ArticlePDF Available

Lebanon's economic reconstruction after the war: A bridge too far?

Authors:

Abstract

Since the onset of the Civil War in 1975 Lebanon has experienced burgeoning fiscal deficits and an unsustainable public debt overhang. Much of this arose from the loss of revenues during the period of the Civil War 1975–1990 and attempts to maintain basic public expenditure, while from 1990 to 2006 this reflected post-Taif rebuilding and reconstruction of key infrastructure with limited revenue capacity. Considerable progress from the 1990s had been achieved in rebuilding the shattered economy from both public and private international and domestic sources, but its legacy is a huge public debt and a servicing requirement that currently absorbs alone almost 30 per cent of total government revenue and is the highest in the world on a per capita basis. While the need to reduce this debt to a sustainable level would be daunting enough in itself, Lebanon's fiscal predicament was further compounded by the outbreak of war with Israel during July–August 2006. The consequence of this 34-day war was the devastation of residential property, vital infrastructure, loss of agricultural production, industrial production, exports, environmental damage, the collapse of tourism and a further erosion of the influence and power of the central government. Estimates of the direct and indirect costs for Lebanon of this relatively brief but devastating war conservatively vary from US$ 10–15 billion. The implications of such reconstruction and rebuilding costs for the budget and public debt are potentially calamitous for Lebanon which is already struggling under the weight of debt overhang and its servicing. A key question is whether Lebanon can tackle this enormous task in insolation.
Journal of Policy Modeling 30 (2008) 857–872
A
vailable online at www.sciencedirect.com
Lebanon’s economic reconstruction after the war: A
bridge too far?
Charles Harvie , Ali Salman Saleh
School of Economics, Faculty of Commerce, University of Wollongong, Wollongong, NSW 2522, Australia
Received 1 September 2006; received in revised form 1 January 2007; accepted 1 April 2007
Available online 6 May 2007
Abstract
Since the onset of the Civil War in 1975 Lebanon has experienced burgeoning fiscal deficits and an
unsustainable public debt overhang. Much of this arose from the loss of revenues during the period of
the Civil War 1975–1990 and attempts to maintain basic public expenditure, while from 1990 to 2006
this reflected post-Taif rebuilding and reconstruction of key infrastructure with limited revenue capacity.
Considerable progress from the 1990s had been achieved in rebuilding the shattered economy from both
public and private international and domestic sources, but its legacy is a huge public debt and a servicing
requirement that currently absorbs alone almost 30 per cent of total government revenue and is the highest
in the world on a per capita basis. While the need to reduce this debt to a sustainable level would be daunting
enough in itself, Lebanon’s fiscal predicament was further compounded by the outbreak of war with Israel
during July–August 2006. The consequence of this 34-day war was the devastation of residential property,
vital infrastructure, loss of agricultural production, industrial production, exports, environmental damage,
the collapse of tourism and a further erosion of the influence and power of the central government. Estimates
of the direct and indirect costs for Lebanon of this relatively brief but devastating war conservatively vary
from US$ 10–15 billion. The implications of such reconstruction and rebuilding costs for the budget and
public debt are potentially calamitous for Lebanon which is already struggling under the weight of debt
overhang and its servicing. A key question is whether Lebanon can tackle this enormous task in insolation.
This paper explores the background to the fiscal crisis, identifies from available literature the extent, nature
and cost of the war damage, analyses the options available to the authorities in rebuilding the economy and
highlights key policy issues and measures that will be required if a sustainable economic recovery is to be
achieved. Despite its demonstrated and remarkable resilience to past trauma the paper concludes that the
fiscal crisis makes it impossible for Lebanon to tackle the reconstruction and rebuilding task on its own and
particularly in the wake of the events of summer 2006. The country will require substantial and ongoing
financial support from international lenders and donors. The success of these efforts in the case of Lebanon
Corresponding author. Tel.: +61 2 42 213702; fax: +61 2 42 213725.
E-mail address: charvie@uow.edu.au (C. Harvie).
0161-8938/$ – see front matter © 2007 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.
doi:10.1016/j.jpolmod.2007.04.004
858 C. Harvie, A.S. Saleh / Journal of Policy Modeling 30 (2008) 857–872
is of particular interest as it could well be a microcosm of possible future outcomes for the region more
generally.
© 2007 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.
JEL classification: E60; E61; E62; E65
Keywords: Budget deficits; Economic reconstruction; Donor assistance; Policy imperatives
1. Introduction
Budget deficits, their funding and impact upon economic performance, have attracted con-
siderable attention over the past few decades in both developed and developing economies (for
example Allen, 1977; Aschauer, 1985; Bailey, 1971; Barro, 1990; Cebula, 2003;Miller & Russek,
1997;Neaime, 2004;Ramirez & Nazmi, 2003;Saleh, 2003;Saleh & Harvie, 2005;Sargent &
Wallace, 1981 among others). In the context of Lebanon, which forms the focus of this study, the
budget deficit and its funding has attracted considerable attention from politicians, international
organizations and domestic policy makers, stemming from its size and longevity (see, for example,
Al-Rifai, 1999; Darweesh, 1999;Eken & Helbling, 1999;Korm, 1999; Makdissi, 1999; Saidi,
2003; Wakim, 1999, among others). Budget deficits first occurred in Lebanon during the period of
the Civil War (1975–1990), and were subsequently maintained during the post-war reconstruction
period (1990-present). As a per cent of GDP it increased from only around 3 per cent in 1975 to
a peak of 33.8 per cent in 1990, one of the largest in the Middle East at this time, subsequently
declining to under 10 per cent by 2003–2005. Bolbol (1999b, p. 442) argues that these budget
deficits were “a symptom of a weak economy”.
Consequently, Lebanese public debt increased precipitously after 1975, with gross public debt
reaching 99.8 per cent of GDP by the end of 1990 of which 80.6 per cent was domestic and
19.2 per cent external. Post-Taif reconstruction focused upon rebuilding the country, providing
infrastructure and services, making Lebanon’s services sector competitive with other countries
such as Israel, creating a business friendly environment and reconstituting and reasserting state
power. Subsequently, after 1993, there was a further acceleration in government capital and
current expenditure which resulted, in tandem with a slow recovery of the government’s revenue-
generation capacity, in a perennial fiscal crisis. Between 1992 and the end of 2000, for example,
the Lebanese government spent some US$ 5.7 billion on public infrastructure that included the
electricity grid (US$ 1.371 billion), post and telecommunications (US$ 769.5 million), roads and
public transport (US$ 566.8 million), ports and airports (US$ 636.3 million), and the water sector
(US$ 636.3 million). Budget deficits increased from 9.2 per cent of GDP in 1993 to 20.6 per cent
in 1996, declining to around 8.5 per cent in 2005. State spending initially increased GDP growth
arising from the construction and real estate boom it triggered, but heavy reliance on funding
through domestic and foreign borrowing contributed to a further rapid accumulation of public
sector indebtedness, higher interest rates and its servicing represented a huge drain on public
resources. This culminated in 2002 when the country faced a severe financial and economic crisis
as national debt reached US$ 25 billion, equivalent to 150 per cent of GDP, and GDP growth
stagnated. By April 2006 total public debt stood at US$ 38.8 billion (183 per cent of GDP)
with debt servicing absorbing any additional revenue increases, and yields on government bonds
remained high.
Chami (1992) theoretically analysed the macroeconomic performance in Lebanon during
1975–1990 (Civil War). He argued that “the central government has become completely par-
C. Harvie, A.S. Saleh / Journal of Policy Modeling 30 (2008) 857–872 859
alyzed and unable to collect tax revenue but continues to spend in order to maintain essential
services, pay wages and salaries and subsidize some basic imported goods” (Chami, 1992,p.
325). This led, as a result, to substantial budget deficits financed by the central bank and com-
mercial banks. This study concluded that the budget deficits contributed to a massive increase in
money supply, high inflation rates and a severe depreciation of the Lebanese currency.
The assassination of former Prime Minister Rafiq al-Hariri in February 2005 plunged the
country into a further period of political and financial turbulence. Significant deposit withdrawals
and a sharp rise in dollarization put pressure on international reserves, which declined by around
US$ 2 billion in the first quarter of 2005. By mid year the financial situation had stabilized and
confidence was restored and, with a resumption of deposit inflows, liquidity conditions improved
markedly. New Prime Minister Siniora announced in July 2005 that the government would pursue
an ambitious economic reform and adjustment program. But the program was delayed due to
renewed political tension. GDP growth, after a decline in both public and private demand in the
wake of the political crisis, slowed to only 1 per cent in 2005 after achieving 5 per cent growth in
2004. The strong growth in 2004 occurred due to a surge in tourism, export growth, which helped
to reduce the current account deficit to 13 per cent of GDP, and construction activity. The budget
deficit declined slightly in 2005, due to a decline in debt service payments on the public debt, a
direct contribution of the Paris II conference, by 12.1 per cent. Overall net debt increased from
151.5 per cent of GDP at the end of 2004 to 158.8 per cent by end 2005, and gross debt increased
further from 164.7 per cent of GDP at end 2004 to 175.1 per cent of GDP by end 2005. Tax
revenues declined by 6 per cent overall in 2005 due to a drop in revenue from international trade
taxes and to a lesser extent from lower domestic taxes on goods and services and fiscal stamp
duties.
While severe the fiscal crisis was further compounded by the traumatic developments during 12
July–14 August 2006, when Israeli bombing of key infrastructure and other facilities resulted in
severe damage,1a dysfunctional economy and further erosion of already weak central government
authority. Once again the economy faced an enormous reconstruction challenge on a par with
that after the 1975–1990 Civil War. Damage to the economy was widespread across numerous
sectors—in particular residential buildings and infrastructure (roads, ports, water and sewerage
treatment, electrical plants, bridges, factories and farms). Total damage to residences has been
estimated at US$ 2 billion and transport sector damage at US$ 404 million. Oxfam estimated
that up to 85 per cent of the country’s 195,000 farmers lost all or some of their crops valued
at between US$ 135–185 million, and suffered a livestock loss of one million poultry, 25,000
goats and sheep, and 4,000 cattle. These losses have serious economic implications as 35 per
cent of the Lebanese population either directly or indirectly rely for their livelihood on farming.2
In the industrial sector 10 large factories and more than 700 small and medium industrial units
were completely or partially destroyed.3Damage to industrial factories was estimated at US$ 190
1The Khiam Centre, funded by the Canadian Embassy, listed the following destruction on 22 July 2006: “28 vital points
(airports, ports, water and sewerage treatment, electrical plants, etc.), 600 km of roads, 23 fuel stations, 73 bridges, 72
overpasses, 6,800 private houses/apartments, 160 units in the commercial sector (factories, markets, farms, etc.)”. By the
end of the hostilities on 15 August, the damage had increased substantially: government sources quoted 15,000 destroyed
homes and 80 bridges hit (French newspaper report).
2Some 12 per cent of the total workforce is directly employed in agriculture, and it contributes approximately 11.7 per
cent of the country’s GDP.
3Industry in Lebanon is mostly limited to small businesses concerned with reassembling and packaging imported parts.
In 2004 it employed 26 per cent of the Lebanese working population and contributed 21 per cent of GDP.
860 C. Harvie, A.S. Saleh / Journal of Policy Modeling 30 (2008) 857–872
million with the loss of up to 10,000 jobs.4The closure of these factories resulted in a loss of
export revenue and foreign markets, contributing to a loans crisis as many destroyed businesses
were unable to meet their debt repayments. This problem is compounded by the fact that many
businesses that have taken out loans had also lost their collateral, mainly their now destroyed
property. Given that 30 per cent of Lebanese commercial banks’ outstanding loans are to the
private sector, this has implications for the financial health of the banking sector. Tourism has also
played an important role in the services sector however an oil spill from the destruction of five
fuel storage tanks at the Jiyeh power plant affected 100km of coastline resulting in the country’s
worst environmental damage, and added an estimated US$ 50–100 million to the overall cost of
reconstruction. This severely impacted upon the tourism sector, which had anticipated receiving
1.6 million visitors in 2006 (see Fattouh & Kolb, 2006).
State reconstruction officials argued that the direct damage arising from the 34-day war
amounted to US$ 3.5 billion, including US$ 1.5 billion for bridges, roads and other infrastructure5
and, of traditional importance to the economy, the electricity (US$ 208 million in damage),
telecommunications and water sectors. This compared to a figure of US$ 2.5 billion by the
Lebanese government on 16 August 2006 for total damage to the country’s infrastructure. Even
the latter figure represented a massive 10 per cent of the country’s GDP for 2005 (US$ 21.2 billion).
If indirect costs are also included, such as loss of tourism revenue, export revenue, government
revenue, loss of FDI, the cost of stabilizing the currency and loss of GDP during 2006, total war
damage could be as high as US$ 10 billion (see Table 2). The UN offered an even bleaker picture
of the direct and indirect costs, suggesting a higher estimate of “at least US$ 15 billion, if not
more”.6Jean Fabre, a spokesperson for the UN Development Program (UNDP), suggested that
“The damage is such that the last 15 years of work to rebuild the country and revive its economy
after the problems suffered by Lebanon (the 1975–1990 Civil War) are now completely wiped
out”.7
Other costs include the permanent loss of human capital through death and migration (some
500,000 skilled Lebanese fled during the war), the permanent loss of both foreign and domestic
investment (capital flight during the war amounted to around US$ 2.5 billion) that could result
in: lower future growth; rising poverty; increased unemployment costs; loss of export revenue;
loss of tax revenue; undermine the stability of the currency; reduce foreign exchange reserves;
and undermine the stability of the government.
The impact of these developments on the budget deficit, and its financing, is now of critical
significance to the country. Increased government spending to deal with immediate emergency
needs has been estimated at around US$ 13.3 million while the loss of direct and indirect govern-
ment revenues is estimated at around US$ 66.3 million. These developments exert further intense
pressure on the government’s already precarious budget deficit.8In addition, the government’s
privatization reforms are likely to be put on hold due to a loss of investor confidence in the econ-
omy, and the likely decline in revenues generated from the sale of damaged assets. Consequently,
4Some 99.3 per cent of damaged factories were uninsured against war damage and 70 per cent indebted to a bank or
financial institution (Bank Audi, 2006,p.3).
5Lebanon has traditionally been reliant on transit and seaborne trade, consequently the destruction of bridges, roads,
ports and airports constituted a major problem to the economy. The destruction of bridges, roads and trucks also affected
transit trade to the Gulf both directly, by limiting national exports, and indirectly as freight forwarders were not able to
ship goods to Persian Gulf countries via Beirut.
6As reported in Spero News (2006).
7As reported in Spero News (2006).
8The implications of this for the fiscal crisis are explored in the following section of the paper.
C. Harvie, A.S. Saleh / Journal of Policy Modeling 30 (2008) 857–872 861
in the immediate term at least, such a policy does not present a viable option as a source of
government revenue.
Perhaps even more precarious is the situation facing an already weak central government. The
fragile foundation upon which it has been based during much of the Taif reconstruction era has
become even further eroded, making it even less well equipped to tackle, alone, the enormous
economic rebuilding challenges. The legacy of an already weak budgetary position and high
indebtedness before the war in July–August 2006, as well as increased political and economic
risk, has compounded and intensified this problem. This restricts the government’s access to
further domestic and, in particular, foreign borrowing, and existing debt servicing absorbs most
of any additional revenue sources. Consequently, gaining access to international donor funding
will be pivotal, requiring a concerted and coordinated effort by the Lebanese government and the
international community—international investors, governments and international development
and donor agencies.
In this context the paper proceeds as follows. Section 2examines the evolution of budget
deficits and public debt in Lebanon since 1970. Section 3elaborates in more detail potential
policy responses to the fiscal crisis and pertinent lessons for the current post 2006 situation.
Finally, Section 4provides a brief summary of the key findings from the paper.
2. Budget deficits, public debt and GDP performance in Lebanon
2.1. Pre August 2006
Prior to 1975 the Lebanese government’s fiscal budget was always balanced and it had never
resorted to borrowing. Borrowing and budget deficits are, therefore, relatively recent phenomena
for the country. From Table 1 it can be observed that budget deficits occurred primarily after
1974. These deficits were sizeable and persistent throughout 1975–2005. In particular, the period
1975–1990 was one of deepening economic crisis for the economy, as evidenced by a marked
deceleration in economic growth and private investment activity. The budget deficit, as a per cent
of GDP, increased from only 2.9 per cent in 1975 to 33.8 per cent at its peak in 1990 (Table 1),
becoming one of the largest amongst the Middle East countries. Increased government expenditure
and declining government revenue were both responsible for this steep increase. Total government
expenditure as a percentage of GDP increased from 15.4 per cent in 1972 to 39.4 per cent in 1990.
The dramatic increase was mainly made up of current expenditure, arising from the generous
wages and salaries paid to government employees and interest payments on the public debt. On
the other hand budgetary capital expenditure declined from 6 per cent of GDP in 1980 to 1.7 per
cent in 1990, contributing to the overall deterioration in the public capital stock.
Government revenue, on the other hand, remained very low as a proportion of GDP during
1975–1990 (around 6 per cent), due to: the slowdown of economic activity; and the inability of
the government to collect revenue, due to the Civil War, as most of this was in the form of indirect
taxes and customs and trade taxes which became difficult to collect with the loss of control over
legal ports of entry and a consequent surge in illegal imports.
During 1970–1975 the average annual growth of nominal gross public debt registered only
3.5 per cent, and the nominal gross public debt averaged 5.4 per cent of GDP. In the pre-war
period public debt was not, therefore, a major concern. Subsequent large budget deficits during
1975–1990 significantly changed this situation with gross public debt rising sharply and peaking
in 1983 at 137.8 per cent of GDP (see Table 1).
862 C. Harvie, A.S. Saleh / Journal of Policy Modeling 30 (2008) 857–872
Table 1
Real GDP growth and key fiscal indicators in Lebanon: 1970–2005 (in % of GDP)
Years Real GDPa
growth rate (%)
Budget deficit Domestic public debt External public debt Gross public debt
1970 6.6 0.5 2.6 4.3 6.8
1971 9.2 0.8 34.4 3.9 6.0
1972 12.4 0.7 2.6 2.9 5.5
1973 5.3 0.5 3.3 1.9 5.3
1974 3.1 0.6 3.9 1.4 5.3
1975 16.1 2.9 2.0 1.5 3.5
1976 57.6 11.9 19.8 2.8 22.6
1977 67.7 7.0 18.4 1.4 19.8
1978 2.6 9.7 21.7 1.6 23.3
1979 2.4 8.9 23.8 2.8 26.6
1980 1.5 9.8 32.1 5.1 37.1
1981 0.5 11.8 41.8 6.8 48.5
1982 36.8 21.9 111.9 6.4 118.4
1983 22.7 21.3 131.2 6.6 137.8
1984 44.5 13.7 111.4 4.2 115.6
1985 24.3 26.1 75.7 7.3 83.0
1986 6.8 26.1 75.7 7.3 83.0
1987 16.7 16.7 26.1 16.8 42.9
1988 28.2 18.8 38.5 13.6 55.0
1989 42.2 34.5 72.8 19.0 91.8
1990 13.4 33.8 80.6 19.2 99.8
1991 38.3 16.3 63.9 12.9 76.8
1992 4.5 14.8 53.4 4.6 58.0
1993 7.0 9.3 44.2 4.3 48.6
1994 8.0 20.5 61.1 8.5 69.5
1995 6.5 18.4 66.5 12.1 78.6
1996 4.1 20.6 84.4 14.6 99.0
1997 3.9 20.2 86.5 16.4 102.9
1998 3.0 14.1 88.5 25.9 114.4
1999 0.6 14.4 102.3 33.6 135.9
2000 0.0 23.7 109.5 42.3 151.8
2001 2.0 13.4 112.3 57.3 169.6
2002 2.0 11.8 97.1 84.3 181.4
2003 3.0 9.5 98.9 86.1 185.0
2004 5.0 9.2 80.4 84.3 164.7
2005 1.0 8.4 87.7 86.9 174.6
Source.Saleh and Harvie (2006),BDL (variousyears),Ministry of Finance (various years),Cashin, Eken, Erbas, Martelino,
& Mazarei (1995),Eken and Helbling (1999), Authors’ calculations.
aData for the years 1970–1996 was obtained from Cashin, Eken, Erbas, Martelino, & Mazarei (1995) and Eken and
Helbling (1999). For the years 1997—onwards data was obtained from Bank Audi (2006),Bank Audi and the Ministry
of Economy and Trade, Lebanon (2006).
Over the post-war Taif reconstruction period (1991–2005) infrastructure rebuilding, together
with large and expanding current expenditure and slow recovery of the revenue-generation capac-
ity, resulted in further fiscal imbalances and rising public debt. Budget deficits increased from
9.3 per cent of GDP in 1993 to 20.6 per cent in 1996 before declining to 8.4 per cent in 2005,
while domestic public debt, in particular, as a per cent of GDP increased from 44.2 per cent in
1993 to 86.5 per cent and to 87.7 per cent in 1997 and 2005, respectively. In nominal terms gross
C. Harvie, A.S. Saleh / Journal of Policy Modeling 30 (2008) 857–872 863
Table 2
Direct and indirect costs of the war on Lebanon as of end July 2006
Sector Estimated cost of destruction (US$ million)
1. Direct costs
Housing and trade 1,464
Transportation 404
Electricity 208
Industrial establishments 90
Water 74
Military installations 16
Petrol stations 10
Total direct costs 2,266
2. Indirect costs
Loss of government revenue 66.3
Loss in FDI and portfolio investment 2,000
Tourism revenue 3,000
Stabilization of the currency 2,500
Total indirect cost 7,566.3
Total direct and indirect war costs 9,832.3
3. Other costs more difficult to quantify
Loss of human capital No estimate at present
Loss of permanent investment No estimate at present
Fattouh and Kolb (2006).
public debt increased from US$ 3.7 billion in 1993 to about US$ 32 billion in 2003. External
public debt increased from US$ 0.3 billion to about US$ 15 billion in 2003 as a result of the
Paris II conference in 2002, where the government met with international donors to seek bilateral
assistance and lower interest rates by restructuring its higher interest rate bearing domestic debt
obligations. An aggregate amount of US$ 4.4 billion was pledged in 15-year loans at reduced
rates to support the government’s effort to reduce public debt Banque du Liban (Central Bank of
Lebanon) (2003). The majority of public debt is in the form of domestic public debt, although
the gap with external public debt has closed noticeably since 2000 and particularly so since 2002.
Money creation remained the primary method of budget financing with the issuance and sale
of treasury bills mainly to commercial banks. Other subscribers, but with a much lower share,
were other financial institutions, the general public, and public entities. It has been argued (see,
for example, Bolbol, 1999a, 1999b; Chami, 1992; Makdissi, 1999; among others) that the main
effects of the large budget deficits, and the way in which they have been financed, have been
through: an increase in the structural budget deficit; higher interest rates; increased money sup-
ply; rising inflation; a depreciation of the Lebanese pound; stagnation and a slowing of economic
growth.
2.2. Post August 2006
The damage arising from the July–August 2006 war was widely spread across a number of
economic sectors, but most acutely in residential housing and infrastructure. This has profound
implications for government spending and the budget deficit. Table 2 summarizes the potential
864 C. Harvie, A.S. Saleh / Journal of Policy Modeling 30 (2008) 857–872
direct and indirect costs arising from the war that can be gleaned from the literature and government
sources, as well as additional effects that are difficult to quantify. These estimates obviously contain
a sizeable margin of error, and it will take some time before they can be verified on the ground, but
the magnitudes are clearly substantial. The estimated direct costs are equivalent to 10.7 per cent of
2005 GDP, while estimated direct and indirect costs are equivalent to 46.4 per cent of 2005 GDP.
This does not include other costs such as that arising from the permanent loss of human capital
and investment which are extremely difficult to quantify. If the UN figure mentioned previously
of US$ 15 billion is closer to the mark this is equivalent to 70.7 per cent of 2005 GDP. These are
staggeringly high and would appear to be insurmountable for the present government acting in
isolation.
2.3. Status of international assistance
The fiscal crisis and past policy failures have resulted in the current weak central government
of Prime Minister Siniora being heavily dependent upon the benevolence of international donors,
and the wealth of prominent supporters, to enable it to conduct and implement the massive
reconstruction task at hand. The government now needs to convince donors that it has the ability
to conduct this task, although its past performance is not encouraging. This has been further
exacerbated by the current political turmoil and instability. The post-Taif reconstruction effort
contained both public and private sector components, although this became increasing opaque at
times due to the significant contribution of Rafiq al-Hariri. As the Prime Minister of the country
from 1992 to 1998, and again from 2000 until his resignation on 20 October 2004, Hariri played a
crucial role in regard to the public sector effort. He also spearheaded a comprehensive private sector
reconstruction effort, arising from three dimensions: he possessed vast personal wealth9and was
the initiator and major shareholder of Solidere10; he possessed considerable personal prestige
particularly with Saudi investors; and he possessed considerable ability, in general, to attract
international finance. In the foreseeable future, however, such public–private funding mechanisms
that were important in the 1990s will not be available in the future without an expanded role for
international donations.
Some confusion exists over the amount pledged for Lebanon’s reconstruction and how much
is needed. Security and humanitarian assistance is often included with reconstruction pledges,
adding confusion about the totals. Among the major reconstruction, and economic recovery,
contributions that can be identified are the following. First, at an Arab League meeting on 20
August 2006, Saudi Arabia (US$ 500 million) and Kuwait (US$ 300 million) pledged a combined
total of US$ 800 million in reconstruction assistance. Second, a UN sponsored early recovery
donor conference in Stockholm on 31 August 2006 raised US$ 940 million in pledges with some
of this for expanded humanitarian aid.11 Qatar alone pledged US$ 300 million specifically for
reconstruction assistance. The Lebanese government insisted that it maintain control over any
9In the 1970s Hariri established his own construction company, CICONEST, which was a major beneficiary of the oil
price boom at this time and the construction boom which it triggered in the Middle East. He accumulated vast amounts
of wealth in a short period of time and emerged as a powerful construction tycoon.
10 Solidere is a private joint-stock company worth about US$ 2 billion that almost single handedly, due to being awarded
a government monopoly, transformed and revived the central business district of Beirut following the Civil War.
11 The amount was nearly double the US$ 500 million that organizers of the donors’ conference had requested to assist
Lebanon to recover. Adding previous pledges and commitments for longer-term reconstruction projects, organizers said
a total of US$ 1.2 billion had been promised to help Lebanon back on its feet. Other major pledges included US$ 175
million from the United States and US$ 54 million from the European Union. The U.S. figure was part of the US$ 230
C. Harvie, A.S. Saleh / Journal of Policy Modeling 30 (2008) 857–872 865
financial aid provided. Third, Saudi Arabia and Kuwait provided US$ 1.5 billion to support
Lebanon’s reserves in a bid to stabilize the country’s currency. This money, however, could not
be spent and, therefore, could not be counted as reconstruction assistance. Fourth, private donors,
including investment funds such as that developed by the Association of Islamic Banks,12 have
also contributed funds. Such commercial funds, however, are most likely to be invested in income
generating business, and were unlikely to contribute to the financing of core reconstruction costs.
Fifth, the US President, a week after the ceasefire, announced an aid package of US$ 230 million
but without detailing disbursement modalities. Sixth, Hizbullah has demonstrated the potential to
play a leading role in the reconstruction of the economy, with financial backing by Iran. Finally,
it can be expected that additional funds from the Gulf countries will also be forthcoming.
Other factors will also make an ongoing contribution to the reconstruction efforts. Specifically,
the Paris I and II13 donor conferences contributed to a reduction of debt servicing costs and to
keeping the public debt at less than it otherwise would have been. The government is also waiting
for Paris III, to be held in early 2007, which is a continuation of both the Paris II and Stockholm
meetings, and where the Lebanese government will submit a new economic reform program. Paris
III will also focus upon the need to implement reforms agreed under Paris II but not implemented
due to prevailing circumstances. The government will be looking for two major outcomes from the
conference. First, to obtain long term soft loans and grants with at least a 15 year maturity period
and a 5 year offset period. Officials and economists suggest that Lebanon needs close to US$ 8
billion, or more, in order to complete the reconstruction drive and reduce the budget deficit.14
Second, to obtain loans at an interest rate lower than 5 per cent, and preferably between 3 and 4
per cent. In addition, other forms of assistance and donations from the international community
will also be sought to facilitate recovery from the war and to achieve its economic program and
reform agenda. The government is relying heavily on attaining these objectives, with failure to
do so likely to deteriorate further the country’s economic situation and result in a severe and
unsustainable debt problem. The public debt in Lebanon could reach over 200 per cent of GDP
by 2010, with unsustainable debt service costs, if the government does not succeed at the Paris
III round in achieving its objectives.
3. Policy imperatives for sustained economic reconstruction and recovery
3.1. Policy priorities
In the wake of the summer 2006 war the country faces a number of urgent economic imperatives
that require an effective policy response. These imperatives, and policy response, will form the core
of the government’s economic recovery program to be presented at the Paris III donor conference.
Key imperatives relate to: infrastructure reconstruction; tackling the fiscal crisis and large public
million already offered by U.S. President George W. Bush. For more details on the key outcome of the conference see
Lebanon under Siege (2006).
12 Wealthy Lebanese and Arab businessmen also offered to rebuild designated bridges and other specific infrastructure
projects.
13 At Paris II former Prime Minister Rafik al-Hariri was able to secure US$ 4.4 billion in soft loans from donor states
to help reduce Lebanon’s debt servicing, but only US$ 2.5 billion of the pledged money came to Lebanon. This allowed
the government to reduce the budget deficit and cut interest rates. Eight donor countries participated in Paris II, namely
Malaysia (US$ 300 million), Sultanate of Oman (US$ 50 million), United Arab Emirates (US$ 300 million), Kuwait (US$
200 million), France (US$ 540 million), Kingdom of Saudi Arabia (US$ 700 million) and Qatar (US$ 200 million).
14 Of which US$ 1 billion is required, specifically, to support the budget.
866 C. Harvie, A.S. Saleh / Journal of Policy Modeling 30 (2008) 857–872
debt overhang; attending to environmental damage and encouraging the recovery of tourism; and
strengthening the role of the private sector.
3.1.1. Infrastructure
Reconstructing the country’s infrastructure15 will be crucial to rebuild the economy, unify the
country, meet social needs, stimulate private activity and re-generate exports. In comparison to the
post-Taif public and private sector reconstruction efforts, under Prime Minister Hariri, the current
reconstruction efforts need to be: truly nationwide in scope rather than focused primarily upon
Beirut; be more transparent; and insulated from political interference. For example, more focus
should be given to the poorer parts of the country where increased income from infrastructure
expenditure has the potential to exert a higher multiplier effect arising from an associated expan-
sion in consumption expenditure.16 As mentioned previously Saudi Arabia, Kuwait and Qatar
have already pledged between them US$ 1.1 billion for reconstruction, but more will clearly
be required. The first step, however, will be to work out the modalities for project develop-
ment and disbursement, and the Lebanese government has proposed that countries adopt specific
projects—such as for specific roads and bridges. Many basic decisions relating to the reconstruc-
tion and rebuilding of the economy, however, remain at an early stage with many crucial decisions
still to be made.
3.1.2. Fiscal crisis and public debt overhang
The Lebanese authorities, as a matter of urgency, also need to tackle the ongoing and intensified
fiscal crisis and large public debt overhang. First, and of immediate concern, is the need for US$
1 billion in budget support for the current financial year to compensate for revenue losses. The
war caused a direct loss of about US$ 650 million in revenues that could not be collected. It
also caused the economy to contract from a projected 6 per cent growth rate by mid 2006 to
2to3 per cent growth for the year (Bank Audi, 2006), causing another US$ 350 million in
revenue losses.17 The budget will go from a projected primary surplus (before debt service) to
a primary deficit. The government’s only alternative to finance this deficit is to print money but
this would have a deleterious effect on inflation and adverse impact on the health of the Central
Bank’s balance sheet. On the other hand taking on more debt to finance the deficit would further
exacerbate the country’s existing public debt, which is the highest per capita in the world. Second,
is the need to refinance the existing public debt of US$ 36 billion.18 Private Lebanese banks hold
US$ 20 billion of this debt, and they have indicated that they will refinance. A key issue will be
their willingness to allow a grace period at a minimal interest rate. The remaining US$ 16 billion
will require help from international official and private creditors and the working out of a debt
relief scheme, although this will be complicated. The third issue relates to the electricity sector.
Subsidies to the sector cost the government about US$ 1 billion annually, equivalent to around 20
15 Top priorities are electricity plants and grid, water supply and sewerage, roads and bridges, with preliminary estimates
suggesting required expenditure in the order of US$ 3.5 billion. Also required will be the reconstruction of airports, ports,
telecommunications, and residential property.
16 The gap between rich and poor widened in the 1990s, resulting in grassroots dissatisfaction over the skeweddistribution
of the reconstruction’s benefits and leading the government to shift its focus from rebuilding infrastructure to improving
living conditions.
17 Other estimates of GDP growth for 2006 suggest 0 per cent according to the Central Bank of Lebanon, 5 per cent
by the International Monetary Fund and 8 per cent by the Economist Intelligence Unit.
18 Finance Minister Jihad Azour expected public debt to reach US$ 41 billion by the end of 2006.
C. Harvie, A.S. Saleh / Journal of Policy Modeling 30 (2008) 857–872 867
per cent of its revenues and around 5.3 per cent of GDP (Anonymous, 2007).19 Between electricity
subsidies and debt service the Lebanese government spends half its annual revenues, crowding
out other investment in infrastructure or expenditure in the social sectors. Ending the electricity
subsidies will produce an economic shock and hardship among the poor that will require in its
place a targeted subsidy program. This is the type of initiative where donor grant funding for
feasibility studies and technical assistance could generate a considerable multiplier effect.
Tackling the fiscal imbalance will require fundamental improvements on both the revenue and
expenditure sides. On the revenue side an increased VAT rate, introduction of a more efficient
and progressive income tax system, and the return to a tax on petrol to its 2003 level need to
be considered. Recently, the government announced that it was planning to increase the current
rate of VAT from 10 per cent to 12 per cent in 2008 and then to 15 per cent in 2010. By the end
of 2010 the government is expecting VAT revenues to be worth around 2 per cent of GDP. The
proposed increase in the VAT rate is still quite low in comparison with many other developed
and developing countries. Tax reform is one of the most important and effective policies to tackle
the deficit and debt problem in Lebanon. For example, property tax in Lebanon accounts for
only 3 per cent of GDP in comparison with 4.5 per cent in OECD countries (Anonymous, 2007).
Hence, tax reform in this area has the potential to significantly improve government revenue.
Another potential source of expanded tax revenue is tax on interest income. The government is
planning to increase the rate of such tax from 5 per cent to 7 per cent by 2008, and is expected to
generate revenues equivalent to around 5 per cent of GDP. This again has the potential to enhance
government revenue and reducing the public deficit, but the government needs to be aware of its
potentially adverse effect on attracting overseas investment. In the short term at least, increases in
taxation of the sort suggested here are unlikely to be part of the government’s economic package at
Paris III due to the current precarious position of the economy, and are more likely to be medium
to long term objectives.
Speeding up the process of privatization of certain public sectors—especially telecommunica-
tions and electricity20 is, therefore, the only other option for the government to tackle the budget
deficit in the short term. A key issue here is whether to use the funds generated from privatization
to reduce the public debt or to utilize these to finance investment expenditure. The total returns
from privatization are anticipated to generate a reduction in debt equivalent to 15 per cent of GDP
(Anonymous, 2007). Hence, privatization is a step in the right direction to reduce the public debt
and deficit but has to be supported by many other economic and tax reforms policies. The war
of 2006 will, however, stall the privatization process due to: the damage to many public sector
assets; the reduced revenue that would be generated from the sale of these assets at this time; a
general loss of confidence, and higher perceived risk, in the economy by domestic and foreign
investors.
On the expenditure side emphasis needs to be placed on reducing non productive and poorly
targeted outlays, as well as tackling the cost of debt servicing. In terms of the former, priority
needs to be given to reducing electricity subsidies. This will have an adverse impact on the poor
19 It has also been suggested that at least 500 institutions are not paying their electricity bills.
20 In 2002 the government emphasized privatization,initially in the telecom sector and electricity, with continued planning
for sales of the state airline, Beirut port, and water utilities in line with Paris II. In reality only the telecommunications
sector has generated profits and was potentially attractive to investors. The government pledged to apply the proceeds of
sales to reduce public debt and the budget deficit. In addition, it projected that privatization would bring new savings as
government payrolls are reduced, interest rates decline, and private sector growth and foreign investment are stimulated.
However, progress on privatization has been much slower than anticipated.
868 C. Harvie, A.S. Saleh / Journal of Policy Modeling 30 (2008) 857–872
and will require the development of appropriate and targeted hardship alleviating measures. At
the forthcoming Paris III donor conference the Lebanese government will be required to argue
vigorously for further concessional terms on existing and prospective loans from international
lenders and donors. Debt servicing represents a huge drain on government revenue. This will also
need to be supplemented by a voluntary contribution by the domestic private sector, specifically
the banking sector, to reduce the interest burden on the public debt. Successful privatization
would also facilitate the reduced need for government to provide subsidies to loss making sectors.
However, even if all of these measures were successfully implemented it will take many years to
reduce the debt to GDP ratio to a sustainable level.
In a recent study by Saleh and Harvie (2006) a dynamic macroeconomic model for Lebanon
was developed, estimated21 and simulated to analyse the effects of exogenous shocks arising from
increased government expenditure upon key macroeconomic variables. They find that a restruc-
turing of government spending from current to capital expenditure has the potential to produce
a number of potential advantages for the economy. First, an expansion in capital expenditure
produces a larger favourable impact on private sector investment (crowding in effect), which the
country desperately requires after the recent war destruction, enhancing the supply side of the
economy. Expansionary capital expenditure is also found to enhance international competitiveness
and improve the trade and current account performance (due to depreciation in the real exchange
rate) as well as resulting in an accumulation of foreign asset stocks (reduction in external debt).
An expansion in government consumption expenditure, on the other hand, produces unfavourable
external developments with the trade and current account balances both deteriorating in line with
a decline in foreign asset stocks (equivalent to an increase in external debt). This finding suggests
that improved productivity of government spending can best be achieved by restructuring it from
current to targeted capital expenditure.
Saleh and Harvie (2006) also find that government capital and current spending produce similar
outcomes in terms of the interest rate and inflation, and are best funded, where possible, through
bond financing rather than through monetary accommodation as this is non inflationary and results
in considerably less interest rate volatility. They also conclude that a gradual fiscal expansion is
preferable to that of a rapid expansion as it results in considerably less volatility in terms of major
macro outcomes.
In addition to the need for government to enhance its revenue capacity and spending produc-
tivity, other measures will also be required by the government in its economic recovery program
including: reducing red tape and corruption in the public sector; reactivating the liberalization
and privatization of the telecom sector; lowering the high costs of business entry and exit; and
strengthening contract enforcement. These represent reinvigorating the structural reform agenda
agreed at the Paris II donor conference, but which the government has been very slow in acting
upon due primarily to inauspicious economic and political circumstances.
3.2. Environmental damage and tourism
One of the major sectors affected by the war has been the tourism sector. The sector plays a cru-
cial role in the economy due to its strong linkages with other service sectors such as transportation,
construction, real estate, banking and financial services and retail. Tourism directly contributes
21 The parameters of the model were estimated using the Full Information Maximum Likelihood and Error Correction
Model techniques.
C. Harvie, A.S. Saleh / Journal of Policy Modeling 30 (2008) 857–872 869
between 10 and 12 per cent of GDP (World Tourism Organization, 2006), and employs around
300,000 people with one third of these working in catering businesses.22 The Ministry of Tourism
predicted 1.6 million visitors in 2006 that would generate some US$ 2 billion in revenue, and
reflected the major advance in economic and political stability achieved by the country before
the outbreak of war in mid 2006. This prediction was on track during the first half of the year
with record tourist numbers, registering a 49.3 per cent increase over the 2005 figure. However
the war precipitated: a dramatic decline in tourist numbers by 58.6 per cent in the third quarter of
the year; the cancellation of festivals and concerts; and the closing down of restaurants, hotels,
nightclubs and beach resorts. This resulted in an overall decline of 8.6 per cent in tourist numbers
for the first 9 months of the year.
Early recovery efforts at the end of the war in mid August 2006 focused upon cleaning up an oil
spill off Lebanon’s coast and clearing unexploded bombs. This reflected the need to re-generate
this sector and of its considerable importance for the country in terms of employment, GDP, and
the generation of foreign exchange. However, the country will not be successful in attracting back
tourists, investment and returnees without achieving sustainable peace amongst its various secular
factions and with regional neighbours.
3.3. Promoting the private sector
The sustained recovery of the Lebanese economy will require strengthening of the private
sector. This sector has the potential to generate jobs, growth, exports and to integrate the coun-
try’s poorest communities with the rest of the country. Economic recovery after the Civil War
(1975–1990) was strongly facilitated by private activities in the agriculture sector, construction
sector and banking system as well as by resilient private sector small and medium sized manufac-
turers mainly concerned with reassembling and packaging imported parts. The main sources of
foreign exchange are generated by the private sector in the form of family remittances, banking
services, manufactured and farm exports, supplemented by assistance in the from of international
aid.
Lebanon has a competitive and free market regime and a strong domestic laissez faire com-
mercial tradition. The economy is service-oriented; the main growth sectors include banking and
tourism. There are no restrictions on foreign exchange or capital movement, and bank secrecy is
strictly enforced. Lebanon has recently adopted a law to combat money laundering, and there are
practically no restrictions on foreign investment. Lebanon also benefits from its large, cohesive,
and entrepreneurial diaspora, and the many Lebanese who live and work abroad generate consid-
erable remittances for the country. The country is also in the process of finalizing its membership
of the WTO which it hopes to have completed by the end of 2007. Hence the government is trying
to further liberalize the economy and to ease trade restrictions. Perhaps this will enhance further
Lebanon’s trade with its neighbouring countries, and especially within the Middle East and with
European countries. Lebanon is also trying to enhance further its capital and stock markets.
After the Civil War the private sector was seen as the engine for economic revival and sustain-
able growth. A similar role will be required in the wake of the summer 2006 war. In this regard
a number of policy initiatives will be required. First, the role and contribution of the banking
22 Lebanon’s service sector has traditionally been based upon tourism and banking, and the sector itself is the most
important pillar of the Lebanese economy. Nearly 65 per cent of the workforce is employed in the sector and it contributes
67.3 per cent to GDP.
870 C. Harvie, A.S. Saleh / Journal of Policy Modeling 30 (2008) 857–872
sector will be crucial. The banking sector achieved a healthy performance over the first 9 months
of 2006 despite the summer war and its adverse repercussions for overall economic activity and
implications for its business clientele base as mentioned previously. Assets, deposits, loans and
especially shareholders’ equity all reported strong growth in the first 9 months of the year. Bank
profitability also increased and appeared to be unaffected by the adverse economic developments
as both interest and non interest income increased. Banks’ assets grew by 4.5 per cent over the
first 9 months of 2006 primarily driven by customer deposits. Total loans increased by 7.1 per
cent over the year to September 2006, and capital adequacy strengthened throughout 2006. Hence
the financial sector remains strong in Lebanon but there are major problems in the real sector.
Consequently, an important contribution to recovery of economic growth and employment
generation, particularly in the private sector, needs to be made by the commercial banking sector.
Lebanon’s strong commercial banks have experience in administering micro and small business
finance, and they have considerable liquidity. However, the current lending risk is high, and, con-
sequently, interest rates and lending terms are prohibitive for many of Lebanon’s small businesses.
To get the business sector moving it is essential that Lebanon’s small and medium sized enter-
prises have access to funding. Consequently, the government has an important role to play as a
conduit between liquidity constrained small businesses and the liquidity abundant banking sector.
Government agencies and the commercial banking system need to work in close collaboration to
devise innovative and effective means of meeting the funding and rebuilding requirements of small
businesses. The government could provide partial or full loan guarantees and financial assistance
to reduce lending risk and lower borrowing rates, provide a repayment grace period and extend
the lending term. While financial assistance, including subsidies, would need to be eventually
phased out, they would open the credit market to a wide range of small entrepreneurs whose
businesses have been destroyed or disrupted by the war. In addition to increasing the availability
of financing for micro and small businesses there is also a need to expand large scale private sector
financing that would facilitate investment in new business opportunities and support restructuring
and modernization of medium and large scale enterprises.
Apart from finance another key obstacle for small and medium enterprises in Lebanon is the
very high cost of production (especially for electricity, transport, telecommunications and that
arising from red tape and corruption, etc.). The government must tackle these issues as a matter of
urgency. The government needs, as mentioned previously, to reduce red tape and corruption, reac-
tivate the liberalization and privatization of the telecommunications23 and other sector sectors as
quickly as feasible, lower the costs of business entry and exit, and strengthen contract enforcement.
Hence there is a need to reinvigorate the Paris II structural reform agenda. While privatization of
sectors such as telecommunications, electricity, the state airline, Beirut port, and water utilities
have been on the agenda since 2002, little progress has been made. The events of summer 2006,
however, have made the privatization task extremely difficult at present, and progress is likely to
be further slowed due to war damage that will considerably reduce the revenue generated from
their sale and the reluctance of international investors to invest at this point in time. A success-
ful re-invigoration of the private sector has the potential to make an important contribution to
reducing the debt overhang. According to a recent government report in Lebanon a 1 per cent
increase in GDP will lead to a reduction in debt, as a percentage of GDP, by 5.1 per cent. Hence,
the government in Lebanon should focus more on maintaining sustainable economic growth in
Lebanon by all means as this is an important step in tackling the public sector deficit problem.
23 This remains the most attractive and profitable sector for private investors.
C. Harvie, A.S. Saleh / Journal of Policy Modeling 30 (2008) 857–872 871
Measures also need to be implemented to encourage the return of some if not all of the US$
2.5 billion in foreign and domestic investment that fled the country during the war, and of some
of the 500,000 skilled Lebanese who fled during the war. Such financial and human capital could
play a key role in revitalizing the private sector. They can facilitate Lebanon regaining its place as
a hub for business and financial services in the Gulf; and restore its engineering and construction
companies to the role as major builders in the Gulf countries.
4. Summary and conclusions
Devastated by Israel’s bombs, threatened by the increasing economic and political influence of
Syria and Iran, divided from within, facing substantial fiscal and current account deficits and the
need to rebuild its fragmented economy, Lebanon faces many difficult tasks ahead. The process
of economic recovery will not be easy and will be heavily dependent upon the benevolence
of international donors. Despite this, history has demonstrated that the country has remarkable
resilience. However, recovery such as that experienced in the post-Taif reconstruction period will
be more difficult in the wake of the war of summer 2006. The government is much weaker and
subject to considerable secular divisions, access to funds from public and private sources for
reconstruction will be much more difficult and there will be much greater dependence on the
benevolence of international donors, there has been considerable capital flight and migration of
skilled labour that could be permanent. Nevertheless, as one of the Middle East’s few functioning
democracies, its pivotal role in trade and finance in the region and its important role for the
attainment of lasting peace in the region suggests that, while small economically, the success of
the country’s reconstruction efforts this time around are of much wider regional significance.
Key to the country’s future growth and development will be the need to reconstruct the country’s
war damaged infrastructure, tackle the unsustainable fiscal deficits and debt overhang, reinvigorate
its private sector focusing upon tourism and enhancing the recovery of small and medium sized
enterprises by tapping into the strength of its banking sector. However, there are clear limits to what
the country can do in isolation. Its future now depends very heavily on international lenders and
donors, and in this regard outcomes at the forthcoming Paris III conference will be pivotal. What
happens in the future for Lebanon could be a microcosm of what will happen, more generally, in
the Middle East region.
Acknowledgements
The authors are grateful for comments received from Glenn Otto and Edgar Wilson.
References
Allen, P. R. (1977). Financing budget deficits: The effects on income in closed and open economies. European Economic
Review,10, 345–373.
Al-Rifai, G. (1999). The government in Lebanon should solve the public debt crisis, Discussion Paper, No. 334001,
AlkiFah Alarabi Newspaper, Beirut.
Anonymous. (2007). The Lebanese government document and economic reform program to the international conference
on Lebanon in Paris, Discussion Paper, No. 10591, As-Safir, Beirut.
Aschauer, D. A. (1985). Fiscal policy and aggregate demand. American Economic Review,75, 117–127.
Bailey, M. (1971). National income and the price level. McGraw-Hill.
Bank Audi. (2006). Lebanon Economic Report, third quarter, Beirut.
Banque du Liban (2003), Annual Report, Beirut.
872 C. Harvie, A.S. Saleh / Journal of Policy Modeling 30 (2008) 857–872
Banque du Liban. (various years). Annual Report, Beirut.
Barro, R. J. (1990). Government spending in a simple model of endogenous growth. Journal of Political Economy,98,
S103–S125.
Bolbol, A. A. (1999a). Seigniorage, dollarization and public debt: The Lebanese civil war and recovery experience
1982–1997. World Development,27(10), 1861–1873.
Bolbol, A. A. (1999b). Deficits, debt and post-war Lebanon: Analysis and policy proposals. Toronto: Economics Depart-
ment, Ryerson Polytechnic University.
Cashin, P., Eken, S., Erbas, S.N., Martelino, J. & Mazarei, A., (1995). Economic Dislocation and Recovery in Lebanon,
IMF Occasional Papers, 120, 1-64.
Cebula, R. J. (2003). Budget deficits and interest rates in Germany. International Advances in Economics Research,9(1),
64–68.
Chami, S. (1992). Economic performances in a war economy: The case of Lebanon. Canadian Journal of Development
Studies,13(3), 325–336.
Darweesh, K. (1999). World Bank and Lebanon: Discussions to reduce fiscal deficits, Discussion Paper, No. 333062,
Assafir, Beirut.
Eken, S., & Helbling, T. (Eds.). (1999). Back to future: Reconstruction and stabilization in Lebanon. IMF Occasional
Papers,176, 1–104.
Fattouh, B., & Kolb, J. (2006). The outlook for economic reconstruction in Lebanon after the 2006 war. The MIT Electronic
Journal of Middle East Studies,6, 96–113.
Korm, J. (1999). The Lebanese government and the external debt option, Discussion Paper, No. 336144, Almoharrer
News, Beirut.
Lebanon under Siege. (2006). Donors pledge more than $940 million for Lebanon, Presidency of the Council of
Ministers, Government of Lebanon, Beirut. Available at: http://www.lebanonundersiege.gov.lb/english/f/eNews/
NewsArticle.asp?CNewsID=261.
Makdissi, S. (1999). Lebanon: public debt and economic policies, Discussion Paper, Alanwar Newspaper, No. 330949,
Beirut.
Miller, S. M., & Russek, F. S. (1997). Fiscal structures and economic growth. Economic Inquiry,35, 603–613.
Ministry of Economy and Trade. (2006). Macroeconomic indicators, on line available at http: www.economy.gov.lb,
retrieved on 18/12/2006.
Ministry of Finance. (various years). Annual report, Beirut.
Neaime, S. (2004). Sustainability of budget deficits and public debt in Lebanon: A stationarity and co-integration analysis.
Review of Middle East Economics and Finance,2(1), 43–61.
Ramirez, M. D., & Nazmi, N. (2003). Public investment and economic growth in Latin America: An empirical test. Review
of Development Economics,7(1), 115–126.
Saidi, N. (2003). Central bank official answers critics, Discussion Paper, The daily Star, Lebanon.
Saleh, A. S. (2003). The budget deficit and economic performance: A survey, Working Paper Series, WP03-12, School of
Economics and Information System, University of Wollongong, Australia.
Saleh, A. S., & Harvie, C. (2005). The budget deficit and economic performance: A survey. Singapore Economic Review,
50(2), 211–243.
Saleh, A. S., & Harvie, C. (2006). Public sector deficits and macroeconomic performance in Lebanon. Hyderabad, India:
ICFAI (The Institute of Chartered Financial Analysts of India), University Press.
Sargent, T., & Wallace, N. (1981). Some unpleasant monetarist arithmetic, Quarterly Review, Federal Reserve Bank of
Minneapolis, 5(3), 1-18.
Spero News. (2006). UN ups estimate on war caused damage in Lebanon, 31 August 2006, available at
http://www.speroforum.com/site/print.asp?idarticle=5226.
Wakim, N. (1999). US$22 billion is the right number of the public debt in Lebanon, Discussion Paper, No. 335666,
Alanwar Newspaper, Beirut.
World Tourism Organization. (2006). Yearbook of tourism statistics, United Nations, Madrid.
... Lebanon experienced considerable economic and political turbulence as a result of civil war during 1975-90 (Bank Audi, various;Bank du Liban, various;Bolbol, 1999a, 1999b: Chami, 1992Eken and Helbling, 1999;Saleh and Harvie, 2006;and Harvie and Saleh, 2008). A legacy of the civil war has been the huge cost to government of reconstructing the Lebanese economy, which resulted in burgeoning fiscal deficits, an unsustainable public debt overhang, and a debt servicing requirement that absorbed almost 30 per cent of total government revenue and was one of the highest in the world on a per capita basis (Darweesh, 1999;Korm, 1999;Makdissi, 1999;Ministry of Finance, various;and Neaime, 2004). ...
... Considerable economic and reconstruction progress was made up until July-August 2006, which was then put into reverse when a short but brutal war with Israel occurred devastating much of the country's infrastructure, business sector, environment and rapidly developing tourism sector (Bank Audi, 2006;Fattouh and Kolb, 2006;Harvie and Saleh, 2008;Lebanon under Siege, 2006;Spero News, 2006;and World Tourism Organisation, 2006). Estimates of the total costs for Lebanon from the war conservatively varied from US$10-15 billion (see Harvie and Saleh, 2008), putting an already fiscally weak central government in an even more precarious position. ...
... Considerable economic and reconstruction progress was made up until July-August 2006, which was then put into reverse when a short but brutal war with Israel occurred devastating much of the country's infrastructure, business sector, environment and rapidly developing tourism sector (Bank Audi, 2006;Fattouh and Kolb, 2006;Harvie and Saleh, 2008;Lebanon under Siege, 2006;Spero News, 2006;and World Tourism Organisation, 2006). Estimates of the total costs for Lebanon from the war conservatively varied from US$10-15 billion (see Harvie and Saleh, 2008), putting an already fiscally weak central government in an even more precarious position. Consequently, the task facing the Lebanese government, of rebuilding a sustainable economy, was, and remains, immense. ...
Article
Full-text available
Purpose The purpose of this paper is to develop a macroeconomic framework to predict the impact of transient donor funding on a developing economy and to facilitate evaluation of the effectiveness of alternative uses of this funding in attaining the desired outcomes. Design/methodology/approach A simulation analysis of the macroeconomic impact of donor funding on the Lebanese economy is conducted. Findings The paper evaluates the potential outcomes for the country from alternative uses of this donor funding and concludes that targeting infrastructure expenditure, mediated through the government, will produce the most beneficial longer term outcomes. Originality/value This paper is the first substantive macro model to be developed for the Lebanese economy. It is the first major study of the contribution of donor funding to the Lebanese macro-economy. The framework, however, can be generalised to other developing donor recipient nations.
... Lebanon's economic development is rooted in trading and services (banking, tourism), and marked by an open economy structure (Harvie and Saleh, 2008;Hamade et al., 2015) with minimal government intervention (Kubursi, 1999b). This laissez-faire approach to economic development, paired with neglect of the agricultural sector and the favoring of urban over rural interests, led to rising income inequality and rural-urban migration in the 20th century (Hamade et al., 2015;Makhoul and Harrison, 2002). ...
... The 2006 war with Israel resulted in the loss of crops and livestock, and significant damage to and loss of jobs in the industrial sector (including agro-food processing). Damage to infrastructure had a direct, negative impact on exports (Harvie and Saleh, 2008). Since the Syrian war began in 2011, violent conflict has spilled into northern Lebanon and the Bekaa Valley, affecting agricultural production ( Hamade et al., 2015). ...
Chapter
This article presents the major components of contemporary Lebanese food policy. Current policies may be organized according to the three dimensions of food security: availability, access, and utilization. Policies targeting food availability primarily seek to stimulate agricultural production, control imports, and promote high value exports. Measures to ensure food access in Lebanon, by both Lebanese and non-Lebanese populations, take the form of price control measures and social safety net programs. Food utilization measures include policies promoting public health nutrition, including food safety. The current agricultural and food landscape in Lebanon is strongly influenced by the country's traditionally laissez-faire approach to economic policy and its history, including recent conflicts. Keywords Lebanon; Food policy; Food security; Agriculture; Nutrition; Food safety; Food trade; Production subsidy
... 38 http://www.oecd.org/dac/stats. levels of fiscal deficits and public debt and in bad need for external assistance in that respect (Harvie and Saleh, 2008). ...
Chapter
Full-text available
Lebanon's history has been scarred by repeated episodes of armed conflict: the Civil War, the Israel-Lebanon war, the Nahr-el Bared clashes, the recurrent clashes in Tripoli between Bab al-Tabbaneh and Jebel Mohsen, and, more recently, the spill-over from the war in Syria. This has resulted in tragic human loss, trauma, disruption of communities and families, migration and displacement, and the destruction of infrastructure and property. Less well-known, but certainly not less substantial, have been the effects of armed conflicts on North-Lebanon's natural environment. In this book, we explore these direct and indirect impacts of violent conflict on North Lebanon's natural environment and their effects on the livelihoods of the population of North Lebanon. We do so through a series of stand-alone studies. All chapters draw on an analytical framework revolving around the concepts of vulnerability and resilience of citizens, municipalities and the private sector in the management of their environment and protection of natural resources. Three components are essential in the analysis: exposure, sensitivity and resilience. We explore various manifestations of resilience that have often developed in the absence of contingency planning, disaster management plans, emergency response mechanisms or even the acknowledgement of an emergency situation. Resilience, in such a context, first and foremost requires cooperation to muster the capacity to address environmental degradation that emerged from the conflict itself or flourished in the absence of formal governance structures. We argue that it is necessary to integrate lessons from the complex political reality of multiple political authorities and plural and instable political institutions into our analyses of vulnerability. As such, our book not only offers innovative analysis of the multifaceted relations between conflict, vulnerability and the natural environment, it also calls for a re-positioning of the notion of vulnerability in relation to state fragility and political hybridity.
... When it does intervene, it is usually to allow exceptions to existing regulations, a practice stemming from widespread corruption, mismanagement and conflicts of interest (Gebara, Khechen and Marot, 2016;Fawaz, 2017). Finally, when it comes to public finance, the irresponsible decision to increase debt year after year without ensuring parallel growth and restructuring the system falls on the national government, but will affect all the sectors across the country (Harvie and Saleh, 2008;Chaaban, 2019;The Guardian, 2020). ...
... Also, a comparison with other post-conflict countries that have experienced the reconstruction process would help in extracting a set of public policies that will assist policy makers in post-conflict Syria in developing better reconstruction strategies and building knowledge society and economy. (Nagel 2002) 5. Building and consolidating the concept of citizenship 6. Equitable distribution of income and economic growth (Collier 2002;World Bank 2018) 6. Enabling all members of society and businesses to access basic services, infrastructure, and technology 7. Economic participation (Harvie and Saleh 2008) 7. Coordination and synergy between the business sector, the research sector, and the government 8. Rehabilitation of industries using obsolete technologies (Ozlu 2006) 8. Rehabilitation of industries by integrating new technologies into industries: taking advantage of technological backwardness (free rider model) 9. Creating a sophisticated financing structure (Adam et al. 2008) 9. Automation of the financial sector and provision of financial facilities for SMEs 10. Building policy and institutional frameworks (Akiwumi and Hollist 2016) 10. ...
Article
Full-text available
Reconstruction in post-conflict countries is essential for determining the future shape of economic and social development in those countries. The aim of this study is to formulate a new approach for a reconstruction process oriented towards building a knowledge-based economy. We measure how the Syrian conflict harms knowledge, human, and innovation indicators as the first step in formulating the reconstruction strategy. Hence, the synthetic control method (SCM) and documentary research method (DSM) are used to identify the conflict’s impact on a set of knowledge output variables as well as human development and global innovation indices in Syria. Results indicate that the Syrian conflict had a significant impact on social and economic indicators, as well as on knowledge outputs indicators. However, the greatest impact was on the level of the Human Development Index, where Syria has lost 23.3 years of development in the first 4 years of the conflict. The results also suggested that Syria has lost 20 positions at the level of the Global Innovation Index. Based on those findings, we propose a novel approach for reconstruction in Syria based on non-classical intervention policies that make the reconstruction process a tool oriented towards building a knowledge-based economy.
... A closer look at the data shows that ODA has peaked during the war in 1981 and later on in the post-1990 period, from 2006 till 2008. More generally, the Lebanese economy was permanently scarred by civil armed conflict, with colossal destruction requiring massive funds for reconstruction, which left the country with high levels of fiscal deficits and public debt and in bad need for external assistance in that respect (Harvie and Saleh, 2008). ...
Conference Paper
Full-text available
This paper aims to examine the determinants of Official Development Assistance (ODA) flows received by Lebanon from 1970 to 2010. Over this period of time, Lebanon's economy and socio-political reality has been under strain due to the outbreak of the civil war (1975-1990). More specifically, the objective of this paper is to attempt to understand the linkage between ODA and civil armed conflict and as well as other factors that might affect these flows. The importance of examining ODA lies in the fact that these funds might serve as resources in the reconstruction process. ODA per capita amounts in Lebanon seem to be positively linked to both GDP per capita and occurrence of armed conflict, therefore highlighting the importance of political factors in aid allocation.
... 38 http://www.oecd.org/dac/stats. levels of fiscal deficits and public debt and in bad need for external assistance in that respect (Harvie and Saleh, 2008). ...
Data
Full-text available
Lebanon’s history has been scarred by repeated episodes of armed conflict: the Civil War, the Israel-Lebanon war, the Nahr-el Bared clashes, the recurrent clashes in Tripoli between Bab al-Tabbaneh and Jebel Mohsen, and, more recently, the spill-over from the war in Syria. This has resulted in tragic human loss, trauma, disruption of communities and families, migration and displacement, and the destruction of infrastructure and property. Less well-known, but certainly not less substantial, have been the effects of armed conflicts on North-Lebanon’s natural environment. In this book, we explore these direct and indirect impacts of violent conflict on North Lebanon’s natural environment and their effects on the livelihoods of the population of North Lebanon. We do so through a series of stand-alone studies. All chapters draw on an analytical framework revolving around the concepts of vulnerability and resilience of citizens, municipalities and the private sector in the management of their environment and protection of natural resources. Three components are essential in the analysis: exposure, sensitivity and resilience. We explore various manifestations of resilience that have often developed in the absence of contingency planning, disaster management plans, emergency response mechanisms or even the acknowledgement of an emergency situation. Resilience, in such a context, first and foremost requires cooperation to muster the capacity to address environmental degradation that emerged from the conflict itself or flourished in the absence of formal governance structures. We argue that it is necessary to integrate lessons from the complex political reality of multiple political authorities and plural and instable political institutions into our analyses of vulnerability. As such, our book not only offers innovative analysis of the multifaceted relations between conflict, vulnerability and the natural environment, it also calls for a re-positioning of the notion of vulnerability in relation to state fragility and political hybridity.
Chapter
The chapter aims to determine three research objectives: (1) ATM service quality in Lebanon measurement based on five dimensions, using the SERVQUAL model; (2) analyze and investigate customer satisfaction and loyalty of the ATM usage, during two different periods, before and after the following situations that Lebanon encountered: foreign currency shortage, commercial banks' informal capital control, and bankruptcy; and 3) assess the intention of the Lebanese to adopt Libra virtual currency. To achieve the objectives of the study, a questionnaire was distributed among bank clients in Lebanese. The results and analysis of the study have been done by comparing the means of SERVQUAL dimensions. The findings indicate that the Lebanese perspective of the banking system changed during the two different periods; however, their intention level to adopt a virtual currency is low.
Chapter
This chapter investigates development in the shadow of imperialism. Asian and Arab worlds are similar in their fundamental social relationship, capital, but dissimilar in what they have become because of shifting class and power relations or their respective mode of integration with the global economy. Each case of development can be attributed to the specificity of the development/security nexus triggered by an imperialism pursuing its interests. Unlike EA where inter-imperialist entente lengthens the time horizon amenable to long term gestating and productive capital formation, the Arab security/development nexus not only absorbs the central economic surplus, but also reinforces commercial exploitation and under-valorisation in price terms a whole range of third world resources and inputs. War is not only about the destruction of assets, it is also the social relationship organising the reproduction of these assets during and after the conflict, especially the sustainability of the reconstruction effort through shifting ideological and institutional reorganisation patterns. This chapter will discuss the primacy of imperialism, its logical precedence and power over history, and how its practice makes or breaks development.
Article
Purpose – Despite the role of post conflict housing reconstruction in establishing the development of peace in conflict affected countries, there are many issues which hinder its success. While the inconsideration of housing needs in post conflict housing reconstruction has directly or indirectly given rise for most of the issues, the countries emerging from conflicts face many challenges in addressing such housing needs. Therefore, the purpose of this paper is to explore the management of housing needs in post conflict housing reconstruction. This paper aims to focus on identifying the challenges in addressing housing needs within the context of post conflict housing reconstruction in Sri Lanka. Design/methodology/approach – The study used the grounded theory approach to collect and analyse the data collected through 37 in-depth interviews, conducted with policy makers, practitioners, academics and housing beneficiaries in Sri Lanka. Primary data were verified through a documents review. Findings – The paper reveals that addressing housing needs in post conflict housing reconstruction in Sri Lanka is challenging, due to several factors. These include the socio economic profile of conflict affected people, conflict sensitive issues, donor requirements, limited availability of finance, weakened government administration, extent of housing and infrastructure damage, attitudes of affected people, land-related issues and shortage of labour and material. Originality/value – A number of studies have identified the challenges of post conflict reconstruction. This study particularly identifies the challenges of addressing housing needs in post conflict housing reconstruction. These findings are useful for policy makers to develop strategies in addressing housing needs in post conflict housing reconstruction.
Article
Full-text available
This study uses the basic tools of cointegration to determine whether there exists a long-term relationship between budget deficits and nominal interest rates in Germany. Maximum eigenvalue, trace, and likelihood ratio tests all affirm that there does apparently exist a long-term relationship between the budget deficit and the nominal interest rate. Accordingly, regression studies and formal causality tests have a reasonable basis for investigating whether budget deficits lead to higher interest rates in Germany.
Article
Full-text available
The relationship between budget deficits and macroeconomic variables (such as growth, interest rates, trade deficit, exchange rate, among others) represents one of the most widely debated topics among economists and policy makers in both developed and developing countries. However, the purpose of this paper is to examine the extensive literature to such a relationship, concentrating on theoretical debates, empirical studies, and econometric models in order to derive substantive conclusions, which can be beneficial in terms of macroeconomics area or in terms of constructing or developing a macroeconomic model for analysing the impact of budget deficits on macroeconomic variables. The majority of these studies regress a macroeconomic variable on the deficit variable. These studies are cross-country and utilise time series data. In general the key outcomes from the studies presented in this paper indicated that both the method of financing and the components of government expenditures could have different effects. Therefore, it is crucial to distinguish between current and capital expenditure when evaluating the impact of fiscal policy on private investment and output growth. Even though, the overall results
Article
This paper presents a thorough empirical analysis of fiscal developments in Lebanon over the past three decades. After an evaluation of major fiscal and monetary developments, the paper uses the Present Value Constraint framework to analyze whether debt and deficits are sustainable. Unit root and co-integration tests reveal that public debt in Lebanon is not sustainable. It is also shown that Lebanon could be heading towards a debt and exchange rate crisis, which could degenerate into a banking crisis similar to the one observed in Argentina, unless timely fiscal adjustment measures are introduced in the near future.
Chapter
Since the 1990s, many company executives, lawyers, and scholars have been debating the issue of corporate governance in Japan.1 However, differences in opinion on the appropriate approach to corporate governance prevented them from coming to a unified conclusion. Given the lack of consensus, some companies took the initiative and started reforming their corporate governance structures voluntarily. They focused mainly on the compilation and functions of their boards of directors.
Article
This paper analyzes the economic situation in Lebanon, which has been afflicted with civil war for the last 15 years. The central government has become completely paralyzed and unable to collect tax revenue but continues to spend in order to maintain essential services, pay wages and salaries and subsidize some basic imported goods. This has led to substantial budget deficits financed by the central bank and commercial banks. The result is a massive increase in the money supply, high inflation rates and severe depreciation of the Lebanese currency. Besides, the endemic political and armed conflict has proved to be a fertile ground for speculations and waning confidence which have compounded the twin problems of inflation and exchange rate depreciation.
Article
The paper develops theoretical frameworks to explain the phenomena of seigniorage, dollarization, and public debt; and then applies them to the Lebanese macroeconomic situation over 1982–97. More specifically, it analyzes the implications of seigniorage and dollarization to see what extent they were responsible for the inflation and exchange rate depreciations during the civil war period. It also studies the sustainability of postwar debt. The conclusions that emerge from the analysis are that budget deficits were only one of the reasons behind the war inflation and depreciations, dollarization could still impose some problems for macroeconomic stability, and tax reforms are essential for fiscal balance.
Article
The paper provides an analysis of Lebanese deficits and debts over the post-war period. li develops relations for the rate of growth of net debt-to-GDP and net debt interest payments-to-GDP ratios, and studies their determinants. Also, it proposes policy changes in four areas of the economy: fiscal policy, industrial policy, monetary policy, and commercial policy. The conclusions are that budget deficits are a symptom of a weak economy; and that economic policy should be conducted on a coherent and long-term basis, not be ad-hoc and short term.
Article
One strand of endogenous-growth models assumes constant returns to a broad concept of capital. The author extends these models to include tax-financed government services that affect production or utility. Growth and saving rates fall with an increase in utility-type expenditures; the two rates rise initially with productive government expenditures, but subsequently decline. With an income tax, the decentralized choices of growth and saving are "too low," but if the production function is Cobb-Douglas, the optimizing government still satisfies a natural condition for productive efficiency. Empirical evidence across countries supports some of the hypotheses about government and growth. Copyright 1990 by University of Chicago Press.