A sectoral study of Lebanon’s economy: A dynamic CGE model

Abstract

This article assesses the impacts of economic reforms on sectoral variables in Lebanon. The lack of political commitment to long term economic strategies has delayed the implementation of sound policies to tackle chronic problems such as recession, public debt, corruption, trade deficits and to face external shocks suck as military attacks and the inflow of refugees. The International Community has sustainably offered its help to Lebanese authorities in order to trigger reforms by providing them with grants, loans and technical assistance conditioned by the implementation of structural, financial and budgetary reforms. Unfortunately, such reforms have not been seriously launched which is putting in danger the growth potential of the economy. The ambitious reform agenda used as a benchmark in this article was set out during the “International Conference for Support to Lebanon” held in Paris on January 2007, known as the Paris III Conference. The article uses a Dynamic Computable General Equilibrium Model with debt constraints (Mehanna and Haykal, 2014; Lucke et al., 2007) to simulate the impacts of Paris III reforms on the economic variables (Value-Added, Investment, Consumption, Government Expenditures, Exports and Imports) of eight major sectors of the Lebanese economy (Agriculture, Energy, Manufacturing, Construction, Transportation and Communication, Services, Trade, and Administration). CGE modeling needs extensive and reliable macroeconomic data which is not easily accessible in Lebanon. Relevant figures have been collected from the National Accounts series and additional surveys compiled by the Ministry of Economy of Lebanon. Using this data, a Social Accounting Matrix (SAM) was built for the year 2003 and considered as the base year for the CGE model. The model was calibrated assuming steady state and solved using MPSGE/GAMS. The Lebanese economy is modeled as a dynamic small open economy (Devarajan and Go, 1998) and recreates an Arrow-Debreu general economic equilibrium model. The Paris III projected reforms were simulated according to four different scenarios “Growth-Enhancing Reforms”, “Social Reforms”, “Structural Reforms” and a “Privatization Program”, and compared to a “Status Quo” scenario, in which no reform is undertaken. Simulation results span over a period of 40 years and indicate that, from an overall output perspective, Lebanon needs to urgently conduct reforms. The “Structural Reforms” scenario incurs the highest positive long term effects on all sectors especially in the Trade and Manufacturing sectors, followed by the “Growth-Enhancing Reforms” scenario. However, if no reforms are undertaken, results show that the impact would be detrimental to the Lebanese economy. These reforms should be considered as complementary and conducted by a centralized agency in order to avoid overlapping and squandering of resources.