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Our small, dependent economy

Lebanon remains hooked on help from abroad

by Jad Chaaban

Lebanon is a small dependent economy, built on a quasi-complete consumerist system where we import more than 80 percent of our energy, food and most consumed products and services. The country also relies on financial inflows to finance its public debt and domestic consumption, with foreign inflows per year into the Lebanese economy reaching more than 50 percent of gross domestic product in the past few years. As a result, we now have an oversized banking sector, with the consolidated balance sheet of commercial banks in the country growing from 188 percent of GDP in 1997 to 360 percent of GDP in 2013.

Where does all this money coming into Lebanon originate? Remittances from emigrants largely finance domestic consumption. With petrodollars and remittance income increasingly available (but not for long, given the recent fall in oil prices), Lebanon has become extremely reliant on this abundant source of capital. This dependency also manifests itself in economic relationships among various groups within the country: civil servants depend on government salaries and pensions, the state relies on funding from local banks to finance its oversized and inefficient public sector and local banks balance their accounts by relying on constant foreign inflows of capital. This has created a system of economic linkages that is highly fragile and subject to volatility.

The dangers of dependence

Overreliance on foreign capital has anchored profound abnormalities in the local economy. Dependency has had deep impacts on development strategies. While rebuilding infrastructure after the war was essential, the choice of all groups in society (and not only the government) was to develop an import dependent services sector. The banking, real estate and tourism sectors all rely on foreign transfers. In parallel, the society is mainly consuming and not saving, with most families and enterprises in debt. The agricultural and industrial sectors have been falling into backwardness, and dependency has even impacted educational curricula, which are now geared towards training individuals to work in the dependent services sectors, both in Lebanon and abroad. 

With an over reliance on incoming financial flows, the system has created monopolies around these sources of economic activity. Powerful lobbies have formed around the financial flows into Lebanon: if you control the pipelines of commodity, monetary and human flows into the country, then you hold the true economic and political power. Proof of this hegemony is apparent in the corruption and nepotism in the Customs Administration, the concentration of the dealership and distribution sectors under sole dealership privileges, the big banking lobby not investing enough in the local economy, the powerful lobbies of petroleum imports and construction, and the continuing control of human flows of migrant workers by the security and intelligence apparatus. At least half of the markets in Lebanon may be considered to have monopolistic or oligopolistic structures. Even at the community level the balance of power is concentrated in the hands of the groups controlling economic flows into and out of the community. Political and religious leaders of nearly all communities excel in maintaining and strengthening a dependent relationship with their followers, denying them massive development that would otherwise undermine the leaders’ authority.

Khalil Gibran wrote in the early 1900s: “Pity the nation that wears a cloth it does not weave, eats a bread it does not harvest and drinks a wine that flows not from its own wine-press”. More than 100 years later, nothing has changed in this small country.

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Jad Chaaban

Jad Chaaban is a French/Lebanese economist and public policy expert with over 15 years of academic and professional experience. He was an associate professor and Assistant Dean at the American University of Beirut, and has held positions at INSEAD, Paris-Dauphine PSL University, LSE, and Toulouse School of Economics. He has worked as an economist for the World Bank and as a consultant for various UN agencies. Dr. Chaaban holds a PhD in Economics and an MBA, and his research focuses on development economics and public policy. He is multilingual and has secured nearly $4 million in extramural funding for international research projects.

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Rudy Sassine February 24, 2015 - 3:49 PM

I concur on this with Dr. Chaaban. Even during the boom years of 2006-2010, the outpouring of foreign capital was limited in large part to the non-tradable sectors of real estate, construction and tourism, and it crowded out investments in the other productive sectors. This system that keeps our economy afloat even during times of insecurity is proving insidious; it doesn’t expose our deficiencies so plainly to push us to take the needed structural reforms in the investment and business framework.

Kamal February 25, 2015 - 12:43 PM

Good article Jad. Would have been great to add the numbers with the central bank balance sheet and the government current account balance. With the actual oil price crisis, I think the impact on the next 2 years can be predicted so to show the negative trend the country is facing ahead.

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