the Economy

The Engines of Lebanon's Economy

by Ishac Diwan

Some doctors believe that if you have a vision, you should visit a clinic. But in the case of Lebanon, a vision can save your life. This is because the post-civil war economic model is dead. Disciplined imagination is needed to envision what a growing economy may look like in the future, and, as a result, what is necessary to guide the efforts needed to recreate a viable economy anew. Indeed, the ongoing, seemingly bottomless financial crises have made it clear that prosperity, if it was to return in the future, will not be built on consumption, nor financed by external capital flows. Nothing less than a rise in productive activities would do. From its current marginal position in the economy, globally competitive production needs to grow and become the central engine for prosperity.

This note is inspired by a series of webinars with Lebanese entrepreneurs organized by the Shir'a Group, which were summarized in a report (Shir'a, 2021). I pick up here two sets of issues which I develop further. First, given that a productive Lebanon must, by necessity, be based on productive sectors, and given Lebanon’s small size, what is it that Lebanon can export (and/or produce domestically rather than import)? Second, what should be the respective roles of the state and of the market? Below, we take on both issues in turn.

In imagining a future, there is the risk of having too many degrees of freedom, with risks of ending up with fantasy or a low ambition. To generate some structure into this foray and mold possible futures, we try to use several disciplining devices, such as resources to history, to global trends, and to notions of dynamic change. It is worth noting that, methodologically, we pretend that politics will not be the main constraint. This is not as much naive optimism as a method. Having a clearer vision of a successful economy should be an inspiration for activists and reformers to reform politics in ways that make future prosperity realistic anew.

Comparative Advantages and Promising Sectors of Activity

Once one accepts that future prosperity can only be achieved through efficient production of goods and services, what hits the mind is the scale of the challenge. Currently, the economy has shrunk from a GDP of about $60 to about $20 billion, and this is supported by relatively small capital flows of about $3 billion in remittances and a bit more in revenues from the export of goods and services. To get back to the 2018 level of output, the Lebanese economy will have to triple its current size. Moreover, it also needs to undergo massive structural change. In recent decades, the productive sectors have been hollowed by a policy framework that incentivized consumption over investment, and debt over savings. For example, between 2011 and 2010, private investment fell from 20 to 10% GDP. Between 1998 and 2016, manufacturing value-added fell from 24 to 14% of GDP, as the lion share of income was generated by finance and real estate.

Given how small the country is, incomes cannot grow without an expanding export sector. Before the blow-out the country had a small export base measured at $2-3 billion of manufactures and another $15 billion of services. The shrinking of exports, in spite of a massive devaluation, is a testimony of how inefficient the economy has become, working on cash and unable to import basic inputs. Moreover, several past export sectors have weakened structurally post-crisis and won't be regained. Banking services are a case in point. Until governance, security, and financial services improve, tourism may also have a hard time getting back to pre-crisis levels.

The objective must be to rapidly scale up exports again. A simple back-of-the-envelope calculation is instructive.  Assuming that the objective is to bring Lebanese GDP back to its 2018 level and use as a rule of thumb that productive economies that rely on production operate on an export-to-GDP ratio of at least 50%.  This, then, means that current exports need to rise by a factor of 5, which will demand effort for more than a generation. This stresses the importance of not just igniting growth, but finding ways to sustain it over long periods of time.

To move onto a rising path then, a very different macro framework is needed, including a competitive and flexible exchange rate anchored on prudent fiscal and monetary policies, in addition to a micro/regulatory framework that focuses on competitiveness. Not only is the scale of the challenge enormous, but if nothing is done, things will get worse as Lebanon's comparative advantages will continue depleting fast.  The current crisis is already leaving deep scars: the country's brand is getting wounded, skills (and capital) are leaving, the accumulated capacity is disintegrating with companies that embody them shuttering, the quality of education is precipitously falling, and a complicated foreign policy is hurting much of the diaspora especially in the GCC.

Comparative advantages
What are the distinct comparative advantages that have (and could again) make Lebanon an attractive site for productive economic activity?  Local producers cite an entrepreneurial culture, rich intellectual capital (driven by a strong and trilingual educational system), a valuable "brand", and deep integration in the global economy including, especially, of a large Diaspora. Closeness to the GCC market is also seen as an advantage, but no longer an over-riding one.

Are those advantages (if rehabilitated and cultivated) enough to be the basis of a Productive Republic? Our focus group of producers saw plenty of potential for value creation in a well-governed Lebanon, especially on the export front. These future opportunities are already reflected in start-ups and recent innovative activities, and they can be put in 3 broad buckets: high-tech services, high value agriculture and craft, and more traditional manufactures and services.

The “Lebanon Brand” is seen in particular as an extremely valuable asset—one that can combine cultural heritage and innovation to speed up export growth by helping to upgrade traditional sectors to the needs of the times, including in areas as diverse as skilled e-services of various kind (health, education, finance, engineering, law, advertizing, media..), high value craft, tourism, sustainable food, all leveraged through e-commerce.

  • High-tech increasingly leverages the communication and digitalization revolutions to allow disruptive innovations in many sectors where Lebanese producers have core competencies—all with distinct export potential. Included are health-tech, education-tech, tourism-tech, fin-tech, industry-tech, water-tech, and clean-tech. These are incidentally some of the fastest rising elements in global exports (UNCTAD, 2021).
  • Lebanon has had traditional capabilities in agro-businesses and traditional craft, but there is huge potential to move up these value chains by using available skills, creativity and culture, while relying on diaspora connections for cultivating export markets.
  • Finally, on goods production, there have been surprising success stories in Lebanon in the past. In the 1960s and 1970s, the country produced an extended range of products, some with a high level of technical sophistication (Atalah and Srour 2014). Recently for example, several firms managed to produce ventilators in response to the COVID-19 crisis. This suggests that the existing skill mix can be easily adapted to changing global demand in manufacturing.

While the low incentives for production limited these opportunities in the past, the future may be different, if a combination of high skills and low costs can remain under control. There are opportunities for Lebanon to transition into a near-shoring hub for the GCC and European markets in both goods and services. This includes providing product niches with flexible production lines that can keep up with rapidly shifting consumer trends. In this regard, intense use of e-commerce can create direct feedback loops with supply chains as well as with consumers. Moreover, with suitable infrastructure, especially digital, islands of specialized skills can promote innovation, attract investment, and engage the diaspora. Such islands would attract universities, vocational schools, and labs as well as become thriving growth centers (Dibeh 2021).

Implications for society
Many of the sectors listed above offer new opportunities that did not exist as recently as a decade ago. The demand for eco-tourism, organic food, and high-value crafts are relatively new areas of consumer interest. Global supply chains that allow for the manufacturing of higher parts of the value chain are also recent. E-services have been spurred by the communication revolution and are now the fastest growing segment of global trade. Moreover, the Lebanese Diaspora has grown fast in the recent past, and it is the recent exiles that retain intense levels of attachment to the homeland. On all these aspects, Lebanon's comparative advantages are more valuable now than in the past.

As already stressed, technology and culture stand at the center of the activities where Lebanon possessed until recently core competencies - this includes high-tech manufacturing, healthcare, education, agriculture, tourism, or design. There are also new sectors in demand, such as organic food, clean energy, or water management, which can become competitive with the application of high-tech. In this, Lebanon could count on its first class education institutions, as well as the global network of Lebanese experts and entrepreneurs.

Most growth opportunities are connected to cultural content, which provides the basis for the distinctive made-in-Lebanon "brand". Cultural inputs as embodied in language, design, and music are especially needed to support the expansion of Internet-based services and of AI into Arab markets. While the Arab speaking world constitutes about 5% of global population, Arabic website content is currently at less than 1% of global content, presenting a unique opportunity for a mix of scientific and cultural value-added for the next decade (Mahroun, 2021). Again, these intangible assets are not just aspirational, but actually rooted in Lebanese history.  In the 19th century, Lebanese intellectuals such as Boutros Al-Boustani and Ahmad Fares el-Chidiac led the pan-Arab Nahda movement that modernized literature and unleashed academic studies.
As already noted, promising areas for growth rely heavily on Lebanon's broad and diverse Diaspora: as consumers of home-made products, contributors to production lines given unique connections to global manufacturers, and financiers connected to regional and global financial networks; and as providers of technology and knowhow.  High skilled Lebanese workers tend to be mobile and immigrate as soon as conditions deteriorate. But incentivizing them to come back to work and live is also possible, as witnessed during the 1990s. This requires not just security, but also “quality of life” factors that appeal to them.

Nature of the Economic System

The domestic political backdrop will likely stay as a constraint on growth, and Lebanon will continue to live in a chaotic neighborhood. While neither constraint rules out growth, a future growth model must consciously incorporate resilience. The basis for resilience involves equal citizenship, solidarity, and justice. Currently, Lebanon is one of the most unequal countries in the world. A prosperous future can only be built on inclusive growth that allows for the hope of social mobility.

Where does that leave us?  If the post-civil-war model was neither sustainable nor desired, should we go back to Michel Chiha's “Merchant Republic '' as a model?  I do not believe so.  Not that this model was necessarily a bad idea for its time. But the reality is, global developments (emergence of China whose orbit is geographically and economically distant from Lebanon), regional conditions (the emergence of Dubai) and technological forces (that rendered entrepôt centers less central) have all conspired to make the Chiha commercial model much less relevant for Lebanon. But China's liberal culture, in the sense of encouraging entrepreneurship, remains and has become part and parcel of Lebanese economic culture, at home and abroad.

But instead of commerce and finance, future prosperity will need to be based on a productive economy that grows based on creativity, innovation, hard work, and high productivity. This is not a romantic vision with no connections to the country's reality. In the last century, there were two notable periods where production drove economic prosperity: the nineteenth-century silk revolution and the rapid growth of manufacturing of the 1960s-70s.

The silk and mulberry boom led to an initial phase of accumulation, and it transformed the country's landscape and social relations. But the monoculture collapsed in the 1870s with international prices, and those living from it fell in destitution. The resulting economic depression led to massive migration. Not much is left of this boom-bust period, outside some (still) wealthy families and a few remaining palaces dotting the countryside. The main lesson from this episode is about the importance of building a resilient economy that can absorb shocks (Salibi 1990).

The second productive boom was largely generated by the move into Lebanon of producers from various Arab countries, escaping nationalization, and bringing along their know-how and networks. Growth, importantly, was facilitated by the developmentalist policies of the Chehabist regime (from 1958 to 1970) and was underscored by an emphasis on institutional development (a meritocratic civil service, Social Security System, the Central Bank, and efforts at balanced regional development including, for example, the Green Plan).

The above does not mean that Lebanon can gaze back to the early 1970s and simply use that as a starting point.  While the political and security situations today may bear some resemblance to the pre-war period, the economic conditions are very different. Back then, a productive Lebanon had to be based on agriculture and industry, and services were limited to tourism and finance. Even then, it was difficult for a country with a small and poorly educated population to compete with the rising East. Today, a labor-intensive model is even less palatable. Globally, China has firmly established itself as the factory of the world and workers are being replaced by robots, reducing the possibility for development led by manufacturing export (Rodrik 2016, Lawrence 2018). Even though there is of late a new near-shoring movement driven by security consideration and rising national sentiment that may bring back global value chains closer to the rich markets of the West, other growth opportunities will have to be pursued more centrally.

Another ingredient that requires attention is social stability. In spite of admirable achievements of the Chehabist model, the social and regional inequalities couldn’t be overcome. Had reforms continued in the 1970s, Lebanon would have arguably been better able to absorb the domestic and regional tensions. Instead, the system succumbed to increasingly oligarchic and sectarian politics, ultimately leading to the civil war and the ensuing economic collapse (Traboulsi 2007).

The tension between liberalism and social justice is not a new phenomenon. That tension must be openly addressed in any vision that seeks to deliver a sustained path for future prosperity.  The good news is that deeply ingrained in the citizenry is a desire for a socially just society—from Tanyos Chahine and the peasant rebellions against feudalism all the way to the labor movements that militate for better workers’ conditions (and were oftentimes heavily repressed). The productive economy offers a historic opportunity to bring prosperity and social justice.

A productive society is one based on innovation and hard work, with a distinct role for competitive markets and for effective state regulation. Economic liberalism—respect for the individual’s freedom in all matters, including economic, importance of competition and entrepreneurship, and integration in the global economy—remains in our view most suited for Lebanon’s historic, geographic, and multicultural specificities. But unfettered markets can also generate rent-seeking, monopolistic behavior, exploitation, inequality, and environmental destruction. The role of the state is thus crucial.  In addition to its central role as provider of basic services (health, education, infrastructure and national security), it is the entity that ensures the well functioning of the marketplace.

Importantly, promising growth sectors and products involve a diversified set of skills, which allows for strategies of inclusive growth to be developed. In-built distributional tensions between workers of different skill-levels are a recurring feature of other developing countries’ experiences. While high-value added sectors are necessary, sectors that hire lower-education workers are also needed for growth to not be un-equalizing. The existence of potential activities of all skill levels will make the growth with social justice challenges easier. This of course does not obviate the need for balanced industrial structures (as compared to one based on large industrial bases) as well as policies that ensure social justice and mobility.

It is not Lebanon's liberal system that has failed it in the past. The Lebanese economic system, since at least the end of the civil war, was anything but liberal. Basic tenets of the liberal order were hijacked and replaced by a Byzantine labyrinth of oligarchy, cartels, and by insidious government-private sector interactions (Diwan and Haidar 2021). In that regard, the state has failed in its role of regulator and has largely abdicated on its role of providing social services, leaving the task to sectarian groups. Infrastructure has been left to decay and has not been modernized in ways to spur productive economic activity.

Regaining the basic tenets of a workable economic and social system is crucial to Lebanon 3.0. This is as much a political imperative as an economic one.  What is needed is a radical re-thinking of the State’s spending priorities and the tax regime that funds them as well as a re-drafting of the regulatory regime and how rules are implemented. Relatedly, monopolies (including in basic utilities) and the system of exclusivity must be dismantled. High barriers to entry should be removed.  Basic rules that force Chinese Walls between the government and the private sector are key. Finally, and above all, desperately needed is wholesale judicial reform that ensures its independence and a-politicization.

Finally, regional decentralization is crucial to allow for the true deployment of the country's comparative advantage, its territory, people, and rich culture.  Regionalism (and even localism) can offer creative workers better life-styles by enabling municipalities across the land to compete to attract firms.  In this regard, environmental and cultural concerns become central not just from ethical or health perspectives, but also for competitiveness. A rich cultural and environmental work set up may well convince entrepreneurs to locate their firm near a well-kept and managed Lebanese small town, rather than, say, in Dubai, the same way Italian high-value entrepreneurs prefer to work in the Piedmont rather than in Torino or Hamburg.

In this central respect, environmental protection is not a luxury but is at the core of Lebanon’s “competitive advantages”: heritage, geography, and the physical environment.  Growth at the expense of these non-negotiable national assets is counterproductive. Prioritizing environmental policy as part of a broader and well-articulated regulatory framework is a must. The energy sector raises some important tensions. It is irrefutable that potential gas and oil discoveries will be transformative for a country that is in desperate need for new sources of wealth and capital. However, at the same time, one needs to acknowledge that those discoveries could exacerbate (and be subsumed in) Lebanon’s culture of corruption and rent. In any event, gas and oil should not distract from the importance of promoting decentralized renewables that are both job-creators and can target lowering the air pollution crisis plaguing the country. 

In conclusion
Some of the recent debates have focused on how to stabilize the economy, in order to be able to unleash growth, albeit from a much lower base. These discussions include debates on how to reform public finances, deal with the debt overhang, restructuring the financial sector, and reformulate macro policies. There are crucial political and programmatic trade-offs involved. Indeed, chances of the “L-shaped” trajectory in Lebanon are high. Headwinds (political paralysis, crumbling institutions, security concerns, dysfunctional banking system, etc.) are massive and will, if not addressed, abort an initial recovery.  Moreover, the crisis itself is creating long-term “scars” that are structurally weakening Lebanon’s long-term potential: the severe brain drain and reputational damage to the “Lebanon brand”. 
But as important as these issues are, not enough attention has gone to policies needed to sustain growth. Once growth is unleashed, it needs to be sustained over decades to achieve the country's potential. A well-articulated vision needs to be formed at the outset to have sufficient credibility to even ignite growth. Policies that are transformative and permanent will encourage long-term investment, help reverse the brain drain, start attracting the diaspora back, and reduce short-termism in consumption and investment. Importantly, these policies can create the kind of hope in the future that binds a society together during the challenging times we’ll inevitably face over the next few years.

There is no miracle recipe for sustained development.  To create a virtuous circle, it is necessary to move from zero-sum to positive-sum games that could resolve collective action problems and traverse faster the perilous period ahead. Needed inputs are ideas, institutions, and “early wins”, all interacting to provide hope for a better and socially just future. In concrete terms, sustainability means macro-stability, an effective state apparatus, social mobility, gender and regional equity, environmental/heritage protection, built-in resilience, and improved business climate.

The model we propose will be driven by citizens empowered to combine the country's natural assets - culture, education, environment, and global connections - with new technologies to innovate and improve productivity. Unlike in the past, a vast majority of the country can thrive in a productive Lebanon. Workers, farmers, capitalists, skilled labor, financers, in all the country's regions, can all benefit from participating in a globally oriented productive economy. If divisions remain, these in part relate to sectarian divisions, flamed by divide-and-rule tactics. But deep down, the inertia in adapting the governance system to our long term interests is also driven by an ignorance of what a broad secular coalition of citizens for progressive change can deliver for their future in this day and age—the topic of and reason for this exploratory note.


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The views, opinions, findings, conclusions and recommendations expressed in these position papers are solely those of the authors and do not necessarily reflect the views the Lebanese Citizen Foundation.
The position papers of the contributing experts are based on their own research and were not reviewed by the Lebanese Citizen Foundation in terms of content or fact checking.

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