Any Economic Plan for Lebanon is Doomed to Fail Until the Country Reduces Hezbollah’s Influence

The management consultancy, McKinsey, has delivered a five-year economic plan for Lebanon to the government. The blueprint is expected to form the basis of the platform of Saad Hariri’s upcoming cabinet. Though details are still under wraps, word has it that the plan recommends cutting Lebanon’s public-sector expenditures to 15 percent from the current 40 percent of GDP. McKinsey advises that Lebanon invest funds in productive sectors, such as technological startups, services, tourism and non-labor-intensive industries. Apart from the fact that the solution sounds inspired by the obsessions of wet-nosed millennials – when what the country needs are radical solutions that acknowledge the difficulty of Lebanon’s particular circumstance – the plan is anyway doomed to fail.

At the government’s request, McKinsey left out the effects of politics on the economy. Instead of taking into account the consequences of Hezbollah’s continued military activity around the region, it restricted its recommendations to “administrative steps” required to help Lebanon out of one of the worst financial and economic downturns it had faced since independence in 1943.

By ignoring the adverse effects of Hezbollah on the Lebanese economy, McKinsey did Lebanon a disservice. A survey published by the World Bank found that a majority of firms believe that the “largest obstacle to business operations in Lebanon” is “political instability.” Over two-thirds of businesspeople say this is their biggest concern. That McKinsey should think that a five-year plan, based on recalibrating governmental expenditures only, can save Lebanon, begs belief.

Separation between politics and economics has always been a core Hezbollah demand. In post-civil war Lebanon, and under Syrian tutelage, the late Prime Minister Rafik Hariri was tasked with “reconstructing” Lebanon. For its part, Hezbollah was designated as the national “resistance.” Hariri’s opponents have accused him of running up piles of debt, estimated at $7 billion, for his reconstruction plan.

Hariri’s only choice was to borrow money to fix the war-shattered country and its infrastructure. But because Hezbollah insisted on fighting Israel instead of negotiating its withdrawal from southern Lebanon, Hariri’s successive cabinets were forced to borrow money at much higher interest rates, due to the ongoing war. Hariri was also forced to reconstruct some facilities, such as power plants, several times, since Israel often punished Hezbollah by targeting the Lebanese infrastructure.

Hariri’s bid that a prosperous Lebanon could have absorbed Hezbollah failed miserably. After his assassination, Hezbollah’s chief, Hassan Nasrallah, offered Hariri’s son and successor, Saad, the possibility of reviving the old formula. According to Nasrallah, Hariri and the Lebanese state would focus on the economy, and leave security, intelligence, defense and foreign affairs to the pro-Iran militia.

After refusing Nasrallah’s offer for over a decade, Saad Hariri eventually caved, and together with Hezbollah’s protege, President Michel Aoun, settled for the old arrangement. When the Lebanese government asked McKinsey to produce an economic plan, in January, it specifically required that the consultancy group focus on the economy only. At a cost of $1.3 million, McKinsey apparently obliged.

To be fair, Lebanon has room for economic improvement, despite Hezbollah’s dominance. The state-owned electric company, for example, has been a drag on the treasury, and has cost close to $20 billion over the past 25 years. The World Bank once offered to restructure the company on the way to privatizing it. To sweeten the pot, the Bank offered the government a prize of $1 billion if it accepted the plan.

But Electricite du Liban is one of the state’s sacred cows. It employs a large number of constituents of Speaker Nabil Berri. Meanwhile, a network of private power-generator owners, the alternative source of electricity for most households, lobbied Aoun against the World Bank’s plan, which eventually failed.

The McKinsey blueprint for the economy will provoke a push back from the public sector at large, such as teachers and staff at the Lebanese University and at state-owned schools. The National Social Security Fund (NSSF), a state-owned medical insurance and retirement programs organization, will also cause some political turbulence if the coming Hariri cabinet tries to privatize it, since a large number of NSSF members are taxi drivers, whose membership costs are waived. These drivers are also strong supporters of the powerful Berri.

As for investing in revenue-generating sectors, the economic plan requires resources that Lebanon does not have, and cannot even borrow, with the debt to GDP ratio hovering at 140 percent. The cost of living in Lebanon is the second highest among Arab countries and the 32nd highest in the world, according to the website Numbeo. For comparison, the cost of living in Egypt is the fifth-lowest in the world, which raises this question: Why would any investor in the Middle East choose Lebanon, an expensive country with political instability and poor infrastructure, over Egypt, a nation with better infrastructure and competitively skilled workers?

McKinsey’s five-year plan might make Aoun and Hariri feel good that they are on top of their game. It might ease the pressure of tired donors, who just handed Lebanon $11 billion in aid and soft loans. But to pretend that there is a way out of Lebanon’s economic troubles and that the country can prosper while the Hezbollah militia makes it the headquarters of its regional military adventures, is an overstretch.

Hariri the father tried and failed. Druze leader Walid Jumblatt once summed it up best by saying that Lebanon has to choose what it wants to be: Hanoi or Hong Kong. The first fought America and lived in poverty thereafter, the second became an island of stability for investors in an otherwise shaky region, and thus flourished ever after. It is a choice that Beirut has to make, and no amount of plans from McKinsey or others can help Lebanon if the country does not help itself.

Hussain Abdul-Hussain is the Washington bureau chief of Kuwaiti daily Al-Rai and a former visiting fellow at Chatham House in London.