A brief synopsis of the Lebanese economy from the 1960s to the present1

¹ This section is based on analysis of the following source material: (Adams, 1988); (Eken, 1995);(Iskandar, 1995); (The Economist Intelligence Unit, 1995); (Economist Intelligence Unit, 1996); (World Bank, 1988).

In the modem economic history of Lebanon we can distinguish three phases, determined by the civil war that lasted from 1975-90. The first phase, the pre-war economy, which was characterized by a sense of prosperity and the hope of a lasting development; the war economy, which has been characterized by a widespread loss of human and physical capacity; and finally, the post-war economy or the reconstruction phase, in which a mixture of hype and scepticism is creating an active but speculative environment still subject to sharp reversals.

3.1 The pre-war economy

The image of a prosperous Lebanon is mainly due to its success in the late 1960s and early 1970s, in using adequately its human, institutional, and geographical resources to benefit greatly from the rapidly expanding wealth of the oil-rich Arab Gulf countries. The development of a modern financial and service sector that channelled the flow of income from the oil boom, the use of its ports, airports and transportation and communication networks for the transit of goods to and from the Arab countries, the large remittances from the supply of an educated and entrepreneurial workforce to the Gulf economies, and finally the exploitation of the beautiful natural environment for luxury tourism and real estate investment, created a dynamic and rapidly modernizing economy.

Lebanon’s role as a necessary intermediary in this period can be understood as arising from three main factors that ought to be assessed in relation to their characteristics in the region as a whole. First the natural geography of Lebanon, with a coastline open to the West at the cross roads of Europe and the Arab countries, established its prime locational advantage for the transit of goods. Second, with one of the most highly educated population outside the most industrialized countries, and the existence of an advanced and diversified university system catering to the whole region, Lebanon had a growing supply of human capital. That supply provided the Lebanese and Arab economies with a skilled labour force and qualified professionals able to take advantage of employment opportunities offered by rapid regional development.

Finally, on the institutional level, the combination of a politically liberal democracy and a market oriented economic system, in a region constituted mainly of autocratic political regimes with centralized economies, created an environment capable of tremendous dynamism and adaptation. Beirut was thus able to attract the human and material resources of the region, in search of a relatively familiar safe haven, in which banking secrecy, a modern financial and communication structure, political tolerance and a free multilingual media were in operation. The interaction of these factors made Beirut the centre for international companies wishing to do business in the region, while at the same time having access to modem infrastructure, information and qualified labour.

All these factors contributed to an impressive record in the last decade before the civil war, characterized by a low inflation-high growth path (around 6 per cent annual real growth of GDP and an average inflation level around 5 per cent), with a high balance of payment surpluses and even a fiscal surplus in the last years before the war. The GDP per capita in 1974 was 2,980 Lebanese pounds ($US 1,279). As a result, the confidence in the Lebanese economy was rising as witnessed by the steady appreciation of the Lebanese pound against the dollar, averaging 25 per cent between 1965 and 1974. While the Lebanese economy had a clear comparative advantage in services, the existence of sizeable agriculture and expanding manufacturing sectors provided some balance to the development of Lebanon. The sectoral breakdown of GDP (and employment in parenthesis) in 1965 was 12 per cent (29 per cent) in agriculture; 21 per cent (24 per cent) in manufacturing and 67 per cent (47 per cent) in services. The oil-rich Arab countries accounted then for 61 per cent of Lebanon’s exports.

3.2 The war economy

As has been noted, the war which broke out in 1975 had a devastating impact on the economy. The intensity of the conflict, and its longevity has had deep human and structural effects. More than 5 per cent of the population died, twice as many wounded and an enormous amount of immigration out of Lebanon has seriously reduced the human capital of the country that was an essential part of its previous development. It was estimated that during the war more than 200,000 professionals and skilled labourers emigrated to find employment outside the country. A very large amount of capital flight has accompanied this massive human migration, depriving the country of much needed financial resources. The destruction of public infrastructure, buildings and communication networks was large scale and has been estimated by the United Nations as valuing $25 billion.

But the actual damage is certainly larger. The war removed the primary reason for the initial success of Lebanon, the confidence in the stability of its system in a politically unstable region. Much of the industrial equipment and productive capital spared is obsolete due to the lack of maintenance. For an economy-servicing regional capital in search of minimal political risks and uncertainty, the civil war was devastating. Lebanon missed most of the potential benefits and opportunities from the oil boom of the mid-seventies to the early eighties. It lost most of the foreign companies doing business in the area to neighbouring countries, and lost its role as the regional business capital.

At the end of the war in 1990, real GDP was at 33 per cent of its 1974 level of $3.5 billion. The fluctuations in output from 1975-90 reflects the varying intensity of the war in Lebanon. The initial drop in output in the first two years of the war was of the order of 65 per cent, but it recovered half of its loss as soon as the situation stabilized in 1977. The Lebanese pound depreciated slightly but held up quite well during the initial years of the conflict. Inflation was up at about 20 per cent a year. Output started increasing slowly but steadily until the Israeli invasion in 1982. The invasion wrought huge destruction in Beirut and south Lebanon and created a serious crisis of confidence leading to a 4 per cent depreciation of the currency with respect to the dollar, attaining its lowest level at 5.49 pounds to the dollar in 1983. This started the phenomenal slide in the value of the pound all through the remaining years of the war. Although GDP started to pick up again in the succeeding years, recovering in 1987 up to 92 per cent of its 1974 level, the confidence was not restored.

3.3 Post-war economy

The passing into law in 1990 of the reforms agreed by most warring factions of Lebanon in the Taef meeting put an effective end to the civil war and ushered a new phase in the economic history of the country. The Hariri Government’s priority is economic rehabilitation. At the time of writing, positive results have been seen from both government and private initiatives. Still, doubts remain over major issues.

Broadly speaking, the economic plan of the Government has the following objectives: first, achieving political and fiscal stability in order to restore the credibility of Lebanon and confidence in its economy, as a precondition to the repatriation of capital and skilled labour. Second, the reconstruction of the public infrastructure of roads and communications and utilities network and the strengthening of the public institutions and administration are preconditions for the growth in business activity, finally attracting foreign financing and investments and the rehabilitation of Beirut as a modem commercial and financial centre for regional businesses and tourism. As explained in Chapter 2, the Government has developed ambitious reconstruction and financing plans for the country aimed at achieving these goals. Initially, in 1991, the Government commissioned consulting firms to prepare a $3 billion national emergency reconstruction plan to be implemented in three years. Slow progress has led the new Government in 1993 to release a more ambitious ten year plan (Horizon 2000), involving some $13 billion in planned investments and debt charges. The Plan’s targets seemed too ambitious and will need to be revised downwards.

The most obvious sign of the regained stability and the partial restoration of confidence in the Lebanese economy is the recent reversal of the slide in the value of the Lebanese pound against the dollar and of the dollarization of the economy. After reaching a very low value against the dollar at the end of 1992, the Lebanese pound has been steadily appreciating since then. The stability of the pound was put through a test after the Israeli attack in southern Lebanon in April 1996, and showed surprising new strength in the face of a short-term crisis. The dollarization of the economy that has followed the depreciation of the pound against the dollar quite closely has declined significantly. The ratio of deposits in foreign currency (mainly dollars) to total deposits decreased from a high of 90 per cent in 1988 to around 60 per cent in 1994. As a consequence of, and also partly as a cause of, the appreciation of the currency, the inflation rate in the economy has slowed down from a high of around 125 per cent in 1992 to 15 per cent in 1995.

Underlying these reversals are a tighter monetary and fiscal policy since the end of 1992. An increased discipline in the controlling of the fiscal deficit has been requested by the World Bank and the IMF as a condition for increased loans to Lebanon.

In large part, the improved expectations of economic agents reflected in the financial indicators above, are based on the improvement in the real productive capacity and performance of the economy. After a plunge of 45 per cent of GDP in real terms in 1989, followed by a decrease of 14 per cent in 1990, the economy rebounded in 1991 by 38 per cent, and has since experienced annual growth rates of real GDP between 5 and 8 per cent. Future output growth is tightly linked to the renewal and expansion of productive capital. In 1994, gross capital formation represented 28.3 per cent of GDP, reflecting a positive long-term prospect from the part of the local industries, investing in new capital to replace and expand their productive capacity. The sectoral composition of GDP is not very different from what it was before the war. In 1992, agriculture accounted for 12.6 of GDP, manufacturing 18.5 per cent, construction 10 per cent, commerce 28 per cent, non-financial services 17.5 per cent, financial services 8 per cent, and about 5 per cent for public administration. Transport equipment alone represented more than 11 per cent of total imports in 1995.

Agriculture has always represented a bigger share of employment than of GDP, hence its importance in the social and economic situation of Lebanon. In 1985 it employed 23 per cent of the labour force while only contributing 9 per cent of GDP. Its share of employment is probably larger now. Furthermore, agricultural exports have been a stable source of foreign exchange, as are those of the agriculture-based processed food and beverages. Various irrigation projects are being studied to increase the productivity of the land in various areas. After having suffered great losses during the Israeli invasions of 1978 and 1982, and the subsequent ban of Arab countries on agricultural imports of Lebanon, due to the suspected infiltration of Israeli products, the exporters are regaining their traditional markets now. The sector still suffers from lack of systematic irrigation, small land holdings, qualified labour, and especially a lack of access to credits which prevents modernization. In 1994 agriculture received only 1.25 per cent of loans distributed to the private sector.

The manufacturing sector has been trying to recover from the destruction of productive capital, and started reinvesting in modernization and replacement of equipment, without government support. These investments reached $170 million in 1994. The great majority of Lebanon’s exports originate in the manufacturing sector. The sector, and especially labourintensive industries like clothing, textile and furniture, have benefited from the reduction in labour costs and the devaluation in the currency, making their exports competitive. Between 1991 and 1995, exports rose by 51 per cent, from $545 million to $827 million. This good performance has been accompanied by an increasing diversification of the manufacturing sector with new firms established in the chemical, cosmetics, paper, solar equipment, pharmaceuticals and food processing. Access to credit is still very restricted; only 9.5 per cent of bank loans to the private sector were awarded to manufacturing.

In 1994 the construction sector accounted for 10 per cent of GDP, it employed local skilled workers but mainly foreign unskilled workers. After being one of the most dynamic sectors in the recent years, the construction sector has slowed down in 1996, due to an over-supply from the boom of previous years, very high interest rates and too little credit to consumers. The banking sector was consolidated after having gone through a crisis in 1991 and 1992, when the Central Bank withdrew the licence of 15 banks and seven other banks ceased operation. Mergers among commercial banks also contributed to the consolidation process. Total bank assets rose from $15 billion in 1994 to $19 billion at the beginning of 1996 and a few banks recorded profit increases exceeding 20 per cent. The insurance sector has not shown signs of strong revival, mainly due to excessive damage during the war and strong competition from other regional companies.

Tourism has started to pick up again, after a complete halt. Major hotels have been reopening in Beirut and plans for the expansion of capacity are being implemented. The advertising sector has boomed in the nineties, with more than 150 advertising firms and an annual expenditure on advertising of $152 million in 1993, up from $26 million in 1992, fuelled partly by the explosion of television broadcasting stations and other mass media. Construction and general trade received more than 66 per cent of all banking loans to the private sector.

3.4 Conclusion

The overall picture drawn by these figures reflects a definite renewal of economic activity in Lebanon. They should not, however, cause complacency concerning the potential problems threatening the sustainability of the development path that Lebanon seems to be taking. The sustainability of progress has to be understood in its economic, political, social and environmental sense. Nowhere more than in Lebanon is the interdependence of these factors so critical, especially in the context of analysing a post-war development path for the county. The belief that Lebanon’s prosperity will derive from the development of services and in particular financial services is leading to a neglect of agriculture and manufacturing. These are vital components of the economy, especially in terms of employment and exports and have definitely not reached their full potential. The danger of the current bias is that it reflects an image of a future of the country that has more to do with perceptions of its past prosperity rather than with reality.

On the socio-economic side, the issue of unemployment, wages and the distribution of income are the most important. The rate of unemployment has been estimated in 1990 to be 35 per cent. As noted, the average duration of unemployment for 66 per cent (EIU 1995) of the unemployed is longer than six months. In agriculture, this is true of 79 per cent of the unemployed, 51 per cent in services and 44 per cent in industry. During the period 1974-93, real minimum wages in terms of Lebanese pounds and dollars have declined 86 per cent and 43 per cent respectively. While good for exporters, it puts most of the weight of the cost of reconstruction on those who can bear it the least. This issue has been the source of most internal troubles since the end of the war. The Government has repeatedly offered wage increases, but fall quite short of meeting the demands of the Confederation of Lebanese Workers. For progress to be sustained in the country, the economy needs to more inclusive and designed to reduce income inequality. The belief that the trickle-down effect of successful growth will resolve most of the social issues of poverty and unemployment is dangerous, especially in light of the experience of Lebanon before the war. The risks associated with a social-political explosion are too high and Lebanon should have a real sense of its potential cost.