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French Version


Lack of strong institutions is Lebanon's weak link

By Louis G. Hobeika

Analysis

Over the past decades, Lebanon has suffered from many serious and violent events. The reasons behind them are political, cultural, demographic, economic and religious. Lebanon failed to set up strong institutions which would have prevented most of these past events from happening.

Lebanon's economic and social development would have been stronger with modern institutions. Do institutions promote development or the opposite is true? Are strong institutions a prerequisite for growth or a result of strong economic development? The recent events in Achrafieh clearly show the weakness of many of our institutions and the absence of any network or system of communications among them.

Statistics show that vast development differences across countries remain today. For example, the income per capita in Sub-Saharan Africa is on average one twentieth of U.S. income per capita. For Mali, Congo and Ethiopia it's about one thirty-fifth of U.S. income per capita. The world was not always like this. Income differences between poor and rich countries were much smaller before the 19th century when a great divergence took place. Some relatively rich countries became relatively poor (e.g. Spain and Portugal) and some countries which seemingly had great economic potential (e.g. China) fell behind.

Statistics show the divergence between rich and poor became larger and larger as of 1950. How can this growing gap be explained? There are four standard reasons:

1. Large physical capital differences between the two groups, as poor countries don't save enough.

2. Large human capital differences, as poor countries don't invest enough in education and skills.

3. Technology differences, as poor countries don't invest enough in research and development (R&D) and technology adoption and don't organize their production efficiently.

4. Poor countries have bad economic policies in comparison to the rich.

The main reasons for the great divergence between rich and poor nations are therefore lack of innovation, economies of scale, education and capital accumulation. Economist and Nobel laureate Douglas North said that these factors are not causes of growth, they are growth. In other words, we should look for the real reasons behind the lack of investment in human and physical capital, behind the failure to adopt new technologies and to organize production efficiently and the reasons behind the implementation of bad economic policies. In fact, the fundamental causes of differences in prosperity and development could be geography, culture and institutions. How does Lebanon fare in these three critical criteria?

1. In geography, Lebanon is well placed to do much better. Lebanon is located in a region rich in natural resources. The Lebanese have done very well in the Arab Gulf states and all over the world. Lebanon's geography and climate are attractive to tourists and to investments in all sectors. Under a normal political, administrative and security situation, Lebanon's geography could become a much stronger asset.

2. In culture, Lebanon has developed over the centuries a strong collection of cultural assets. Culture is "the total of inherited beliefs, values, and knowledge which constitute the shared basis of social action." Lebanon has not benefited optimally from this accumulated wealth. We have not succeeded as a society in making Lebanon an attractive international cultural center. Piece-meal efforts have been well invested but more and better coordination is needed for success.

3. On institutions, Lebanon has performed very poorly. An institution is "an established law, custom, usage, practice organization." Institutions are the rules of the game in economic, political and social interactions. North said that institutions are the humanly devised constraints that shape human interaction. Institutions evolve with the maturity and preferences of society. To grow, you need institutions that restrain the powers of the state and people in power who care about investment. Although many people in consecutive Lebanese governments cared about investments, some of the adopted policies have actually worked against growth. Among them are the regulatory and administrative issues which discourage investments.

All studies show a strong causal effect of institutions on long-run economic growth. Differences in institutions account for over three fourths of the variation in income per capita today. Institutions create the environment in which people and societies make investment decisions. Are we finally ready in Lebanon to start thinking institutionally and build an economy for the future?

Beirut 13-02-2006
Louis G. Hobeika
The Daily Star



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