This article is part of a report outlining an actionable US roadmap to win in Lebanon, comprising eight chapters of specific policy interventions across the security, economic, and political dimensions needed to secure a sovereign Lebanon, lock in US gains against Iran, and permanently end the Israel-Lebanon conflict.
Key Takeaways
- Lebanon’s economic crisis is a deliberate outcome of a predatory Player State that actively crowds out competition to sustain internal monopolies and state-sanctioned cartels.
- The state must transition from a market participant to a neutral Referee, strictly enforcing competition and the rule of law across both the public and private sectors.
- The international community must stop underwriting this broken system with unconditional aid and instead focus on helping Lebanon physically secure its economy and build independent regulatory institutions.
- Economic empowerment must shift to the Lebanese individual rather than sectarian groups, effectively starving illicit networks and breaking the mafia-militia alliance from within.
The Death of the Merchant Republic and the Mafia-Militia Synergy
For decades, the romanticized myth of Lebanese laissez-faire has masked the stark reality of a state-managed oligopolistic economy. The current Lebanese regime does not govern; it operates as a Player that actively picks winners and losers to sustain an economic system best described as a deeply entrenched mafia-militia alliance.
To understand this, one must look at the historical distortion of the Lebanese state. In the 1960s, under President Fouad Chehab, Lebanon attempted to build a modern welfare state with robust public institutions and civil infrastructure. However, this nascent institutionalism was hijacked by sectarian militias during the 1975-90 civil war. The turning point came in the 1980s with militia capture that decisively fractured the state’s authority, subjecting the national economy to the whims of warlords. The Taif Accord in 1989, which ended the war, did not resurrect the Chehabist state; rather, it institutionalized the militias, transforming warlords into politicians and permanently fusing the mafia with the militia. This setup manifests as a systemic protection racket: an armed faction like Hizballah provides the militant muscle to shield elements of the political establishment from accountability, while allied crony capitalists exploit control over state ministries to monopolize essential sectors and siphon off public funds.
This alliance operates on an extortionist model, using the perpetual threat of state collapse and regional spillover — for example, leveraging security threats or refugee crises — to extract “stability” funds from the international community. Consequently, meaningful macroeconomic reform, such as adhering to International Monetary Fund (IMF) conditions, is fiercely resisted by the ruling class because transparency poses a direct, existential threat to their rent-seeking mechanisms. Instead of initiating reform, these cronies rely on financial sleight-of-hand and the cynical exploitation of the Lebanese diaspora, treating their remittances as a permanent subsidy for a comprehensively failed domestic model.
However, the era of financial ruses is over. The regional geopolitical umbrella that protected this system has collapsed. The fall of Bashar al-Assad’s regime in Syria in December 2024 dealt a fatal blow to the political architecture that had sustained this mafia-militia model in Lebanon since the 1980s. The regional paradigm has deeply changed, yet many Lebanese pundits and political elites refuse to see the new reality, clinging to the old rules at their own peril. Today, this denial is most visible in how political blocs continue to systematically paralyze IMF-mandated banking reforms and obstruct independent appointments to regulatory boards, preferring to protect the monopolies of their cartel allies rather than surrender their patronage networks to open competition. The economic gravity of a modernizing, integrating Middle East is going to impose itself. The Lebanese government must prepare the country to benefit from this new reality, and the only viable path forward is establishing a regulatory Referee State capable of fostering a modern competitive economy.
In fact, the election of President Joseph Aoun in 2025, alongside the subsequent appointment of Prime Minister Nawaf Salam, provided a distinct glimmer of hope for a pivot toward institutional accountability and the rule of law. Their arrival at the executive helm signaled a potential willingness to finally reassert state sovereignty and break from the paralyzing gridlock of the past. Yet the “entrenched state,” which is an intricate web of bureaucratic rent-seekers, sectarian gatekeepers, and cartel bosses, remains fiercely ingrained in the public administration. This ongoing resistance proves that simply changing the faces at the top is insufficient; unless the structural monopolies are systematically dismantled by a regulatory state, this alliance of rent-seekers and gatekeepers will simply wait out the reformists and suffocate any top-down efforts.
The Bloated Player and the Sanctioned Cartels
The culture of cartelization begins within the state itself. The Lebanese public sector functions almost entirely as an instrument for political patronage and loyalty rather than a mechanism for service delivery, creating a bloated bureaucracy that drains fiscal resources and crowds out private enterprise.
This state failure is deliberately maintained in essential sectors. For instance, the state electricity company, Électricité du Liban (EDL), vehemently resists decentralization and regional grid integration to preserve its central monopoly. Because EDL only provides power for a few hours per day, the result is a total systemic failure where Lebanese citizens pay some of the highest effective electricity costs in the world, forced to rely on a clique of private diesel generator operators who earn outsized profits while state inefficiencies incur billions of dollars in annual losses. This manufactured dependency effectively acts as a regressive household energy tax that perpetually keeps Lebanon reliant on emergency assistance and foreign aid from actors like the European Union, Arab Gulf states, and the United States, cementing Washington’s interest in reforming this sector. Similarly, the telecommunications sector (managed by state-owned networks Alfa and Touch) acts as a regressive tax on the digital economy. Historically ranking among the most expensive in the world relative to purchasing power, Lebanon’s telecom sector delivers low-quality service while serving as a cash cow for political elites. This deficit-driven cycle necessitates a perpetual “governance of beggars” posture toward international donors. However, these traditional donors, primarily Arab Gulf states and France, grew exhausted by this model and ceased financing Lebanese governments that were effectively appointed by Syria and Iran from 2011 until the collapse of the Assad regime.
This entitlement culture is perfectly mirrored in the private sector. Professional associations and private sector guilds, spanning engineers, physicians, lawyers, pharmacists, and strictly capped professions like notaries public and customs clearing agents, weaponize arbitrary constraints and licensing requirements to construct dense barriers to entry. Even more damaging are the commercial monopolies enshrined in Lebanon’s exclusive-agency laws. Relics of the mid-20th century, these laws grant single families or conglomerates the exclusive right to import critical goods, ranging from pharmaceuticals and automobiles to basic food commodities. For example, exclusive import monopolies on some essential goods mean Lebanese families often pay exorbitant markups simply to secure life-saving medicines. This “sanctioned cartel” model artificially inflates the cost of living and prevents genuine market competition, guaranteeing that innovation is stifled and national wealth remains concentrated within a narrow, unaccountable elite.
Physical Isolation and Starving the Beast
To maintain these monopolies, cartel networks rely on physical isolation and infrastructure bottlenecks. Essential infrastructure functions as a gatekeeping mechanism: the country’s reliance on a single airport and a handful of ports effectively creates physical “toll booths” controlled by the elite.
For decades, the aviation monopoly of Middle East Airlines (MEA) and the state’s stubborn refusal to adopt true Open Skies policies actively isolated Lebanon from global and regional tourism. However, the formal termination of MEA’s 57-year monopoly in mid-June 2026 represents a watershed moment for potential market liberalization. This shift coincides with recent encouraging signs regarding the opening of a second commercial hub in the north — the René Mouawad Airport in Qleiat. Following the award of the operating contract to Sky Lounge Services, Prime Minister Salam formally launched the airport’s redevelopment on June 6, 2026, with full commercial service targeted for November 2026. Yet the true test of a newly established Referee State will be in the execution. While independent startups like Mada Airways are preparing to enter scheduled commercial service from Qleiat, the deeply entrenched system will undoubtedly attempt to protect legacy interests. As MEA prepares to launch a low-cost subsidiary, Fly Beirut, in 2027 to defend its market share, the state must ensure that genuine competition is rigorously protected, preventing incumbent actors from using subtle regulatory capture to sabotage new entrants and artificially inflate passenger and freight costs.
Similarly, the protection of domestic fuel import cartels has caused a total failure to integrate Lebanon into regional oil and gas pipelines. History proves this isolation is a choice, not a geographic destiny. In the mid-20th century, the Trans-Arabian Pipeline (Tapline) connected Saudi oil fields directly to the Zahrani terminal in southwestern Lebanon, and more recently, the Arab Gas Pipeline was designed to supply the Deir Ammar power plant in the north. Yet these physical integrations have been left to rot or actively sabotaged. Why? Because connecting to regional pipelines and power grids would bypass the local maritime fuel-importing cartels and trucking businesses that reap artificially high profits.
Compounding this physical isolation is the collapse of the banking sector since 2019, the product of a massive state-sponsored Ponzi scheme. Because the economy had relied heavily on physical US dollars since the early 1990s, that collapse pushed Lebanon into a primitive, almost purely cash-based economy. This outcome is not a mere byproduct of the crisis; it is a feature that actively facilitates money laundering, tax evasion, and the consolidation of the informal power of paramilitary groups and corrupt elites. Today, largely unregulated financial “boutiques” and money transfer shops have replaced banks and operate largely outside the scope of international anti-money laundering (AML) compliance. This deliberate regulatory vacuum recently culminated in Lebanon being downgraded to the Financial Action Task Force (FATF) “gray list,” which is a punitive designation that further isolates the country from the global financial system, and one that the current paralyzed governance structure is struggling to reverse. To genuinely assist Lebanon in escaping this designation, the United States must pivot from relying solely on punitive sanctions to providing robust, targeted technical assistance from the Treasury Department. By actively empowering Lebanon’s Financial Intelligence Unit (the Special Investigation Commission, SIC) to aggressively audit these unregulated money transfer shops and prosecute illicit cash flows, Washington can directly help Lebanese authorities dismantle the financial networks of paramilitary groups while helping Lebanon restore its standing in the global financial system.
To dismantle this economic system, the state must “starve the beast” by reasserting absolute control over its physical and financial entry points. Militiamen and cartel bosses cannot survive under the harsh sunlight of public scrutiny. Implementing a comprehensive digital government (e-gov) framework will eliminate the petty bureaucratic bottlenecks that allow public servants and political overlords to extract ransoms from the populace just to do basic paperwork or pay fees.
Physically, this necessitates the aggressive deployment of automated scanners, sophisticated camera networks, and digitized customs protocols at all seaports and the airports in Beirut and Qleiat. Furthermore, the sprawling network of illegal land crossings into Syria must be systematically closed. The United Kingdom has previously provided valuable military aid to the Lebanese Armed Forces (LAF) to build border watchtowers; this model must be taken seriously, scaled up, and fully integrated with advanced surveillance technology. For US policymakers, assisting in securing these borders is not just a logistical upgrade; it would directly advance American national security interests by choking off the very smuggling routes used to finance and arm regional proxy networks and historic drug trafficking routes. Financially, Banque du Liban (BdL), Lebanon’s central bank, and its SIC must allow the entry of new, compliant foreign banks to restore clean capitalization, while bringing every informal money boutique under strict, unyielding central bank surveillance. Eliminating illicit financial flows and ending the cash economy is the non-negotiable prerequisite for economic survival in the 21st century.
Restoring Trust and the US Policy Imperative
Trust is the ultimate currency of economic recovery, and in Lebanon, it has been depleted. Financial capital, whether domestic diaspora wealth or foreign direct investment, will not return to a black hole of cash transactions and unregulated borders. Once the state begins to starve the illicit economy and secure its physical infrastructure, the foundational trust required to invest in Lebanon can be restored. This restoration must be anchored in transparent, internationally standardized mechanisms, such as rigorous public-private partnerships (PPPs). Lebanon requires a massive injection of financial capital to rehabilitate its basic infrastructure — including electricity, water, transport, airports, ports, and telecommunications — which has been devastated by years of conflict and intentional state neglect. By utilizing PPPs and strictly enforcing the Lebanese Public Procurement Law, the state can ensure that this monumental redevelopment is insulated from the patronage networks of the past.
To fully restore monetary trust, Lebanon must fundamentally rethink its currency. Given that the Lebanese lira, which has been governed by the outdated Code of Money and Credit since 1963, has been debased twice, first in the 1980s and again in 2019, there is a strong argument that the state lacks the fiscal discipline necessary to maintain its own currency. The government has historically exploited the BdL as its own bank of last resort to finance structural deficits. Moving forward, the state must either fully dollarize or explicitly abandon the lira and issue an entirely new currency to completely strip the government of its ability to artificially finance its patronage systems.
Nonetheless, it is vital to have a nuanced understanding of Lebanon’s current gray or parallel economy. The informal economy is not inherently bad; rather, it is a rational response by enterprising workers and businesspeople to a predatory state. The state must draw the informal economy back into the formal sector not through punishment, but by making formalization the more individually rational choice — making participating in the formal sector genuinely more attractive than staying outside it. The state must abandon its historical approach of acting solely as the taxman, arriving to eat into profits. Instead, making paperwork automated, cheap, and easy must become the default for conducting business.
Only a fair, flexible Referee government, supported by an improved and well-paid justice system, can achieve this “economic regime shift.” Judicial reform is the linchpin. The government must clean up the justice system, protect it from political interference, and vastly improve compensation for judges so they are immune to bribery. Furthermore, judges require constant, specialized training on modern economic laws, anti-trust enforcement, and human rights. This is a highly actionable recommendation where US and foreign aid money can, and should, be spent to yield tangible structural results.
For skeptical US policymakers, the strategy must pivot from reactive crisis management to proactive state-consolidation. The United States can help the Lebanese state, as a whole, become a strict, uncompromising Referee. There is historical precedent for this approach: much like the institutional and technical assistance provided to South Korea in its formative economic years, US diplomatic and technical support should be rigidly conditioned on structural empowerment. This does not mean replicating a model of the state picking market winners, but rather providing the rigorous developmental scaffolding necessary for robust institution-building. The cornerstone of this roadmap must be the establishment of a fully independent, internationally aligned Competition Authority (or Bureau). This body must possess extensive prosecutorial freedom, operating with the institutional independence of a central bank, with the explicit mandate to break up private guilds, dismantle legislative exclusive agencies, and enforce anti-trust laws across the nation.
Regional Integration and Breaking the Cycle
By dismantling these cartels, Lebanon can transition from a culture of entitlement to a genuine meritocracy, removing the barriers to entry that currently block startups, small and medium-sized enterprises (SMEs), and the nation’s highly educated youth. The government must incentivize formalization by choice, creating tax frameworks and legal protections that make the formal sector vastly more attractive than the parallel economy.
When the Lebanese state acts as a reliable referee, it establishes institutional credibility and legal predictability, which naturally opens the door to regional integration. The strategic priority must be reconnecting the country to the Arab Mashreq and the Gulf. This means prioritizing integration into the regional electric grid, developing modern highway and rail links to lower transit costs, and expanding market reach. A powerful, recent indicator of this potential is the Saudi government’s June 2026 decision to once again allow Lebanese exports into the kingdom. This diplomatic opening, alongside visionary regional infrastructure discussions like the revival of a modern Hejaz railway network connecting the Levant to the Gulf, signals that regional markets are ready and willing to engage with a normalized, competitive Lebanese economy, provided the internal governance structures are sound.
Lebanon’s potential is not permanently locked inside international donor vaults; rather, its future is being held back by artificial barriers imposed by cartel bosses and sectarian gatekeepers. These enablers of the status quo must be dislodged. The transition to a Referee government is the only sustainable mechanism to break this cycle, transforming the economy from a captive, survivalist enclave, which is often used by regional actors as a theater to settle scores, into a thriving regional hub.
Ultimately, this is about empowering the Lebanese individual over the Lebanese sect, clan, or militia. An economically empowered, legally protected citizen no longer needs the patronage of a warlord or mafia don to secure a livelihood. By leveling the playing field and instituting the rule of law, the state can break the mafia-militia alliance from within by sheer socioeconomic knockout. It is time for the Lebanese state to stop playing the game and start refereeing it.
Walid Marrouch is Professor of Economics at Lebanese American University. He is also a Fellow at the Centre for Interuniversity Research and Analysis of Organizations, Montreal, and at the Economic Research Forum, Cairo; an Expert affiliated with the National Centre for Social Research – International, London; and Associate Editor of the Journal of Public Affairs.
Photo by Roudy Doumit/Getty Images
معهد الشرق الأوسط (MEI) هو منظمة تعليمية مستقلة وغير حزبية وغير ربحية. لا يشارك المعهد في أي أنشطة دعوية، وآراء الباحثين فيه تعبر عن آرائهم الشخصية. يرحب المعهد بالتبرعات المالية، لكنه يحتفظ بالسيطرة التحريرية الكاملة على أعماله، ولا تعكس منشوراته سوى آراء المؤلفين. للاطلاع على قائمة المتبرعين للمعهد، يرجى النقر هنا.
Achieving a Permanent End to the Israel-Lebanon Conflict
