Reconstructing the economy of Lebanon.

• Author: Kubursi, Atif A.

The basic thesis of this essay is that Lebanon's current economic predicaments are rooted in the unmanaged mercurial successes experienced in the 1950s through the mid-1970s, in the traumatic consequences of the civil war and the massive reconstruction effort that followed it, and, in a less obvious way, in the confessional structure of the economy that is still one of its dominant organizing principles.

It is also argued that accounting for past successes and the processes that supported and sustained them is a necessary prelude for understanding the economic causes and consequences of the civil war and the difficulties encountered in reconstructing the post-civil war economy. Such an understanding could also be helpful in restructuring the economy and reconstituting the Lebanese polity and society.

The essay begins with an examination of the sources of past Lebanese economic growth and the economic causes and consequences of the civil war. It ends with a suggested economic framework for reconstruction and rehabilitation of the economy and society, one that is different from the framework used by the Hariri government.

THE LEBANESE ECONOMIC MIRACLE

There is nothing magical or miraculous about the sources of the past economic success and growth in Lebanon. Actually, most of the sources and causes of this growth can be explained in terms of traditional economic factors.

Generating a surplus is a good measure of the ability of an economy to save and to expand its productive capacity. A central feature of the Lebanese economy that goes back to the early 1940s was the high ratio of investment to GDP (gross domestic product). In fact this ratio, on average, had rarely fallen below 20 percent throughout the 1950s until the eve of the 1975 civil war. Starting with a capital-output ratio of about 2.47 (see Saidi, 1986), this investment ratio could have theoretically supported an annual GDP rate of growth of about 8 percent, a rate that was in fact typical of the Lebanese economy for much of the prewar period.

Given that services accounted for more than 60 percent of Lebanon's GDP, the 20 percent investment ratio understated the magnitude of investment per unit of output in the commodity-producing sectors of the economy. A high investment to value added originating in these sectors explains the relatively high capital-labor ratios in the commodity-producing sectors of Lebanon before the war. This, in turn, explains the relatively high labor productivity indices generally then observed in Lebanese manufacturing and agriculture.

[TABULAR DATA FOR TABLE 1 OMITTED]

Another central feature of Lebanese development before the war was a young and growing population investing heavily in education and supplying a dynamic, well trained, and highly motivated labor force (Saidi, 1986). Lebanon had the highest adult literacy rate (73.5 percent) in the Arab region and one of the highest among developing countries (Richards and Waterbury, 1990). This domestic skilled manpower was supplemented by a large pool of cheap semiskilled Palestinian workers trained by UNRWA at little or no cost to Lebanon and a large group of unskilled seasonal immigrant Arab workers from neighboring countries, particularly Syria. Estimates of the foreign labor force in the early 1970s put the total number at about one third of the national labor force (Khalaf and Rimlinger, 1982).

The Lebanese economy was and is basically a confessional economy that grew as a natural outcome of an extensive intersection of interests of basically Maronite bureaucrats and Sunni trading families. The former group was primarily interested in developing and securing a stable source of public finance, which in the context of the then prevailing conditions and structures of the Lebanese economy could only be based on custom duties on foreign imports. Much of this activity was controlled primarily by a handful of very powerful Sunni trading families in the coastal cities of Beirut, Tripoli, and Sidon. These traders saw their interests best served by a government restricting itself to building an efficient social infrastructure and maintaining a policy environment favorable to free trade. This intersection of interests manifested itself politically in the National Pact. It also manifested itself, perhaps in a less obvious way but no less strongly or importantly, in an implicit economic and social contract that gave the political accord a strong economic base.

The terms of this implicit contract called for the public sector to invest heavily in building an extensive infrastructure of trade routes, ports, airports, warehouses, and an excellent communication network. It also required the government to restrict its activity in promoting competing commodity producing sectors or regions that could undermine the dominance and the free flow of imports. The terms also called for a pro-free trade, pro-business policy environment with minimal government interference, low or no income or profit taxes, bank secrecy laws, and a free foreign exchange market.

In a less obvious but no less certain way, confessionalism has given rise to Everett Hagan's "blocked minorities" phenomenon (see Hagan, 1962). Disgruntled and disenfranchised Orthodox, Protestants, Shi'ites, Druze, Armenians, and Palestinians sought influence, power, and protection through economic success outside bureaucratic jobs and trading monopolies, thus giving rise to a proverbial class of local entrepreneurs and highly competent professionals.

Lebanese prosperity also had much to do with the fact that Lebanon had a jump start in economic and social development over neighboring countries rich in resources but relatively poor in skills, world contacts, and developmental experience. The advanced educational system in Lebanon and the extensive connections the Lebanese had garnered with the West bestowed on Lebanon some real advantages in its ability to act as the indispensable middleman in much of the contact of the Gulf and other Arab countries with the West.

The Palestinian enclave (sub-) economy also contributed to Lebanon's prosperity. The Palestinian "infrastructure" within Lebanon may have been a negative political factor, but it certainly injected into the Lebanese economy a good amount of operating and capital money in addition to cheap semi-skilled and unskilled workers and some first class bankers and entrepreneurs. At one time, this economy was estimated to have pumped over $4 billion annually in social services, wages, and salaries into its "public servants and army" and other goods and services in the domestic economy.

Last but not least, a stable political environment (relative to its neighbors), combined with a banking system designed to attract and protect foreign hot capital, meant that Lebanon was able to capitalize on the growing pains and political instability of other neighboring countries.

The 1975 war undermined most of these favorable factors and processes and, in addition, created some very negative mechanisms and attitudes of its own that are proving to be difficult to reverse or correct.

A brief account of some of these negative processes and a simple analysis of their underlying mechanisms is attempted below by way of sketching the necessary framework to deal with them.

THE WAR ECONOMY

The economic causes and consequences of violence are not well researched or documented in economics. Generally economists have shied away from studying these phenomena, preferring to leave them to other social scientists and disciplines. In a way, Lebanon provides a kind of a social laboratory for analyzing and gauging the economic mechanisms and processes spawned by violence.

Even without the war, the uneven sectoral, regional, and class development was bound to create social tensions, contradictions, and conflicts. Whether it would have exploded into open warfare the way it did in 1975 is debatable. Several mitigating factors could have easily made these tensions and inequities simmer for a long time on the back burner of history. The new explosive opportunities in the Gulf region were just beginning to loom on the horizon. The uninterrupted and continuous growth that began in the early 1950s was just as solid in the 1970s. Furthermore, a new vigorous economic spurt was just about to begin, fueled by the emergence of a vibrant and dynamic small-scale manufacturing activity that was primarily export oriented. The war blunted this growth and sent the economy reeling on a contractionary spiral that lasted over 17 years.

Perhaps the most long-lasting damage was the profuse brain drain triggered by the war. Professionals and skilled workers with international transfer prices (i.e., with skills that are easily transferable in the international market) emigrated, leaving semi-skilled or unskilled workers behind to fend for themselves. Losses in productivity were experienced in most sectors and real incomes of the unskilled plunged sharply, exacerbating an already iniquitous and skewed income distribution system. Conservative estimates of net emigration suggest that a total of 740,000 people left Lebanon between 1975 and 1988 (Labaki, 1989, 1990). Another 240,000 are believed to have emigrated in the first eight months of 1989. The total tally of all those who emigrated during the Aoun-Lebanese Forces conflict was difficult to estimate precisely, but the conflict was believed to have triggered another wave of emigration of no less significance than that experienced in 1989. Eighty percent of all Lebanese emigrants to Arab oil producing countries between 1975 and 1982 had some technical qualifications. In the mid-1970s over 50 percent of the emigrants were part of the labor force. In the 1980s this bias was toned down to 25-30 percent as earlier emigrants gathered their families.

This out-migration of talent and skills could have been partially compensated for by flesh crops from the educational system. But the Lebanese...