Politics and the labor market

Lebanon’s constant inconstants since the 1990s

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I first came to Lebanon in the late 1990s to lead a development organization’s mission on labor and social protection. Since then, a lot has happened: in 2000, Israel pulled back from southern Lebanon to the international borderline; in 2005, prime minister Rafik Hariri was assassinated, and many others were murdered before and after him; the year after, Israel tried to turn “Lebanon’s clock back 20 years” with the Second Lebanon War, which ended without a defined military victory; then came the 2008 global financial crisis, the IMF remarking that “Lebanon [had] mocked the doomsayers, [as its] ongoing economic resilience bolstered the banking system, with deposit inflows…growing at nearly 20 percent annually”; and from 2011 onwards, the Syrian war that brought over 1.5 million refugees into Lebanon.

Most importantly, by 2014, the last pretext of democratic governance since the end of the civil war, came to an end. The masks fell when, in addition to the political impasse resulting in not being able to elect a new president for the following two years, practically all (98 percent) of the parliamentarians who were present in the relevant vote in November that year, agreed to extend the parliament’s term without new elections. This explicitly brought Lebanon down to the level of dictators who reappoint themselves after their term has ended. The difference is that dictators have individual names, while Lebanon has religious-political sects.

The conclusions of the report I wrote on Lebanon 30 years ago still hold today. In that report, I had compared the level of wages with prices, especially the rising prices of real estate. There was no way families earning an average income could maintain their “average” (middle class) status over time, let alone afford to buy “an average” house. I also examined unemployment by education, using education as an indicator of socio-economic status. My research made clear that domestically, the better-off Lebanese did not have better prospects than the less fortunate. The alternative is well-known to all: emigration and brain drain followed by praise of the achievements of the Lebanese Diaspora.

Another characteristic of the economy back then was the structure of production, a structure still present today. The majority of establishments were small, while only a few major players dominated the field, primarily through uncompetitive practices sustained by clientelistic and political patronage (wasta). Moving from the micro to the macro, Lebanon was on course for an economic disaster for decades that few in power wanted to address.

Persistent government budget deficits and rising public debt could not have lasted forever, as a time would eventually come when the government would have to pay back what it had spent without earning. The interest rate paid on deposits cannot but reflect global market conditions in an open economy: the rates offered by Lebanese banks were dictated by what was needed to postpone a sovereign default – the bankruptcy that eventually followed – instead of what the economy could sustain, and what the international financial markets offered. Finally, the exchange rate could not have remained constant (at LBP 1,500 to $ 1) for long, as imports consistently exceeded exports by a factor of five or even more. The myth that Bank du Liban had a secret formula that could defy widely accepted economic rules is now busted.

This is all to make a simple point: the majority of employment problems originate from the perils of the economy and political governance, not from the labor market itself. This is conveniently forgotten by politicians who try to find scapegoats: blaming youth for not trying hard enough, teachers for not imparting good quality education, and companies for not training their employees adequately.

All in all, the labor market has been the victim of Lebanon’s political elite, a group driven by sectarianism, nepotism, corruption, and clientelism. This has created a private sector whose uncompetitive practices have failed to create new jobs, let alone decent employment. It has also ignored ordinary citizens’ welfare. Lebanon is perhaps the only upper middle-income country without an effective social security system for the private sector, a critical element for the labor market and prospective workers.

By October 2019, the inconceivable became inevitable. While addressing the issue of reducing public debt had long been on the table, it was never taken to heart by governments since the 1990s. Still before the 2019 fiscal crisis and the massive demonstrations that followed, Bank Audi stated in its quarterly report that “there [was] still room for a soft-landing scenario in public finance conditions rather than harmful measures with long-lasting adverse effects such as devaluation or debt restructuring.” Half a year after that report, massive devaluation has turned into reality and Lebanon has become bankrupt.

Lebanon’s development partners, including the IMF, have put forward specific proposals for the prioritization, intensity, and sequencing of policy reforms that would be required as preconditions for providing financial assistance. These conditions are not much different from what politicians have been promising to do in return for recurrent generous external support, but failed to carry out for decades. Before 2019, Lebanon had repeatedly promised to undertake more than one hundred reforms in several meetings in Paris, Rome, Brussels and all over the GCC – promises and reforms spanning public expenditure, the energy sector, water, pensions, the social safety net and the labor market. In fact, most of the current French-endorsed plan for Lebanon’s recovery has been included in past documents, including very recent statements by Prime Ministers Hassan Diab in 2020 and Saad Hariri the year before.

The impending economic prospects on the labor market are known: the debt-to-GDP ratio may pass the 350 percent mark by end 2020. Lebanon is now experiencing the first episode of hyperinflation in the Middle East North African Region (MENA) with a 50 percent monthly inflation rate recorded this summer.

Under such conditions, economic recovery, and with it job creation and poverty reduction, will take decades. The labor market creates jobs from new hires either by the public sector or the private sector. The former can be excluded for now. The latter can learn from the Greek experience. Greece has better functioning political institutions and relatively better economic and social protection indicators, and it is now where it was in the mid-1990s and it will take it another 20 or so years to get back to where it was before its 2009 crisis.

A recent study has estimated that Lebanon’s GDP may return to its 2019 level not earlier than 2043. This implies that the next generation of Lebanese would face labor market conditions that would be worse than those that existed at the end of the civil war.

Moving forward, the international experience suggests that to succeed, a rescue program like the one that is on the table for Lebanon now must have clear strategy and objectives laid out from the beginning. If adopted, such a program could minimize the effects of austerity and put the economy unto a sustainable and inclusive growth path. Still it will take decades to address the heavy social costs the program will inflict on citizens including in the form of slow employment growth and poor quality of jobs.

The implementation of such an economic program requires domestic political will that at present is lacking, as it has been for decades. Here, one is tempted to say that politically, Lebanon needs a Dayton Accord a-la Bosnia. Relevant elements of that Accord include a transparent constitutional court; an independent central bank; international oversight of what was agreed upon; an Office of High Representative charged with the task of civil implementation, and another international body that would be in charge for organizing elections. Most of these elements, suitably adjusted, can contribute to rebuilding the economy. This may prove to be easier than building a Lebanese State that will be transparent and accountable and will serve the interests of the citizens, not those of the politicians and clerics.

Professor Zafiris Tzannatos is a senior international consultant for strategy and policy based in Lebanon.

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