Without Hezbollah, Lebanon's Economy Could Rise Out of the Ashes

It's a long shot, but even amid financial crisis, dysfunctional government and brain drain, Lebanon has many of the raw materials to start over

David Rosenberg

Back in 2021, it was hard to see how Lebanon could fall any further. The economy had been shrinking since 2011. It fell off a cliff in 2019, with gross domestic product falling by more than half over two years after the national Ponzi scheme that had kept the economy afloat collapsed. The country defaulted on its foreign debt in 2019, its financial system was paralyzed and its main port was decimated in an explosion in 2020. Elections in 2021 resulted in a political stalemate that left the country without a permanent government or president.

As it turns out, things could get a lot worse. As Israelis hail a decisive victory over Hezbollah, Lebanon is being pummeled by Israeli bombs. Hundreds of thousands of residents in the south have fled for fear of Israeli airstrikes. The government – three years later, still a caretaker without a president – not only can't defend the country, it has done nothing to help the refugees or care for the wounded. "They have no money and they have no control over what's happening on the ground," Mark Daou, a lawmaker, told The New York Times.

The old chestnut about Lebanon being the Switzerland of the Middle East is nothing more than a fun fact out of the distant past for the history books. The last time Beirut could boast of being a major banking center was before its civil war erupted in 1975. Today, it would be better described as the Somalia of the Middle East, with warlord No. 1 being Hezbollah.

Yet the Somalia comparison isn't entirely fair. Amid all the dysfunction and chaos in Lebanon, there remains considerable latent potential to return to the glory days.

Rebuilding the economy will not be easy. The government is hopelessly corrupt and ineffectual, as evidenced by the fact that five years into the biggest peace-time economic collapse since the 19th century, it has not even proposed a recovery plan. It is heavily in debt and since it defaulted, can no longer tap the international financial market for funds. Infrastructure is in shambles. The state power company doesn't come close to meeting electricity demand, leaving Lebanese to rely on private generators. The only way an ordinary Lebanese can get his or her money out of the bank is by robbing it.

In the short term, the economy may be even worse off without Hezbollah, which the hundreds of millions of dollars a year it received in Iranian funding was spent on local goods and services. Lebanon also stands to lose the export receipts from Hezbollah's drug smuggling, arms and cigarette smuggling, and currency counterfeiting mainly in Latin America.

There is also a risk that Israel's successful assault on Hezbollah over the past two weeks could set off a new round of sectarian fighting in Lebanon and destroy the last remnant of political stability and a functioning economy. "The demolition of Hezbollah's capabilities will likely embolden its opponents and anti-Iranian forces within Lebanon," Imad Salamey, an expert on Lebanon at the Lebanese American University, told Al-Jazeera television.

But the reverse could also happen: the elimination, or at least the significant weakening, of Hezbollah could remove its baleful influence and enable Lebanon to begin rebuilding its decimated economy.

Silver lining

Among other things, Lebanon would have to contend with far fewer Western sanctions, most of which are directed at Hezbollah and affiliated institutions. It is just possible that freed of Hezbollah interference, a government can finally be formed. Aid and investment from the Gulf and the West may be forthcoming for the first time in years.

Perhaps a more intense effort to find natural gas off Lebanon's Mediterranean coast will get underway. Lebanon's enormous diaspora – estimated at 15.4 million, almost three times the domestic population – could be a source of capital and for opening up foreign markets, just as the Jewish diaspora was for Israel in the past. There is even a silver lining to Lebanon's feckless government, namely less government red tape and low taxes.

But in the end, Lebanon's economic fate will depend on its people, or more precisely its human capital. Without significant natural resources or a domestic market to support industry, the future will depend on its becoming a knowledge economy, one based on technology and sophisticated services, as Tarek Ben Hassen, a Qatar University economist, proposed in a recent article.

Not surprisingly, even in 2019, before the roof caved in, Lebanon had long ceased to be a globally competitive economy. The World Economic Foundation's Global Competitiveness Report that year ranked Lebanon 88th of 141 countries, one notch below Tunisia and one above Algeria – not the kind of neighbors a self-respecting country would want on this league table.

But on a few critical metrics, Lebanon came out looking much better. It placed 24th on graduates' skill sets, 23rd on digital skills and 26th for imparting critical thinking in primary school teaching. And, these rankings probably understate Lebanon's talent base: Like many countries, they are an average between a highly skilled elite and a less skilled majority. But a knowledge economy can get started with a small elite, if it is sufficiently capable.

Lebanon has another knowledge economy asset in its system of higher education. Despite all the economic and political vicissitudes of the last few years, six Lebanese universities are ranked among the world's top 1,000 (top-ranking American University of Beirut comes in at 250), according to the QS World University Rankings for 2025.

And although it is not much in evidence these days amid economic collapse (the WEF ranked Lebanon 74th in 2019 for entrepreneurial culture), Lebanon has a long history of entrepreneurship stretching back to the days of the Phoenicians. Lebanese labor costs for engineers and the like are low.

These kinds of numbers are a good foundation for a knowledge economy.

The catch is that they reflect the situation as it was in 2019; since then, the collapse of the economy caused the country's traditionally high rate of emigration to balloon 4.5-fold in 2020 and 2021. Many of those who fled were Lebanon's best and brightest, and the young who contend with a youth unemployment rate of nearly 50 percent.

If Lebanon can get its act together, it may be able to lure many of these expatriates back. The knowledge that Hezbollah is no longer casting its shadow over the country will certainly be an incentive. The wreckage that Lebanon is today may be seen by the most ambitious and entrepreneurial as an opportunity.

With or without Hezbollah, establishing relations with Israel is unlikely. But if Lebanon were to do that and establish a warm peace involving trade, tourism and business deals, like the one between Israel and the other Abraham Accord countries, the road to a thriving economy would be that much shorter.