Will Lebanon become a "Rentier State"?

             Years of political turmoil and failed negotiations finally gave way to Lebanon holding its first round of petroleum licensing, in the fall of last year. The bids of France’s Total, Italy’s Eni and Russia’s Novatek, were approved on December 14, 2017 and extraction is expected to begin sometime in 2019 (Marcel and Obeid, 2018). This has generated quite a large amount of excitement, Cesar Khalil, Lebanon’s Energy Minister, tweeted “Congratulations to the Lebanese people… on Lebanon entering the club of oil countries” (Marcel and Obeid, 2018). On face value, this excitement seems to be appropriate as the influx of petroleum wealth may bring substantial benefits to the state. For example, Lebanon is expected to reduce it 156% debt/GDP ratio (the third highest in the world) and reduce unemployment, as each company is contractually obligated to hire 80% Lebanese staff (Domat, 2018). However, this excitement may be pre-mature; the current economic, political, and social circumstances of the state, make it a prime candidate to become what Middle East regional scholars have termed a “Rentier State”.        

             Rentier states are those which function primarily from “externally generated rents rather than the surplus production of the population” (Karl, 2007, p.2). Historically, in states such as Nigeria, Libya, Iraq, and Saudi Arabia, all of which have been classified as rentier states, we have observed such a reliance as primarily having two adverse effects. Firstly, states typically become subject to the “resource curse”, which refers to the paradox of states having an abundance of resource wealth yet, poor or negative economic growth (Karl, 2007). This is typically due to the fact that resource windfalls render other exports non-competitive (Karl, 2007). Thus, the state will promote that particular export and neglect others, resulting in the economy being dependent on that particular resource. In instances of resource depletion or global prices dropping, the state’s economy may suffer substantially. In an attempt to reduce its likely hood of becoming subject to the resource curse, it is imperative that Lebanon implement significant economic reform. Since the end of the Civil War in 1990, no government has been able to address its “sluggish economic activity” (Mehanna and Haykal, 2016). The primary concern in regard to the Lebanese economy is that the governments will continue to neglect its poor economy due to the petroleum windfalls giving the illusion of a thriving economy, when truly it is quite unstable and subject to the rigorous “boom-bust” cycle of petroleum exportation.                  

             A second adverse effect of the rentier state and arguably the most concerning for Lebanon, is that it can hinder a state’s democratic growth. Many of the early contributors to the Rentier State Theory (RTS) (Mahdavy, 1970; Beblawi and Luciani, 1987; Anderson, 1987) perceived a lack of an institutionalized system of taxation to be the causal link between a reliance on externally generated rents and low democratic development. Essentially, when a state requires the wealth generated from taxes, its creates a direct and institutionalized route for political accountability (Herb, 2005). This “taxation effect” was quite prevalent among political scientists for quite some time, however, it has not been concretely proven (Ross, 2001). Skeptics argue that this causal link is exaggerated and that the lack of democracy in resource-rich states can be traced to other factors (Herb, 2005). The more likely explanation, which already exists within the Lebanese political system to a high degree, is general political corruption.

             As only a minority of the population will have access to rents acquired from the extraction of petroleum, which is typically the political and social elite, these individuals have a tendency to use the wealth to promote their own political agendas and develop clientelist systems (Fagbadedo, 2007). The main issue here is that resources will not be distributed adequately throughout the state and the population may suffer as a result. Additionally, the high value of the resources and the abundance of wealth it generates, promotes “rent-seeking” by political and social elite (Hodler, 2005). Rent-seeking is the efforts of individual actors, both legal and illegal, to acquire access or control over opportunities to acquire the rents generated by the exploitation of the resource (Karl, 2007). While the occurrence of both these phenomena of the rentier state depend on the political and societal conditions of a state, Lebanon’s condition seems to suggest it may fall subject to both clientelism and rent-seeking. This is quite concerning as it will intensify the already prevalent issues of political corruption. According to Transparency International’s 2017 Corruption Perception Index, Lebanon is one of the most economically, politically, and socially corrupt states in the Middle East region (Transparency International, 2017).     

            In regard to clientelism and resource wealth being distributed disproportionately, it is mainly countered by strong institutions, which can provide checks and balances at all levels of government. Moreover, they will manage the resource wealth and serve as a blockade for rent-seeking political actors (Karl, 2007). However, in the case of Lebanon, these institutions are quite weak. Resources are disproportionately distributed throughout the state, as the public administration is staffed on sectoral grounds to satisfy clientelist arrangements (Transparency Internation, 2017). Moreover, political parties have no institutionalized accountability structures and they mainly exist to garner support for existing political elites on sectarian grounds. There is a long history of public mistrust in political figures and some have even expressed this concern before the extraction has even begun (Marcel and Obeid, 2018). If Lebanon is unable to redistribute petroleum wealth appropriately and political figures begin to increase the pre-existing clientelist systems, corruption may increase and become more widespread, which will hinder proper democratic practices. In regard to rent-seeking, a study conducted by Roland Hodler concluded that “oil windfalls should cause intensive fighting and rent seeking in such a fractionalized country” (Holder, 2006). Lebanon is arguably one of these most fractionalized states in the Middle East region. Both the political and social arenas are divided on communal grounds and this has been a significant factor in the multiple civil wars it had throughout the twentieth century. Thus, the influx of petroleum wealth may intensify these communal tensions at the political level and intensify the pre-existing level of corruption.    

             It would be incorrect to concretely state that Lebanon has some sort of dismal fate awaiting it once the petroleum wealth begins to pour in. Many states such as Norway and Botswana, all which could be classified as “rentier states”, have performed exceptionally well in extracting and exporting their natural resources (Hodler, 2006). However, the literature of RST suggests that a state with similar economic, political, and social conditions as Lebanon, are likely to experience varying degrees of poor economic and democratic performance. Therefore, rather then celebrating Lebanon’s admission to the club of oil producing states, policy makers must focus on how they will utilize the petroleum wealth appropriate. The state has an excellent opportunity to implement the long awaited economic reforms and reduce debt, unemployment, and poverty in the state; none of which will occur if the petroleum wealth falls into the hands of corrupt, rent seeking political actors. Needless to say, Lebanon has a lot of work to do in the near future if that state wishes to substantial benefit from the influx of petroleum wealth coming its way.       

Taha Doueidar is an undergraduate student in the School of Political Science at the University of Ottawa. He has a keen interest in the political impacts of petroleum-led development in Middle East and North African states.      

                                                                                        References

Domat, C. (2018). Lebanon signs first oil and gas exploration contracts. Global Finance. Retrieved from https://www.gfmag.com/topics/blogs/lebanon-signs-first-oil-and-gas exploration-contracts.

Fagbadebo, O. (2007). Corruption, Governance and Political Instability in Nigeria. African Journal of Political Science and International Relations, 1(2), 28-37.

Herb, M. (2005). No Representation without Taxation? Rents, Development, and Democracy. Comparative Politics, 37(3), 297.

Hodler, R. (2006). The curse of natural resources in fractionalized countries. European Economic Review, 50(6), 1367-1386.

Karl, T. (2007). Oil-Led Development: Social, Political, and Economic Consequences. CDDRL Working Papers, 1-36. 

Marcel, V., & Obeid, J. (2018). Is Lebanon Set for an Oil Bonanza?. Chatham House: The Royal Institute of International Affairs. Retrieved from https://www.chathamhouse.org/expert/comment/lebanon-set-oil-bonanza.  

Mehanna, R., & Haykal, R. (2016). A sectoral study of Lebanon’s economy: A dynamic CGE model. The Journal of Developing Areas, 50(3), 389-416.

Ross, M. (2001). Does Oil Hinder Democracy?. World Politics, 53(03), 325-361.

Transparency International. (2017). Corruption Perceptions Index 2017. www.transparency.org. Retrieved from https://www.transparency.org/news/feature/corruption_perceptions_index_2017