 Ishac Diwan Lebanon is in a deep hole. Not only is its financial sector badly broken, but so is the state and indeed, its economic model. The country is now much poorer and more unequal. We are stuck in a poverty trap, and it will take generations, or a miracle, before the proverbial phoenix manages yet another rebirth.
This piece, like many written these days, is a search for how to shorten the time to resurrection. There is no easy answer. I will dare to argue that if there is a miracle, it would have to be an economic one. That it can only be engineered by civil society and citizens associations. And that it is unlikely to be of the sudden salvation type, but rather, that it would require several years of activism and organizational work to start showing progress. In the process, I will indulge in multiplying references to my recent work on related issues. The starting point is to recognize that while the technical challenges facing us are really complex, a good governance system should be able to rebuild state services and progressively bring back prosperity, albeit initially from a much lower level, by focusing on creating a new path of economic growth. This is because Lebanon is now way below its potential – you just have to look at its education, infrastructure (minus electricity), and housing stocks, its productive knowhow, the connections abroad of its citizens, to recognize that current productivity is way below where it should be. But we must live with the governance system that we have, even as we strive to improve it. The post-war oligarchic coalition has proven highly inefficient at policy-making, but also highly resilient. Pragmatism requires that to recover, we must search for a formula that can work even before governance improves. My goal here is to develop the proposition that progress requires as a starting point a credible vision for a new path of economic growth (more on this here). Lebanon has an economy that has overshot in its collapse, now around $20b compared to $50b in 2018. Is there a credible outlook of a recovery? The Rafik Hariri formula cannot play-out again, as the reputation of Lebanon as a safe bank has now been lost and cannot be rebuild on shaky grounds. The older vision of the entrepôt of the Middle East is also gone, with that function now firmly based in Dubai. The remaining part of the Swiss-on-the-Mediterranean dream is tourism, which by itself is insufficient. The only growth elevator left is to produce and export goods and services to complement tourism. How society can get organized to do so is an essential question. There are many visions out there on how to do so. In my own vision of a new growth path, decentralization, care for the environment, and culture, would be the underpinning of a new path of a “knowledge economy of the sea and the mountains” producing high value services, high-tech manufactures, and agri-business (see my take here). So far, despite a massive devaluation, exports have fallen instead of starting to rise. The first steps in any promising scenario must be to fix the electricity sector, re-open bank credit, and provide minimal state services. This could generate enough momentum to start reducing the brain-drain and capital flight (more on this here). Until state revenues rise sufficiently, securing the education sector, with the help of donors, is the top priority, as it is in the end Lebanon’s essential comparative advantage, which needs to be preserved to keep the possibility of a recovery alive. Usually, we tend to think of stabilization as the first step to recovery. In this case, paradoxically, a credible vision of a future growth path is required to allow for the stabilization of the economy. In the financial sector, dividing up the humongous financial losses turned out to be a super-difficult task (more on this here). In retrospect, it is not surprising that the financial elite - large bank shareholders and depositors -would refuse writing off their assets within what resembles a liquidation procedure. It makes sense that they would rather wait and bet on a possible upside, even if at low probability. If there was a credible growth plan, instead of dividing losses, adjustment would constitute a higher value organization that would also attract new money. A more hopeful future would allow the state to issue growth warrant to recapitalize the rich, while using national assets – the remaining reserves and gold, banks’ loan portfolio, and public properties, to support smaller middle-class depositors and pensioners. A broad stabilization coalition would then support the necessary restructuring of the banking system. The state has shrunk by ten-folds, from $10b to $1b. Public servant salaries have fallen by similar proportions. While you cannot have an economy without a financial sector, you cannot have a country without a state. Rebuilding the economy requires a functioning state, but rebuilding the state requires tax revenues and a functional economy. To get out of this chicken-and-egg situation, borrowing against future growth opportunities is the only way out. This would reduce the need for monetary financing which generates inflation. The ability to borrow anew for growth paradoxically reduces the required haircut on financial capital that is needed to regain creditworthiness (more on this here). In fact, it can even be argued, albeit more speculatively, that economic progress is the necessary route to gradually improve governance itself. The next growth miracle can only take place through increased productivity and hard work. This will increase the demand for improved governance, as it cannot happen without it. A productionist path would empower labor unions, industrialists, and professionals over protectionist and rent-seeking merchants and bankers’ groups. These groups will demand a better application of the rule of law, social justice, and effectiveness - out of self-interest. This is a path that got started in the 1960s but was aborted by the extra-liberal policies of the 1970s, and later by the civil war. But can we expect our current regime to facilitate such a path? On this, I would not be as pessimist as I am in the case of Egypt or Tunisia. Our political malady is different from theirs. In Egypt, a myopic autocrat fears that a dynamic private sector would pose a risk to regime survival. In Tunisia, intense competition among young political parties led to power-sharing governments, which as in Lebanon, proved impotent at making tough strategic economic decisions. Unlike Egypt and Tunisia, we do not risk ending up with a populist strong man who is supposed to solve everything but typically only makes things worse, as our suspicious communities would not allow that to happen – we are among the rare global cases of “a society against the state.” Instead, our malady is the difficulty of coordinating the many oligarchs of our sectarian governance system. Our oligarchs are not opposed to the private sector. They simply fell in the pocket of sectors that do not have potential anymore – banking, real estate, commerce. A stronger push by civil society, unions, productivist associations can equally push them in other directions. A growing economic pie would benefit their supporters, who would also push in this direction, even if as argued earlier, economic growth would also start planting the seeds for an evolution of the system. How to get better economic coordination towards the goal of improved prosperity? I am a bit of a loss at this point and would have to conclude this article by leaving the question open for debate. What is clear is that at least two elements are needed. First, a vision of a productive Lebanon should become much more real and visible. It should be articulated in all kinds of ways – in schools, the media, art, and political programs. Believing rationally that the economy can grow is the can opener to many of our ills. We have moved, whether we like it or not, from the Lalaland that outlasted the genie of Rafik Hariri, to the age of economics. We better start understanding better what this means. It is time to bring back the Phoenicians-the creators, inventors, and innovators! Second, we need an effective conductor to bring the diverse veto-payers on board around important steps and decisions. The Emirs of the mountains are long gone. In more recent times, Hafez El-Assad played this role until his demise. Since then, the political elites spent their time buried in the search for the holy grail of the next “safa’a”, instead of solving priority problems one at a time. Hezbollah may have the firing power, but it does not have the will nor the skills to play economic cop. We are at a stage where it can only be the civil society that acts as a traffic cop. It has the power to do that, but this pushes the coordination question from formal politicians to civic leaders and associations. It can potentially be done, but it is a challenge. It is in the fact the most important challenge, as it is only progress here that can realistically speaking improve the functioning of the whole structure. If the next demonstrations and social mobilizations start focusing on the real constraints to economic progress – a capital control law, a solution to the electricity problem and so on– this will create momentum to move to a fuller vision, and to start improving its credibility. This would in turn support finding solutions to the loss-distribution imbroglio, in ways that create the type of banking sector needed to support growth. As momentum build-up, monetary policy could start supporting stability. If enough progress is achieved, we could afford having a program with the IMF that improves Lebanon’s credibility abroad, without sacrificing program quality to the whims of IMF bureaucrats. I want to thank, without incriminating, Joseph Bahout, Raed Charafeddine, Youssef Fawaz, Fawwaz Traboulsi, and Mohamad Zbeeb for conversations that have inspired this article. |