While economic research proved that remittances ease poverty, most studies failed to establish a causal relationship between them and economic growth.
Migrant remittances have been Lebanon’s main source of capital inflows for most of the post-war period, and their abundance is considered, by some, an indicator of the country’s economic well-being. These transfers are regularly made by Lebanese nationals working abroad to their families residing in Lebanon.
Last year, remittances equaled 12.72 percent of the country’s GDP, with this figure being the 18th highest in the world, showing Lebanon’s reliance on such inflows.
Most of the country’s economists welcome these inflows, claiming they contribute to economic growth, as additional income tends to increase overall consumption and investment. They are also believed to serve as social safety nets, compensating for the lack of essential public goods and alleviating poverty. While economic research proved that remittances ease poverty, most studies have failed to establish any causal relationship between such inflows and economic growth.
What kind of growth?
Migrant cash transfers, in the case of Lebanon, are compensatory in nature and are thus mostly spent on household consumption. With the lack of basic public goods, they generally cover education, healthcare, housing and utilities expenses, with the rest eventually capitalizing local banks. The result is a services sector boom, putting upward pressure on overall wages, and thus increasing costs for the tradable sectors of the economy.
A 2018 cross country study including Lebanon revealed that migrant remittances caused a labor market shift from high wage, high productivity, tradable industries to low wage, low productivity, non-tradable industries. In other words, remittances have been proven to shift resources from agriculture and manufacturing into the services sector.
Indeed, this was the case of Lebanon in the post-war period. The services sector’s share of GDP increased from 66.8 percent in 1992 to 81.2 percent in 2017, while the tradable sectors’ share dropped from 33.22 percent to 18.76 percent in the same period according to data from UNCTAD.
Although there are no case studies exploring the effects of remittances on growth in the Lebanese economy, claiming they had a positive effect would be far-fetched. Sluggish growth has been a feature of the post-war Lebanese economy, with GDP per capita growing at an average rate of 0.3 percent per year from 1998 until 2018 according to the World Bank’s data. Such figures point out that instead of supposedly promoting growth, remittances formed an economy symptomatic of a Dutch disease, with low equilibrium growth, large trade deficits and underperforming tradable sectors.
Remittances and the costs of the government’s economic policies
The prevalence of remittances inflows shaped the state’s economic policies in the post-war period. The government sought to appropriate part of these revenues through taxation. Taxing remittances directly was not an option since it would deter their inflow. Indirect taxation was thus seen as a means of appropriating a portion of incoming remittances. As these inflows tend to raise consumption, the government first opted for taxing imports, in a country that is extremely import reliant. A value added tax was subsequently adopted in 2002, after cuts in tariffs. According to data released by the Ministry of Finance, indirect taxes made up 42 percent of all government revenues between 1998 and 2017.
Non-tax revenues were also a means of appropriating a portion of incoming migrant cash transfers. Exorbitant fees on basic utilities like telecom, and various other small fees like passport, stamps, general security and traffic violation fees make up most if not all non-tax revenues. When combined with indirect tax revenues, they make up 68.4 percent of total government revenues from 1998 until 2007. This figure shows the importance of indirect taxation for Lebanon’s government finances, and thus its reliance on migrant remittances to fund itself.
Excessive indirect taxation placed a disproportionate burden on the low and middle-income branches of society. The UNDP’s most recent estimates of income inequality in 2017 showed that the richest 2 percent owned as much wealth as the poorest 60 percent of society, which ranks Lebanon 124th of 141 countries in terms of wealth inequality.
On the other hand, the peg of the Lebanese pound to the U.S. dollar was adopted to encourage the inflow of remittances. The easy convertibility of the two currencies and the stability of the exchange rate soothed expectations and prevented uncertainty in times of political crisis.
The cost of such a policy was high interest rates, increasing borrowing costs for domestic industries. Depositing money in banks thus became lucrative, crowding out investment in favor of the receipt of easy passive income.
Feeding on Arab oil
The importance of incoming remittances for government finances poses essential questions for the sustainability of the Lebanese economic model: What are the determinants of these inflows? And what if they stop flowing in?
Migrant cash transfers to Lebanon mainly originate from the Arab Gulf countries, which finance their economies using petrodollars from oil sales. This makes the price of oil one of the most important determinants of remittances inflows, which puts the Lebanese government finances at risk in the event of a downfall in oil prices. In fact, the drop in oil prices since 2008 can primarily explain a stagnation in remittance inflows since 2009.
The recent domestic financial difficulties can thus largely be attributed to the stagnation of remittance inflows after the global financial crisis in 2008. Such difficulties clearly point to bad government policies, with a state relying on essentially unstable forms of income and exposing its economy to exogenous shocks.
Rethinking government policies
The government’s policy objective should be to move remittances out of their compensatory role, and channel them into industries generating high amounts of jobs, with higher value-added products. Doing so would require the state to provide the public good services, be it education or healthcare, and the lacking utilities like electricity.
Families receiving these cash transfers would thus move their consumption out of the once compensatory services they were paying for and spend more of their income on physical capital produced by tradable industries. As income becomes more available, people can also choose to invest, thus creating jobs and spurring economic growth.
Constraints on local businesses should also be addressed, starting with the burden of indirect taxation, which raises the costs of domestically produced products, and exposes them to international competition. The government should tax income in a progressive manner instead, thus lowering costs on industries and eventually reducing inequalities.
These policies should accompany a broader set of reforms aiming to avert an economic crisis without putting the burden on working families and small productive businesses. The question remains as to whether the Lebanese political class is willing and able to undertake such policies.
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