Putting a Dollar Cost on the Havoc in Lebanon

For more than two years, AtifKubursi has been doing for the United Nations the reverse of what every journalist is taught to do--dehumanizing the tragedy in Lebanon with cold, hard numbers. Kubursi is a Canadian economist who was asked by the United Nations for a study on the never-ending Lebanese civil strife, in a form that economists and bankers could understand.

It was to be an economic primer of sorts that would eventually tally the cost of rebuilding the one-time Monaco of the Middle East. The idea was to alert global monetary institutions such as the World Bank and the International Monetary Fund.

Last month he handed in his as-yet unpublished study, a mind-numbing fact sheet with an equally amazing bottom line: In the unlikely event that civil war in Lebanon ended today, it would cost between $25 billion and $30 billion to rebuild the country.

The figure comes very close to the $33-billion Japanese estimate for the rebuilding of Iran and Iraq after their war. Or, in a North American context, close to what it cost Kohlberg Kravis Roberts & Co. to buy tobacco and food giant RJR Nabisco.

“This is the hidden cost of the Lebanon war,” Kubursi said in an interview. “It flattened a country that was a success story in 1974, an economy that was poised to take off.” His study tallies everything from the gross domestic product to the consumer price index and capital investment--or the lack of it--in plants and factories, comparing the present with the prewar years before 1975. As sources, he used the Central Bank of Lebanon and the local chamber of commerce (yes, both are actually functioning), professors and students at the American University in Beirut and the U.N. economic staff.

Kubursi, a professor of economics at McMaster University near Toronto, is a Lebanese Christian by birth; he came to Canada some 20 years ago. His parents rent a three-bedroom apartment in Beirut.

“In 1976,” he said, “they used to pay a rent of $7,000 a year. Today, they pay about $31. But the bizarre thing is that the landlord gets the same amount of Lebanese pounds for $31 that he did in 1974 for $7,000.”

Currency devaluation was one of the casualties of the 14-year-old strife. During the prewar period, the Lebanese pound appreciated steadily against the U.S. dollar and other currencies. Since 1975, it has been depreciating by an average of 18% a year until 1985 and much faster since then. While 2.3 pounds were equal to $1 in 1974, the dollar now fetches more than 550 pounds and a few months ago it bought 620.

While bankers and currency-futures players may draw one meaning from this fact, it has much wider implications.

“Now, given that Lebanon imports over 75% of its requirements, most of it food, the real incomes of families are all that much lower,” Kubursi explained.

Put against the backdrop of 1974, the hidden cost of Lebanon’s free-for-all becomes more striking. Lebanon was the playground of the Near East, drawing rich businessmen to rest and to launder their money through the secretive, Swiss-style banking system.

“It was called the success story of the Third World,” Kubursi said. “Its economy was poised to take off and challenge the ‘Southeast Asian Tigers’--Singapore, Hong Kong, Taiwan and South Korea. Among other things, such exports as fresh produce, electrical goods, textiles, cosmetics and even petroleum byproducts were increasing at a rate of 33% a year.

“It was the closest model to an Adam Smith economy,” he said. “The Lebanese government was restricted to minimal activities. Even most education and medical services were private . . . the only thing the government looked after was telephone, mail, justice, defense, just the very minimal.”

The effects of the civil war that began on April 13, 1975, were not felt for a few years, for several reasons. The Middle East was enjoying an oil boom. Lebanese working in the gulf were remitting about $400 million a month to their country. In addition, the Palestine Liberation Organization was based in Lebanon, with its own schools, hospitals and other infrastructure, pumping about $4 billion a year into the economy.

Today, the Adam Smith model has become virtually a state-run enterprise. “In 1974, the government’s expenditure was only 14.9% of the gross domestic product (the total goods and services produced by a country),” Kubursi said. “In 1985 this increased to 45.5%, in 1988 to 60.1%--Lebanon has become a state-run economy, a role it was ill-equipped to play.”

Unlike the private sector, which adjusted by firing workers, the government had to spend more on things such as subsidies for the imported food, defense and so on. But somebody had to finance this and it drew on the Central Bank.

“As a result,” Kubursi said, “there was a sharp acceleration of money supply growth arising from the Central Bank financing of the government deficit--a euphemism for printing money.” By the early ‘80s, the buffer had also crumbled. The oil boom was going bust. The PLO was driven out of Lebanon after the 1982 Israeli invasion, dropping its spending from $4 billion a year to about $500 million.

Among the major sources of income left were the ports, which explains the incessant fighting for their control between the militias and the government. By 1986, the government’s port revenue had shrunk to 423 million pounds from 477 million pounds but at a vastly devalued rate. The militias, meanwhile, helped themselves to about 900 million pounds annually from port income to fund their activities, including providing jobs to the growing unemployed.

“Almost all the fighting now is over revenue,” Kubursi said. “The public debt exceeds total government revenue of about $5 billion . . . so the public sector is effectively in a state of bankruptcy, it can only print money. Ether way they have more inflation.”

The consumer price index, rising at a rate of 3.6 % in 1974, rose at a rate of 20% up to to 1985 and then in 1986 and 1987 topped 700%. A basket of essential goods that cost 10 pounds in 1974 had risen to about 60 pounds by 1985 and 741 pounds by 1988.

Against this, the average family income in Lebanon in 1974 was $800 a month. Today it is less than $130, Kubursi said.

In 1974 Lebanon was in the enviable position of having virtually no deficit. Today just the interest it needs to service its debt is greater than its income. All of this translates into social costs, Kubursi notes:

-- The middle class, the only one that could play a cementing role in Lebanese society, has been virtually wiped out.

-- An “out-migration of human capital”--a brain drain--with the entrepreneurs and skilled workes fleeing, has left the semiskilled and unskilled to fend for themselves.

-- A “reduction in the quality of human capital” leaves schools closed most of the time; professors have “either fled or been kidnaped.”

-- A reduction in the number of males has caused a greater participation of unskilled and unprepared females in the labor force. Many households are led by women who work long hours without such support services as child care.

-- The ensuing tension has increased the divorce rate on one hand and increased polygamy on the other. Men, not necessarily Muslim, may have two or three common-law wives.

Is there anything that is still functioning in Lebanon?

“Banking is still very vibrant,” Kubursi said. “Deposits in Lebanese banks are about $4 billion, $3 billion of these in U.S. dollars. Lebanon still acts as a tax haven, a lot of money is laundered through it because it maintains the Swiss-style numbered accounting system.” According to Canadian police sources, a lot of the laundering is done by drug barons. Kubursi said even on days when it is impossible to get through by telephone to people in Lebanon or find out the weather in Beirut, bank telexes and fax machines keep whirring.

“And every newspaper religiously reports the Lebanese exchange rate every day,” he said.