In the midst of a recession and parliamentary elections, anything seems to go. Politicians have recently blamed Israel for the recession and for the ongoing power shortages. Others have found that the cure to Lebanon’s economic malaise lies in making peace with Israel. They believe that peace will make Lebanon prosperous again, increase investment and magically do away with its structural ills. Peace is expected to bring economic benefits and many have been convinced that Lebanon will boom as a result. This is based on the underlying assumption that Lebanon is the only country in the region that can compete with Israel. What economic benefits will peace bring to Lebanon, if and when it is signed?
First, analysts expect that peace will reduce military tension and, as a result, spending. Defense spending in Lebanon was 6% of GDP in 1999. That’s high compared to 1.5% for Switzerland, 1.8% for Belgium or 3% for Tunisia. Moreover, money allocated to the ministry of defense is more than that allocated to the ministries of education, health, vocational and technical training, culture and higher education put together in 1999. A relocation from defense to social ministries is desirable. But a closer look shows that the defense budget is not being spent on F-16 jet fighters or cruise missiles. In fact, 85% of defense spending pays for salaries, compensations, jeeps and other equipment. And these are unlikely to decrease as a result of peace.
Peace is also expected to encourage trade with Israel. Generally, the more competitive the economic structure of two economies, the greater the chance that integration will increase their welfare. But the economies of Lebanon and Israel are quite different. Israel has a GDP of $90 billion—five times that of Lebanon. Its industrial sector accounts for 38% of the economy compared to just 22% in Lebanon. The Israeli economy ranks first in the region in terms of the degree of industrialization, with the share of manufacturing sector reaching 25% of GDP, well above the 10% in Lebanon. The Israeli manufacturing sector is more diversified and dominated by capital industries with a sophisticated electronic base. Lebanon’s manufacturing sector is more concentrated and dominated by consumer industries—food, textiles and wood.
Israeli exports are more diversified than Lebanon’s and per capita exports much higher. In terms of export destination, Israel is primarily dependent on industrialized markets and Lebanon on developing countries. This quick comparison shows that Lebanese and Israeli economies tend to be complementary. Hence, the after-effects of integration may not be as beneficial as often cited. In fact, economic wisdom suggests that results of trade between Lebanon and other regional economies, such as Syria, Egypt and Jordan, may be more beneficial. In economic jargon, trade creation gains are likely to be larger than the trade diversion effects if a preferential trade arrangement is implemented among the Mashreq countries, while the trade diverting effects seem to outweigh the trade creation gains with such an arrangement between Lebanon and Israel.
Looking beyond the static welfare effect, there may be some dynamic and long-term benefits for both countries. Economic arrangements between the two countries may boost investment, increase economies of scale and stimulate competition. With military insecurity a thing of the past, domestic and foreign investments could take off in Lebanon as the general environment improves. Although this is a prerequisite for investment, it is by no means sufficient. A conducive environment must be created and uncertainties at home must be eliminated. Bureaucratic inefficiencies, corruption, red tape, incoherent and incompatible policies must be seriously dealt with. Otherwise, foreign investment will likely find a better home in Israel.
Larger markets as a result of peace are expected to give rise to economies of scale. Firms operating below capacity could expand output and reduce costs. For this to happen firms must be productive, innovative and have access to finance, among other things. Clearly, Lebanese firms face major hurdles. Another aspect of regional integration is the stimulation of competition, which in theory allows efficient producers in Lebanon to compete directly with the most efficient producers in Israel. As much as we want to boost the role of the private sector in our economy, Lebanon lacks the enforcement of competition laws and rules that prevent monopolies and oligopolies. Again, without strengthening the institutions that make markets operate efficiently and effectively, international firms will set up their headquarters elsewhere.
If domestic reforms are not undertaken, peace will not bring benefits to Lebanon and will definitely not cure its ailments.
