1. The review of key parameters and determinants of Lebanon’s economy leads to the conclusion that the model that may have served it well for a time is now out of breath – anemic growth, rampant unemployment, widening income gap, rising poverty, loss of human talent, obsolete infrastructure and widespread natural and environmental degradation – and can no longer meet the expectations and vital needs of a stable and prosperous society.
2. Through its contemporary history, Lebanon’s economic performance has been marred by fragility and the impact of conflicts. In the generation following independence (1950-74), economic growth rate averaged 7% per annum. The (1975-90) civil war wrought uncounted losses in human capital (death and emigration, especially of youth), immeasurable devastation in terms of physical capital erosion (infrastructure, housing stock, and productive assets), and dislocation of the institutional order from which Lebanon is yet to recover. Only in 1998, twenty-five years after the war’s onset, did gross domestic product (GDP) return to its pre-war level – literally a “lost generation” economy–wise!
3. The challenge for Lebanon, with its so-called legendary resilience, first and foremost is to erase the legacy of the civil strife and avoid the pitfalls of regional conflicts. It also needs to achieve strong and sustained growth rates that create high value-added jobs, on a scale sufficient to maintain civil peace, reduce social and regional inequalities, and spare young professionals the inexorable fate of exile. The task is hard given the current structure of the Lebanese economy and its key sectors, as jobs lag the economy in growth, with some data showing growth rates of only 1% in jobs, for 3.5% in GDP.
4. Only job creation could slow down emigration from Lebanon, a nation turned into a factory out-shipping talents and skills. Hard to come by, good jobs result from productive and innovative investments, which at the scale required – 20,000 new slots needed each year for graduates thronging the labor market – can only be justified by an access to a market of a substantial size extending well beyond the narrow confines of the national territory of 4 million Lebanese residents. Exports pertain not only to agricultural and manufactured products. They also, and should increasingly, involve the provision of “knowledge-based” services in information technology, engineering, consulting, research and development, accounting and auditing, translation, publishing, media, and medical tourism. Yet, the ability to export goods and services rests heavily on the competitive power of the economy.
5. What about this competitiveness? In 2016, Lebanon’s imports stood at US$21 billion, compared to a paltry US$4 billion in exports, putting the trade deficit at US$17 billion, the equivalent of one third of GDP. In the World Bank 2018 “Doing Business” assessment, which measures factors influencing competitiveness, Lebanon ranks 133 out of 190 countries, underperforming Saudi Arabia (92), Jordan (103), and the MENA’s regional average. That is hardly surprising as the competitiveness of the Lebanese economy is assailed on all fronts by high interest rates, a decaying infrastructure including an information technology sector lagging behind, irreversible environmental degradation, burdensome public administration, and institutionalized corruption. Further, in the absence of sizeable and continuous productivity gains, the fixed exchange rate parity and its attendant costs add significantly to the rigidity of the economic model.
6. Interest rates. Lebanon’s high interest rate levels put upward pressure on corporate borrowings, and thus domestic production costs, further eroding competitiveness. Even at a time of historically low global interest rates, Lebanon’s dire fiscal situation – a result of unbridled governments spending for more than a decade in the absence of budgetary and parliamentary controls – has been driving up the cost of credit. Indeed, the high base rates that Lebanese commercial banks must offer to attract the external flows necessary to finance ever-increasing public deficits and debt, and massive trade imbalances, are transmitted throughout the economic cycle. Lending for private productive investments is crowded out as a result of: (i) the high cost of money; and (ii) the significant portion of bank holdings that are diverted both to the treasury debt market and to central bank instruments funding the foreign currency reserves needed to support the exchange rate peg that has been the anchor of monetary policy for over a quarter of a century. (What is further worrisome regarding indebtedness, is that the scourge of the public debt no longer appears on the radar screen of a nation accustomed to live with this debilitating disease, though its latent effects will in time consume the body.)
7. Infrastructure. The lack of capital investments in infrastructure over four decades has taken its toll on the provision of essential public utilities, as a result of deficient capacity, and uneven and costly access to services. Unreliable electricity supply, congested roads, inadequate water and sanitation networks, expensive and inefficient telecommunications systems weigh heavily on the productivity of all economic agents, not to mention their effect on citizens’ quality of life. Soaring land values – the result of scarcity, but also of a misaligned tax regime – and therefore high factory and office space costs, add measurably to enterprises’ operating expenses.
8. Institutional setting. An obstructive and cumbersome administration, and entrenched corruption represent strong headwinds to the system’s efficiency as a whole. A ruinous code of conduct and questionable ethics pervade economic management, and impede the overdue reforms of governance practices in state institutions, overstaffed and underperforming.
9. The loss of talent to emigration affects the economy in a dramatic and lasting way, and dents Lebanon’s potential in the development of its knowledge economy. Key structural, fiscal, legal, regulatory and governance reforms are needed to retain at home Lebanon’s diversified pool of talents, the only way to spur the budding knowledge-based industry. In Lebanon, with the proper incentives, this growing industry could leverage abundant financial resources and a privileged geographical location to market its output across a broad regional, and possibly global, consumer base. This is of course in addition to the traditional sectors of banking, trade, tourism, and selected manufacturing where Lebanon’s position is well established, though increasingly challenged. Yet, current public policy, to the contrary, tends to favor the expatriation of Lebanese skills – “goose with the golden eggs” that perpetuates the infernal cycle of unemployment-emigration-remittances-deficits financing.
10. The case of tourism, a prime sector for foreign currency receipts, which represents 20% of the national economy, is revealing in this respect. With no supportive policies, and inadequate infrastructure, Lebanon is already trailing competitor countries (Turkey, Jordan, Hungary, India) as a potential destination for medical tourism. The state is equally derelict in failing to create the enabling conditions for Lebanon to retain its once dominant position in traditional recreation. Government hardly takes remedial measures to prevent the illegal occupation and private use of the public domain, irreversible degradation of the environment, erosion of the coastline, pollution of clear water sources, proliferation of quarries disfiguring hitherto wooded peaks, garbage dumps in meadows and waterways, … The effect on seaside tourism for example, has been to deter swimming along Lebanon’s once pristine shores, discourage the influx of would-be visitors, and drive Lebanese themselves towards the safety and cleanliness of cypriot, turkish and hellenic seaside resorts. In 2016, the tourism sector was in the red, with US$5.5 billion of expenses incurred by Lebanese tourists abroad, against revenues of only US$3.5 billion. So much for a “stellar” foreign exchange earning sector!
11. For the Lebanese economy, salvation may only come from growth through productive and innovative investments in competitive, export-oriented activities creating high value-added jobs which can retain at home a much higher share of Lebanon’s pool of talent and expertise. Such a regime, to materialize, requires radical public policy changes that spur domestic productivity and strengthen competitiveness, so that Lebanon may generate, in external markets, effective demand for its goods and services. These reforms would also help Lebanon strengthen and expand its domestic production in import substitution activities where it has a comparative advantage. That is the road through which the “Lebanese miracle” might be given a new lease on life.
Competitiveness as a Path to Growth