August 2017
Shielding Lebanon’s Industrial Sector from the Resource Curse

Economists have long warned of potential adverse effects that natural resource rents can have on national economies. At the heart of this matter is the so-called “resource curse paradox”, namely that the presumed benefits of resource extraction can result in severe negative social and economic consequences including conflict, widespread corruption, and even poverty. Lebanon is not immune from these risks in the event of commercial resource extraction. One avenue to mitigate the possibility of a resource curse in the case of Lebanon is through economic diversification.
 
The most commonly analyzed channels for the emergence of a resource curse are the Dutch disease phenomenon, overconfidence and neglect of human resources, and rent-seeking activities upon a natural resource discovery. More to the point, if countries fail to diversify their economies prior to a resource boom, they will grow dependent on their resource sector and thus become vulnerable to commodity prices, and this volatility will adversely affect growth. Additionally, a boom in the resource sector would necessitate the reallocation of capital and human resources from non-resource sectors (especially the high-tech manufacturing sector) to the low-tech resource sector. Once resources are depleted, those with high-tech skills would have already lost out on experience needed in the non-resource sectors. Consequently, it would be very expensive to reallocate and invest in human and physical capital in the more high-tech, non-resource sectors again, thus leading to adverse effects on economic growth in the long term.
 
Nevertheless, the successful extraction of valuable natural resources need not signal doom and gloom. Some countries have indeed become growth winners due to their resource wealth, including: Norway, Botswana, Canada, the United States, and Australia. The aforementioned countries challenge the resource curse hypothesis and show that non-renewable resource endowments can indeed be blessings. Some studies have shown that oil abundance has positive effects on growth and on institutional quality, which further demonstrates that resources can be blessings not only from an economic perspective, but from a social one too. However, what is common among all growth winners is the adoption of a solid industrial policy that helped those countries deal with windfall resource revenues. Natural resource supply is ultimately limited and by the time resources are depleted, countries should have planned well enough to ensure their non-resource sectors have not shrunk to non-redeemable extents. This is where economic diversification policies are needed to render oil revenues a blessing as opposed to a curse.
 
Lebanon now finds itself in a position where it must consider and weigh the potential benefits and pitfalls that could result from future petroleum production off its coast. This is particularly pressing given Lebanon’s already-weak and long-marginalized industrial sector. Lebanon’s industrial sector has not been operating at full capacity, particularly as the country’s economy remains dependent on the service sector. Indeed, this has increased the country’s vulnerability to exogenous shocks and political instability that have long plagued both itself and the region.
 
A central idea in modern economic growth theory is that any country aiming to create inclusive and sustainable growth must diversify its economy first by producing more sophisticated goods, i.e. goods with high value-added to the economy. Even though Lebanon’s industrial sector is not highly developed, its not-so-poor diversification status does offer a glimmer of hope. In fact, the Lebanese industrial sector is well positioned to make more complex products that have the potential to help sustain industries already in the country as well as spur an expansion into making other, more complex products. Furthermore, upon taking a closer look on Lebanon’s productive base, Lebanon could focus on developing its productive capacity in complex goods it already has a presence in, namely those involving machinery and chemical products. In this sense, Lebanon is set to benefit from sound industrial policy to revive its long-neglected industrial sector. However, this could all be at risk if policies aimed at supporting the country’s productive sectors are not instituted before petroleum extraction comes online.
 
Finally, a positive outcome from resource extraction is unlikely unless a coherent industrial policy is adopted involving a strong public-private process. The government’s support is needed in terms of providing needed public inputs such as infrastructure and regulations, in order to help existing industries in Lebanon improve their productivity, expand to nearby opportunities, and diversify their production set. With such a strategy, Lebanon would be less likely to fall into the resource dependence trap.