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Political chaos undermines Lebanon's economic future.

The news out of Lebanon--both economically and politically--is grim. Much of the commentary has to do with the convoluted internal power struggle tinged with the assertion of influence by Lebanon's neighbors as well as the interests of various global elements.

Lebanon still bears the weight of its long (1975 to 1990) and economically devastating civil war. During the last years of the war, from 1988 through 1990, the Lebanese economy contracted minus 83.8 percent according to International Monetary Fund (IMF) statistics.

The graph above, which plots Lebanon's Coincident Indicator of economic activity, shows the economic impact of the Hezbollah war with Israel just a year ago during July 2006 and August 2006. The Coincident Indicator declined 71.8 points from June 2006 through August 2006, almost minus 40 percent.

What must be fully appreciated, however, is that by November 2006, the Coincident Indicator had recovered much of its value and stood at 180.8 points. And by March 2007, the Coincident Indicator was 185.5 points, according to the Bank of Lebanon's June 18, 2007 Monthly Statistical Bulletin.

The quick recovery of the Coincident Indicator has much to say, first of all, about Lebanon's resilience, and it also points to something not mentioned in the recent gloomy coverage of the obviously dangerous political situation.

A certain acknowledgement must be given to the existence of an economic infrastructure in Lebanon made up of not just survivable, though now weakened, institutions, but also of a long tradition of banking and commerce. This tradition persists in the generations old social and business connections among Lebanon's elite bankers and merchants.

This hard to quantify social infrastructure served Lebanon well after the civil war helping the country with its relatively quick recovery--albeit with the security help of the United Nations (UN) and impressive international donor support. And this social/business network is still strong enough to have withstood the 2006 devastation.

But now there is a new danger.

A June 10, 2007 report by the UN's Integrated Regional Information Networks (IRIN) revealed a curious fact about Lebanon. "No official census has been taken since 1932, for fear of upsetting the delicate power-sharing agreement between Lebanon's rival sects."

The result has been to cloud the true nature of who is leaving Lebanon to escape the political chaos and violence, and who is staying. IRIN says, "Researchers warn that economic instability and persistent security threats are driving ever more young, educated Lebanese abroad, creating a brain drain that threatens the country's economic and social future."

In other words, there is some well founded speculation that the social/business networks that have served Lebanon (and the region) during past upheavals may not be sustainable.

For the country's consumers, it is heartening that skillful Lebanese bankers have been able to control inflation. The IMF expects the rate of inflation to increase 3.5 percent in 2007, and 2.5 percent in 2008.

GDP, which did not expand at all in 2006, is estimated by the IMF to grow by 1.0 percent in 2007. The IMF also expects GDP to grow 3.5 percent in 2008.

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Publication:Market Africa Mid-East
Date:Aug 1, 2007
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