation and hyperinflation. The result was a zero-sum society where landowners, labor unions, the military and the urban middle class fought to maintain their shares of a once-overstuffed economic pie. Unable or unwilling to confront the demands of competing constituencies head on, successive Argentine governments failed to deliver the reforms needed to break out of dysfunction.
In Lebanon, the problem is similarly created by an uneasy mix of tribalism, crony capitalism and gross income disparity that helped push the country over the edge in the 1975-90 civil war. After those hostilities ended, Lebanon returned to a slightly modified version of its post-independence “confessional” system of government, choosing to ignore the fact that this system had just failed so spectacularly at its stated goal of maintaining peace and social stability.
Under the confessional system, each political office is assigned to a specific religious community based on its share of the population (Christian Maronite President, Sunni Prime Minister, Shia Speaker of Parliament). Family dynasties head each religious sub-tribe’s political parties, which together number more than 88 in a county of less than 5 million people. With no conflict-of-interest laws, party heads award government contracts to family members, friends and business contacts in return for cash and favors.
Along with sapping state finances, party nepotism has frozen economic development and hobbled critical public services as rivals squabble over contracts. Lower down in the pecking order, local politicians award jobs and favors to secure the votes of their constituents, who then expect ongoing benefits.
The economic consequences of all this corruption are devastating. IMF data show that after expanding at an average annual rate of 9.1 percent during the 1991-99 postwar reconstruction period when lavish foreign aid flowed in, Lebanon’s growth decelerated to 4.8 percent per year in 2000-9 and then to 2.5 percent in 2010-16.
The worst, alas, was yet to come: GDP per capita crashed from $7,663 in 2015 to $2,784 in 2020 (in part, but only in part, due to Covid). Living standards, moreover, aren’t quite as bad as that latter figure suggests because the purchasing power of the currency has held up better than conversions at deeply depressed exchange rates (see below). But the plunge has been bad enough to prompt the World Bank to reclassify Lebanon from an upper- to a lower-middle-income country.
Just to ice the cake, the Lebanese disaster has had unexpected dimensions. In August 2020, years of mismanagement and corruption resulted in the deadly Beirut port explosion, crippling what was left of the country’s shipping industry and causing an estimated $15 billion in damage — only $3 billion of which was insured. Lebanon is heavily reliant on imports, but with exports declining at an average annual rate of 6.8 percent from 2015 to 2020, foreign exchange is increasingly scarce. The once-proud banking sector is insolvent and, as of November 2021, the Lebanese pound had lost more than 90 percent of its value on the black market compared to 2019.
Government expenditure as a share of GDP reached a maximum of 32.2 percent of GDP in 2018, up from 26.6 percent in 2015. It dropped to 19.2 percent in 2020 only because the government’s Ponzi-like strategy of paying off old debts with new borrowing and aid collapsed after further injections stalled. By that point, government debt stood at 150 percent of GDP, and the electricity grid and essential services were collapsing. Under the UN’s more comprehensive definition of poverty that includes nonmaterial deprivation, the poverty rate was 82 percent in 2021, up from 42 percent in 2019.
Even in times of plenty, the confessional system institutionalizes a zero-sum society in which the ruling elites can pillage the country’s coffers to benefit themselves and their individual constituencies at the expense of others. In lean times, this zero-sum model is really a negative-sum model, a recipe for economic implosion.
In a further blow to the failing economy, Saudi Arabia, the UAE, Kuwait and Bahrain suspended loans, grants, investment, trade and even access to their labor markets in late October 2021, after Lebanon’s information minister criticized the Saudi war in Yemen. Given the nature of the diplomatic spat, it’s unclear whether Lebanon can expect any form of debt forgiveness from the Gulf nations if and when it completes a much-delayed recovery plan agreement negotiated with the IMF.
Even before the Gulf states cut aid, Lebanon’s economy was predicted to shrink by more than 10 percent in 2021 and to contract further in 2022. The World Bank anticipates triple-digit inflation remaining well into 2022, combined with coronavirus-related economic dislocations, falling household income and businesses disruptions linked to the scarcity of foreign exchange and insufficient supplies of energy.
While the destabilizing reassertion of power by Iran-backed Hezbollah, the recent flood of Syrian War refugees and the Covid-19 pandemic obviously contributed to the crisis, in an unusual public criticism, the World Bank pointed to a “deliberate lack of effective policy action by authorities” as its root cause. The Bank’s governance indicators explain why the bureaucrats have lost patience: government effectiveness declined from the 45th percentile in 2010 to the 18th by 2019. Regulatory quality, a proxy for the business environment, fell from the 54th percentile in 2010 to the 37th by 2019, the rule of law from the 29th percentile to the 20th percentile and control of corruption from the 20th to the 12th percentile.
This freefall is hardly surprising given that the confessional system prioritizes balancing the interests of the country’s competing sectarian communities above the national interest. Even in times of plenty, this system institutionalizes a zero-sum society in which the ruling elites can pillage the country’s coffers to benefit themselves and their individual constituencies at the expense of others. In lean times, this zero-sum model is really a negative-sum model, a recipe for economic implosion.
The IMF and Lebanon’s other remaining donors are requiring specific reforms as a condition for future aid. But each religious community retains veto power, so that the decision to enact any reform must be unanimous. As growth has gone negative and zero-sum forces strengthened, what potential for cooperation existed has vanished.
Lebanon desperately needs leadership capable of ushering in reforms, mobilizing resources and channeling them into productive activities. But the confessional system makes even formation of a government arduous and time-consuming. The current prime minister, Najib Mikati, assembled a government in September 2021 after a 12-month deadlock. His coalition will presumably carry the country to its May 2022 general election, after which in-fighting will likely block postelection government formation until late 2022.
Argentina eventually rekindled growth by reluctantly accepting reforms mandated by its creditors and the IMF. But at least in Argentina reforms hold genuine promise of propelling this resource-rich economy back to First World affluence. Lebanon’s road is an even harder one to hoe.
Still, a traditional IMF reform program might temporarily halt Lebanon’s economic decline, provided Lebanon’s interest-trapped politicians recognize that the alternative to swallowing the bitter pill is unthinkable. In the long run, however, a complete overhaul of the political system is needed if Lebanon is ever to regain its First World gloss. “Paris of the Middle East” may be forever out of reach for Beirut, but a whole lot of people would settle for 24/7 electricity, imported cognac and occasional garbage collection.