AKSOB Faculty Talk International Funds and Economic Reform after Beirut’s Blast
AKSOB faculty weigh in on the international donations following the port of Beirut explosion and their possible impact on our economy.
Following the horrific blast that shook the capital Beirut on August 4 killing at least 200 and injuring nearly 6,000, foreign donors provided humanitarian aid to meet the priority needs of those affected, such as rebuilding homes and re-equipping medical centers. However, with the absence of an established mechanism to manage the flow of incoming money, the Lebanese are left in limbo as to how and where it is being spent.
In this joint interview, associate professors of economics at the Adnan Kassar School of Business (AKSOB), Dr. Walid Marrouch and Dr. Hussein Zeaiter touch on whether international donations might uplift our economy and the steps required to achieve economic reform.
Given the current financial crisis, how can the international donations following Beirut’s explosion affect our economy? Could the flow of foreign currency help to uplift it?
WM: According to the Beirut Rapid Damage and Needs Assessment prepared by the World Bank, “$3.8 and $4.6 billion are reached in damage to physical stock, while losses including changes in economic flows as a result of the decline in the output of the economic sectors are estimated to be in the range of $2.9 and $3.5 billion.” However, international aid falls far short of these figures. The international community has so far pledged $300 million only in the aftermath of the August 4 massive Beirut explosion. It is obvious that the flow of foreign aid needs to be more substantial for it to uplift the Lebanese economy.
HZ: International donations are considered an important source of funds for a country that has a deep shortage of international reserves like Lebanon. Even though the donations represent a small percentage of the needed foreign funds, they are essential and helpful for the economy. Besides the inflow of billions of dollars, stabilizing the Lebanese economy requires a revolution and a change in the political regime.
Given the various types of donations – personal, institutional, countrywide – what mechanism should be adopted to better organize the flow of incoming money while ensuring it does not fall into the wrong hands?
WM: The best mechanism going forward is one that channels international aid directly to recipients without going through the inefficient government bureaucracy. Establishing crowdfunding platforms by private citizens and organizations can be useful as they would create a direct link with potential donors for targeted financing. Moreover, rebuilding the Beirut port can be subcontracted to a private firm directly financed by international donors.
HZ: All types of donations are needed. They become very helpful only if handed to the right people through uncorrupted channels. The Lebanese Army could, for instance, become one of the right channels.
On the monetary side, how can the fresh dollars influx affect the LBP-USD exchange rate?
WM: I prefer not to use the term “fresh dollars,” which is a bizarre Lebanese invention that obfuscates the serious trouble facing Lebanese banks in meeting their obligations toward their Lebanese clients. Having said that, inflows of dollars always have a positive effect of the LPB-USD exchange rate.
HZ: The shortage of the dollar currency has caused the Lebanese pound to depreciate by more than five times. While pumping fresh dollars into the Lebanese economy can help improve the LBP-USD exchange rate, I do not think the amount of the donations will have a significant impact on the exchange rate.
How are banks dealing with the large incoming flow of fresh dollars?
WM: Banks are trying to confiscate as much as possible of these incoming flows by imposing new fees or using hidden fees.
HZ: The decision rests with the Central Bank rather than the commercial banks who proved to be partners in this biggest robbery in history and caused the depreciation the Lebanese pound when they decided to smuggle billions of dollars outside the country lately.
What are the steps required to achieve economic reform?
WM: By now, answering this question has become tiresome to any observer of the Lebanese economy due to the nonchalance of the Lebanese policymakers. Some first steps include a hiring freeze of public servants for several years to bring about natural attrition in the size of the bloated public sector, segregating production, transmission, and distribution of electric power and privatizing some or all of the three activities.
Other steps could focus on stopping the printing of Lebanese pound banknotes – which increases the size of the LPB-USD black market and negatively affects the value of the pound – and restructuring the public debt and banking sector, while eliminating fuel subsidies and replacing them with direct transfers to poor households.
HZ: We cannot have economic reform without political reform and, moreover, a change in the political regime. This regime has allowed widespread and organized political and administrative corruption and was the major cause behind the current economic failure. Therefore, a need for a secular and democratic regime is a must to get out of the current economic failure and to avoid future crises.
Following the regime change, having a more representative electoral system, and reorganizing the priorities of the country toward having a more productive and competitive economy are a must. A change in the tax system (decrease it for production sectors) and a good and nondiscriminatory welfare system are also required as well as decreasing the size of the government, creating the Electronic government, restructuring the banking sector, creating a credit reporting system and having a judicial system that is separate from political influence.
How can we make the best out of this situation?
WM: By demanding and forcing a genuine reform agenda upon the ruling class.
HZ: This sad situation could be an opportunity for the Lebanese people to get together regardless of their religions or sects and look at this country as their home and resort for their kids, because a place with all this chaos at all levels is not suitable to live in or raise our kids.
What lessons can we draw from what others have experienced?
WM: We cannot create wealth out of nothing as some in the Lebanese government thought in 2018 when they enacted the generalized increase in public sector wages. Economic reform requires hard work and patience.
HZ: We can learn from Singapore not to be financially dependent and rely on domestic production rather than imports, and from Tunisia that a secular political regime is possible and political reform is needed despite the differences of its people. Japan can teach us that solid governmental institutions are a must for long-term stability politically and economically while Europe proved that, despite the wars faced amongst each other, it was able to prioritize the benefit of its people and found an economic and a political unity among its states.