This semblance of economic normalcy may be deceiving

The sharp economic deterioration started in October 2019 — and was exacerbated by the COVID pandemic and the tragic Beirut port explosion — led to a significant contraction in economic output, reaching its lowest point in 2021. While growth seems to have picked up in 2022 and is continuing in 2023, we should be careful not to take too much solace in these developments. After reaching rock bottom, economic growth was bound to happen, although it does not guarantee a sustained recovery and long-term prosperity.

The "new normal" we are in now is in fact far from normal.

There are anecdotal indications of an economic rebound, the extent of which, cannot be confirmed given the absence of timely official statistics. We do notice and hear – but only in select parts of the country – of packed hotels and restaurants, the return of heavy traffic , an increase in consumer spending, and scenes of extravagant and lavish lifestyles. However, these manifestations of normalcy may be deceiving and could sow the seeds of social tensions to come.

Widening gap

Regardless of these positive developments, policymakers should remain vigilant and not let this semblance of normalcy give rise to complacency. They must stay committed to the pursuit of an indispensable reform process that ensures sustainable and inclusive growth, as well as prosperity. Failing to do so will increase risks and uncertainty, and will not capture or build on these positive trends for a more promising future.

The slight economic growth we are currently experiencing has been neither inclusive nor equitable. Investment in new businesses and expansion of existing ones have benefited from the collapse of the exchange rate, allowing businesses to pay back their loans at a deep discount — either in lira or dollars — resulting in a sizeable wealth transfer from ordinary Lebanese citizens and depositors to businesses and the corporate sector.

Consequently, the gap between the wealthy and the needy has widened— further exacerbating income and wealth disparity. Moreover, the loss of confidence in the distressed banking system has led to reinvestment of profits into the economy rather than depositing them back in banks or hoarding them at home.

These developments clearly show a skewed income distribution that could bode ill for the future. It is true that income and wealth disparity had been a characteristic of Lebanon, but inequality in the present context is susceptible to (substantial) further increase. On current trends, Lebanon will be divided into two distinct groups: a small affluent minority with an opulent lifestyle, along an impoverished majority struggling to access basic social services in education, healthcare, and other daily necessities. This alarming pace will effectively hollow out the country’s middle class.

A crucial middle class

Traditionally, the middle class plays the main role as a source of consumer demand and the primary engine of economic growth. While the spending of the affluent is currently driving economic activity, the potential for sustainable growth will be limited if the middle class continues to shrink and the most vulnerable segments of society are unable to spend. The middle class has a higher “marginal propensity” to consume, meaning that when their income increases, they are more likely to spend than save, thereby stimulating demand, supporting businesses, and boosting economic growth. If the middle class keeps contracting, growth will stagnate, failing to uplift the most vulnerable and set the country on the right track.

The existence of a large middle class is crucial for a healthy and prosperous society. The middle class is composed mainly of professionals in education, health, construction, technology, and other service sectors. Until recently, a large proportion of public service employees belonged to this group. The middle class is known for prioritizing education and driving innovation and entrepreneurship. However, persistent inequality resulting from the hollowing out of the middle class limits the lower and middle classes from accessing education and enhancing their skills, ultimately leading to decreased productivity and growth.

In the public sector, the middle class constitutes the main taxpayers' group. Due to its large size and known income sources, a significant portion of budget revenues typically come from this group. Conversely, corporations and businesses can exploit loopholes in the system and avoid taxes when tax compliance is lacking. As the currency depreciates and inflation rises, the middle class will be the first to suffer. Their salaries cannot be adjusted quickly and sufficiently to match the decrease in purchasing power. This is what we are witnessing today in Lebanon as wage earners, especially in the public sector, are struggling to cope with the substantial increase in the cost of living.

As the middle class continues to shrink, the gap between the two Lebanons — those who have and those who have not — will inevitably widen. Public services, especially social services, which heavily rely on government revenues, will be severely affected. The deterioration of physical infrastructure will disproportionately harm those in lower income brackets compared to the upper brackets. Consequently, the middle and low-income classes, who depend on these services the most, will be disproportionately affected, while the affluent can sustain their living standards using their own resources. This further exacerbates income inequality.

Socially, a strong middle-income group acts as a buffer between the rich and the most vulnerable segments of society and enhances social cohesion. It helps reduce social tensions, ensures a more equitable distribution of resources and opportunities, and contributes to improving the living standards of those in lower income brackets through higher demand and taxes. Even the high-income group benefits from a better lifestyle when most people can sustain an acceptable standard of living, thereby reducing the threat of anger and frustration among those at the bottom of the income bracket.

Politically, a strong middle class is often associated with political stability and a harmonious society. People in the middle class generally enjoy a reasonable level of economic security and are less likely to resort to radical or extreme ideologies or engage in violent activities. In Lebanon, a strong middle class could reduce reliance on sectarian and political leaders, as their influence becomes less needed. Without a robust middle class, allegiance to sectarian leaders will persist, hindering political and economic reforms and depriving the country of the good institutions required to harness the abundant Lebanese talents and foster prosperity.

In conclusion, Lebanon’s current semblance of normalcy is deceptive, hiding potential underlying social tensions and income disparities. A thriving middle class is critical for a stable society and prosperous economy. Policymakers must prioritize equitable reforms to bridge the gap between the haves and have-nots and foster a strong middle class that can drive sustainable and inclusive growth and uplift the entire country. Failure to act could lead to further troubles ahead.

Saade Chami is Lebanon's Caretaker Deputy Prime Minister.