Adonis Diaries

March 2018  (I already love the title)

Bassel F. Salloukh, Associate Professor of Political Science at the Lebanese American University, Beirut

Lebanon’s financial moment of reckoning seems to have finally arrived.

At least this is what the latest IMF mission concluding statement of 2 February 2018 suggests.

It warns that “Lebanon’s debt is unsustainable under the baseline scenario. In the context of Lebanon’s low growth and rising global interest rates, debt dynamics will deteriorate further and public debt will increase rapidly to just below 180% of GDP by 2023 under the baseline and continue to rise thereafter.

Similarly, without adjustment, government financing needs will continue to rise; the underlying co-dependence between banks and the sovereign will intensify; and Lebanon’s growing reliance on deposit inflows will expose the economy even more to sudden swings in depositors’ confidence.”

Reaction in Lebanon to the IMF’s report is at best mixed.

Some consider it nothing more than déjà vu hubris. Lebanon’s balance of payments problems are not new, they argue, and have always been managed by creative monetary policies.

Others are alarmed but hold on to hope that the anticipated Paris 4 conference will buy the country enough time, at least until prospective oil and gas extraction starts generating revenues that make it possible for the government to stabilize the budget deficit and reverse the country’s galloping public debt and its ratio to GDP.

On this latter view, then, Paris 4 seems to be the perfect half-time break the country needs between present difficult economic conditions and what promises to be a haven of prosperity awaiting us in the future.

This indeed seems to be the economic logic behind Paris 4.

Assuming news reports are accurate, the Lebanese government is going to Paris 4 with the hope of raising funds for a long wish list of infrastructural projects that amount to, at most, $16-17 billion over the span of eight to ten years, through a mix of grants, long-term loans, and public private partnerships (PPP).

The assumption is that investments in infrastructural projects will create some 120,000-160,000 new jobs annually (ridiculous, may be for the duration of the 10 years?), and growth rates in the range of 6% to 8% (far fetched illusions).

More importantly, infrastructural investments will automatically lead to GDP growth, which in turn will reduce the debt-to-GDP ratio.

Bracketing the timing of the Paris 4 conference, as it is scheduled just before the long-anticipated parliamentary elections, and the clientelist carnival they often unleash, these are high hopes indeed.

No one doubts the urgent need to overhaul the country’s infrastructure. Compare Beirut’s  infrastructure to Dubai’s, and you would think the latter comes from a sci-fi movie. It does not. It comes from a government possessing not just resources, but a true futuristic master plan of what it wants to make of its emirate, in addition to that government being bent on holding contractors responsible for their work.

The dilapidated state of Lebanon’s infrastructure is a result not just of many years of government neglect. It is also the consequence of stress that comes with refugee flows generated by the war in Syria. (This is the master excuse, since it is the Syrians running the greedy Lebanese businesses)

The Lebanese government has every right to demand that the international community assume its share of the geopolitical price tag. Other states, especially Turkey, have unabashedly done so.
 
But, who guarantees, in a state anchored on clientelist practices and neo-patrimonial networks, a transparent process of tenders and project execution?

If the experience of postwar reconstruction is any guide, then future spending on infrastructural development is not the panacea now promised by the government.

As for those who condition the success of Paris 4 on PPPs and progress in the country’s privatization laws, they seem to have missed the deep organic connection between clientelism and the public sector, the revolving door between the private and the public sectors, have no idea how contracting and sub-contracting operates in the so-called “Lebanese miracle”, or, alternatively, want to use the recent gloom and doom media reports to extract more financial concessions from those sectors of society who can barely make ends meet.

Unfathomably, only a minority in this country is willing to consider what looks like a gathering perfect storm as an opportunity to undertake real economic reforms.

The recipe is neither new nor complicated.

It requires a radically different vision of what Lebanon is and should be, and views the country as more than just a tax haven and a cash cow on steroids for the privileged few.

It entails policies similar to those undertaken by many countries in the global South, ones that ultimately set them on a long-term growth trajectory, and enabled them to ultimately reduce income inequalities.

PPP to develop the country’s battered infrastructure is a necessary but certainly insufficient condition to solve Lebanon’s economic problems. Alongside infrastructural projects, the Lebanese economy is in dire need of public and private investments in both old and new sectors.

Agriculture and industry have long been neglected sectors because of the hegemony of the rentier, service-based ruling ideology, and the concentration of economic activities in Beirut and its environs. As a result, Lebanon’s hinterland is a veritable ticking-bomb, a barren and lonely place, bereft of job opportunities and hope.

Anyone who has done work on countering violent extremism (CVE) will tell you that extremist ideologies attract mainly those who have no socio-economic prospects.

Whole rural generations have no alternative but to make their way to a congested and suffocating Beirut seeking low-paying menial jobs. The lucky ones emigrate in search of a better life.

A more caring political economy would make use of the roaring talents of the country’s millennials to turn Lebanon’s rural areas into a haven for agri-solutions, eco-tourism, and alternative forms of domestic tourism, recreation, and development.

This entails more than a road here and a football field there. Rather, it would encompass the kind of “destination development” that not only makes these regions attractive to tourists on a year-long basis but also supports the living standards of host communities.

After all, and despite their success in attracting a special kind but ultimately limited clientele, Faqra and Faraya alone do not make for a successful tourist model for the whole country. State-led or PPP development of Lebanon’s rural areas—including its infrastructure—is a far more efficient strategy than the demonizing discourse and practices with which its inhabitants are always treated.

Industry is the other casualty of Lebanon’s rentier-driven economic ideology. The obsession with the service sector at the expense of the job-producing industrial sector means that nearly 85% of what Lebanese consume is imported at a cost of $23.1 billion in 2017, generating a trade deficit of some $20.3 billion in the same year.

A persistent bias against this sector in a country with a talented population but with high unemployment and consumption rates remains a puzzle. Is it the fear that an organized labor force tends to mobilize along socioeconomic rather than sectarian lines, as the experience of the pre-war years suggests, and that this ends up denying the sectarian political elite a significant but docile constituency disciplined through clientelist strategies?

Or is it the agony of admitting that what Lebanon has always needed is a variant of the developmental state, one that nurtures infant local industries and allocates credit selectively, rather than the blind powers of the free market?

A robust but invariably mixed import substitution and export-oriented industrial sector would surely offer Lebanon’s army of unemployed—camouflaged in creative but horrendously low-paying jobs, as in the case of the omnipresent and indefatigable valet—a more decent and humane life.

It would also decrease the import bill and hence the trade deficit. Or is the developmental state too much to ask of a bureaucracy infested by clientelist allegiances?

Alongside investments in the aforementioned sectors, there is also a need for bold initiatives in new, futuristic, sectors. To name just a few, there is a need to invest in sustainable technologies that make use of the country’s solar resources, waste management facilities that put an end to present cancerous environmental conditions, social enterprises that harness the country’s creative talents, and a new kind of educational system that prepares future generations for the challenges awaiting them in the 21st century.

Aren’t our children taught the myth that the Lebanese are the inheritors of the Phoenician entrepreneurial spirit? Then why not give the younger generations the opportunity to deploy their skills here at home, instead of belatedly celebrating their success in exile?

Let us then hope—a little against hope—that Paris 4 will invite a reevaluation of exactly what type of state all Lebanese deserve. There is a healthy debate in academic literature on the true capabilities of the Lebanese state given the substantial internal autonomy enjoyed by sects and the power of special interest groups.

Often assumed as insignificant, this “state” can sometimes surprise us. For example, and despite immense opposition from the business community, it managed to increase salary scales at a cost of about $1.9 billion, mitigated partly—again, despite immense opposition—by a package of tax increases on corporate profits (from 15% to 17%), on interest rates on deposits (from 5% to 7%), on VAT (from 10% to 11%), and on proceeds from treasury bills and Eurobonds. Albeit belatedly, but the Lebanese “state” demonstrated that it can act as a state when it wants.

Those who command Lebanon’s political economy today have only two choices: They can either ignore the warning signs—as they have done with the fiscal Photoshop of the 2018 budget—and embrace the same economic choices that avalanched into the current fiasco.

Or, alternatively, they can use Paris 4 to rethink what kind of economy Lebanon can and should have. Let them turn crisis into opportunity and—like Michigan Governor George Romney in 1963—ask themselves: “If not us, who? If not now, when?” And let’s hope they do so before it is truly too late.