Starting from 2011 onwards, it was clear to discernable observers that the policy and institutional framework for the Lebanese economy was unsustainable. It was only a matter of time before the ‘chicken came to home to roost’, and that happened unexpectedly but not surprisingly in October 2019 and is still ongoing. The purpose of this note is not simply to record the GDP growth lost during the 2019-2023 period – as this is fairly well known – but to see how much of this lost GDP growth was due to the failed policy and institutional framework, in addition to the unstable political and security situation.
To investigate the above, we will resort to the slightly-technical but fundamental notion of growth accounting. And the equation to undertake growth accounting is the following Cobb-Douglas production that relates output to factor inputs:
(1) Y = A (EL) α Kβ
where Y is GDP, L is labor, E is education, making EL education-augmented labor or human capital, K is physical capital, α is the share of labor in output, β is the share of capital in output, and A is total factor productivity (TFP). TFP is the most crucial variable here because it reflects the contribution to GDP that is independent of labor and capital, as it is about the “intangibles” that are not accounted for by the “tangibles” of factor inputs. In other words, it relates to factors that determine the overall efficiency and caliber of production: quality of technology, quality of policies and strength of institutions and property rights, and the extent of political stability and security. It is perhaps the most important single measure to capture the governance and competitiveness of an economy.
If we take the log differential of equation (1), we get:
(2) y = a + αl + αe +βk
where ‘small letters’ signify the rate of growth of each of the corresponding variables in equation (1). As such, equation (2) states that the growth of GDP, y, is the sum of the growth in TFP, a; the growth of labor, l, and the growth in education, e, weighted by the share of labor in output α; and the growth of physical capital, k, weighted by the share of capital in output β.
Using World Bank data[1], we were able to estimate the growth components in equation (2) for the 2019-2023 periods with a, or the growth in TFP, calculated as residual. The findings are tabulated below:
In %: Average 2019-2023
| y | a | αl | αe | βk |
| -7.22 | -8.55 | -0.52 | 1.07 | 0.78 |
Assuming reasonably that α is estimated at 0.3 and β at 0.7[2], the table reveals some very interesting results. As we can see, GDP growth averaged -7.22% annually during 2019-2023. But, more importantly, labor contributed -0.52% to the annual decline in GDP growth, as the size of the active labor force fell from 2.05 million to 1.77 million during the period because of emigration and layoffs, and it was the first time in the post-war period that labor’s contribution turned negative[3]. In addition, physical capital contributed +0.78% only, but that is because the investment to GDP ratio fell to a lowly average of 5.6% during the crisis. Luckily, education continued to contribute decently, as it averaged +1.07% annually, prompted by a rise in tertiary enrollment from 50% to 61%[4], and signifying that our universities still count for something despite all the havoc from the crisis. Incidentally, Lebanon is still ahead of all Arab countries in education’s contribution, with Tunisia second at 0.91% and Jordan third at 0.8%[5].
What is left, of course, as a residual is the growth in TFP at -8.55% annually. Its contribution is negatively large because of reasons we must be familiar with: policy paralysis if not defectiveness, institutional decay and bad governance, and ‘mindless and needless’ political and armed conflicts. And these have been dreadfully costly: they account for 118% of the -7.22% decline in GDP growth; in other words, the negative TFP growth overwhelmed the negative GDP growth, and only the increase in human and physical capital gave GDP growth some breathing space or produced positive but slight compensatory contributions to growth.
What is interesting is that the ‘writing has been on the wall’ at least since 2011 (the year that is widely considered to be the embryonic time period for the crisis): TFP growth was positive at 0.6% between 1992 and 2010, but turned negative to -1.8% during 2011-2014 and to more than -3% during 2015-2018[6]. However, no corrective action was taken, except for BDL’s financial engineering measures that, in retrospect, seem to have added ‘insult to injury’. With that in mind, it is then not surprising at all that, after five years of the crisis, still no action has been taken, barring BDL’s measure to stabilize the exchange rate. But that is by no means enough, as the economy needs a comprehensive reform program not simply to restore GDP growth but to turn TFP growth to positive and higher levels. All this makes you wonder whether the country has forfeited its future, and perhaps for good!
[1] World Bank Development Indicators data files.
[2] See: Bolbol, A. “A Note on Growth Accounting for Post-War Lebanon: Preliminary Analysis and Policy Implications”, Blomivest Bank Blog, Spotlights, May 2017.
[3] The growth in capital, k, is estimated as the product of the investment to GDP ratio and the inverse of the capital output ratio, the latter assumed at 0.2; see, Bolbol (2017)
[4] It is estimated that a 1% increase in tertiary enrollment increases GDP by 0.37%; see, Hanif, N. and Arshed, N. “Relationship between School Education and Economic Growth,” International Journal of Economics and Financial Issues, 2016, 6(1).
[5] Malik , M. “An Analysis of Economic Growth, Productivity and Convergence of Middle East and North African Countries”, Journal of Development and Economic Policies, 2022, 24 (1).
[6] See Bolbol (2017).