To get well or worse

Lebanon’s political economy today is in a situation where risks are existential and inaction opens the gates to disaster, but potential payoffs are highly skewed to the upside—if successful. This suggests that the newly eager-for-action behaviors in the political class—which appear in many ways counterintuitive to previous decision-making patterns here—convey at least a modicum of hope.

Besides rapid action determination by the current political cohort, what is accentuating the potential for optimism further into the realm of rational hope (as opposed to groundless speculations), is the growing count of emergency rescue proposals (which according to Executive’s information is set to increase further) drafted by local and expatriate stakeholders (see story page 12). This emergence provides both hope—based on the surge of desire and mental commitments for resolving the Lebanese mess—and an incentive for rational analysis by anyone from the concerned government ministers to members of civil society and media.

Although there are cognitive and experiential caveats against attempting predictive analyses based on economic theorems and laboratory research, and although the scope of this story only permits looking at a few relatively uncomplicated propositions, the exercise of putting three specific rescue recipes to an analysis, hopefully, will add to the rationality of rescue hopes.

One interesting and specific proposal is the abolition of banking secrecy, proposed in a paper by small Lebanese consulting firm Triangle. The idea of an incremental fade-out of banking secrecy, which does not feature as prominently in many other plans, is touted by the consultants as “most pragmatic solution” for the problem of insufficient tax collection in Lebanon.

“Lebanon should pursue a staged dismantling of the banking secrecy framework,” Triangle suggests. “First, confidentiality protections should be lifted for all public officials and civil servants, along with all parties who are awarded state contracts. Next, the reforms should allow financial investigators to access the accounts of all Lebanese citizens, facilitating stronger compliance with progressive taxes. Then, nonresident account holders should also lose their rights to banking secrecy.”

In Triangle’s reasoning, the idea of abolishing banking secrecy is garnished with several unproven statements and questionable assumptions. These include the stipulation that until recently banking secrecy helped Lebanese banks achieve “easy wins” through provision of tax haven services and “offering progressively higher interest rates,” or that phasing out of banking secrecy protection means that “Lebanese banks must start working harder for their money.”

Furthermore, the consultancy’s admonition that Lebanon’s “banking secrecy hinders the imposition of a fairer, more progressive tax system”—which is reasonable when recalling European governments’ recent successes in collection of previously evaded tax dues from professionals with high incomes taxable at (historically) more or less progressive rates—does not automatically mean that Triangle’s implied assertions of greater tax justice and collection rates after removal of banking secrecy have self-fulfillment qualities.

Contemplating Lebanon’s quality of state services, provision of social safety and welfare, and paucity in redistributive transfer payments, it seems somewhat unlikely that it will mainly be a question of banking secrecy if the willingness of the Lebanese tax population to contribute their share to the fiscal authorities should remain below par. More transparent, fairer, and, especially for society, more rewarding taxation—in the sense of the state providing provable and appreciable benefits to the resident population—might be deserving much greater investments of reformist energy by fairness advocates and policy-makers alike.

This notwithstanding, it is undeniable that the archaic shielding from transparency for those who can pay enough for this self-interested and unethical form of privacy protection has no moral justification. More practically, it has, in recent years, been disappearing as a comparative advantage for banks, as even bankers in Switzerland (at least in their publicly voiced views on the issue) have been eager to assure. In this context of a world that is moving ahead, the eventual benefits of reassessing banking secrecy as a relic and obstacle to a fairer society (and improved tax collection) in Lebanon appear to outweigh arguments for the dated practice.

Another proposal that combines very tangible dimensions with direct financial implications for Lebanon appears in the articles by Chairman of Bank BEMO Riad Obegi and is picked up in Lebanon Opportunities’ LeadersClub economic revival plan: the usage of gold hoarded in Banque du Liban (BDL), Lebanon’s central bank. In Lebanon Opportunities’ reasoning, the gold reserves’ legal status of being by law untouchable and protected from squandering since the beginning of the Lebanese conflict in the last century “has rendered such an asset devoid of dividends or other financial benefits.” Moreover, according to the same source, the gold reserves’ “cushion of trust” effect has been diminishing “when compared with the enormous national debt (18 percent of net public debt).”

At first sight, the issue of gold, like the issue of banking secrecy, seems to be one of historical dimension in conjunction with a limited function in the Lebanese financial system and real economy. As such, it seems reasonable and deserving further detailed assessment if economic rescue proposals suggest, as does the Lebanon Opportunities paper, that, “In a revival plan, the gold should be put to work in favor of the State.” Technical aspects of employing the gold hoard, such as renting the gold to an AAA rated country or using it as collateral, as suggested by Obegi, raise no immediate red flags about economic cross effects and appears to be worth examining further as non-squandersome means toward amelioration of Lebanon’s domestic lending rates and sovereign credit rating.

Among noted economists, there are some deep conceptual and practical disagreements that have implications or outright repercussions on finance and banking, two of the central current concerns for the Lebanese. There are views that such academic divergences within and between the tribes of economists around the world impact economies through anything from the narratives on origins, theories of money, and contemporary monetary policies (quantitative easing [QE] is not distributionally neutral) to occasional (but crucial) errors of judgement by mainstream economics and ignored merits of backwater economists.

One consequential, and to this day unfinished discussion, begins with the very identity and theory of money. As British economist Robert Skidelsky writes in his 2018 book “Money and Government,” anyone researching the roots of the Great Recession of 2007-09, will come to realize “that at the heart of today’s mainstream macroeconomics is the belief that unimpeded competitive markets deliver welfare, and that the financial institutions, which create money, and through which money is allocated, have no independent effect on the real equilibrium of the economy.” In Skidelsky’s analysis of tools used by central banks since the crisis, QE increased the concentration of private wealth by enriching the already wealthy, with the author saying about the UK: “After nine years of emergency money, the financial system remains as dangerously stretched as it was before the crisis, and the economy as dangerously dependent on debt.”

Whether this described orthodoxy holds up to checks of its universality or ethical validity, or if it could provide the economic answers that will help Lebanese society in its immensely financial affliction and banking dilemmas, must be totally different questions (not for the mainstream orthodoxy).

Historically, it was not the mainstream of American economics represented by the Chicago and East Coast temples of scientific inquiry that may have provided the purest founts of understanding of the role of money and finance in context of economic theory. For American economist James Galbraith, it was not from either of these two schools (dubbed freshwater and saltwater) but from what he calls backwater economists—meaning “unpersons of the profession”—such as Hyman Minsky that one should turn to for when searching to understand the nature and causes of financial collapse.

Treating finance as the only way to understand the economy, Minsky’s model on the interconnection between financial stability and instability recognizes that the finance system has rules and boundaries but no predictable outcomes and does not require relying on explanations such as assumption of external shocks. Adding to the financial system’s distinction of inherent potential for instability is that trust in the finance and banking related wisdoms espoused by leading American economists and policy-makers by Galbraith’s narrative in his 2015 book “The End of Normal” is not being helped by such policy modifications as those that in the 1980s endorsed market discipline over supervision for running the savings and loans system, and those that unleashed the blending of commercial and investment banks in the 1990s or, ultimate blame, a public encouragement by Alain Greenspan for “mass adoption of speculative (adjustable-rate, paymentoptional) mortgages,” as Galbraith notes.

It is hard to shake the suspicion that adherence to current mainstream economic dogmas might neither provide a foolproof diagnosis nor remedy for problems that are rooted in the financial economy.

A third example for a vital proposal in an economic plan, a proposal that has few or no obvious collateral implications for further analysis, is the first item on the 10-point to-do list in the paper promoted by Carnegie Middle East.

Suggesting to “establish an empowered economic emergency steering committee,” the idea covers two core points. The first one refers to the need on the part of the government “to design, negotiate and implement the [economic rescue] program.” Having witnessed the politically induced deficiencies of past cabinet planning—highlighted most recently in the drafts of the 2019 and 2020 budgets with their incongruent numbers, kneejerk fiscal measures, and strategically mystifying reforms, it makes a great deal of sense to suggest a clearly defined and empowered body with economic competence.

The second aspect of the proposal addresses the need to organize (and perhaps even institutionalize) interaction with society with regard to economic rescue. Here the suggestion is to “create participatory mechanisms to discuss with civil society the policy package, and to empower citizens to monitor its implementation.”

When compared with other pillars and top-line agenda items in rescue plans, the idea of an empowered committee—presumably with a good number of experts—and a participatory mechanism has some potential downsides such as the cost and time factors involved, but the potential upsides of a well-structured emergency committee and communication interface with society can easily outweigh such drawbacks. Moreover, the idea looks to be implementable without creation of major unwanted side effects or detrimental cross influences on other action needed for Lebanon’s economic salvation.

The two issues—unintended negative side effects on society, and detrimental or contradictory cross influences between seemingly unrelated policy measures aiming to facilitate the country’s economic rescue—can often not be excluded when analyzing other proposed points in economic plans. This extends to both main pillars such as package proposals on fiscal, monetary, banking, financial, and privatization measures, and to less prominent line items in detailed proposed economic concepts, for example ideas relating to rural reform and agriculture.

A large analytical caveat on complex packages—and complexity is the middle name in many fiscal and monetary concepts that have been put forth—is to be noted in the fact that measures such as raising or redesigning taxation, or cutting subsidies on electricity combine economic and social impacts, and therefore have a wide range of potential upside/downside effects that cannot be modeled perfectly, and thus involve blind spots.

A further barrier against attempting to analyze the points in the economic plans cogently—in addition to their sheer number—originates from the limited or inexistent usefulness of comparisons with other economic emergencies and the rescue measures used therein on the crisis response side and with suggested “case studies” of other, very different economies on the growth recipe side. The large number of variables in the economic fabric of countries that previously saw themselves forced into debt restricting and requests of programs by the IMF or other institutions stands against drawing conclusions for Lebanon by means of induction.

Doubts appear to be furthermore in order when it comes to proposals on the immediate emergency implementation of CEDRE and the— by now even more dated—Capital Investment Plan for infrastructure projects or the Lebanon Economic Vision prepared by international consultancy McKinsey. Obstacles to ana

lyzing these growth plans under current realities arguably start with the different frameworks and economic mindsets of Lebanon under distress

Blunders resulting from economic narratives—that are by default tainted by human biases and discolored by injections of ideologies—are numerous, and first-world economic experience, especially the past 100 years (see box page 22) implies that ruling lords of the financial system often inadvertently cause these systems to become dysfunctional by their very own systemic interventions that only tried to improve performance—like tuning an engine until a casket blows.

Reviewing the economic rescue plans for Lebanon from an analytical angle, indications are dichotomous in the sense that a number of factors— such as the need to avoid overconfidence in comparisons with trajectories of restructuring scenarios in other countries, the mainstream assumptions of the non-scientific economic sciences, and the fundamental cognitive impossibility of exhaustively analyzing any system involving innumerable and cross-active variables before it is implemented in reality on substantial scale—imply limitations of any such analyses and cautiousness against relying on them blindly.

Other factors—the need to chart the most promising course for an economic rescue process, the amazing investments on local and foreign experts into the design of numerous plans for this purpose, and the importance of thoughtfully structured and sequenced action for having a chance at success in solving the huge mess that the economy is in right now—speak to the contrary for enacting of analyses in the current time of intense preparation for undertaking the project of Lebanon’s economic rescue.

In the balance of considerations, the prudent path could reside in a focus on adaptability and nimbleness in iterating decisions—flexibility that coincidentally is associated with entrepreneurial thinking and noted by observers of local business virtues as a strength of private economic initiatives in Lebanon.

One might note, on the side, that the openness to embrace the genius of the “and,” the readiness to adjust anything except for core values, and the willingness to try, and keep—with the implication to be ready to err and iterate—happen to be three of the virtues attributed to highly visionary companies in 1994-vintage business bestseller “Build to Last” by Jim Collins and Jerry Porras.

On this note, the best approach to the urgently needed further analysis and development of economic rescue plans for Lebanon may not lie in sorting the proposals into orthodox neoliberal or more deficit-spending oriented ideas, of which there are just a few on the table, but (with a distant nod to development economist Paul Collier) in eschewing all economic ideology and attempting detailed practical reasoning.