How Lebanon’s Political Structure Diminshes Job Creation


The Lebanese are enraged. Hundreds of thousands of protestors, over a million in some estimates, have taken to the streets of cities across Lebanon demanding the fall of the sectarian power structure that’s been in place since the end of the country’s devastating civil war. The reason? Well, it started off as a spontaneous reaction to the government’s announce plan to impose a $6 dollar tax on WhatsApp usage, but extended to become a movement through which citizens are expressing their frustration at the rising prices, taxes, and, of course, soaring unemployment – now standing at 25% in recent estimates.

The government, however, isn’t the only party on which the burden of job creations falls upon. We’ve heard once and again, the private sector is the real engine of job creation and economic growth. In theory, the private sector should – in any capitalistic country such as Lebanon – be the biggest contributor to job creation. Unlike many countries in the region where ruling elites exert direct influence over whole economic sectors, crowding out the private sector and lowering incentives for foreign investment, the elite’s interference in economy has somewhat been subtler in Lebanon. The country’s unique sectarian, but somewhat democratic, system of governance has enabled powerful political entities to have certain economic sectors under their wings, but how does that impact the economy?

In a new research paper by AUC School of Business researcher and professor Jamal Haidar, joined by Ishac Diwan of the Parisian École Normale Supèrueire, the political dynamic in Lebanon its effects on the business environment is put under the magnifying lens. More specifically, the paper, titled Political Connections Reduce Job Creation, examines how firms that have connection to powerful political elites have contributed to the soaring levels of unemployment in the Levantine country.

“In the post-war reconstruction phase of the 1990s, the necessity to consolidate security led to the constitution of a large political coalition which brought political stability at the cost of an extensive system of spoils,” read the paper, citing a 2012 research by prominent social scientist Wouter Leenders. “Three quarters of university students by the Lebanese Center for Policy Studies (LCPS) thought that political connections were important to find jobs, and 20 % said they had used them,” further elaborated the paper.

Since these political connections don’t demonstrate a direct control of the business environment on part of the elite, how do they negatively impact job creation?

Well, politically connected firms, defined by the research paper as  those who have at least one of their stakeholders is a politician or their associates, hire on the basis of political allegiance, not competence. They tend to be big firms, as opposed to their competition, and they also tend to “over-hire among the constituents of their political patron in exchange for economic privileges.”. This practice ends up lowering labor productivity (output per labour) than their competing smaller firms. It also lowers the competitiveness of the sector in which they operate, and makes it less attractive to investors who are not politically connected to enter such sectors.

“Politically connected sectors grow less, create less jobs, have lower output per labor, and pay higher wages than non-politically connected sectors,” explained the paper. “All sectors grew less during the 2009 election year, for example, but politically connected sectors grew less than non-connected ones.” The research paper carries on to estimate that for every politically connected firm in a given sector, 6.8% less jobs are created each year on average.

On the other hand, those with no political connections, regardless of their skills or competence, find it to be more of a struggle to land jobs in these sectors, breeding frustration and anger among the youth who are more prone to unemployment. For better or worse, they’ve now taken to the streets to demand the demise of the political elite holding a grip over the country’s affairs. If their demands are realized, could that bring an end to these unfair practices in the job market?

“At a deeper level, a more competitive economic structure would not support the current oligarchic political equilibrium, and would possibly lead to political chaos, unless a different political system was in place for the country.”

In other words, change for the better is possible for the Lebanese economy, however that entails an end to the current regime and system. It is crucial, however, for the Lebanese protestors and political opposition to propose a vision for a new political system to replace the current one, one which could save the country politically and economically. Or, as seen in the aftermath of the Arab spring, the country could fall into chaos or power would simply roll back in the labs of the current political elite – meaning the politicization of the Lebanese economy will continue unchecked.

 

    Knowledge Partners

    CONTACT US

    School of Business
    American University in Cairo
    AUC Avenue – P.O. Box 74
    New Cairo 11835
    Egypt
    Email: BusinessForward@aucegypt.edu

    Copyrights © 2017 The American University in Cairo School of Business • All Rights Reserved

    Copyrights © 2017 The American University in Cairo School of Business • All Rights Reserved