State Collusion or Erosion During a Sovereign Debt Crisis: Market Dynamics Spawn Informal Practices in Lebanon

Abstract

This chapter contributes to an understanding of the role of Lebanese political elites in molding state institutions and distorting Lebanon’s public finances, which severely skew Lebanese citizens’ attitude toward informal economic practices as Lebanon plunged into a sovereign debt crisis in 2020. While it faults elites for nurturing an unsustainable political-economic model that builds on state debt, harms the balance of payments, and structures the economy around unproductive sectors that benefit a privileged few, it gages the impact of these institutional shifts on citizens’ embracement of informality. It finds that central bank restrictions on citizens’ access to their U.S. Dollar bank deposits, coupled with monetary dislocations that create multiple currency exchange rates on the market, spawn a set of informal economic practices. It reveals that citizens’ adoption of this informality helps them salvage part of their frozen assets, challenge state regulations of the market and national currency as a larger volume of business activity now occurs outside formal channels, and, quite significantly, contest the political-economic model undergirding Lebanon’s sectarian system. In so doing, citizens’ espousal of informality helps them implicitly negotiate a new social contract with the state and Lebanese elites by shifting the old economic model that underpinned this dominant sectarian system.