Lebanon Pulse

Neutrality, reform needed to rescue Lebanon’s economy

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Article Summary
Lebanon’s economy is collapsing and the only thing that can save it is a new government that keeps Lebanon neutral in the Syrian war and implements economic and administrative reforms.

A political crisis is gripping Lebanon. It has almost completely paralyzed the constitutional institutions and is affecting the economy and the country’s social fabric. The decline is no longer confined to public finances and public debt, but for the third year in a row the fiscal deficit has grown alongside a rise in the debt-to-gross domestic product ratio. The decline is affecting citizens’ finances and standard of living.

The slow economic growth, the political crisis resulting from the inability of the politicians to reach a minimum understanding to spare the country the effects of the regional war in Syria and the spread of corruption and mismanagement are impoverishing the Lebanese, eating away at their wealth and pushing them to emigrate, in addition to exacerbating the structural imbalance of the social and economic environment.

In its last report of 2013, issued in late January, Credit Suisse estimated the net wealth per adult in Lebanon at $30,868 at the end of June 2013. This was $31,323 at the end of June 2012, which constitutes a decline of 1.5%. Net wealth per adult in Lebanon peaked at $35,615 at the end of 2007.

The report indicated that the amount of debt per adult rose to $9,858 at the end of June 2013, after it had reached $8,754 in June 2012. This is an indication of the dwindling net wealth per capita and the increase in debt as a result of the volatile political conditions and inability of the ruling class to rectify things and lead the country toward stability and the necessary reforms to spur growth.

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In parallel, the Credit Suisse report indicated that 68% of Lebanese adults have a total wealth of less than $10,000 as measured at the end of June 2013, while 29.8% have a wealth ranging between $10,000 and $100,000, 3.2% have a total wealth of more than $100,000 and only 0.3% have a wealth of above $1 million.

Those numbers indicate the variation in wealth distribution among the Lebanese and point to challenges in terms of economic stability and social security. They are a measure of the size of the middle class, which, according to the above figures, does not exceed 33% at the most.

Of course, a nation is considered in good shape if its middle class is in good shape and growing. The middle class is the backbone of democracy, instrumental in the social security structure and the reservoir of creative energies.

In another report issued by Gallup on Jan. 17, figures show that the index of net potential migration in Lebanon dropped from +15% for 2007-2009 to -4% for 2010-2012. In other words, if all adults had the ability to immigrate and emigrate at will, the population would drop by 4%.

These figures are clear evidence that, since 2010, confidence in the country is collapsing, and that there’s little hope for a better future in light of developments in the region — especially Syria, to which Lebanon is directly linked. No one doubts that confidence is the cornerstone of any economy because it drives markets and investments.

These numbers suggest that outgoing Prime Minister Najib Mikati’s government has been unable to maintain the pace of growth achieved by previous governments — despite the failures of previous governments — especially toward reforms. All governments — and even Syrian tutelage — since the Lebanese civil war ended have been unable to reform the public administration and economic sectors.

In summary, the challenge for any future government is to boost economic growth to stop the erosion of wealth and dissolution of the middle class, and open a crack in the wall of despair facing the country and its neighbors after Lebanon has become a scene of terrorism and counterterrorism.

The first condition for reviving the economy is the stabilization of security as stated in the recent report issued on Jan. 22 by the Institute of International Finance. The road to that lies in pursuing a policy that keeps Lebanon neutral toward the conflict in Syria and all regional conflicts.

In practice, this means getting out of the institutional paralysis. The government resigned more than 10 months ago. A new government must be formed and its ministerial statement must be the Baabda Declaration, which states that Lebanon must be kept neutral toward the war in Syria. That declaration was approved by all Lebanese parties and subsequently supported by countries friendly to Lebanon, as demonstrated in the inaugural meeting of the International Support Group for Lebanon at the UN headquarters in New York on Sept. 25, 2013. It is no exaggeration to say that Lebanon’s neutrality is necessary not only for security and stability but also economic growth.

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Found in: syrian civil war, stability, middle class, lebanon, investments, government reform, economy, economic crisis

Sami Nader is a columnist for Al-Monitor's Lebanon Pulse, an economist, Middle Eastern affairs analyst and communications expert with extensive expertise in corporate strategy and risk management. He currently directs the Levant Institute for Strategic Affairs, focusing on the economics and geopolitics of the Levant, and is a professor for USJ University in Beirut. On Twitter: @saminader

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