As Lebanon ended the year 2006 in a spell of indecision and instability, alarmingly little attention was given to what arguably may be, short of war, the most debilitating result of the country’s political deadlock: economic collapse. The giant bubble of confidence that has, miraculously, kept Lebanon afloat financially in the last decade will not last forever.
Reportedly, that stark message was transmitted by Central Bank Governor Riad Salameh to political leaders involved in the national dialogue last November. Salameh warned that the country’s finances could not withstand much more political bickering. As Hizbullah and the anti-Syrian parliamentary majority went at each other over expanding the government, the main economic representative institutions began sounding the alarm bells—and it’s easy to see why.
Heavy losses from the summer’s war
According to some United Nations estimates, Lebanon may have endured losses of over $10 billion during the summer war. Economists have calculated that GDP, previously around $20 billion, had contracted by 2% due to the conflict. With Lebanon facing a public debt of over $40 billion, the GDP-to-debt ratio stands at around 200%, one of the highest rates in the world. Economic confidence is declining because of the ambient uncertainty, and whatever force is buttressing the pound is certainly less hardy than ever before.
Given all this, why do neither Lebanon’s politicians nor much of the public quite realize what an economic collapse could mean?
That economics are invariably politics is a truism, but in Lebanon that interplay has been taken to dangerous extremes, with economic policy usually a hostage to political power plays. Take the long-awaited Paris III meeting, scheduled for early next year to help Lebanon face its economic tribulations. In recent weeks, as the parliamentary majority and a coalition of March 8 groups and the Aounist movement confronted one another, President Emile Lahoud was repeatedly heard condemning French President Jacques Chirac. Why Chirac, as if Lahoud didn’t have enough enemies as it is? Few doubted that his target was less Chirac than the Paris economic conference, which could only boost the credibility of the cabinet and parliamentary majority at a time when its adversaries, Lahoud among them, is trying to bring the cabinet down.
One can deplore Lahoud’s methods, but the Lebanese system has always invited such behavior, if not necessarily so egregiously. Capitalist culture in Lebanon is political culture, and nothing would so worryingly emphasize that point as a financial collapse, the result mainly of Lebanese banks being unable to roll over the public debt one more time.
One needn’t try hard to predict the results: social unrest, the government forced to resign, inflation, financial controls to avoid, if possible, the meltdown of the banking system, which holds the bulk of the debt, etc. However, since money is also politics, the political repercussions of an economic breakdown would be ominous. Lebanon has been floating on an impossible wave of self-confidence since 1992, when Rafik Hariri became prime minister, despite many signs in recent years that the state has simply been unable to take control of its debt. But between the war last summer and increasing political polarization, confidence has been shaken.
The harsh reality is that no one would be spared. Any presumption that one side would come out of the maelstrom stronger than the other is foolish. When economies collapse, the initial reaction of most people is to turn against their politicians. The real danger is the second phase, when demagogues take over. But demagogues thrive on conflict, and if Lebanon were to dissolve into a new generalized conflict (against the premises of class solidarity), everyone would pay a high price.
That’s precisely why, whatever happens in the coming months, the political class must impose a consensus that Lebanon’s financial policies remain outside their mutual struggle; but also that general principles be agreed at the soonest in order to move toward a necessary and successful Paris economic conference to provide funding for the state. This means agreeing to advance privatization, streamline the bureaucracy, and cut spending where possible. Why not start by setting up a national economic dialogue with major economic actors, presided over by Salameh, to parallel the stalled political dialogue? The different political parties would be allowed to have their say, but ultimately the major economic representatives and the relevant government ministries would be the ones drafting a final document, to be presented to the broader cabinet and parliament for endorsement.
Too idealistic? Perhaps, but it’s one idea among many possible ones, at a time when new ideas are scarce. In our obsession with politics, we should understand that an economic breakdown would sweep everything else away—the political class first among them.