Throughout the 2020s the world economies have slid in and out of recession in rich and poor nations. People in rich economies like the US and Austria have been able to manage by cutting back on essentials and citizens of poorer nations like Cameroon and Guatemala have been less affected due to their lower-than-average connectivity to the global economy. But middle-income nations like Lebanon and Pakistan have felt the full brunt of economic troubles in the young decade.
According to the World Bank, the world’s Middle-Income Countries (MICs) are a diverse group by size, population, and income level. They are lower-middle-income economies – with a GNI per capita between $1,036 and $4,045; and upper-middle-income economies – with a GNI per capita between $4,046 and $12,535 (2021). In the previous twenty years, Lebanon rose from a brutal civil war between religious factions to become one of the richest per capita countries in the Middle East. Yet years of mismanagement caused a rapid decline in the “Switzerland of the Arab World. ”
Lebanon Economic Production
According to the World Bank, Lebanon’s Gross Domestic Product (GDP) in 2021 was 23.13 billion US dollars, a significant decline from close to US$52 billion in 2019. This decline is due to the severe economic crisis that Lebanon has been facing since 2019, exacerbated by the COVID-19 pandemic, political instability, and the Beirut explosion in August 2020. The World Bank projects that Lebanon’s real GDP will contract by a further 6.5% in 2022.
Lebanon’s GDP per capita was approximately $3,042 in 2021, down from $6,406 in 2019. The country has experienced hyperinflation, with the currency losing over half its value in the parallel market in 2022 alone. It has been over a century since the world has seen such an economic decline. Looking at the story of Lebanon can help us determine if this is just the beginning of a massive economic decline for many middle-income nations.
Lebanon Crisis
Lebanon’s economy has been in crisis since 2019, with a severe economic contraction and a marked decline in disposable income. The country has experienced hyperinflation, with the currency losing over half its value in the parallel market in 2022 alone.
The World Bank projects that real GDP will contract by 6.5% in 2022, subject to high uncertainty and inadequate macro policy responses. The crisis has led to a decline in the middle class, with many Lebanese citizens emigrating for better prospects. The crisis has also led to a shutdown of the previously lucrative banking sector, which has further hamstrung the economy. Reports by NPR show a rise in bank robberies by everyday Lebanese people, many of whom have deposits in the very banks they rob. After the banks decided to stop depositors from accessing their funds, people took to robbery to survive.
“The bank brought the cops on us. We’re only asking for our rights,” yelled one depositor when the cops were called after they refused to leave until they could access their funds. Banks in Lebanon spent years running what observers have called a Ponzi scheme where financial aid and public funds were rerouted to politicians, financiers and other connected individuals. As most of the money fled the country in offshore bank accounts every day Lebanese people are forced to suffer the consequences. The situation has led to over 80% of Lebanese people living in poverty. For comparison, the tiny African nation of Rwanda which is still three times poorer than Lebanon has only 40% of people in poverty.
The Political Landscape
While political mismanagement and corruption have existed in Lebanon since the end of its bloody war, the country and its citizens were willfully ignoring the problems while cracks emerged in the society. It wasn’t until the Beirut explosion in 2020 that everyone started to take notice. The Beirut port explosion occurred on August 4, 2020, when a large amount of ammonium nitrate stored in a warehouse at the port detonated, causing widespread damage to the city and killing over 200 people while injuring thousands more12. The explosion was one of the largest non-nuclear explosions in history, and it caused damage to buildings as far as 10 kilometres away from the port. The cause of the explosion was found to be the result of years of negligence and mismanagement, with the ammonium nitrate being stored at the port for over six years without proper safety measures or storage regulations12. The explosion led to widespread protests and calls for accountability, with many Lebanese citizens blaming the government for the disaster1.
As of June 2023, investigations into the explosion are ongoing, with many questioning the effectiveness and transparency of the investigation process13. In October 2021, tensions rose around the investigation, with army troops being deployed after violence broke out during protests over the investigation1. In June 2022, the investigation was suspended for the second time, leading to further criticism of the government’s handling of the situation. The political economy in Lebanon remains challenging, with a need for significant reforms to address the underlying issues and restore economic stability. The country has received international aid and support, but the road to economic recovery remains long and uncertain.
What Does This Mean for Us?
Along with Lebanon, there are other mainly Asian countries that have seen near disasters similar to Lebanon. Pakistan, one of the most populous nations in the world, is currently facing several crises including economic mismanagement, political upheaval and terrorism. The country’s GDP growth is expected to be 0.6% in 2023 and 2.0% in 2024, with inflation rates forecasted at 27.5% in 2023 and 15.0% in 2024. The country has also been hit hard by the COVID-19 pandemic, which has led to a decline in exports and a drop in remittances. Pakistan while considered a democracy the nation is run primarily by the military. Unable to create productive companies or provide social services the military is indicted in corruption similar to politicians in Lebanon.
Also in South Asia, Sri Lanka has fallen from a development darling to just above a collapsed state. After a stellar two decades of growth pushed by tourism, debt and exports the overleveraged island has run out of foreign reserves thanks to yet again more corruption. Sri Lanka’s ‘port explosion’ moment came when the world found out about the secretive Chinese deal with the Hambantota Port. Hambantota has been promoted as part of China’s Belt and Road initiative with China assuming an 85% interest in the port through a long-term lease agreement with Sri Lanka. The development of the Hambantota Port has faced criticism from local communities over issues including land acquisition and environmental concerns. Many also point out that the port is built in the former president’s hometown, a little hamlet that makes little sense as a port facility.
All three of these nations have spent the better part of the 21st century overleveraging themselves in debt and fueling political corruption. Now in 2020, these acts are coming home to roost. Lebanon’s case is an extreme example of what is happening to many nations all over the world, but their problems are universal. To get through this decade middle-income nations will need smart thinking and an inclusive political process.