The Political Economy of Postwar Reconstruction in Lebanon

This paper studies the postwar economic and political reconstruction in Lebanon. The paper shows that the ‘reconstruction boom’ was short-lived. The economy experienced a growth trap early in the reconstruction period, and entered a cyclical crisis in 1998 which resulted from an ill-designed fiscal-monetary policy mix. The expansionary fiscal policy resulting from the high resource demands – due to economic and political reconstruction and from the needs of addressing horizontal inequality codified in the peace agreement known as the Taef Accords – led to a fiscal crisis of the state. The monetary and central bank policy was finance-biased with emphasis on financial and exchange rate stability and foreign capital inflows. Such a mix led to a real interest rate shock in the postwar period that played a role in the onset of the cyclical downturn. The finance-biased policy led to the rise of a rentier economy leading to deindustrialization during this period. The rise of a growth-impeding political economic structure resulting from the Taef Accords also played a role in intensifying the economic crisis through exerting pressures on public resources and through the engendering of a political crisis that brought to an end the era of postwar reconstruction.