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One more problem in Lebanon, but now may not be the time to solve it

Samin Mirfakhrai, a first-year Conflict Management student at SAIS, writes:

The Carnegie Middle East Center February 19 held a discussion of inequality in Lebanon. Panelists were:

• Lydia Assouad, El-Erian Fellow, Carnegie Middle East Center; PhD Candidate, Paris School of Economics
• Haneen Sayed, Human Development Specialist, World Bank Group
• Toufic Gaspard, Former Senior Economic Advisor to the Lebanese Minister of Finance; Advisor, IMF
• Gregg Carlstrom as moderator, Middle East Correspondent, The Economist

Key Points

 Income and wealth inequality have been a cornerstone of the Lebanese economy for decades; the existing disparity has grown more extreme since 2005. The political elite have long upheld a system rooted in clientelist institutions and policies. The political culture has exacerbated economic inequalities to benefit the ruling elite and forego creating opportunities in upward mobility for the middle and lower classes.

 The state of the political economy is dire. Without the proper reforms, financial collapse is imminent. Within the scope of fiscal policy, implementing a general and progressive income tax, increasing top marginal tax rates, and instituting an annual wealth tax are recommended to increase the national revenue.

 Economic reform must be coupled with political form. Long-term programs that increase human development, continue economic subsidies, and offer cash assistance can lower inequality rates, yet the financing needed for such measures is unavailable. Panelists agree that real change cannot be achieved without political reform.

Figures

 The richest 10 percent of the population hold approximately 70 percent of total wealth in the country.

 Extreme poverty in Lebanon has nearly doubled since 2012.

 The lower poverty line, classified as anyone who cannot provide their daily caloric needs, is at 22 percent.

 The Human Capital Index in 2018 was 0.52, meaning a child born in Lebanon can expect to be 52 percent as productive as he/she could be upon reaching the age of 18.

Summary

This event was organized around Lydia Assouad’s research on economic equality in Lebanon. Her recent paper for the Carnegie Middle East Center entitled “Lebanon’s Political Economy: From Predatory to Self-Devouring” focuses on assessing income and wealth inequality at the apex of several converging crises. Income inequality has been a ubiquitous aspect of Lebanon’s socioeconomic sphere since the state was formally established in 1943. While it isrecognized that inequality has persisted since the decades before Lebanon’s civil war erupted in 1975, data is lacking.

Inequality has grown more severe as the country faces various crises that have combined to beget a serious humanitarian crisis. In 2019, a massive protest movement responded to decades of policies that have sustained and exacerbated levels of economic inequality that are considered some of the highest in the world. Since then, a number of events, including a protracted banking crisis, coronavirus, and the Beirut port explosion, have compounded on a dire situation.

Assouad’s research first tackled the dearth of data on economic inequality in Lebanon. There is little data available on the phenomena prior to 2005, the year Syrian forces left Lebanon after nearly three decades of occupation. The data since then is incomplete. Her novel methods of collecting micro-fiscal data allowed Assouad to delve into the nature of inequality in the country and deliver a sober message that economic amelioration must be coupled with political reform. The political elite are often the country’s wealthiest individuals, who continue to take part in kleptocratic and corrupt practices lacking in political accountability and integrity.

Assouad’s recommendations emphasize the need for tax reform in order to generate government revenue. Specifically, she advocates a progressive income tax that would combine all sources of income as one, instead of considering them separately. Additionally, an exceptional wealth tax of 10% on billionaires would collect approximately 2-3% of the national income.

Panelist Gaspard criticized Assouad’s focus on tax reform, suggesting that a progressive tax would not be feasible for a developing economy like Lebanon’s because fiscal management and administrative systems are underdeveloped. He further expanded that while fiscal policy has caused the collapse of the exchange rate, it is monetary policy that brought the collapse of the banking system. Attendees also questioned the ability to tax a wider base when public trust in institutions is so low.

All panelists agreed that economic reform would need to be coupled with massive political change in order to reverse Lebanon’s collapse, but major reforms are difficult during stability, let alone during the country’s current crisis. Such changes require strong leadership, political consensus, public engagement, and tough measures—a combination not to be found in Lebanon today.