Public Debt: It’s Not the Size That Matters, It’s How You Use It (Part 3 of 3)
Day 31: Saturday, November 16, 2019
In the aftermath of the economic crash of 2008, austerity was promoted around the world as a remedy for alleviating states’ increasing debts. Yet austerity is a recipe for disaster. Austerity basically consists of reducing state expenditure mainly through cuts to benefits and services provided by the state (in other words, the final dismantlement of the social welfare state), capping public sector wages, and a reduction in state investment. Given that the biggest actor and investor in an economy is the state, however, adopting such measures cuts the purchasing power of a large section of the population, thus leading to a contraction in the economy and inevitably to a decrease in state revenue (i.e. taxes), which in turn makes it even harder for states to repay their debt. The way out of debt and economic downturn is to invest in the economy, not to shrink it.
Even the International Monetary Fund (IMF) acknowledged this in 2012. Paradoxically, the IMF has recommended austerity to the Lebanese state, and politicians have readily obliged, as reflected in the Lebanese government proposed budget for 2019.
As discussed in Part 2, the Lebanese state is currently spending half of its revenue, as well as borrowing money (through issuing bonds and increasing the debt) mainly to finance existing debt. In practice, this translates into larger profits for Lebanese private banks. A different approach would be to borrow money for investment purposes. This can take various forms: from direct investment in productive projects, to establishing an investment bank, to attaching investment conditions for buying Lebanese bonds — a measure mainly targeted at Lebanese banks. It is time to shatter the myth of a strong Lebanese banking sector. It is an incompetent and shortsighted sector that needs to be brought under control.Lebanon has a large and oversized banking system, with bank deposits at more than 300 percent of the GDP (with only Luxembourg and Singapore having higher percentages). Most of this capital is either sitting idle or is invested in buying governmental bonds. Lebanese banks do not lend much to their customers. In 2015, more than 40 percent of this small lending went to the real estate sector (both financing construction projects and the purchase of the constructed housing), and nearly 90 percent of all loans to the private sector were exposed either directly or indirectly to the real estate sector. Lebanese banks mainly invest in non-productive sectors that produce large and quick profits. As the real estate bubble was on the verge of bursting in 2012, the BDL began offering yearly economic stimulus packages (around $1 billion per year), with more than two thirds of the credits dedicated to the real estate sector (compare this to the situation in the aftermath of the 2006 war, when the 200 manufacturing companies damaged received nearly no aid from the government). The BDL chose to bail out the real estate sector, and by extension, the banking sector. Not only does the Lebanese state finance and bankroll Lebanese banks, it also bails them out.
It is time to shatter the myth of a strong Lebanese banking sector. It is an incompetent and shortsighted sector that needs to be brought under control. In fact, in a sense it is already under control. The main reason that Lebanon escaped nearly unscathed from the 2008 global crash was because the BDL had forbid Lebanese banks from dealing in financial derivatives. But what is needed today is a different type of control, one that dictates economic priorities and policies, taking into account who these policies are meant to serve. And that requires a radical changeWhat is needed at the very least is a Keynesian system, strong state interventionism that dictates the economic and social needs, similar to what Western Europe experienced in the postwar decades.In his latest televised intervention, the governor of the BDL tried to reassure citizens of the availability of US dollars on the Lebanese market, stating that “they can invest [these dollars] in real estates or other [sectors].” It is this economic vision, enshrined in an ongoing reproduction of failed economic policies in pursuit of quick profit out of non-productive sectors, that needs to be changed. The economists’ statement rightly asked for a radical configuration of the Lebanese economy. However, it fell short when it came to identifying the necessary measures, delineating them through soft state interventions such as building infrastructure, or through vague slogans such as the right to housing and healthcare.
What is needed at the very least is a Keynesian system, strong state interventionism that dictates the economic and social needs, similar to what Western Europe experienced in the postwar decades. What is needed is a total overhaul of the economic liberal approach, starting by cutting unnecessary intermediaries, and by identifying which sectors constitute the common good and then extracting them from market logic and dynamics. An example would be to establish a national health service, similar to that of the United Kingdom, to provide healthcare to all the population living in Lebanon. This proposal is not only morally correct, it is also economically feasible. By providing free universal healthcare, insurance companies become redundant, and the money usually amassed by them can be used to build and run this health service. If such a measure necessitates the state to borrow money and to be indebted, it is worth it. Because doing so will create a healthy and consequently a more productive society, which in turn will be able and willing to reimburse the debt and to protect this system that everyone would benefit from. We are in a situation where society is put at the service of an economic system based on trade and finance, while the sensible approach is to have an economy at the service of society.Such ideas would surely be opposed by those who benefit from the existing system, in the case of healthcare the insurance companies. But such measures are crucial to alter the existing economic structure, to divert resources to other sectors, and ultimately to a new economic system based not on quick profit but concerned with social needs, with the environment that sustains us, and yes with even the simple things in life, such as happiness. Currently, we are in a situation where society is put at the service of an economic system based on trade and finance, while the sensible approach is to have an economy at the service of society. Ultimately, it all boils down to one question: what kind of society do we want to live in?