Lebanon's relatively small economy is based mainly on services, which have traditionally accounted for approximately 68 percent of the GDP. The sector is mainly comprised of a thriving regional banking market, tourism, and trade. Most economic activity is concentrated in the coastal cities. Other economic activity includes quarrying for the cement industry and small-scale farming, largely concentrated in the coastal plain and the Bekáa Valley in the south. Agriculture has traditionally accounted for only 13 percent of the GDP, which explains why the country is heavily dependent on the import of foodstuffs. The industrial sector is also relatively small, mostly because of the small domestic market. Jewelry, cement, processed food, and beverages are among the country's chief exports.
Lebanon entered the 20th century as a French protectorate heavily dependent on trade, especially along the coastal cities of Tyre, Sidon, Beirut, and Tripoli. Most of Lebanon's present-day problems can be traced to 1920, when the French incorporated Beirut and other coastal towns, the Bekáa Valley, and certain other districts in Mount Lebanon to form Greater Lebanon. The establishment of Greater Lebanon meant that the Maronites, concentrated largely in the Mount Lebanon area, were no longer the majority, and the population became equally divided between Muslims and Christians. In 1926, the French drew up a constitution that provided a formula for power-sharing among the various religious groups, making it mandatory for the president of the republic to be a Maronite, the prime minister a Sunni Muslim, and the speaker of the chamber a Shi'ite Muslim. This formula ensured that the pro-France Maronites exercised more control than any other religious group, allowing France to continue to control Lebanon through its close relations with the Maronites long after its full withdrawal from Lebanon in 1946.
The 1926 constitution, coupled with an unwritten power-sharing agreement known as the National Pact drawn up between Christians and Muslims in 1943, allowed Lebanon to maintain parliamentary democracy until the mid-1970s. However, rising tensions between Christians and Muslims, who by the mid-1970s became a majority and began demanding more political power, led to the outbreak of the civil war in 1975. In the immediate years before the outbreak of the war, Maronite Christians, feeling threatened by Muslim demands, resorted to violence to crush Lebanese Muslim opposition. They also wanted to oust the Palestinian Liberation Organization (PLO), which had a strong presence in Lebanon in the 1970s and was seen as an ally of the Muslims. The civil war intensified and broadened during the 1980s, with Palestinian refugees and their allies launching attacks into Israel from Lebanon, and the taking of Western hostages in Beirut by various Arab guerilla groups (guerilla groups practice non-conventional warfare in an effort to wear down the resistance of their adversaries). Syria was also involved, stepping in to fill the vacuum left by the weak Lebanese government and army. In an effort to stop the attacks and destroy the PLO, Israel invaded southern Lebanon in 1982, and it required major efforts by the United States and other powers to stop the fighting—at least temporarily—and escort the PLO out of the country. But Lebanon's war dragged on and did not end until 1990, with the adoption of the U.S./Arab-brokered Ta'if accords, which essentially recognized Syria's continued involvement in Lebanon's affairs and slightly adjusted the power-sharing formula among the various religious groups designed by the French in 1926.
Until 1975, Lebanon's economy was characterized by minimal state intervention in private enterprise. In those years, the country managed to transform itself into a major banking center by avoiding restrictions on foreign exchange or capital movement and enforcing strict bank secrecy regulations. Lebanon's economic infrastructure , however, was severely damaged by the 1975-90 civil war. International organizations estimated the cost of physical destruction to be between US$25 billion and US$30 billion. Since the end of the civil war, the country has been engaged in an economic reconstruction process and has made significant progress toward the restoration of democracy. As a result, inflation fell from more than 100 percent to 5 percent between 1992 and 1998, and foreign exchange reserves jumped to more than US$6 billion from US$1.4 billion in the same period. The Lebanese pound has been relatively stable. Much of the physical and financial infrastructure damaged during the war has been rebuilt.
Lebanon's economic policy after the war has been largely shaped by Rafik al-Hariri, who served as prime minister between 1991 and 1998 and returned to power in August 2000. Hariri's economic policies have focused on reconstructing the country's war-damaged economy through the infusion of huge capital into the construction sector. Much of this capital has come from Lebanese expatriates and Arab investors from the Persian Gulf region. As a result, the period between 1991 and mid-1996 witnessed high levels of growth. This growth, however, slowed in 1996, mainly as investor confidence began to weaken in the wake of Israel's 2-week bombardment of the country in April 1996. The resulting economic slowdown has affected the country since, and attempts by the government to curb inflation by raising interest rates has caused the economy to slow even further. The Lebanese economy has been in recession since 1999, and the country's real GDP has experienced a decline of 0.5 percent, mainly the result of the drop in private demand, consumption, and investment. The government's huge spending bill has fueled a large budget deficit , which was equivalent to 53.5 percent of expenditure in the first 7 months of the year 2000.
Lebanon in 2001 continues to be primarily a free-market economy and is by far the most liberal among Arab economies. Since the end of the civil war in 1991, the country has had a fairly stable multiparty system and is strongly supported by the United States and the European Union. The main challenge facing the economy is the large budget deficit, which is fueled by a substantial government debt, mostly spent on reconstruction and a large government bureaucracy. A hike in public spending has thus far failed to stimulate economic growth. Further, the government's privatization program, launched in the first half of 2000, has thus far not been successful; in May 2000, the Lebanese parliament adopted a new law that sets the general framework for privatization. However, privatizing state-owned companies is going very slowly and hinders true economic reform.
Corruption is widespread in Lebanon. Officially, several anti-corruption regulations are in place, but they are rarely enforced. According to the U.S. State Department, corruption is more pervasive in the public sector than in private businesses, and is especially evident in procurement and public works contracts. A 1998 study by the World Bank estimated that at least US$45 million is spent annually in bribes to brokers and government officials. Between 1998 and mid-2000, the cabinet of Prime Minister Salim al-Hoss made it a priority to fight corruption, which it mostly blamed on Prime Minister Rafiq al-Hariri's economic reconstruction drive while he was in office. The government's initial efforts to enforce anti-corruption measures led to the dismissal of hundreds of public servants, but the general verdict has been that corruption continues to be pervasive in the country.