Lebanon's economic mystery

By Eqbal Ahmad

Business is not usual, though. Inside the well-stocked shops a visitor encounters smartly dressed sales persons and an eerie 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 I 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 maybe sell three." Cafés 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.

Like in Europe, prices are high. A cup of coffee or tea costs a US dollar at a street-side café, a sandwich is $4, the shortest taxi ride amounts to $5 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 important, the Arab sheikhs 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 British-trained economist, one of the talented young men Prime Minister Rafiq Al-Hariri's government has wisely inducted to rebuild the country.

A cautionary note is in order. The figures below are approximations. 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 ensures 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 per cent of the economy. Taxes on profit have dropped from 37 per cent in 1974-75 to nearly 10 per cent, and taxation is virtually flat, non-progressive. Indirect taxes account for 80 per cent of government revenues. There is no progressive taxation even on luxury items. The agricultural sector suffers from neglect and the stranglehold of large owners. Three to four per cent of feudal families own 70 per cent of the cultivable land while a mere 0.5 per cent of bank loans go into the agricultural sector. Farmers are so starved for credit that nearly all borrow from suppliers of input, paying as much as 100 per cent interest. As a result, agriculture accounts for only 10-12 per cent of GDP even though the land is fertile. 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 per cent of GDP while the service sector yields some 55-70 per cent of GDP. Exports make up barely 10-15 per cent 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 $40,000. 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 per cent of its income on food. In 1996, this percentage had gone up to 60 per cent, indicating a rise in prices -- and poverty. Yet, by Third World standards Lebanon remains a prosperous and stable economy. So what explains this apparent anomaly?

"Immigrants" is everyone'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 eight 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 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 per cent 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 inflows of money," says the high-level economist. "It alone compensates for our chronically large trade deficits. So our economic management has remained focused 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, governments have traditionally focused on meeting these demands while neglecting other, more fundamental problems such as raising agricultural productivity, promoting industry and providing adequate social services."

Al-Hariri's government achievements lie, above all, in restoring some of the pre-war indicators of the economy. The war had battered the lira. In 1983, one US dollar exchanged for 3,000 liras. Since 1992, the lira has been stable at 1,500 to the dollar. Inflation is under control at between 4-5 per cent, and the interest offered on treasury bills is 17 per cent so that investment in Lebanon is attractive to expats and foreign 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 per cent 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, 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.