This article is part of an Executive special report on wealth management and private banking. Read more stories as they’re published here, or pick up September’s issue at newsstands in Lebanon.
The numbers are clear. There is something deeply wrong with Lebanese capitalism. Yes, there is considerable wealth that is readily visible to all as wealth manifests itself in buildings, cars, lifestyles and so on. But beyond the appearances of prosperity lie the festering problems of an economy that is unable to generate jobs for its young (24 percent unemployment among youth), produces mostly low paying jobs (average monthly wage around $1,000), excludes women from productive labor (23 percent female labor participation rate), suffers from a persistent debt problem (160 percent of GDP), is burdened by foreign debt that no one talks about (170 percent of GDP) and finally is unable to provide public services and goods such as electricity, water and a well equipped national army. The last problem of the ‘public system’ is mind boggling in a country that is an upper-middle income country with income per capita of $11,000. All countries that lack adequate supply of such goods are positioned very far below Lebanon on the worldwide income ladder and definitely have much less wealth.
High wealth inequality
Data on wealth and its distribution worldwide has been forthcoming lately. The United Nations University’s WIDER research project on global wealth has produced figures for most countries. In Lebanon, for the year 2000, net wealth per capita was around $13,000 and the Gini coefficient of wealth distribution was 76 (Gini measures the degree of inequality with 0 being perfect equality and 100 being perfect inequality). In 2013, the Credit Suisse Global Wealth Databook estimated net wealth per capita in Lebanon to be around $21,000 with a Gini coefficient of 86.3.
Compared to non-GCC countries in the MENA region and other developing countries, wealth in Lebanon is high (examples: Jordan: $8,200, Tunisia: $14,800, Costa Rica: $18,900). Globally, Lebanon belongs to the ‘intermediate wealth’ group (wealth range $25,000 to $100,000 per adult) which it shares in the MENA region with Bahrain, Oman and Saudi Arabia. Although wealth inequality is high around the world, Lebanon is one of the most unequal in wealth distribution, with around 66 percent of the adult population owning less than $10,000 in wealth and those with $100,000 or higher constituting only 3.5 percent of adults.
Wealth in Lebanon is composed mainly of financial and real estate wealth. Since many see GDP figures as controversial after 2007, I will use in the forthcoming analysis data from 2000 to 2007. During this period, gross wealth to income has greatly risen by between 3.3 and 4.6 times. According to Thomas Piketty in his book “Capital in the Twenty-First Century,” wealth to income has been increasing all over the world since the 1980s, driven by the retardation of growth rates and the rise in the return on capital. As long as the latter is larger than the former, this trend will continue and will reflect the rise of income from capital in capitalist economies at the expense of income from labor.
In Lebanon, the rentier class wealth was buoyed by the rising return on financial capital since 1992 fuelled by public debt rise — if we had data on wealth since 1993, I conjecture that it would show a significant rise in the wealth-to-income ratio in Lebanon after the end of the civil war — and by the rise in real estate prices since 2007. Public debt played an important role in the rise of the rentier. By financing postwar reconstruction and fiscal expenditures through debt rather than through taxing the wealthy, the wealth of those who lent to the government increased.
Given the continuation of current low tax rates on capital and profits, the high public debt burden and the increase in the power of the rentier class in the economy, the Lebanese economy will continue to wobble. We need to tax capital in order to build up physical public capital, pay down public debt — the theory that the debt burden will be reduced by growth has been proven to be wrong as was the theory of solving the problems of employment and inequality by growth — and lay the ground for genuine economic growth with rising labor incomes. Otherwise we will have a country wealthy in money and land but poor in all other aspects such as productivity, entrepreneurship and infrastructure development. And in the end, these are what matter for long term prosperity.