Adversity in Context
On August 4, 2020, a massive explosion rocked the Port of Beirut (PoB), destroying much of the port and severely damaging dense residential and commercial areas within five kilometers of the site of the explosion. The disaster left more than 200 people dead, thousands injured, and many homeless. Shocking pictures and videos from the Lebanese capital were shared widely across the planet, showing a city in ruins and the suffering of those affected.
Beyond the human tragedy, the economic impact of the explosion is notable at the national level despite the geographic concentration of the destruction. This reflects: (i) the demographic clustering of the Lebanese population in Beirut and its suburbs; (ii) the prominence of economic activity in the affected areas, especially in regard to commerce, real estate and tourism; and (iii) the fact that the PoB is the main point of entry/exit for the small open economy, channeling 68 percent (2011-2018 average) of the country’s total external trade. Even prior to the explosion, Lebanon was already reeling from multiple crises since 2011. These included: (i) spillovers from the conflict in Syria, which led Lebanon to host the largest refugee per capita population in the world; (ii) a financial and economic crisis that has induced systemic macro- financial failures, including, impairment of the banking sector and risk of deposits; an exchange rate collapse; a default on sovereign debt; triple digit inflation rates; and a severe economic contraction; and (iii) impacts from the COVID-19 pandemic; Lebanon, not unlike other countries, responded with lockdowns that further exacerbated economic and financial stresses.
The above add to long-term structural vulnerabilities that include low-grade infrastructure—a dysfunctional electricity sector, water supply shortages, inadequate solid waste and wastewater management—public financial mismanagement, large macroeconomic imbalances, and deteriorating social indicators. These vulnerabilities are taking place against the backdrop of high levels of corruption, political turmoil, and weak governance. Internationally, Lebanon was sub-optimally integrated into the global economy and global value chains, and the sizeable and persistent migration of highly educated human resources to foreign labor markets (brain drain) further contributed to poor productivity.
As a result, the economy has struggled to reduce poverty and to generate inclusive growth, with job creation remaining weak and poorly distributed even during periods of high GDP growth. The long-run employment-growth elasticity is estimated to be 0.2, much lower than an estimated MENA average of 0.5. Meanwhile, the generated employment has been concentrated in low productivity activities as those involving higher productivity have not grown proportionally. Since foreign labor dominated low skilled (less productive) activities, high GDP growth rates have not translated into significant job creation for the Lebanese.
The eruption of the conflict in Syria exposed Lebanon’s economic vulnerabilities. Since 2011, real GDP growth averaged 1.2 percent annually (pre-financial crisis), down from an average of 4-5 percent prior. Under a fixed exchange rate regime, lower capital inflows, combined with larger internal and external imbalances, led to heightened macro-financial risks that were mitigated at increasingly high costs (i.e. the Central Bank’s financial engineering). By 2019, systemic failures rippled through the macro-financial system, inducing one of the strongest economic contractions the country has ever experienced, accompanied by a surge in poverty rates. According to pre-explosion estimates, growth in 2020 featured negative double digits, while general and extreme poverty rates were estimated at 45 and 22 percent respectively. In fact, as early as Spring 2016, the Lebanon Economic Monitor (LEM) declared Lebanon’s socio-economic model bankrupt. Lebanon’s Systematic Country Diagnostic (SCD) identified elite capture – hidden behind the veil of confessionalism and confessional governance – as one of two overarching constraints for the country’s economic development. Under the guise of preserving confessional balances, a post-war elite emerged to command the main economic resources, both private and public, generating large rents and dividing the spoils of uncompetitive markets and a dysfunctional and hollowed out state.
In the face of heightened risks, a series of analytical reports and policy notes prepared by the World Bank (WB) identified specific structural and sectoral reforms that could help mitigate risks and boost growth. In December 2016, following two and a half years of Presidential vacancy and institutional paralysis, the WB published a White Paper on needed reforms for the then-new Government. The White Paper presented a menu of priority reforms over two-time horizons—the first 100 days of the new Government, where 10 priority reforms were listed, in addition to medium term reforms. This list was later developed and attuned in the WB Strategic Assessment of the Capital Investment Plan (CIP) for Lebanon that was presented at the CEDRE conference in Paris in April 2018. The Assessment listed specific structural and sectoral reforms that can enable the CIP, which the Government adopted at the conference. In return, donors pledged about US$11 billion in concessional financing for Phase 1 of the CIP. The Government has subsequently failed to implement its commitments.
The port explosion occurred as Lebanon was struggling with the convergence of the above- described difficulties—some being endogenous to the system and a clear manifestation of systemic failures in governance and economic policy, but others resulting from being a frontier country in one of the world’s most volatile geopolitical fault lines.