Time to rethink our economy

More industry is needed if the economy is to grow

Lebanon is presented with the most serious challenges it has faced in the past decade. The economy is struggling, the internal security situation is deteriorating and the country’s neighbors pose real threats. In these circumstances the very fact that the country continues to operate can be seen as a success. And amidst everything, there are opportunities — not just in newfound offshore oil and gas but also within the country’s ingenious population.

As we head into 2013, what can be done to help the country unite, to overcome its challenges and ultimately to grow? Over the course of this week, eight influential figures will address seven important topics, each suggesting one proposal to help the country move forward. In this first article, former Labor Minister Charbel Nahas argues that the country’s economy needs fundamental reform.

 

In 2013, I believe it is time to fundamentally reassess the way our economy works.

The Lebanese, all of them, independent from the political discourse, are overwhelmingly supportive of a modern system of management of the economy that is built on two basic principles: (1) A very large reliance on the influence of capital inflows to finance consumption that goes far beyond domestic production. (2) A very attentive management of channels of redistribution of this inflow of capital through the financial system, through public expenditure and through private lending so that these funds do not remain deposits in the banks held by a small number of wealthy people but are recycled to appear as if they were income. This inevitably leads to a huge deficit in our trade balance.

This clientelistic management of the channels of distribution is at the core of our socio-political system. It forms the base of a political system that forces the people to recognize leaders who defend the interests of each sectarian group in order to grasp what they feel is their fair share of the pie. In this sense the notion of production, of social partners, is absolutely absent. It is a predatory system.

This status quo is deeply unstable in the sense that major, vital functions of the economy and of the state have been allocated to each of the groups to give them the power to veto the others. This leaves very little room to address structural economic issues: the equilibrium of such a system is very precarious. It used to work until 2005 because the arbitrator — Syria — was agreed upon. After 2005, when the Syrians were pushed out, the system became blocked and it is still completely blocked.

Second, it is a system very low in economic efficiency. The effect of these inflows of capital are very deep on the economy, in the sense that they favor non-tradable services. It pushes the available resources in capital and labor to services that are linked to the final stages of distribution — commerce, domestic intermediation, education, health, construction — where the openness to international competition is very limited and therefore the potential productivity gains are almost zero. This leads to a stable equilibrium of low productivity and helps increase prices of domestic goods in a systematic manner.

Thirdly, the system is destructive, as it consumes the cohorts of young Lebanese and forces them to emigrate to provide capital for the economy. In their place foreign workers come and are often exploited. Human capital is thus wasted.

Time for change

Most of the debates you hear about the Lebanese economy are linked to the fine-tuning of this system. Fundamentally questioning it is deemed unthinkable. But I believe we are faced with a basic choice: either you think that this system suits Lebanon in the long-term or you do not. Simply, if you do not believe in it then making the system function better is a major error — you give it more chance to deepen its impact.

I deeply believe that this system is absolutely perverse both morally and economically. It generates a type of society where the values of production are absolutely secondary to the predatory attitudes. That predatory attitude cannot continue without strict fidelity to the clientelistic system.

It is not an easy bind to get out of, but we must start with a reallocation of resources. At every element of the chain the choices are not complicated — using an increasing part of capital as investment rather than consumption. This would be the trigger to get out of this scheme by influencing the allocation of these resources. Banks and services would become less profitable, but exporters and industry would be more so. The level of wages would increase in Lebanon, the reliance on poor labor decrease.

To be frank, I tried to do this as a minister — as others did before me — with little success. You are stepping on the toes of large and influential groups — politicians, businessmen and others — who are accustomed to the existing system and have strong interests in preserving it. Trying to force change is a major disturbance and they will oppose it.

But if you are talking about the possibility of changing the DNA of the system, 2013 could present opportunities. Firstly, there has been an increase in alternative movements and social forces. Moreover the fact that the system is blocked makes adjustments more difficult so a moment of truth could appear, meaning we have to make difficult decisions.

If we take, for example, the government’s current predicament over the proposed wage rise, this could prove some kind of trigger. The government essentially sought to increase wages without any meaningful reform and now they have found they cannot afford it. They are faced with three options: renege on the promised wage rise and lose some political credit, do it without serious change in the fiscal basics and risk the financial system, or make serious fiscal changes — but this will require them to hurt their powerful allies.

But more fundamentally, change has to come from the Lebanese people; a major public decision to change public intervention in the economy, instead of favoring the perpetuation of this bizarre system that we have all become so used to.

Charbel Nahas was Lebanon’s Labor Minister until February 2012

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