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The Collapse of the Lebanese Economy

Lebanon in the 1960s: a picturesque land of Beirut-focused tourism and banking sector-driven prosperity – a visual impossible to imagine considering the desolate conditions plaguing the nation in current times. Following a cascading waterfall of corruption and poor governance, Lebanon has lost any semblance of peace. The 21st century has witnessed Lebanon facing an economic crisis, one of the worst the world has witnessed since the mid-1800s. From its birth during the Lebanese Civil War (1975-1990) to its infancy in the post-war period, economic conditions have worsened owing to a lack of political will and severe corruption continuing to plague the country to this day. The country today faces a rapidly deteriorating situation and impending bankruptcy if the crisis isn’t handled urgently in an effective manner.



Lebanese Civil War: How it all began

The conflict which lasted from April 1975 to October 1990, began with the legalising of sectarian disputes, resulting in the establishment of a weak state. Christians profited disproportionately from economic progress, while Shia Muslims remained at the bottom of the socioeconomic ladder. Due to demographic shifts, Syrian influence, regional events, and political deadlocks, violence broke out between the Palestinian guerrillas and the Phalange. After 15 long years of fighting and the failure of either side to establish dominance, the war came to an end. The Civil War's economic implications were severe, and they foreshadowed the current catastrophe.


In the aftermath of the war, the country faced an acute drop in the amount and rate of growth of domestic production and income. Human and non-human capital stocks were destroyed, thus lowering productivity. The segmentation of the market and economic activity led to lower domestic labour mobility, higher costs, and a decline in efficiency. Also born during and persisting after the war, was a brain drain of skills – emigration – that has resulted in a drop in the productivity of semi-skilled and unskilled labour, as well as a decrease in wages. Government spending has gone up while receipts have decreased, and rapid acceleration of money growth combined with the slowing of actual economic development has resulted in hyperinflation and devaluation of the Lebanese Pound.


Inefficient Bureaucracy and Corruption: How it continues

Lebanon has a score of 25 out of 100 on the Corruption Perceptions Index as of 2020, which has seen a slow decline since its highest score of 36 in 2006. Corruption is deeply entrenched within the government, and average citizens have to resort to Wasta, or the use of political connections to get favors. Citizens have to depend on economic assistance from their party and therefore cannot afford to speak up against the system. Wasta has led to increased economic inequality. According to the UN-commissioned corruption assessment report, the Lebanese state wastes over $1.5 billion a year on corruption at all levels of the government.


Corruption skyrocketed after the Lebanese Civil War and has led to several inefficiencies in the government’s functioning. Plundering of public funds and hoarding of money by former warlords and wealthy businessmen. Although anti-corruption laws have been passed, they are unlikely to be effectively implemented. Weeding out political corruption holds a lesser priority in the eyes of Lebanese politicians, as they are the ones benefiting from its plights while the common people descend deeper into recession. A spectrum of various forms of corruption run rampant in Lebanon. According to an article by the Lebanese Center for Policy Studies published in 2018, the Parliament spends very little time doing legislative work and parliamentarians rarely keep the executive branch in check.


On the other side, the judicial branch is structured to be subservient to the executive and legislative branches, limiting judges' capacity to hold corrupt authorities accountable. The government's monitoring and disciplinary agencies are severely under-resourced – or, as is sometimes the case, are staffed at the behest of political elites, and are thus considered incapable of carrying out their duties effectively.


Overall, a sectarian government working in favour of the oligarchs and political elites, lack of transparency, incompetent policy decisions, and lack of political will are the reasons behind the continuing corruption in Lebanon. Rampant corruption in the country has led to economic insecurities and hoarding of funds, increasing income inequality. Corruption has also put the state’s ability to collect taxes and revenue in jeopardy. Reduced effectiveness of human capital has led to lower pay and rising unemployment. Poor infrastructure development is also one of the prime reasons behind the lower standards of living in the country. Almost 82% of the population lives in poverty, the share of households deprived of healthcare has increased to 33%, and more than half of the population can’t afford medicines.


Beirut Explosion: A byproduct of incompetent governance

On 4th August 2020, a blast took place at the Port of Beirut due to the accumulation of 2750 tonnes of ammonium nitrate that had been stored in a warehouse without proper safety measures for six years after being confiscated by the Lebanese authorities. Protests took place in the aftermath, against the incompetence of the government and their failure to prevent the disaster. A total of 218 people died in this blast and over 7000 people suffered mild to serious injuries. Several homes were damaged, the grain silos were destroyed making the food shortage situation worse and severe financial issues, leaving the country with a month’s worth of grain in reserve. The damages caused by the blast amount to over $15 billion and insured losses at around $3 billion.


With the explosion, the country’s main entry point for imported goods was damaged. The effects of the explosion at the Port of Beirut on the Lebanese economy and supply chains have worsened an already deteriorating socio-economic situation and spiralling inflation, which is likely going to increase the rate of poverty in the country.


Lebanese Economic Crisis: The problem at hand

With a history of prolonged civil wars and multiple conflicts, Lebanon has been declared by the World Bank as a Fragility, Conflict, and Violence (FCV) state, with a high risk of social unrest. The Lebanese economy is on the verge of a collapse that the World Bank has described as the worst since the mid-1800s. The Lebanese Pound’s value has fallen by 90% and annual inflation is at 84.9%.


Analysts have described the Lebanese economy as a Ponzi scheme. A Ponzi scheme is a fraudulent economic model where money is borrowed to pay off existing lenders. Early and later investors are shown an illusion of economic success which prompts them into investing more. This cycle continues until an economic problem comes up. The state’s economy without any new investment coming in starts falling apart. It is similar to a pack of cards that can fall apart at any given moment. If the comparisons of the Ponzi scheme ring true, Lebanon will face a similarly unfortunate fate.


According to the World Bank, the real GDP of Lebanon shrunk by 20.3% in 2020, following a 6.7% contraction in 2019. It is further likely to shrink by 9.5% of its real GDP in 2021 with extraordinarily high uncertainty and no hopes of quick recovery.


Lebanon also faces a human resource crisis. High-skilled workers and foreign passport holders are leaving the country at an unprecedented rate. Immigrants from Lebanon include doctors, nurses, teachers, and other highly educated people who have been looking to leave the country since the drop in their wages and increasing difficulty. Those left behind without the means to leave the country continue to suffer from food shortages, power cuts, and a poor healthcare system crippling under the lack of medical workers.


Prices of consumer goods have quadrupled and people’s savings are being effectively wiped out owing to inflation. The country faces an acute shortage of food, fuel and medicine; along with extended power cuts. Businesses have been forced to lay off workers to avoid financial ruin and many families have been unable to afford even basic necessities.


Solutions: A better way to deal with it?

With the economic situation worsening, quick and decisive steps are a must to prevent a complete disaster. Establishing an empowered ‘Economic Emergency Steering Committee’ is essential to improving the economic situation and increasing effective allocation of resources and human capital. Participatory mechanisms are a must to empower citizens to monitor the correct implementation of policies. Replacing the ad hoc and self-administered capital and banking controls is crucial to countering the economic corruption in the country, followed by decisive steps to deal with the public and private sector debt.


Embarking on a credible fiscal and public spending reform in sectors like electricity, to increase revenue and spending, improve standards of living. The middle-class population is strengthened, all the while ensuring a chance at the upward mobility of the lower classes.


Finally, a multi-year Stabilization and Structural Reform facility is needed to shore up Banque du Liban’s (BDL) net reserves, help fund the immediate government budgetary needs, finance badly needed social spending, and contribute to the bank recapitalization. Following these steps is crucial to stabilizing the faltering economy and to ensure a smooth progression towards development and lesser corruption.



Written by Ashirvad Mohanty

Edited by Eshal Zahur and Veda Rodewald



 

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