19 July, 1998
Lebanon's economic mystery
By Eqbal Ahmad
The war over, old glory has nearly returned to Beirut, home to a third of Lebanon's estimated four million people. Its upper and middle class neighbourhoods are largely restored and wear again the look of a European city. In the streets and shopping centres the ratio of men and women is about equal.
In some areas such as West Beirut's fashionable Hamra district women outnumber men. They are stylishly dressed shoppers and office workers, confident, courteous and full of grace. The kalashnikov bearing men in olive green are gone, and the Mediterranean swagger belongs now to the briefcase bearers. Streets are crowded with people and cars - mercedes abound - and the shops are full of merchandise, tastefully displayed.
Business is not usual though. Inside the well stocked shops a visitor encounters smartly dressed sales persons and an eery emptiness. There are few if any customers. "I have been ready for two years", says the owner of a fine bookshop that stocks books and magazines in Arabic, French and English, "but am not yet able to pay expenses, much less make profit." How many dresses did you sell today?, I ask a saleswoman at a fashionable clothing store. "Two", she said with a radiant smile that gave no hint of bitterness, "I shall open again tomorrow, and may be sell three."
Cafes and restaurants alone have customers in good numbers, and people are on the move so cars and pedestrians compete for space in the streets and on sidewalks which serve as illegal parking spaces. Having rebuilt much of their destroyed country and readied it for business, the Lebanese are waiting, patiently, with hope and a most enviable flare for life.
Prices are high, like European prices. A cup of coffee or tea costs a US dollar at a street side cafe, a sandwich is four dollars, the shortest taxi ride amounts to five dollars, and consumer items such as shoes and clothing are twice as high as in the US. These are not tourist prices. They reflect the price of food, clothing and rentals which in Beirut are more expensive than in New York.
There is but little industry in Lebanon, agricultural yield is poor and the sector is grossly neglected by the state, exports are low and imports high. Most importantly, the sheikhly Arabs on whose investments and spending the Lebanese government has staked much of its reconstruction plan, have not returned. Yet, the middle class is large, working people are adequately fed and clothed, the currency is stable and inflation under control. The economics of Lebanon struck this visitor as mysterious. To solve the mystery, I turned to a Britain-trained economist, one of the talented young men Prime Minister Rafiq Hariri's government has wisely inducted to rebuild Lebanon.
A caution is in order. The figures below are approximations. The Lebanese government fight shy of numbers. A bureau of statistics exists but in name only; a national accounting system is non-existent. The best estimates are with the Central Bank which enjoys autonomy, and insures a degree of economic discipline. These present a bleak picture of the economy and the state's neglect of its structural requirements:
The informal sector - to which belong, among others, all the Palestinians in various camps who are forbidden to work in Lebanon - represents as much as 70% of the economy. Taxes on profit have dropped from 37% in 1974/75 to nearly 10%, and taxation is virtually flat, non-progressive. Indirect taxes account for 80% of government revenues. There is no progressive taxation even on luxury items. Agricultural sector suffers from neglect and the stranglehold of large owners.
Three to four per cent of feudal families own 70% of the cultivable land, and a mere 0.5% of bank loans go into the agricultural sector, and farmers are so starved for credit that nearly all borrow from suppliers of input paying as much as 100% interest. As a result, agriculture accounts for only 10-12% of GDP even though the land is fertile and Lebanon has a sophisticated food processing industry and a made-to-order clientele among Arab immigrants abroad.
Interest on industrial loans are slightly lower; manufacturing contributes 20-35% of GDP while the service sector yields some 55-70% of the GDP. Exports make up barely 10-15% of Lebanon's import costs; hence the country suffers chronically from balance of trade deficits.
This is a fairly typical third world economic profile. Yet, Lebanon looks like a south European country of two decades ago. Per capita annual income is around $4000.00, and despite skewed distributive patterns people's living standards are distinctly superior to those in the non-oil producing Arab countries. While unemployment is not low thousands of Syrian, Sri Lankan, and Filipino workers are in Lebanon because they work on lower wages and employers do not have to pay toward their pension and social security funds.
During the war, living standards did fall and have not picked up since. In 1974, an average Lebanese family spent 40% of its income on food. In 1996, this percentage had gone up to 60%, indicating a rise in prices and also poverty. Yet, by third world standards Lebanon's remains a prosperous and stable economy. So what explains this apparent anomaly?
"Immigrants" is every one's answer. Again no one knows the exact figures. The most common estimate given is 20 million Lebanese immigrants abroad. Of these about half are departees of such long standing that they are fully integrated in their adopted countries and have lost links to their ancestral land. About 8 million, double the current population, are believed to be "active" expatriates - those who still support families and/or invest in Lebanon, mostly in bank deposits.
Since the foreign remittances are frequently made through private channels, no reliable figure exists of its actual size. But it is largely due to expatriate investment that bank deposits equal 150-200% of Lebanon's GDP, and a large share of it ends up in government hands. Lebanese expatriates also constitute the backbone of Lebanon's tourist trade. This reality defines the attention of Lebanon's financial planners.
"Our economy depends on inflow of money", says a high level economist, "it alone compensates for our chronically large trade deficits. So our economic management has remained focussed on assuring a healthy rate of inflow. There are traditionally three main sources of inflow: remittances, foreign depositors, and visitors. All three demand a stable currency, high interest rates, low rate of inflation, and a good infrastructure. So traditionally governments have focussed on meeting these demands while neglecting other more fundamental problems such as raising agricultural productivity, promoting industry and providing adequate social services."
Rafiq Hariri's government's achievement lies above all in restoring some of the pre-war indicators of Lebanese economy. The war had battered the lira. In 1983, one US $ exchanged for 3000 liras. Since 1992, the lira has been stable at 1500 to a dollar. Inflation is under control at between 4-5%, and the interest offered on Treasury Bills is 17% so that investment in Lebanon is attractive to expats and foreigner investors. Are they coming? Yes, says the economist, "but the cost is high. We have achieved stability at the cost of increasing debt which stands now at $17.2 billion. Three-and-a-half billion dollars are in foreign debt. Fifty percent of the government's budget is used up in interest payments."
Where goes the remainder? "After meeting state expenditure, the highest priority of the government is reconstruction and infrastructure, and these are adding to the debt burden. The approach is old but its costs are recent." Like Prime Minister Nawaz Sharif of Pakistan, Mr Rafiq Hariri, who is a construction tycoon with a listing in Fortune 400, is fond of mega-projects. Thus, Beirut's newly built airport is designed for six million passengers annually, a number it may never attain. Similarly, in reconstructed Beirut there are 120,000 apartments waiting to be rented or sold. The Sheikhs of Arabia will never get a better opportunity to grab one. But then the West still casts its spell on the poor rich Arabs.