Lebanon Lost 50% of Its Economy in 2 Years

This is Lebanon, a small country on the Mediterranean coast home to 5.5 million people,

according to the best available data.

An exact figure on something as simple as how many people are living in the country

is hard to come by, and estimates from different organisations vary by as much as 20%.

That is because Lebanon is possibly the most desperate economy in the world today.

It has defaulted on huge amounts of foreign debt, hyperinflation has gripped the nation,

making its currency worthless, its people are dealing with chronic food insecurity,

and those that can leave already have.

We have spoken a lot about the challenges of population decline in this channel before.

For reference, in places like China, the 0.4% projected annual drop in their population they

are estimated to have over the coming decades is radically reshaping their economic future.

Lebanon has lost 20% of its population in the past 5 years,

as people simply don't see a future for themselves in the country.

If that wasn't a clear enough indication of how bad things are in Lebanon,

the headline output figures should clear things up.

In the last 2 years, Lebanon has lost more than 50% of its GDP,

falling from $52 billion in 2019 to $23 billion in 2021.

This is the most severe economic contraction in history,

only technically beaten out by Macau, which is not a country but rather a special economic zone,

that was effectively forced to shut down due to covid policies and other political

pressures from the Chinese communist party.

Ukraine, which was not a wealthy country to begin with, has lost less economic output in

the same time period while being invaded by a nuclear superpower.

The clear question for economists around the world is, why?

A year and a half ago, the world was shocked by an explosion that

levelled a large part of Lebanon's capital city, Beirut.

The blast killed 218, injured over 7,000 and left 300,000 homeless,

as the area around the port had to be rebuilt after $15 billion worth of property damage was done,

which was roughly half of the country's annual output at the time.

It would be easy to blame this disaster for all of Lebanon's economic problems,

but the country was already falling apart well before the explosion,

and it would likely be in the same place today, even if it never happened.

If all of that wasn't already tragic enough, up until around 2017,

the country was doing very well for itself.

It was growing rapidly, developing new industries and improving living standards for its people.

Understanding what went wrong will be vital to economists trying to rebuild Lebanon,

but also to the dozens of other developing economies around the world that are starting

to face very similar challenges today.

So, what was driving economic growth in Lebanon in the past two decades?

Why did it fall apart so suddenly?

And finally, how did certain economic systems fail so badly that the country

lost more than half of its total outputs?

Once we have done all of that, we can put Lebanon on the Economics Explained National Leaderboard.

Growing a national economy is a very difficult thing.

Even the most privileged countries in the world that have enjoyed decades of peace and prosperity,

a well-educated labor force, and have strong capital investments into tools and infrastructure,

struggle to grow by more than a few percent each year.

Growing a national economy like Lebanon's in 1990 at the end of a 15-year long civil war

is even more difficult.

But the country did it.

One of the first steps the government took was regaining the ability to collect taxes,

because it turns out during a war that divides a nation,

the people on the other side of the conflict don't want to pay up.

The economy was also helped by basic exports and remittances coming from Lebanese nationals

that had moved abroad to find more lucrative jobs in Europe, North America, and Australia,

but were still sending money back home to family members that remained in Lebanon.

Additionally, foreign aid gave the country enough to resume basic operations and start

a rebuilding effort that by all accounts did pretty well.

Between 1990, after the end of the war, and the year 2000,

the economy of Lebanon more than quadrupled its real economic output.

It wasn't starting from a very high benchmark,

but that's still an impressive result in such a short period of time.

By the mid-2000s, the geopolitical problems of the country were well enough forgotten about

that tourists and international investors started to make Lebanon a destination.

Because of the unstable environment they had existed in for such a long time,

Lebanese banks were also very conservative and seen as stable places for people to keep their

money, not just within Lebanon, but also from all across the Middle East,

in accounts denoted in both Lebanese pounds and US dollars.

When assessing an economy's overall well-being, experts will often look at its debt-to-GDP ratio.

This is the amount of government debt a country has as a percent of its total output.

Debt-to-GDP ratios can also include household and business debt,

but figures like these will normally specifically mention those inclusions.

Nine times out of ten, when an economist is talking about debt-to-GDP ratios,

they are only using government debt up here in the numerator.

So if a country has a GDP of a trillion US dollars and a total government debt of a trillion dollars,

its debt-to-GDP ratio would be 100%. Pretty simple.

Generally speaking, any debt level close to or above 100% of GDP is considered high.

By the mid-2000s, Lebanon had a debt-to-GDP ratio of 183%,

one of the highest rates in the world at the time.

Now normally when we're talking about lots of government debt, it's a bad thing,

but there is another side to this.

Governments have to get their debt from somewhere, and the people giving Lebanon

loans at this time were investors who believed in the future growth prospects of the country.

Lebanon's economy was growing, which means that this high debt-to-GDP ratio

was not caused by the country taking on lots of debt and then suddenly losing all of its output,

it was caused by foreign investors lending them more and more money

to fund the country's increasingly ambitious growth plans.

Most countries that want to build out local industries to develop their economy

need to take on some level of debt to make the necessary investments into infrastructure.

One of Lebanon's biggest industries became its banking,

but banks are very capital-intensive businesses,

and the country had to get its money from somewhere to start off with.

Even something like globally competitive manufacturing that takes advantage of a

country's low-cost workers requires some level of investment.

Tooling and machinery for factories is expensive, and it's only produced in a handful of countries.

Those countries are unlikely to accept Lebanese pounds for payment because

nobody outside of Lebanon uses it.

So before even a basic factory gets built,

the economy needs to source some globally recognised currency that it can use to

purchase basic equipment to get its industry started.

That currency is usually US dollars, and the only way for a country with

no existing export industries to get their hands on this money is to borrow it.

Some countries with lots of easily extractable natural resources are lucky

and can get their foreign currency from the sale of oil,

but most countries, including Lebanon, need to borrow.

Economists normally hate comparing national economies to household budgets or small businesses,

but for the sake of simplicity, developing countries taking on debt to fund their economic

development is like a new business getting a loan to buy all the equipment they need to get started.

If the country makes good investments into projects that will increase its ability to

produce value, then it will be able to pay back these loans and rapidly build out its economy.

Long term, the goal is to become an economy like Japan, South Korea, or Taiwan,

that have all in the last century taken on a lot of debt to build out industries that

eventually made them advanced economies, and now when they borrow money they do it

at a much lower interest rate because they are seen as safer and more secure.

Now that's the plan, but during the time that the economy is developing its industries and

balancing a large debt burden, it is incredibly vulnerable to economic shocks,

both from within the country and from global events.

Surprisingly for an economy that was becoming so dependent on banking,

Lebanon actually rode out the GFC in 2008 surprisingly well.

Again, it had the very conservative practices of its banks to thank for that.

However, internal problems as early as the mid-2000s were bubbling away under the surface,

and the economy had to answer for them in the crisis of 2019.

By the end of the 2010s, Lebanon's economy was almost what you would consider a success story.

It still wasn't rich by global standards, but it was comfortably ahead of most other

countries in the region, apart from the oil-rich states and Israel.

Since the end of the Lebanese civil war, the country had experienced almost totally

uninterrupted economic growth, even as the rest of the world was dealing with major economic crises.

During this age of relative prosperity, issues like government corruption,

rigid social policies, and geopolitical tensions between its much more powerful neighbour

went mostly unnoticed.

People are willing to put up with a lot when their quality of life is improving as rapidly

as it was in Lebanon at the time, but the country was still in a vulnerable position.

It was growing rapidly, but it was taking on a lot of debt to do it.

While everything was going well, that wasn't a problem,

but Lebanon couldn't keep dodging economic shocks forever, and in 2018, its luck ran out.

An ongoing civil war in Syria, supported through various complex geopolitical channels in Lebanon

and Iran, spilled over into a full-blown humanitarian crisis when Lebanon was

inundated with over 1.5 million refugees within a year.

This was such an intense population shift in a relatively small country,

that it can actually be seen on their population graph.

What's also obvious by looking at this graph is how quickly people are leaving the country,

and that's because of what happened next.

The fallout of the Syrian crisis also put certain organisations in Lebanon under US sanctions,

and while those sanctions weren't actually that broad or restrictive by themselves,

they did start the economic dominoes falling.

The US sanctions kicked off fears about the viability of the Lebanese banking industry.

By this point, it had been operating without fault for over two and a half decades,

and it was becoming an ever more popular destination for people across the Middle East

to have accounts.

Since 1990, the Lebanese pound has been pegged to the US dollar at a rate of $1 to 1,507.5 pounds.

Why that specific number? I have no idea.

But the fixed rate let people take advantage of Lebanon's banking

stability and privacy laws to effectively keep US dollars.

They would have a bank account full of Lebanese pounds,

but they knew if they ever needed US dollars,

the Lebanese government would honour their pegged exchange rate.

The sanctions tightened this practice, and foreign account holders in particular

tried to move their money out of Lebanese pounds and back into US dollars.

The government didn't have enough money on hand to honour all of these exchanges,

and so the currency broke its peg, collapsing in value in foreign exchange markets.

Other account holders started to fear that the government would come after their savings by

taking money directly from their accounts, so they also withdrew their money and either

took it out of the country entirely, or invested it into real assets.

In a tragic irony, one of the most popular places to park money outside of the banking system

was in apartment complexes on the waterfront in Beirut.

These liquidity problems made it more likely that the government would default on its loans,

so getting more loans became harder and more expensive.

Desperate to raise revenues, the government tried to introduce taxes on fuel,

tobacco, and voice-over internet calls.

People were not happy about this, and it kicked off small protests that eventually

turned into massive riots, condemning not just the taxes, but the issues of corruption,

economic mismanagement, and the strict sectarian social policies.

Again, a lot of people were happy to ignore these issues while the economy was still growing

rapidly, but a lot of these problems snowballed on top of one another and started unravelling

all of the progress the country had made in the previous two decades.

The people were also not happy about the banking privacy laws that the country's biggest industry

had been built around, because they only really benefited the rich, but everybody was paying

the price for it in the fallout of the US sanctions.

Shortly following these protests, COVID lockdowns started to take effect on industries like tourism,

one of the country's last remaining sources of foreign income, which was shut down overnight.

Then there was the explosion.

This was the point in time that the state of the Lebanese economy became common knowledge

around the world, but in reality, it was in serious trouble even before this disaster.

Today, the currency is spiralling towards worthlessness.

The banking industry that was once promising to make it the Singapore of the Middle East

has evaporated, and unemployment is approaching 50%.

Lebanon is now a failed state.

It has defaulted on its debts, and even international organisations like the IMF

and the World Bank, which operate to help countries out in situations like this,

are struggling to offer assistance, because the country's leadership is failing to meet

basic demands for economic management, and is still getting involved in regional disputes.

Okay, now it's time to put Lebanon on the Economics Explained National Leaderboard,

which is a country that has a very good chance to be the lowest on the list.

Starting as always with size, Lebanon has a GDP of 23.1 billion dollars,

which makes it one of the smaller economies in the world, roughly equal in output to Albania

and Malta. If we were measuring its score back in 2018, it would've got a nice healthy 5 out of 10.

But for now, after its recent economic collapse, it only gets a 3 out of 10.

That output is spread out over a population of just 5.6 million people,

a population that is shrinking fast, but for now it means that it gets a GDP per capita of 4,136

dollars. That is unlikely to improve as the population continues to decline.

Some of this is just refugees returning to their home countries, but a lot of it is Lebanese

citizens from the small upper class leaving the country before the situation gets any worse,

taking their capital and skills with them. At less than half of the global average,

Lebanon gets a 2 out of 10.

Stability and confidence is obviously very bad, and it arguably has been even during its three

decades of relative prosperity. Even though nothing went disastrously wrong in the economy

during that time, the country was balancing a large debt burden and an unstable currency

peak that could've collapsed spectacularly, like it is right now. Even its banking industry,

that was prized for its conservative financial risk-taking, was just taking another type of risk

by serving clients from across the world that wanted a way to keep American dollars off the

books in a country that no one would think to come looking for it. Lebanon gets a 1 out of 10.

Growth was strong up until recently, but it was fuelled by very aggressive and risky economic

policies which meant that as soon as things got a bit off course, the whole system unravelled

very quickly. Lebanon's GDP is now 40% smaller than it was a decade ago, so it can only get a

0 out of 10. Finally, industry, which has also taken a huge hit in recent years. The country

is now struggling to afford basic imports, so local industries aren't getting what they need

to operate, banking has all but fallen apart, and tourism has not recovered from covid because

economic conditions have made travel unsafe. Lebanon gets a 2 out of 10. Altogether, that

gives Lebanon an average score of 1.6 out of 10, which puts it into last place on the Economics