LEBANON: WAR ECONOMY BREEDS RADICALISM AND PARTITION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88T00096R000400490003-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 26
• Document Creation Date: December 27, 2016
• Document Release Date: May 6, 2011
• Sequence Number: 3
• Publication Date: December 1, 1986
• Content Type: REPORT

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Directorate of
Intelligence
Radicalism and Partition
ecret
Lebanon: War Economy Breeds
NESA 86-10052
Decembe8 r 1986
Copy 'T
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Directorate of Secret
Intelligence
Radicalism and Partition
Lebanon: War Economy Breeds
with the Directorate of Operations.
Office of Leadership Analysis. It was coordinated
contribution by
This paper was prepared by (Office
of Near Eastern and South Asian Analysis, with a
Comments and queries are welcome and may be
directed to the Chief, Arab-Israeli Division, NESA,
Secret
NESA 86-10052
December 1986
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Lebanon: War Economy Breeds
Radicalism and Partition 25X1
Summary Lebanon's economy, which has shown amazing resilience despite a decade
Information available of civil war and foreign military intervention, is in crisis. Growing
as of 3 November 1986 unemployment-affecting at least one-third of the active labor force-and
was used in this report.
falling real per capita income are deepening the country's political divisions
and factional rivalries and intensifying narcotics and arms trafficking in
Lebanon. Economic decline and weak central authority have contributed to
increasing lawlessness among the militias, who have de facto control of
much of the country. The militias' growing dependence on external support
is encouraging foreign parties to buy influence among the rival factions.
Although many Lebanese maintained relatively high personal incomes
through the late 1970s and early 1980s, possibly higher than before the civ-
il war, the economy and living standards fell sharply after the political
turmoil that flared following the Israeli invasion in 1982. Emigration
among skilled professionals increased, and Beirut's status as an Arab
financial center virtually collapsed. Falling oil prices and the regional
economic downturn have also depressed the economy. Since 1983 the
Lebanese pound has depreciated by 91 percent and will fall further as
capital flight increases and more residents choose to hold foreign currency
assets. Finally, the Lebanese Government's expanding budget deficits and
the lack of foreign aid have produced a staggering internal public debt
relative to domestic output-$3.2 billion in 1985, with interest payments
exceeding total budget revenues. This debt absorbs most of the nation's
financial resources and threatens the banking structure.
Lebanon's political stalemate and violence have produced de facto partition
in the country, changing the nature of the economy. The Maronite
Christians and the Druze in particular are seeking economic autonomy.
The proliferation of illegal ports and separate administrative organs, are the
most striking indicators of this trend. Lebanon's economy, however, can
adapt to partition and Syrian occupation if goods and labor move freely
and safely and if Lebanon can retain its liberal, open economic structure.
The successful rise in branch banking is perhaps the best example of the
economic response to partition.
Secret
NESA 86-10052
December 1986
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Secret
Lebanon's surging inflation-estimated at 70 percent annually in 1985-
and general instability have affected some groups more than others. The
formerly prosperous and influential middle class has been hardest hit. The
Christian community, which has the largest middle class, has declined
significantly in size. Over one-fourth of the estimated 1 million prewar
Christian population have left the country since 1978. Middle-class
expectations exceed those of the rural poor-mostly Shia-and they are
less able to offset financial setbacks than Lebanon's small wealthy elite.
The capital's growing Shia-populated southern slums are among Lebanon's
most impoverished and have become a breeding ground for radicalism.
For the near term, Lebanon's economy will muddle through with various
sources of income, including external funding provided for the militias by
Syria, Iran, Libya, Israel, the PLO, and overseas Lebanese. Over the
medium to long term, a lasting political settlement is unlikely. The
consequence will be further erosion of Lebanon's economy and de facto
partition. Genuine reconstruction is impossible, and investment will decline
further if assets cannot be protected. Lebanon's extensive financial and
human resources at home and abroad could feasibly support economic
recovery, but the country will probably never regain its former prominence
as the commercial hub of the Middle East.
For the United States, the political and social implications of economic
deterioration in Lebanon are greater than the economic implications.
Radicalization of the Lebanese population will grow, and the chaos will
perpetuate Lebanon's role in international arms transfers, encourage more
drug production and trade, foster more terrorism, and increase the
likelihood of another Syrian-Israeli conflict.
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Precipitous Decline in 1984
Flagging Gulf Economies
4
Eroding Lebanese Confidence
5
Bank Sector Losing Resilience
5
Manufacturing and Trade Suffering
6
Agriculture Remains Weak
8
Emerging Regional Economies
9
South Lebanon Remains Depressed
9
North Lebanon's Fragile Status
9
Bekaa Valley in Transition
Militias Plundering for Profit
Growing Partitionist Trend
Christians Face Syrian Stonewall
Druze Organize for Autonomy
Outlook and Implications for the United States
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Lebanon: War Economy Breeds
Radicalism and Partition
Eleven years of civil war and intermittent foreign
occupation have severely damaged the Lebanese econ-
omy.' Before 1975, Lebanon enjoyed a high standard
of living, as compared with its Arab neighbors, due
mainly to its liberal economic policies and skilled
entrepreneurial class. Per capita income in 1974 was
more than $1,250-the highest among Arab countries
except for the small oil-exporting Arab Gulf states.
The past decade of violence has curtailed most tradi-
tional economic activity:
one-fourth of Lebanon's
productive capacity was destroyed from 1975 to
1984.
? Payment inflows have fallen as prospects for politi-
cal settlement grow dimmer, and capital flight is
becoming more evident.
? Embassy reporting indicates 70-percent inflation
last year and price increases of 100 percent for the
first half of 1986.
? Much of the remaining skilled, professional class
has decided to leave the country.
Nonetheless, until late 1983, Lebanon's economy
proved resilient and retained its basic vitality. The
open, liberal economic system functioned adequate-
ly-if not strongly-despite weak central authority.
Real domestic output fell over 50 percent from 1975
to 1980, but per capita income remained strong
through 1982, according to our estimates.
speculated that real disposable
per capita income may have been higher in 1981 than
before the civil war.
The Lebanese maintained personal incomes and living
standards through high worker remittances, transit
and intermediary trade, and the entrepreneurial skills
of their bankers and merchants. Lebanon's principal
export is its population. According to a Paris-based
Lebanese periodical, over 860,000 Lebanese-primar-
ily Christians of the upper and middle classes-
emigrated from 1975 to 1984. This produced high
remittances flowing into the Lebanese economy-over
$2 billion in 1980. Money inflows were bolstered by
residents' interest earnin s-$678 million in 1981,
n bank deposits
abroad. This is a function of emigration, increased
capital flight, and the growing number of Lebanese
banks that relocated overseas to escape the turmoil in
Beirut.
until 1983.
From a financial standpoint, the Lebanese economy
displayed several strengths in the early 1980s. Foreign
financial support for militias-including that from
Syria, Iran, Libya, Israel, the PLO, and overseas
Lebanese-injected money that trickled through the
economy. Illegal activities such as drug cultivation
and smuggling into Syria also stimulated Lebanon's
economy. Illegal Syrian trade, for instance, may have
generated over $50 million a month, according to the
US Embassy in Beirut. Current and capital inflows in
1980 were over $3 billion, resulting in a payments
surplus of about $477 million. Payment inflows helped
the Lebanese pound remain strong against the dollar
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Following Israel's invasion of Lebanon in 1982 and
the turmoil associated with the central government's
inability to reestablish control in 1983, the nature of
Lebanese economic problems changed. A situation
bordering on anarchy in various parts of the country
reduced Beirut's power to collect taxes, although
government spending on salaries and services contin-
ued apace. In 1982-83 a US-backed Lebanese Gov-
ernment tried to extend its authority partly through
expenditures. The collapse of these efforts was eco-
nomically costly. Beirut's self-destructive spending
policies generated an internal public debt in 1985 of
over $3.2 billion. Debt service payments currently
exceed actual government revenues, forcing Beirut to
continue borrowing from domestic banks to meet
interest obligations. Industrial output fell as many
factories in Beirut and Sidon were damaged or de-
stroyed in fighting after 1982, and the 91-percent fall
in the pound since 1983 has choked off imports of
machinery and raw materials. In addition, the confes-
sional struggle has increased the costs and dangers of
internal travel, cutting off many industries and the
agricultural sector from supply networks and export
markets.
Precipitous Decline in 1984
The economy began to stagger in late 1983 with the
demise of the Lebanese Army, signaling the collapse
of central governmental institutions. Remittances
from Lebanese working abroad have fallen from over
$2 billion in 1980 to $500-700 million last year,
according to our estimates based on foreign payments
data. Lebanese bankers report that letters of credit
through mid-1985 were only 40 percent of the 1983
level. The US Embassy in Beirut estimates that
unemployment, once held to acceptable levels by
emigration, affects about one-third of the active labor
force. We believe the growing pool of unemployed
youth may increase the numbers involved in full-time
militia participation.
Figure 3
Lebanon: Economic Indicators, 1980-85
1 1 1 1 1 1 5 I I
0 1980 85" 0 1980 85'
Domestic Production
of Cement
Million ,netric tons
0 1980
Industrial Machinery Imports
Million US $
85? 0 1980
particularly the elderly and refugees, are facing in-
The economic decline manifests itself in social up- creasing difficulty feeding themselves. There is, how-
heaval. Robbery and street crime have risen through- ever, no evidence of famine or widespread shortages-
out Lebanon. Young, armed militiamen are most except for periodic shortfalls of subsidized commod-
often the culprits. The once powerful and prosperous ities like grains and petroleum products, which are
middle class is being steadily impoverished by infla-
tion, and many are living off savings. The urban poor,
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Figure 4. Housewives protest high prices.)
Arab charitable organizations.
imported and distributed by the government. Regular
supplies of many staples are attributable to Lebanon's
open borders and relief from a variety of Western and
cut remittances and capital investment.
Several factors explain the faster decline in 1984 and
the changing nature of Lebanon's current economic
problems:
? Government internal debt is expanding rapidly as
debt service rises and the tax base shrinks.
? Lebanon's bankers and merchants are reeling from
falling oil prices, which have hurt the entire region.
? Public apprehension over the political situation has
amount to over $40 million.
Massive Internal Debt
Lebanon's internal public debt is growing wildly,
expanding 68 percent last year to over $3.2 billion.
The debt crunch stems from Beirut's large budget
deficit-about $1.2 billion in 1985, or half of estimat-
ed GDP. The Cabinet and parliament appear unable
to cut spending or obtain external support, and Le-
banon's tax system is not indexed, so receipts are not
responsive to inflation. Customs duties traditionally
provide 40 percent of revenues but last year fell to
only one-fourth of total revenues, or $69 million. Ports
controlled by unofficial militias flourished, draining
revenues from the Treasury. Many Lebanese no long-
er pay income tax or public utility bills, and the
government is powerless to enforce collection. Press
reports indicate that uncollected telephone bills
We believe that a principal factor behind Beirut's
growth in spending is the government's price subsidies
on fuels and wheat. According to open sources, the
Central Bank earlier this year sought to impose some
discipline over the budget and refused to pay the oil
import bill, which resulted in a severe fuel shortage in
Beirut. The government has reduced the fuel subsidy
since late 1985, raising the gasoline price 150 percent,
but the steadily falling pound negated the price hikes.
The subsidy structure traditionally ensures that Le-
banon's gasoline prices are among the world's low-
est-about US 37 cents per gallon before the most
recent price increase. Low prices have encouraged
widespread smuggling offuel to Syria, Jordan, and
even Israel until the IDF withdrawal. Embassy re-
porting indicates the Port of Beirut alone imported
enough petroleum in 1984 to meet the country's
estimated consumption.
Beirut's extensive subsidies for grains allow raw
wheat and wheat products to be sold well below the
import cost, which encourages high consumption and
reexports. Press reports indicate that Lebanon's Cere-
als and Sugar Beet Office sells wheat to millers for
about $12 per metric ton, while the world market
price is about $120:
? As a result, large volumes of wheat are reexported
at substantial profits.
? Much subsidized wheat is bought to feed chickens
and cattle rather than for human consumption.
Subsidy costs have fallen sharply with the sharp
decline in average world oil and wheat prices, but we
believe that dismantling the subsidy structure will
require that Beirut exercise political discipline, which
it may not have. Eliminating or reducing price subsi-
dies is a crucial first step in solving the government's
massive financial problems. Until then, we expect
budget deficits and domestic debt formation to
persist.
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Figure 5
Lebanon: Nominal Budget
Deficits, 1980-86
Table 1 Million US $
Lebanon: Customs Receipts, 1980-86
1980
1981
1982
1983
1984
1985
1986 a
Total Beirut
Port
198 127
114 55
101 47
306 211
106 36
69 22
16 5
Meanwhile, government spending is booming. Wages
and indemnities accounted for 35 percent of the 1985
budget, although fewer than half of public-sector
employees report to work. Official government statis-
tics indicate that debt service represents over 26
percent of budgeted expenditures and actually ex-
ceeds revenues. The government is financing debt
service payments through increased borrowing, which
has absorbed much of Lebanon's private domestic
savings. Beirut is increasingly turning to the Central
Bank to finance the budget deficit. The Central Bank
has pledged almost $400 million in additional credit-
four times last year's amount-to the government for
1986, according to a Middle Eastern economic period-
ical. This amounts to printing money and will spur
inflation.
The government has few alternatives in its search for
funds. A tacit agreement among Lebanon's leadership
prohibits the government from employing its 9.22-
million-ounce gold hoard with a market value of over
$3 billion to extricate itself from its debt imbroglio.
The Treasury has resisted raising interest rates on
Treasury bills, already near 20 percent, but banks are
withholding subscriptions until rates move to higher,
more profitable levels. Despite mounting problems, we
believe government default on internal debt is not
imminent because:
? As of June 1986, commercial banks still held $4.7
billion in deposits, and Treasury bills are the best
domestic investment opportunity.
? Inflation, which is probably well over 100 percent
this year, will erode the real value of domestic debt.
? Debt formation may slow this year with the fall of
some commodity prices. The US Embassy reports
Lebanon's monthly fuel bill dropped from about $50
million last year to $23 million for 1986.
Flagging Gulf Economies
Lebanon's economy has long been closely tied to the
Gulf economies, and the weak oil market has buffeted
Lebanon by reducing trade and-to a lesser extent-
worker remittances. Arab countries account for al-
most 90 percent of Lebanon's export and reexport
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trade, and decreased oil earnings have cut sharply into
imports by other Arabs. Likewise, the Gulf states
have developed a strong banking and financial infra-
structure that has effectively displaced Beirut as a
transit point for capital flows from the Gulf to
European markets. The Gulf downturn partly ac-
counts for the sharp fall in remittances. Although
there are still over 100,000 Lebanese expatriates in
Saudi Arabia, the US Embassy in Riyadh reports
their numbers are down sharply from past years. In
addition to lower salaries or layoffs in the host
countries, instability at home probably dissuades over-
seas Lebanese from repatriating their earnings.F_
Eroding Lebanese Confidence
Finally, we believe that Lebanon's current economic
problems stem from a general and understandable
decline in popular confidence. Apprehension by Leba-
nese at home and abroad over the fading prospects for
political settlement has driven many educated Leba-
nese to cut their ties to their country. For instance, a
Lebanese weekly reports almost 30 percent of practic-
ing medical graduates of the American University in
Beirut are now in the United States or Canada. A
separate survey in the late 1970s confirmed that most
emigrants were professionals, including engineers and
skilled technical workers. We believe that emigration
of skilled professionals has continued or increased in
through the early 1980s, due largely to the inflow of
private Arab capital from the Gulf states.
non attracted Arab oil wealth for years because of its:
? Strict bank secrecy laws.
? Strong Central Bank authority.
? The stable Lebanese currency.
The rapid fall in the pound has weakened many
banks. Banks that sought profits through currency
speculation have suffered the most. In addition, high
bank credit to the stagnant private sector-about $3.5
billion outstanding in 1985, according to banking
statistics-suggests that many banks are simply roll-
ing over bad loans.
Banking statistics indicate many Lebanese are re-
sponding to the weak pound by holding more funds
outside Lebanon or shifting from pound deposits into
special foreign currency-denominated accounts in do-
mestic banks. Although foreign currency deposits
have fallen 16 percent since 1982, there are still over
$2.9 billion in foreign currency deposits in Lebanese
banks. This does not include the substantial assets
held in foreign banks by Lebanese residents and the
expatriate community.
estimates these assets at more than
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recent years
A prime example of the loss of confidence is Beirut's
foreign exchange market. Since late 1984 the pound
has fallen over 85 percent. The US Embassy in Beirut
reported in early 1985 that foreign currency transac-
tions have fallen from $30-40 million a day to less
than $10 million-still high for a developing country
but weak compared with former levels. Press reports
suggest that real estate transactions-a traditional
outlet for expatriate earnings-have declined consid-
erably in 1986.
Bank Sector Losing Resilience
Although Lebanon still has substantial financial re-
sources, its commercial banking sector has been weak-
ened by capital flight and the 65-percent fall in the
pound this year. The industry was relatively strong
$10 billion. We believe the shift out of Lebanese
pounds will continue and further depress the currency.
We believe that political instability-and an associat-
ed high level of criminal activity-has changed the
structure and practices of Lebanon's financial sector
in addition to stimulating capital flight. To counter
the flurry of armed bank robberies-49 reported for
1985-and decreased investment opportunities, most
foreign-owned banks have been absorbed by domestic
banks. Many banks have relocated abroad. By late
1985, 11 Lebanese-owned banks had moved to Cy-
prus. We believe these banks have a particularly
negative effect on Lebanese finances because they
account for much of the capital flight and current
speculation against the pound.
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Figure 6
Lebanon: Nominal Exchange Rate, 1982-86
F June 1982
Israel invades Lebanon
October 1982
Christian-Druze
Fhting erupts
January 1983
US, Israel, Lebanon
hold withdrawal talks
F February 1984
Army falls, militias
control West Beirut
March 1984
Lebanon annuls
1983 Israeli accord
March 1986
Strict bank regulations
imposed
December 1985
Syrian-backed
tripartite accord
signed
FNovember 1984
Israeli withdrawal
approved
1 1
1985
First stage of
Israeli withdrawal
Many Lebanese banks have decentralized operations
by establishing major branches throughout Lebanon.
Open sources indicate that from 1981 to 1984 the
number of branches rose from 473 to 640. There are
now more than 80 commercial banks located in the
Christian Ra's al Matn area alone. The Central Bank
is headquartered in Muslim-controlled West Beirut
and operates with a skeleton staff of Muslim employ-
ees because most Christian employees cannot report
to work. The rise in branch banking, however, has
increased bank exposure to robberies in the outlying
areas. Press sources suggest that banks must pay
protection money to dominant militias, strengthening
factional control over territory. We believe the suc-
cessful rise in branch banking over the past few years
is a strong indicator of the partitionist trend in
Lebanon and of Lebanese resourcefulness in confront-
ing the problems of factionalism and confessionalism.
Lebanon's manufacturing sector faces the most diffi-
culty adapting to and overcoming war damage and
instability. The manufacturing sector is mostly com-
posed of small-scale, low-capital enterprises such as
handicrafts, textiles, food and tobacco processing,
wood, leather, and plastics. Cement production and oil
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Figure 7
Lebanon: Composition of Bank Deposits, 1980-86
Bank deposits
denominated in
foreign currency
Bank deposits
denominated in
pounds
refining are the only significant capital-intensive in-
dustries. According to a Lebanese economist, the
inflation-adjusted value of industrial exports has fall-
en 80 percent in the decade since 1975.
estimates capacity utilization of the factories still
operating in Lebanon was only 20 percent in 1985.
The dramatic fall in output and trade stems from:
? Labor shortages due to emigration.
? Rising costs for imported capital goods, raw materi-
als, and transportation.
? Continued destruction of fixed assets by the
fighting.
? Competition from goods smuggled through illegal
ports.
? Decreased bank credit for industry.
? Low inventories and poor worker turnout due to
security concerns.
? Weak demand in domestic and Arab markets.
There are signs of improvement, but we believe the
deteriorating security situation will frustrate sus-
tained recovery. Industrial exports for the first half of
1985 reached the highest level since the Israeli inva-
sion. Moreover, Arab states in April 1985 lifted the
partial boycott of Lebanese goods, which had been
imposed to prevent imports of Israeli-origin goods that
had penetrated the Lebanese market.
Lebanese exports to Middle East
countries had fallen 56 percent from 1980 to 1985.
The decline in Lebanese exports to the rest of the
world in that period was only 16 percent.
Lebanon's economic decline is closely tied to its trade
performance. The Lebanese traditionally rely on im-
ports for about 80 percent of their consumer goods.
Export and reexport trade, especially to Arab coun-
tries, accounts for a major portion of income.
about
40 percent of Lebanon's exports are reexports. Total
exports fell 63 percent from 1980 to 1985, while
imports decreased by 53 percent, reflecting the gener-
al fall in income. Many Lebanese merchants have
adapted to the security environment by cutting reex-
ports and bypassing Lebanon entirely, simply acting
as middlemen for trade between European and Arab
partners. We estimate this trend has declined,
however, with the fall in oil prices.
Secret
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Lebanon is intimately linked to the Syrian economy
through legal and illegal trade, providing a major
windfall to Lebanese merchants. Several Lebanese
ports-Beirut and Tripoli, in particular-have been
the traditional ports of entry for Damascus. Record-
ed Lebanese exports to Syria were $81 million in
1980, but they fell to $27 million in 1985,
Syrian importers rely on Lebanon
for smuggled goods to compensate for the costs and
delay associated with importing through official Syr-
ian channels and in cases where certain goods cannot
be imported legally.
Lebanese merchants accept Syrian pounds for sales of
consumer and capital goods, which they send to the
Gulf for resale to Syrian expatriate workers there.
According to Embassy reporting last year, one major
bank in Beirut indicated that 80 percent of its letters
of credit were issued for goods transiting Lebanon for
the Syrian market. The US Embassy in Beirut
speculated last year that smuggling to Syria provided
over $50 million per month, although Syria's present
economic crisis and the crackdown on smuggling have
reduced the trade for 1986.
Agriculture was hit hard in the 1982 Israeli invasion.
Southern citrus groves served as battlefields, fields
were neglected or abandoned, and transport was
impeded, preventing agricultural products from
reaching urban markets. Israel's phased withdrawal
in 1985 and the reopening of the south to Beirut's
commerce have helped southern farmers.
fruit exports
to Arab customers increased over the past year. The
sector is still threatened, however, by labor shortages
and high costs for fertilizers and machinery.
The US Department of Agriculture estimates crop
production in Lebanon rose about 6 percent in 1985,
although output remains well below the 1975-80
average. Lebanon's principal crops are citrus and
apples, and the USDA estimates current production
to be about 300,000 tons and 110,000 tons, respective-
ly. Financial returns to farmers vary because of
Table 2
Lebanon: Balance of Payments, 1980-86
Trade
Balance a
Exports
Imports
Balance of
Payments b
1980
-2,775
1,032
3,807
477
1981
-2,803
991
3,794
570
1982
-2,594
879
3,473
263
1983
-3,104
638
3,472
-935
1984
-2,397
480
2,859
-1,355
1985c
-1,411
386
1,797
250
19864
-1,100
400
1,500
-100
b Estimated from financial flows.
c Estimated.
d Projected.
transport problems, but demand for products locally
and overseas has grown as the pound has depreciated.
In the north, farmers' trade with the large Beirut
market was hurt after closure of the Barbara Check-
point on the Christian-Syrian dividing line between
Beirut and Tripoli. Similarly, farmers in the Syrian-
occupied Al Biqa' (Bekaa Valley) have suffered from
security problems around Zahlah-a traditional sup-
ply point for area farmers.
Real estate and construction activity has varied
throughout Lebanon, but high construction costs and
limited commercial credit recently have weakened
this traditionally strong sector. The continued fighting
discourages real estate investment, and government
policies have hurt as well. High prices for real estate
through 1985 suggest that some expatriate Lebanese
money was still flowing into real estate, but transac-
tions and new construction have fallen off this year.
Moreover, most rents in the cities are fixed by law and
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have become an unremunerative investment in Leban-
on's inflationary environment. Although a bane to
construction, rent ceilings are a boon for tenants,
effectively eliminating housing costs for many resi-
dents under older leases. For example, in late 1985
longstanding tenants were paying the equivalent of
$50 a year for an average apartment in central Beirut.
Meanwhile, the housing shortage, combined with
renters' unwillingness to vacate their apartments,
make new rental rates and sales prices prohibitive for
most Lebanese.
Nevertheless, the pound's rapid depreciation this year
probably has enhanced real estate's attractiveness for
overseas Lebanese and resident holders of foreign
currency. If peace somehow comes to Lebanon, the
construction sector will probably face an upsurge in
demand. For instance, a middle-class coastal apart-
ment in Beirut sold for the equivalent of $520 per
square meter in late 1985. The same property would
now probably cost under $250 per square meter.
Beirut's belligerent environment has encouraged real
estate investment outside the capital, especially along
the coast. Press reports indicate the North Ra's al
Matn area around Juniyah in the Christian enclave is
Lebanon's most active market.
Emerging Regional Economies
The entire country has suffered economic decline
from the impact of Syrian and Israeli occupation and
confessional violence. We believe that the prospects
for economic recovery vary regionally according to the
degree of order and stability.
South Lebanon Remains Depressed
The economy of south Lebanon practically ceased
with the Israeli invasion in 1982 and barely func-
tioned in the power vacuum following Tel Aviv's
withdrawal in 1985, but prospects for economic recov-
ery are brightening.
total exports from this area have
recovered to 80 percent of their preinvasion level, with
agricultural trade the most improved sector. The Shia
Amal, Druze Progessive Socialist Party (PSP), and
other militias maintain roadblocks on the main coast-
al highway that hamper commercial road traffic,
however, and some farmers and merchants may now
ship goods to Beirut via the southern port of Tyre.
Before withdrawal, Israeli agricultural products
largely displaced Lebanese products in the south,
severely curtailing farm incomes in that region.
Israel's principal northern port of Haifa served as an
unofficial port for south Lebanon, effectively under-
mining Beirut's role in the region. The extent of
Israel's market penetration is displayed by the dra-
matic decline in the volume of trade with Israel after
the 1985 withdrawal:
? From 1983 to 1985, Lebanon's annual trade turn-
over with Israel fell from $100 million to $63
million, according to the Israeli press.
? By August 1985, three months after IDF withdraw-
al, the quarterly volume had shrunk to only $2
million.
torn capital.
The intensity of conflict in the south between Israel
and its surrogate, the Army of South Lebanon, and
radical Shias and Palestinians will threaten the area's
recovery. If political instability in the south persists,
we believe the flow of Shia refugees to Beirut could
grow again, further straining the resources of the war-
North Lebanon's Fragile Status
In the north, especially around the industrial city of
Tripoli, Syrian occupation has diverted attention from
politics to economic activity and stimulated some
rebuilding. Press reports indicate most residents were
confident the Syrian entry in mid-1985 would spur
the local economy. Embassy officials in Beirut report
that commercial activity in Tripoli is still modest, but
local officials say the security situation is under
control and extensive repairs to buildings have been
made in the last 18 months. Nevertheless, industrial
output has not recovered from the extensive fighting
of 1983-85 between Syrian troops and Muslim fac-
tions. Of the 1,200 factories in the north that account-
ed for 20 percent of national output, 35 percent have
closed since 1980. A separate survey confirms that
most have closed since 1984, and those still open are
operating below 40 percent of capacity.
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Bekaa Valley in Transition
Syrian occupation has disrupted the traditional econo-
my of the Bekaa Valley but has brought some stabil-
ity. The valley has suffered less destruction than other
areas in Lebanon, but it has been largely cut off from
traditional markets such as the greater Beirut area.
The valley is still a major farming area, comprising
nearly 40 percent of Lebanon's total cultivable area,
with cereals, vegetables, and citrus widely produced.
Drug cultivation has always existed in the Bekaa but
has become much more extensive in Lebanon's chaot-
ic environment. The major product is hashish, which
requires little irrigation or fertilizer, and some farm-
ers are turning to opium poppies as well. One medi-
um-scale Bekaa hashish farmer told an Arab journal-
ist that his annual profit was about $80,000. The
cultivation, processing, and distribution of drugs in-
volve all the major parties in the Bekaa, including the
Syrian military, various Shia factions, Sunni Mus-
lims, and the Christian militias situated on the route
to the coast. We estimate that possibly half of the
cultivable land in certain areas of the Bekaa is
devoted to drug production, and press reports indicate
much of the area's agricultural laborers are involved
in drug cultivation.
The economic impact of the drug trade on the Bekaa
has been extensive. Press reports indicate that some
farmers can afford foreign laborers, including Bedou-
ins from Syria, for peak periods, and several small
development projects in the region have been financed
with narcotics money. Although many local farmers
have been involved, large-scale operations are begin-
ning to dominate the trade. We believe the enormous
profitability and the range of players involved will
perpetuate the northern Bekaa as a major center for
drug production and trafficking.
Beneath the surface of Lebanon's traditional economy
lies another layer of services and trade that sustains
the economy. Some militias have established a "civil
arm" that imposes taxes and provides public services.
All the major militias-including the Christian Leba-
nese Forces, the Druze PSP, the Shia Amal and
Hizballah-aggressively solicit funds from local and
foreign sources. Increasing competition between rival
militias for funds, however, intensifies the factional
struggle and further undermines the state. Among the
sources of revenue for the militias are:
? Fees from unofficial ports operated by militias.
? Support from state sponsors and the PLO.
? Contributions from coreligionists at home and
abroad.
? Fees collected at checkpoints throughout the
country.
? Informal "taxes" imposed on local business.
We believe that the Christian Lebanese Forces militia
has the most sophisticated financial structure. This
includes a computerized system to collect-or, in
many cases, extort-taxes from businessmen, shop-
keepers, and housewives. In return, the militia pro-
vides sanitation service and limited public works for
East Beirut.
Christian militia controls several ports in the Chris-
tian enclave and leases the four most important ones
to entrepreneurs for large sums. We believe that
revenues from these port operations dropped signifi-
cantly after Syria tightened its border in January
1986 to stem illegal imports and punish the Christian
opposition to the tripartite accord. Syrian transit
trade has partly recovered, however, and a Christian
port operator commented to a US Embassy official in
April that 80 percent of the cargoes unloaded in his
port are for the Syrian market.
We believe general economic decline and weak cen-
tral authority will contribute to increasing lawlessness
and reliance on smuggling and drug trafficking
among the militias. The militia-controlled ports pro-
vide an excellent depot for drugs and arms trafficking,
as well as for goods stolen from other Mediterranean
ports. We expect Lebanon's economic decline to in-
crease the militia's dependence on external support.
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The emergence of several unofficial and militia-
controlled official ports has reshaped the nation's
economy over the years. The fees charged by these
militia-operated ports are 60-70 percent below Leban-
on's official port fees, and no customs duties are paid
on goods entering these ports. The unofficial ports
have lowered import costs but deprived the state of its
principal source of revenue. Among the major illegal-
ly operated ports are:
? Fifth Basin, Beirut. This Lebanese Forces-con-
trolled portion of Beirut Port is Lebanon's main
illegal port.
? Juniyah. This small, shallow Lebanese Forces port
serves as a transit point to Cyprus for travelers who
avoid the Beirut Airport. We estimate about 20,000
travelers, almost all Christian, used the ferry ser-
vice to Cyprus in 1985.
? Ad Dubayyah. This Lebanese Forces port is under
expansion and bankrolled by the family of Finance
Minister Chamoun.
? Khaldah. This Druze port is the most active non-
Christian illegal port. It cannot handle large ships,
however, which required the PSP to construct Al
Jiyah.
? Al Jiyah. The Druze are building this container
port and petroleum offloading facilities. It may be
finished by the end of 1986.
? An Nabi al Awza'i. This port is controlled by Amal
and can handle container traffic. It is located near
Beirut Airport.
? Tyre. This Amal-controlled port handles a fairly
low volume of traffic, due partly to an Israeli
blockade.
? An Naqurah. This port was constructed in 1984
and is controlled by the Israeli-backed Army of
South Lebanon.
Foreign parties will probably take advantage of Le-
banon's economic chaos to bid for influence among
rival factions. Likewise, the cash-starved militias will
probably press for more support from resident and
overseas coreligionists in addition to increased rob-
bery and extortion-developments that push street
fighting to dangerous new levels.
Economic partition is an emerging reality in Lebanon,
but we believe the current political environment will
frustrate efforts to create economically viable inde-
pendent cantons. With no political settlement on the
horizon, the Maronite Christians and Druze have
sought to create ministates characterized in part by
independent resources, institutions, and objectives.
The Shia-dominated areas in the south, the Bekaa,
and Beirut lack the financial and human resources,
infrastructure, and organization of the other confes-
sional ministates and are economically weaker.
Although politically divided, there is substantial eco-
nomic cooperation and accommodation between the
confessional groups. For example, Druze leader
Jumblatt allows regular convoys to move from East
Beirut, held by Christian Lebanese Forces, to the
Jazzin area, controlled by the Christian Army of
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South Lebanon. In addition, private firms and govern-
mental bodies such as the telephone service operate
throughout the country, with Christian, Muslim, and
Druze employees working in their respective cantons.
Traditionally one of Lebanon's poorest
confessional groups, the Druze lack a skilled middle
class, indigenous resources and industry, and repre-
sent only 7 percent of Lebanon's population. In fact,
Druze are barely a numerical majority within their
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Christians Face Syrian Stonewall
The Christian hardliners are particularly intent on
achieving economic independence from other groups,
and the Christian heartland has the largest concentra-
tion of wealth and business. The increased Syrian
presence around their ministate, however, will frus-
trate Christian efforts to achieve partition. Likewise,
the relative stability within the enclave is increasingly
threatened by factional infighting, which could under-
mine the Christians' economic strength. As the Leba-
nese economy unravels, we expect temptations for the
Christians to abandon traditional cross-confessional
institutions and arrangements to grow. There have
been several examples this year of the Christians'
desire to erect independent economic institutions in
their heartland, including public services and an
independent telecommunications system and calls for
a separate power grid, civilian airport, and possibly a
Christian central bank.
Perhaps the best example of Syrian stonewalling of
partition is the Maronite Christians' controversial
alternative to Muslim-controlled Beirut International
Airport-Halat Airport north of Beirut. Halat is
primarily a Christian military facility, but it is pri-
vately financed and designed to offer medium-range
commercial service for the Christian community.
Formidable legal and logistic obstacles have slowed
the project, but a major barrier is Syrian opposition,
including the shelling of the runway by pro-Syrian
militiamen last May. Although the Syrians have not
spoken officially against Halat, we believe Damascus
or its surrogates would intervene to prevent commer-
cial service if Halat becomes operational, since it will
increase the prospects of a permanent partition and
subvert Damascus's role as a peace broker.
Druze Organize for Autonomy
The Druze are attempting to erect an independent
ministate in the Ash Shuf but will probably remain
dependent on external support to sustain their econo-
own ministate.
since the exodus of Christians in 1985.
Despite their economic vulnerabilities, the Druze have
managed to erect a ministate under Walid Jumblatt's
PSP-Lebanon's strongest militia-due to skillful
leadership and tactical links to virtually all of Leban-
on's contending parties. The Druze heartland in the
Ash Shuf has its own capital at B'aqlin and social and
administrative organs that direct economic, cultural,
and educational activities. The main Druze port,
Khaldah, provides the PSP with a revenue source and
a possible supply link to the USSR-the principal
arms supplier to the Druze. Other sources of income
include remittances from overseas Druze and Pales-
tinians, roadblocks, port fees, a Jumblatt-owned ce-
ment factory, and drug trafficking. US Embassy
contacts in Beirut report, however, that production of
bananas and apples in the Shuf has almost ceased
In response to growing financial problems, the Druze
are seeking economic support from several sources.
Jumblatt is seeking to
improve ties to the Christians. Over 80 Christian
villages in the Shuf are empty, and Jumblatt wants
Christian refugees to return because of their leading
role in the region's agricultural sector.
recent financial problems have
prompted the PSP to reduce salaries 15 percent and
boost taxes and transit duties on vehicles.
Shias in Disarray
For the near term, we believe the Shias will not
organize themselves economically. They are Leban-
on's poorest and least cohesive confessional group-
economically, geographically, and politically. Their
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principal militias, the moderate Amal and more radi-
cal Hizballah, are poorly financed at home and rely
principally on outside military and financial support
from Syria and Iran, respectively. Damascus's lever-
age over the Shias, from an economic standpoint, is
enhanced by Syria's military control over the Bekaa
and the possible extension of the Syrian security plan
into the south toward Sidon.
Despite Amal's prominent military role in the south,
the economic position of the Shia areas is weak. The
Amal-controlled port of Tyre is used lightly, and most
customs revenues are paid in Cyprus to the Israeli-
backed Army of South Lebanon and enforced by an
Israeli blockade, according to the US Consulate Gen-
eral in Jerusalem. Shia leadership is fragmented and
preoccupied with the Amal-Hizballah rivalry, while
the largely rural Shia population is unprepared to
establish independent commercial and governmental
institutions. In addition, the range of players in the
power struggle for the south-including the Syrians,
Druze, Christians, Israelis, and PLO-are all working
to subvert the establishment of a Shia ministate.
We believe that the most damaging long-term aspect
of Lebanon's recent economic problems is the weaken-
ing of the Sunni and Christian middle classes. The
Sunni Muslim population, which comprises 27 percent
of the population, is well placed economically but has
no significant militia. The wealthy who hold foreign
currency accounts are largely unscathed by inflation
and the declining value of the pound. The middle-
class professionals, however, who are the most impor-
tant factor in Lebanon's long-run economic perfor-
mance, face a considerable decline in their traditional
living standards. This attrition undermines Lebanon's
economic prospects because it removes a major ele-
ment of long-term stability.'
Emigration, especially by Christians, will probably
remain a major political and economic issue. Accord-
ing to a Lebanese
weekly, 78 percent of Lebanese emigrants between
1978 and 1984 were Christian. Combined with a
declining birthrate, the exodus of Christians has
reduced their share of the resident population from
over 40 percent to about one-quarter since the civil
war began. The growing gap between the relative size
of the Christian and Muslim populations will proba-
bly aggravate confessional conflict by further threat-
ening the Christian hold on power and strengthening
Shia Muslim demands for political and economic
equality.'
The rural population has been less severely hurt by
economic crisis, and the majority are not radicalized
solely by their material condition. The agricultural
sector is performing adequately with increased domes-
tic demand, narcotics, and the Syrian trade. The
urban poor and refugees, however, have no means of
support beyond the relief aid provided by various
organizations, and there are virtually no employment
opportunities for many young urban Shia men besides
militia participation. The likely consequence will be
greater violence and continued chaos.
Outlook and Implications for the United States
We believe that, as the civil war drags on and the
prospects for a political settlement remain dim, Le-
banon's economy will steadily decline. We believe the
overseas Lebanese will grow more reluctant to repatri-
ate earnings, cutting domestic incomes further. With-
out political resolution of some sort, genuine recon-
struction is impossible. Investment will continue to
decline if assets cannot be protected, and more
wealthy and middle-class Christians and Muslims will
move their families out of Lebanon.
' The Christian community, in their quest to legitimize their hold on
political power, have traditionally included overseas Christians
within their majority. The last official census, conducted in 1932,
thus showed a 52 percent Christian majority. Today, disagreements
abound over the size of confessional groups and the allocation of
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Figure 9
Lebanon: Estimated Distribution of Confessional Groups,
1975 and 1984
Maronite 26
Druze 6-
Orthodox 9-
Other Christian 2
Sunni 24
Shia 28
Shia 41-
Druze 7-
Maronite 16
Orthodox 5?
Other Christian I
Sunni 27
For the short term, Lebanon's role as principal battle-
field for regional conflicts will provide opportunities
for groups to sell their loyalties, regardless of their
ideological commitments. Competition among the
principal foreign parties embroiled in Lebanon-
Syria, Iran, Libya, the PLO, and Israel-will ensure
that money continues to flow to their surrogates.
Although these "political remittances" bolster Leba-
nese personal incomes and the banking system, they
will probably prolong the fighting.
Economic recovery is not beyond the reach of the
Lebanese, but we do not expect the country to regain
its former prominence as the commercial hub of the
Middle East. The rise in the banking, insurance, and
transportation industries throughout the region that
accompanied the oil boom of the 1970s effectively
displaced Beirut. We believe, however, that a political
settlement could still spur significant economic recov-
ery and mobilize the human and financial resources
within Lebanon and overseas.
For the United States, the political and social implica-
tions of economic deterioration in Lebanon are great-
er than the economic implications. As the economy
deteriorates, Beirut will be less able to repay its FMS
and other debts to the United States or finance its
public-sector imports. Meanwhile, radicalization of
the Lebanese population will probably grow, increas-
ing the chance that new leaders will be less favorably
disposed to US interests in the region. Lebanon's
chaos will perpetuate its role as a scene for interna-
tional arms transfers, fencing of stolen goods, and
drug production and trafficking. The government's
weak response will further damage the economy and
increase the militias' control. The implication is in-
creasing lawlessness, possibly more terrorism, as well
as a destabilized setting for another Syrian-Israeli
conflict on Lebanese terrritory.
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West Beirut has been the main arena for most of
Lebanon's conflicts. Formerly Lebanon's commercial
center, West Beirut and the city's southern suburbs
have suffered disproportionately in the fighting as the
city has been divided along confessional lines. The
fighting and poor security situation have hampered
the flow of goods, causing periodic shortages of basic
commodities like flour and gasoline and raising
prices 10-20 percent above prices in East Beirut,
according to Embassy reports.
The population of the southern suburbs has bal-
looned from about 50,000 before 1975 to possibly
700,000 with the influx of Shia refugees since the
mid-1970s, causing severe housing and distribution
problems. The southern suburbs' chronic housing
shortage was worsened with the Israeli invasion in
1982 when almost 10,000 units in Beirut alone were
damaged. In the absence of government authority,
public and privately owned land in the southern
suburbs was taken over for housing. A 1983 survey by
the Shiite Supreme Council showed about 5,800
apartments housing 35,000 people were built illegally
on public and private land.
We believe that the Shia "belt of poverty" around
Beirut offers fertile ground for proselytization of
disaffected Shia youth by radical Shia groups. Ac-
cording to Embassy reporting, Hizballah transmits
its revolutionary Islamic message to villages in the
south through small communities of refugees who
migrate between Beirut and Shia areas in the south.
We believe Hizballah's success throughout Lebanon
will largely depend on its growing appeal to a disaf-
fected young population of the southern Beirut
suburbs.
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