Grand Theft Lebanon
14 April 2020
A closer look at the breakdown of Arab nationalities appearing in the dataset, in post-war years, provides interesting insights into Lebanon’s ability to attract foreign direct investment. This graph shows the number of Saudi, Iraqi, and Egyptian shareholders in new Lebanese companies. Specifically, FDI appears closely linked to disruptions caused by instability and conflict elsewhere. The influx of Saudi shareholders, for instance, correlates with Rafic and Saad Hariri’s tenures as prime ministers, but seems to have been boosted primarily by 9/11 and the subsequent repatriation of Saudi funds invested in the United States and Europe to the Arab region, including Lebanon. The rapid uptick of Iraqi shareholders closely follows the levels of violence in Iraq from the US invasion up to the oil crash. Egyptian involvement, for its part, peaked with the Arab spring.
One of the most counterintuitive findings in the dataset relates to the effects of the Syrian civil war on Lebanon’s economy, which popular and governmental narratives depict as exclusively negative. The interconnected nature of the Syrian and Lebanese economies appears clearly here, with Syrian nationals representing by far the most active foreign businessmen throughout Lebanon’s modern history. Their role surpasses that of other Arabs at virtually every point in time—notably in the mid-1960s, when a wave a nationalizations in the region spurred the relocation of capital to Beirut, making Lebanon the so-called “Switzerland of the Middle East.” The graph suggests, however, a much larger relocation of economic actors in 2013, when civil strife in Syria reached a tipping point, promising to last for years and become ever more destructive.
At the heart of the Lebanese economy lies an unusually dense banking sector, which emerged during the golden age and was central to shaping the country’s image as a hub for financial and other services. Between 1944 and 1970, no less than 52 banking institutions were founded—representing half of all such establishments created to this day. The graph above proves a straightforward but critical point: The financial sector’s development is a matter of state policy, with new regulations determining to a large extent its level of activity. What is important here is the counterpoint made evident by the following graph.
Not all sectors are driven by government policy. The oil and gas sector remained unregulated until 2010, long after interest in the matter surfaced. Indeed the sector, globally, is one of the most lucrative and, if well-managed, productive in terms of indirect job-creation. In the 2000s, approximately 200 new companies mentioning oil in their corporate description emerged in the absence of any clear legislation. Here the creation of companies—involving, in some cases, top politicians—largely predates the sector’s formalization, which remains largely incomplete to this day. This delay reflects the expense and difficulty of institutionalizing such a complex industry, which requires a functioning state apparatus. Institutional processes thus lagged behind the prospects of quick gains.
Real estate, by contrast, is a speculative sector that lends itself perfectly to the rentier nature of the Lebanese economy. This graph shows not a rise in real estate companies per se, but the fluctuating interest in buying, selling, and leasing properties on the part of companies of all kinds: Those featuring here incorporated in their description some reference to real estate transactions. This became a standard practice as the rent economy kicked in after the civil war, developing spectacularly despite the 2005 assassination of Hariri and the 2006 war with Israel, and climaxing between 2008 and 2014. Rising, artificially high prices made for a self-sustaining dynamic, diverting potential investments from more productive sectors of the economy.
Lebanon’s economic crisis has been long in the making, as the wartime boom and the rentier economy both hid and fostered the country’s structural weaknesses.Yet this final graph captures the causes and timing of its actual bankruptcy. It highlights the sudden explosion of companies dedicated to speculating on the country’s sovereign debt, by purchasing Treasury bonds with inflated, unsustainable interest rates. These companies are almost exclusively offshore, hardly pay taxes, and thus embody the evermore extractive and unproductive nature of Lebanon’s economy.
This curve mirrors almost precisely the evolution of Lebanon’s international credit ratings. In 2008, the outlook shifts from stable to positive. In 2009, Lebanon is granted a B2 grade, and improves to B1 the following year. By 2013, the outlook is back to negative, and 2014 sees the first downgrading in a series that ultimately leads the country to “junk” status—warning investors that their bonds are not likely to get reimbursed, and thus deterring further investments.
The brief rebound in 2017 reflects the intense financial engineering orchestrated by the central bank and commonly known as “the swaps,” designed to return dollar liquidity to the central bank. From that point on, Lebanon redistributed increasingly high returns on financial products derived from sovereign debt in an attempt to sustain a speculative bubble that was already giving all the signs of bursting. Publishing such trends at the time would have made that clear to all.
The original 2008 takeoff, which is partly related to the global economic crisis, is best understood through the lens of local politics. This is the year when Lebanon’s factions signed onto the Doha Agreement, tamping down a phase of extreme and even violent political polarization. Lebanon’s leading parties thereafter settled into an unprecedented power-sharing formula, involving all the factions that grew out of the civil war. For the first time in decades, the country was neither subjected to foreign dictates nor paralyzed by internal strife. The latter, however debilitating, also imposed certain constraints on otherwise unregulated crony capitalism.
The national unity government formed in 2008 lifted these checks, inaugurating an economic free-for-all. While the government failed to articulate any economic policy to speak of, and stalled on all promised reforms, it condoned a gold rush, with the country’s current and future assets as the prize.