Can Lebanon be saved?
This is the last chance for the country's elite to turn things around
The world watched in horror Tuesday as footage poured in of a gigantic explosion in Beirut, Lebanon. It appears that more than 2,700 tons of ammonium nitrate were touched off by an accidental fire in a nearby fireworks factory. The explosion wrecked the Port of Beirut, flattened multiple nearby buildings, and caused damage all across the city. At time of writing more than 130 people were reported dead, and more than 4,000 injured. Some 300,000 are estimated to now be homeless.
The explosion is the latest in a series of disasters that have smashed the Lebanese economy and created enormous unrest. Its economy was in freefall by late 2019, brought down by a failed development model and galloping corruption — which was only made much worse by the coronavirus pandemic. Now, many nations, including France, Britain, Australia, the Netherlands, Norway, and even Israel (which is technically still at war with Lebanon) have promised humanitarian supplies and money to aid recovery from the blast. Accepting this aid, and previous offers to address the underlying economic problems, may be the last chance for the Lebanese political elite to save their skins, and their country.
The roots of the economic crisis are complicated, but as Hannes Baumann explains in a recent paper, the Lebanese elite has for decades pursued a form of unproductive rentier capitalism. Unlike many countries in the region, Lebanon has no oil, but rather than trying to build up a productive export sector so it can pay for much-needed imports, its elite has built up domestic finance and real estate with oil money from Gulf states and remittances from the Lebanese diaspora. The Lebanese pound was pegged to the dollar, and to pay for imports, the government borrowed, offering high interest rates to well-connected domestic and foreign banks that preferred lending to the state instead of actual domestic business. One result was a skyrocketing debt-to-GDP ratio, which reached 170 percent.
Essentially, a tiny minority of people at the top of Lebanese society managed to divert a good chunk of global income flows and the vast majority of what Lebanon actually does produce into their own pockets, through a combination of chicanery and outright corruption. A side consequence of this kind of rigged, unequal economy is appallingly bad public services, as elite looting leaves no space for anything else. For years Lebanon has been drowning in trash, thanks to government dithering and corrupt sanitation contracting. It suffered severe wildfires recently in part because the state had not maintained donated firefighting helicopters. The whole thing was built on economic sand.
Indeed, corruption and incompetence are probably to blame for the explosion, too. The New York Times reports that the ammonium nitrate had been sitting in the port for six years after it was impounded from a jalopy Russian freighter that its owner abandoned. Customs authorities had made multiple proposals to get rid of the stuff somehow, but judges did not respond. "We have been waiting for this to be resolved for six years, in vain," said the port's general manager. The Port of Beirut is mere yards from downtown. That judges wouldn't even respond to letters asking to get rid of over 2,700 tons of a notoriously unstable and dangerous chemical, or that somebody didn't just take unilateral action to at least get it out of the city center, beggars belief.
In any case, what amounted to a largely Ponzi scheme-based economy hit the skids over the last year or so. The state, banks, and individuals are all desperately short of dollars, while poverty, inflation, and unemployment are skyrocketing, and the pound is in freefall. The power grid barely functions. In March the government defaulted on a debt payment for the first time — and now the explosion has destroyed both the main route through which Lebanon gets its food (80 percent is imported) and a huge store of grain that was in nearby silos.
Various European nations and the International Monetary Fund had already offered assistance before the explosion, including $10.2 billion in loans and $860 million in grants back in 2018, and as noted, more has arrived since the blast. But rich nations, led by France, are asking for conditions before any kind of general economic rescue, including a restructuring of the country's abysmal electrical system, capital controls, and recognizing some financial sector losses. Lebanese elites have resisted these conditions, in part because complying would mean a lot of powerful and well-connected people would be humiliated and lose money. Regarding losses and corruption, the Lebanese leadership simply must face facts, because otherwise Lebanon is going to disintegrate, or the elites are going to be overthrown in a revolution.
That said, the IMF proposal contains some of the usual counterproductive neoliberal austerity it is infamous for. The agency argued that "Lebanon's fiscal policy needed a consolidation plan that stabilized debt and then began to reduce it," Reuters reported back in 2018. In reality, what Lebanon needs is a large debt cancellation. It would be a mistake to simply bail out the current elite without strings attached, because they would probably just steal the money. But should reasonable conditions be met, the country needs additional borrowing, not austerity, so it can invest in badly-needed infrastructure and elementary public services.
That is likely to be unpopular with European banks, which own quite a bit of Lebanese sovereign debt. But the plain fact is that Lebanon could not possibly repay what it owes even before an accident devastated its largest city. It's time for a clean slate and a fresh start. One hopes that Europe and the current crop of Lebanese leadership — or whoever might replace them — can see that is the only way through. Because if they don't, in a few months there might not be a Lebanon left to rescue.
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