FDR & Japan: Economic Lessons for Lebanon

“The only thing we have to fear is fear itself,” warned Franklin Delano Roosevelt in his 1933 inaugural address to the American people. Surrounded by economic crisis and in the depths of the Great Depression, he acknowledged one of the simple truths about economic development in countries: it's all about confidence. Today we may feel as though things are relatively well off. While the global economy is still slowing down and there is resentment about the loss of economic mobility among the masses, things aren’t in major crisis -- in the West, that is. 

We need only turn our eyes eastward to see the crisis of confidence playing out in Lebanon. Lebanon’s newest crisis has began just weeks ago in mid October. The crisis originated from public resentment of government incompetence, as well as new taxes on fuel, tobacco, and WhatsApp calls -- bringing to a head the problems that have gridlocked the country politically and set it on course for an economic disaster. These problems are twofold: both social and economic.

The first lies in the corrupt nature of Lebanon’s job market, and the loss of social mobility that it has caused. Within Lebanon, different sects have entrenched their positions and enriched themselves at the expense of the masses by delaying essential reforms that would begin to stabilise the economy. The ruling class’ desire to impose tax reforms targeted on essential middle class goods signals the abandonment felt by the people, and exposes the divide between system insiders and outsiders. This unfortunate situation has now led to an economic crisis.

Lebanon's debt to GDP ratio sits at just over 150%, making it the third largest debtor nation in the world. With great debt comes great responsibility to ensure debtors receive payments. One need only look to the world's largest debtor nation, Japan, to see the stark differences in governance that imperils Lebanon. Japan sits at an awesome 236% debt to GDP ratio, the largest in the world, eclipsing even that of the United States (almost twice over). And yet the Yen, Japan’s currency, is a safe haven asset that people flee to in times of economic crisis. 

Why is this? It’s because Japan has indicated itself to be a mature economy and stable society. People who invest in Japanese debt instruments have the confidence that they will be repaid when they are promised. This is why Japan has an A1 ‘high grade credit’ rating from Moody’s. Compare this with Lebanon, which has a current credit rating of Caa1, a credit tranche sitting on the lowest rung of the ‘junk’ rated pile: that of substantial risk and default. If Lebanon is to emerge from the crisis without economic destruction, they must draw lessons both from Japan and from Roosevelt.

The gridlock in Lebanon’s government and the resignation of its Prime Minister have only exacerbated these problems. Outsiders smell blood in the water, and the loss of confidence is creating a vicious cycle. We see a government in paralisis, soaring debt levels, and mass protest -- and we wonder why the Lebanese choose not to invest in their country and send their children away to work in France. 

Lebanon now sits on a knife's edge. The central bank has guaranteed deposits to shore up investor confidence, but without a clear and focused reformer government the country has only one bullet left in the chamber to stave off disaster. The country can utilize its $30+ Bn foreign exchange reserves to continue to prop up the Lebanese pound, but it may already be too late. Black market exchanges are pricing in a 30% cut to the pound’s strength, a level that if manifested in official records would surely result in economic collapse and an internationally coordinated bailout of the country.

To emerge successfully from this crisis, Lebanon needs to heed Franklin’s words on confidence, and bring about the necessary measures to wield its high debt levels like Japan. This is possible, but will require significant reforms and a social shift to a more inclusive society -- one that can create the jobs needed to keep talented people in the country, and generate the revenues to reduce the debt burden. The whole world waits to see if Lebanon has the muster to face these challenges and deliver for their people; at the end of the day, the only thing they have to fear is fear itself.