Areas of strength and of dysfunction in Lebanon’s socio-economic contract. Wealth and income disparities, the causes of the widening divide, and policy remedies.
I am going to give you today some qualitative analyses that I am currently working on quantifying and validating
- From the 40’s to the mid 70’s, it was clearly Lebanon’s vibrant middle class that made it so successful and so different from its neighbors.
- The quality of life and the purchasing power of the middle class, i.e. employees, civil servants, judges, military, teachers… was remarkably good.
- Banking secrecy was introduced to protect citizens of neighboring countries from predator governments, not to allow the Lebanese to evade taxes
Look at Tripoli as a sample, a microcosm. I have chosen a city that is relatively big, relatively homogeneous when it comes to communitarianism (so no one can argue that it is about communitarianism), and that used to be a typical middle-class city, with a few prominent families that would enjoy significant wealth, mainly in land properties. Tripoli, where civil servants, teachers, craftsmen, bank employees, etc. used to enjoy a decent cultural life (movies, theatres, cafes,…) became today a city with hundreds of thousands of extremely poor people, with the noticeable presence of a few extremely wealthy billionaires. The eradication of the middle class in the capital of northern Lebanon is typical of the country’s evolution.
What went wrong?
Insider trading (story of the law)
Depreciation of the pound
Financial engineering (not the fault of the CB)
The demolition of the public service and administration, and the freeze in its salaries (issue of salaries and wages today)
The big corruption, as a concentrator of wealth (unlike the small one?)
The public debt, treasury bills, 40% interest rates
Solidere, and the loss of small owners’ rights
Securing permanently higher profits for banks, from taxpayers’ money and without any objective reason (financial engineering)
The inability to create jobs in the private sector (0.5% in 2008-2009), hidden unemployment, loss of competitiveness
Brain drain toward Europe, the Gulf, etc.
Concentration of deposits
Free trade treaties
Tax system that favors rent against investment and labor. Money is available, but no incentive to invest.
The continuous increase in real estate, supported by public policies, which increases wealth in the hands of few, and penalize investment in productive sectors
Broad-based subsidies that fail to target the poor
The inefficient infrastructure
Poor social safety nets
Rigidity of the labor market
Impossible to succeed without “protection” (in some areas, it is forbidden to work without a “partner”)
Bank lending against mortgages, no project financing
Small market without complementary markets
Real estate speculation, which attracts most of the investment, and high returns that other activities cannot match
Government’s poor performance: Refraining from paying compensations for expropriation, for settling social security arrears, etc. which causes chain reaction effects