Restarting The Real Economy Growth, Jobs and Social Justice Presented at the Seminar on “Saving Lebanon’s Economy” Wed. 26/02/2020 at AUB

1. Restarting The Real Economy
Growth, Jobs and Social Justice
Jad Chaaban
Presented at the Seminar on “Saving Lebanon’s Economy”
Wed. 26/02/2020 at AUB

2. Outline
• How did we come to this? Origins of the economic crisis
• What we are told: The official narrative
• What was really happening (or not happening)
• Fiscal policy fiasco
• Macroeconomic planning fiasco
• Massive inequality and resources grab
• Macroeconomic assumptions we cannot ignore anymore
• The way forward

3. How did we come to this? Origins of the economic crisis
6.4
11.3
3.8 3.9
-0.8
1.1
3.9
3.4
1.7
7.5
2.7
1.5
9.3 9.1
10.2
8.0
0.9
2.5
3.8
2.5
0.2
1.5
0.9
0.2
-0.2
-0.5
-2
0
2
4
6
8
10
12
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
e.2019
e.2020
Real GDP Growth (%) • Recession and decline in economic output in 2019
(and probably in 2020) for first time since 1999
• Recent origins: Impact of the Syria crisis (exports,
investments, tourism..)
• Immediate origin: Drop in private consumption
(uncertainty, unemployment, salary cuts); drop in
business output due to liquidity shortages,
• Structural origins: Economic activity biased
towards services and rentier sectors; low value
added and low job creation
• Real economy victim of regular business cycles,
due to exposure to external flows fluctuations
(deposits, FDI, remittances, aid) and linked to local
and regional conflicts
• But there is more to these origins…

4. What we are told: The official narrative
• The official narrative, backed by international financial institutions, concentrates on 4
main factors:
• Confessionalism and problems of collective decision making
• Corruption (which everyone wants to fight but no one is responsible for)
• Regional problems and their impacts on the economy (it’s the refugees fault)
• Inherited structural problems (Lebanon is a service economy, emigration is
historic, etc.)

5. What was really happening (or not happening)
• When the post-war reconstruction boom came to an end, the ruling class (coalition
of warlords and new confessional and business leaders) turned to local resources
grab and engineered a system to attract foreign deposits mainly from Lebanese
expats
• Neo-liberal economic doctrines (smaller government, private sector lead growth,
little regulation, open capital flows…) served a good fit to their resource-grab
schemes
• Engineered “Laissez-faire” doctrine and incompetence for a seemingly functioning
public decision making
• Media and public discourse on “external influence” and “bad luck and fate”, while
crony capitalists and oligarchs close to the ruling class amassed fortunes even in
economic downturns

6. Fiscal policy fiasco
-8%
1% 1%
-12%
-26% -27%
-13%
12%
-56% -53%
-39%
34%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
2015 2016 2017 2018
Difference between budgeted and actual (%)
Revenues Expenditures Deficit
2015 2016 2017 2018
Revenue (budgeted) 15,713 14,832 17,380 19,670
Revenue (actual) 14,435 14,959 17,524 17,405
Expenditure (budgeted) 24,571 26,683 26,718 24,013
Expenditure (actual) 18,108 19,517 23,186 26,821
Deficit (budgeted) (8,300) (9,739) (9,303) (7,048)
Deficit (actual) (3,673) (4,558) (5,662) (9,416)
Main fiscal policy indicators (billion LBP
Data source: Ministry of Finance
• 12 years without an officially approved budget
(2005-2017)
• Many entities and public funds not included in
central budget (like CDR)
• Deficiencies in treasury management and
reliance on advance payments and
settlements
• More than 50 separate accounts for the State
at the BDL!
• Major planning and forecasting deficiencies,
with 10%-30% differences
• 2018 fiscal year: 34% increase in actual vs.
planned fiscal deficit!

7. Macroeconomic planning fiasco
2018 2019 2020
Growth rate of real GDP (%) 2.13 2.91 3.1
Growth rate of nominal GDP (%) 3.43 3.91 4.6
Inflation rates (%) 1.69 1.72 2.02
Gross Domestic Product (LBP billions) 86087 89456 93567
Gross Domestic Product (USD millions) 57106 59341 62068
Total expenditures (% of GDP) 27.4 27.01 26.3
Budget revenues (% of GDP) 17.79 17.86 17.91
Fiscal Balance (% of GDP) -8.36 -7.9 -7.14
2018 2019 2020
Growth rate of real GDP (%) 0.2 -0.2 -0.5
Growth rate of nominal GDP (%) 3.6 -0.6 -5
Inflation rates (%) 6.1 2.9 10
Gross Domestic Product (LBP billions) 82885 82404 78284
Gross Domestic Product (USD millions) 55000 54681 39142
Total expenditures (% of GDP) 32.4 30.2 30.7
Budget revenues (% of GDP) 21 18.4 17.9
Fiscal Balance (% of GDP) -11.4 -11.8 -12.8
• Economic data is scarce and erroneous: GDP calculation is based on a 2008 base year with annual
adjustments following price data and extrapolations
• Price data is collected nationally with many interruptions and lack of resources
• 30%-50% of the economy is informal, so the national measure of economic value is not adapted
• No capacity at the core entities (MoF, MoET, PMO, CDR…) to conduct macroeconomic simulations and
planning based on reasonably comprehensive applied macroeconomic models
• Major discrepancies in forecasts and estimated outcomes
• Dependence on international institutions for technical support and recommendations
Assumptions used in MoF 2018 Budget planning Estimates from MoF and various international agencies

8. Massive inequality and resources grab
• Concentration of wealth, age of the 1%:
• They control 45% of total wealth (estimated at 90B$)
• 50% of deposits in the banks
• 25% of total incomes in the country
• Concentration and politicization of key sectors ownership:
• 40% of bank assets directly controlled by politicians
• 500 companies control major sectors (mainly through exclusive dealerships and
political grab)
• Beneficiaries of subsidized loans, government support, donations, etc.

9. Macroeconomic assumptions we cannot ignore anymore
• Dealing with macroeconomic planning as a technocratic exercise with no specific
analysis of agency and political economy is useless, and yes complicit
• Core assumptions that need to be incorporated in any revival plan:
• Informality and non-state actors
• Inequalities and concentration of power
• Labor market deficiencies
• Poverty and vulnerability to price shocks
• Regional disparities in wellbeing
• Need to move away from the neo-liberal cover-up model to a real revival model that
gets the country out of this acute crisis

10. • Lack of decent stable jobs is a major characteristic of the labor market
• Economy only created 3000-5000 jobs per year, while the need was for 25,000+ /year
• Most jobs in armed forces, NGOs, and in private self employed professions
• Unemployment remained stable thanks to massive emigration
• Most work unprotected, informal, low pay, no pension or medical insurance, average salary of 800-
1000$/month.
• Recent crisis estimates at 250,000 who lost their jobs, many others with pay cuts.
2004 2016
Not of working age 27% 20%
Inactive 40% 40%
Unemployed 4% 4%
Employed 30% 36%
Public 2% 2%
Armed forces 2% 3%
NGOs & intl 0.3% 1.2%
Private employee 7% 7%
Private self employed 21% 22%
Emigrants 9% 14%
Main social indicators as % of total Lebanese population
Data sources: CAS, AUB-UNDP Rapid Poverty Assessment 2016, CARIM 2015, UNDP 2016

11. 41
22
28
26
15
20
2
20
13
12
6
8
1
10
7
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Poorest Richest Overall
Distribution of household expenditures
(Annual, based on CAS data)
Other
Communication
Clothing and Footwear
Education
Health
Transportation
Food and Drinks
Housing and Utilities
• Impact of cost of living on wellbeing of families is a core inhibitor for economic wellbeing
• Housing, electricity, food, transportation and health costs are core components
• All these sectors have oligopolistic pricing, lack of regulation, and inefficient government intervention
• Devaluation a major threat to purchasing power of households on core commodities that are mostly
imported.

12. 25%
66%
17%
36%
30%
40%
42%
0%
10%
20%
30%
40%
50%
60%
70%
Beirut Tripoli Zahle Baalbeck Saida Tyre Nabatieh
All Lebanon
29%
Poverty headcount according to a national poverty line of 8.5$/person/day.
Source: AUB-UNDP Rapid Poverty Assessment 2016
POVERTY RATES ACROSS MAJOR CITIES - 2016
• Regional dimension of economic policy planning cannot be ignored anymore
• Socio-economic indicators vary greatly between the Center (Beirut and Mount Lebanon) and the
Peripheries (major cities outside Beirut + rural areas)
• Including sub-regional variations between centers and deprived suburbs

13. The way forward
• People-centered economic plan (as opposed to a plan that preserves the current
distribution of economic power)
• There has to be winners and losers, as opposed to the rhetoric of “sacrifices for all”
• Main pillars (highlights):
• Alleviate constraints on private consumption to trigger aggregate demand
• Provide housing, utilities, health and education public support and subsidies
• Control price inflation in major commodities
• Decentralized economic planning with regional objectives
• Massive public works program in the Government and key promising goods and
services sectors, through “growth-bonds” agreements with donors
• Reallocate liabilities into equity in new public banks, public investment funds,
cooperatives and other institutions that can stimulate local economic
development.

14. Thank you
jc11@aub.edu.lb