The Lebanese Political Economy

A glance at the 2003 numbers for the Republic of Lebanon reveals a myriad of problems: economic inequality marked by weak social spending, including insufficient public education; world-ranked public debt; corruption among officials; and poor infrastructure. Though these problems seem characteristic of the "backwards" third-world, perhaps those of a struggling former colony in Africa, Lebanon has a unique economic history that demonstrates once-remarkable success turned into chaos. Under a laissez-faire system with nearly no capital controls, little restriction on foreigners conducting business, and a strict policy of banking secrecy, the country enjoyed the massive influx of wealth in being a preferable trading hub in a preferable geographic location. Invariably, the country was torn apart by external political pressures that exacerbated the previously dormant internal political problems caused by uneven distribution of wealth and divisions among sectarian lines. The following intervention by the Syrian military somewhat reunited the country, but damaged the ability of the Lebanese government to act as its own independent entity. As a result, Lebanon has suffered severe economic consequences that have relegated it to economic disaster relative to its former achievements, next to the political implications that have prevented it from righting those wrongs in the present.

The Lebanese Civil War and Early Reconstruction

In the years before the Civil War, the 1943-1975 era known as "Independent Lebanon," the tiny Middle Eastern country commanded a dynamic economy with a strong currency, high growth rates, and a climbing per capita income (the per capita GDP nearly doubled during 1966-1973 from $560 to $1,023), while it carried the prestigious title "The Switzerland of the Middle East" for its status as a respected hub for banking and trade. With the coming of war, however, there was the departure of prosperity. Political disputes between several warring factions and the Israeli incursions into the country froze almost all economic activity, accelerating the steady decline in national output. One of the most important factors, of course, contributing to the failure of the economy during the '80s was the disappearance of governmental authority and the shift of power toward unofficial entities. Though some of the tax revenue still managed to arrive through the first few years following the outbreak and lull of conflict, by 1983-84 the government had lost control of all ports (which had previously provided as much as half of yearly revenue in the prewar years), and could not effectively enforce collection of utility bills and taxes (at one point, utility inflows were as low as 10 percent of money owed.) Mounting public costs because of the war in addition to weakened revenue broadened budget deficits, forcing monetary expansion in order to finance them, and the country was plunged into a vicious cycle of inflation. The economy had grown more "dollarized" and capital bled from the country while the Central Bank ceased to support the Lebanese Pound, allowing it to reach all-time lows in the early 90s. In the aftermath of the war, in addition to a furiously devalued currency, the war-torn country had to face approximately $25 billion in damage to infrastructure and significant losses in skilled manpower due to emigration.

Previous reconstruction efforts had been deterred by the evanescent, fragile peace in the past decade, but by 1992 Lebanon had finally become stable enough to commence long-term restoration once 35,000 Syrian troops had occupied most of the country and forcibly implemented a cease-fire, an action done at the "behest" of Lebanese Parliament members (as persuaded by Saudi-backed billionaire Rafiq Hariri). Hariri, heralded at the time as an economic savior, was eventually appointed as the new prime minister, soon to be greeted with enthusiasm and a nearly instantaneous 15 percent rise in the value of the Lebanese pound. With the refreshed morale of the people and economic autonomy granted him by Syria, the new premier moved into action and declared that Lebanon would return to its pre-war economic glory. Among immediate changes were the replacement of the old tax rates with a 10% flat rate on personal and corporate income, and an elimination of taxes on capital gains, done with hopes of attracting foreign capital and resettling expatriates to reinvigorate the sluggish economy. Hariri's plan, known as "Horizon 2000," focused on restoring the physical infrastructure and revitalizing the once-great financial sector (instead of the agricultural and industrial sectors) in hopes that they would sustain powerful economic growth. Additionally involved in the effort was The Company for the Development and Reconstruction of Beirut's Central District, also known as Solidere, which emphasized the importance of the central business district in Beirut as critical to the rest of the economy.

The Politics of Lebanese Reconstruction

Nevertheless, Hariri's economic administration requires a stretch of optimistic imagination to label it successful; while economic growth proceeded once more, averaging 5.7 percent over 1992-1997, and inflation dropped from 120 percent in 1992 to a manageable 3 percent in 1998 (successes all lauded by the Ministry of Finance), over the same time period, the internal public debt rose from a pre-Hariri $1.5 billion to $13 billion, in addition to an increase in external public debt from $300 million to $2.2 billion. As a result of the increased debt servicing demands on the budget (71% for internal and 5% for external debt in 1996) yet the sustained reconstruction spending, the deficit grew from 63% of revenue in 1993 to 105% in 1996. In response, the government moved to increase indirect taxation, further placing the burden of cost on the lower classes, who had received little benefit from Lebanon's brief postwar boom. One-quarter of the population continued to live under the poverty line while social expenditures remained meek, leaving very little for any indication of real progress once growth rates slumped in the following years.

The inherent corruption in Hariri's crony-appointee-government was the result of the government's cemented political bond to Damascus and an unbreakable relationship with private interest. Solidere, a corporation of which Hariri coincidentally was the top shareholder, worked with the government to take property in Beirut's business district and compensate the owners with shares in the company, worth significantly less than the land itself, resulting in immense profits for Hariri and his associates. Military chieftains around Lebanon, still significant players with power, soon, too, received benefits from a positive relationship with Hariri when they enjoyed "kickbacks" that granted contracts in excess of true cost. The growing economic inequality that resulted from his policies also began to cause unrest and spark vocal criticisms, but the government mobilized rapidly to suppress it through the media and coercive force as part of its campaign to move ahead in securing the country for its Damascan handlers. As the Lebanese media had its control handed over to Syrian and pro-Syrian elites, the Lebanese Army was utilized to enforce the 1994 government edict that banned all public demonstration, effectively leaving in place the illusion that Lebanon was not suffering from terrible internal discontent, but making progress through reconstruction.

The Second Hariri Appointment

By 1998, economic growth had crawled to a weak 2 percent, and the rapidly growing public debt of $18.3 billion began to mar Hariri's future prospects. What followed was a complex web of political interests: Bashar Assad, son of then-dying Syrian President Hafez Assad, sought to terminate any opposition to his succession, and certain Syrian elites- probable to oppose Bashar's ascension- had become wealthy because of their connections with Hariri. In addition to the appointment of former armed-forces commander Emil Lahoud as President, a new prime minister, Salim Al-Hoss (who had held the position five times before), replaced Hariri with the advertised intention of economic reform. Al-Hoss's appointment had much to do with image and political warfare, which included an aggressive "anti-corruption" campaign that sought to discredit internal opponents, but the Hoss administration was nevertheless also working to fix previous mistakes (political coercion could only go so far under international scrutiny). The greatest attempt at reform put forth was a five-year fiscal plan aimed at reducing the budget deficit and public debt by the end of 2003, but the years under Al-Hoss were characterized by a sharp recession and little in the way of significant change. Though there were several entangled reasons, Al-Hoss was evicted partly because of his failure to point the economy in the right direction, and a Hariri-led government was welcome once more in the following term.

By Hariri's second appointment, there was universal assonance over the need for an economic overhaul in Lebanon. The country was beleaguered by economic strain: a negative growth rate at 0.5 percent; a fiscal deficit that increased by nearly 10 percent of GDP from 1999-2000; a debt service increase from 74 to 92 percent of revenue over the same period; and a balance of payments striking a deficit of $289 million, the first of the postwar period. The government went through a series of broad liberalization measures, including pushing an "open skies" policy to airlines to encourage tourism, cutting customs duties among other trade barriers, revising archaic business codes, and signing several trade agreements among Arab regional blocs and the European Union. In tandem with internal political forces, the IMF and World Bank had begun to pressure the problematic state to reduce its overly bloated bureaucracy (as it became when Hariri needlessly created several civil servants in his first reconstruction plan) while further lessening the financial burden on the government by moving power and water distribution under state monopoly toward privatization. At the top of Hariri's priorities, however, was putting a hold on the rapidly climbing debt, which had reached 153.7 percent of the GDP at the end of 2000. In a conference of friendly nations and lending banks, known as the Paris summit, 500 million euros of low-interest financial assistance was secured, to be soon followed the next year by the second-round Paris II summit in 2002, which allowed 32 percent of the public debt to be restructured at lower interest and longer maturity. Over 2000-2002, the economy experienced slight improvement as a result of the attempted policies; growth rates pulled back up to 2 percent; the fiscal deficit crept downward 7.3 percent in tandem with debt servicing falling to 79 percent of revenue.

Lebanon Through the Present

In 2003, political stalemates due to the upcoming elections, in addition to the resignation of Prime Minister Rafiq Hariri in April, put a hold on major policy decisions, including vital privatization of the telecommunications industry among other "fiscal slides" that have left the budget surplus at a meager 3.6 percent, far below targeted levels. The debt continues to plod upward, reaching its 181.5 percent of GDP high, with the recent fiscal stabilization only partially mitigating the fragility of the debt crisis. The country's power distributor, Electricite du Liban, has had its plans for privatization put on hold indefinitely as it continues to operate at annual losses of an estimated $500 million due to its ineffectual enforcement of approximately half of its electricity bills, with promises for, but no active government effort to remedy it. To date, power outages still occur, and Lebanon now imports 16% of its annual electrical consumption from Syria. The delay in privatization seems to lack valid reasoning, as does the large lack of capacity in the system (the expected 2,000-megawatt capacity in 2000 was met with a meager output of 1,400MW in 2003), until revelations from inside sources suggest, "more than $500 million ended up in the pockets of leaders, ministers, and entrepreneurs." Farther behind on the agenda is the current state monopoly on water; Lebanon is lauded as one of the only countries in the Middle East with a self-sufficient water supply, yet poor investment in water infrastructure leaves a system that wastes 50 percent of available resources through irregular piping and waste pollution. Infrastructure privatization has been indefinitely postponed as a solution at all. Last on the list, with the least room in the debt-dominated budget, come social amenities, whose lack of funding have spawned social unrest, causing a general strike in October 2003, also caused by continued burdens on the population: planned increases in the "value added tax" on goods that would affect prices across all sectors, a 1996 salary freeze, a decrease in per capita income by 7.6 percent, rising inflation, and an impending failure in the social security system. On the very meek upside to the economy, tourism has made a slow and steady recovery, one of the few advantages of the massive expenditures on the early postwar beautification and restoration of Beirut. Likewise, the once-renowned banking sector is beginning to mobilize once more. Politically, Lebanon has experienced some serious transformations, including the withdrawal of Syrian forces from Lebanon in April 2007 following the assassination of Rafiq Hariri, and the subsequent overhaul of government. There is still little evidence, however, that the prior trends have started down a road of resolution.

On October 30, 2000, the Hariri Cabinet released its policy statement to the Lebanese Parliament, and in the closing remarks- home to the usual deep, resounding ideological conclusions- a particularly telling paragraph appeared:

This requires true national unity to elevate national interests and the fate of the country above all considerations. More than ever before, this requires an alliance, cooperation, and solidarity with Syria and the deepening of mutual confidence. We are confident that the Lebanese-Syrian experience, in constant cooperation and coordination, is the most important achievement of this phase in the history of the region. It spelled out the defeat of Israel, forcing it to abide by international resolutions and withdraw, accordingly, from Lebanese territories. It also proved right our views regarding the Arab-Israeli conflict, and how to manage the battle with Israel.

If we accept the standards of political discourse implied by a speech like this, the primary question is one of internal consistency. Why is Lebanon in this "battle" against a power so similar, yet allied with a power so strikingly dissimilar? Even holding that those might be irrelevant factors, what basis for a destructive conflict with Israel would it have if it were to make the decision independently? Under an occupation by tens of thousands of soldiers that has extended fifteen years past the conclusion of a conflict and the conclusion of their necessity, the country's progression (or re-progression) appears to be stifled by the politics and interests of foreign forces. Though Lebanon is definitely not a nation of starving children, something must be said about the failure to tap into the potential that the nation still possesses from its better days and the possibilities that it continues to grow. The war, aside from causing immense physical damage and taking hundreds of thousands of lives, forced Lebanon, with the achievement of peace and fatigue of war in mind, to accept such an occupation by a power that sparsely shared any of its economic or political ideals (such as free markets, or fair elections). Once this had occurred, the former government, by no means perfect, that had been wed to the private sector was replaced by a different management- one more powerfully connected to the political-economic interests of a new group- and the country was soon controlled through not an autonomous Lebanese entity, but an entity autonomous to Lebanon. What can the people do if their economy is subject to exploitation and their government subject to blatant foreign puppeteering, and their land used to open another front in someone else's war? So long as there is no concerted, effective effort to restore control where it belongs, there will certainly be no free Lebanon, much less an economically prosperous one.

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