Lebanon must face up to its economic problems by Yakoub El Khazen

Lebanon must face up to its economic problems

Editor’s note: What follows are abridged extracts from the economic program of the Lebanese National Bloc, one of the country’s opposition groups, outlining what Lebanon must do to overhaul its economy and place it on a stable platform for future investment and development. The party proposes a series of measures to reduce public debt and stimulate the economy along with plans to improve the country’s education system and improve women’s rights. Its proposals are a timely reminder of the many economic problems facing Lebanon, which to date few politicians have seen fit to discuss during the current election campaign.

A number of our proposals have been discussed by previous governments and others but never implemented due to the archaic nature of Lebanese politics, made worse by 30 years of Syrian domination, a situation that thwarted any post war national growth. Simply by eliminating waste, fighting corruption and implementing already approved projects, Lebanon can make an immediate change for the better. However, this will not happen unless competent and credible leaders make it happen.

Prior to the assassination of former Prime Minister Rafik Hariri, Lebanon had, for the previous 18 months, enjoyed relatively robust economic activity, which allowed for the replenishment of reserves, high Gross Domestic Product (GDP) growth rates in 2004, vigorous financial sector liquidity through swaps and “Paris II” soft loans, a reduction of the debt-service burden and a reversal of debt dynamics for the first time since the mid 1970’s (gross debt to GDP dropped from 185 percent in 2003 to 177 percent in 2004).

The fact that these positive gains were set back by one – albeit one major – incident proves that postwar governments have not been able to effectively build the necessary foundations to reduce the vulnerability of the economy to unexpected shocks, nor for that matter, set up a sound economic policy to place Lebanon on a path toward sustainable economic growth.

The situation was aggravated by the Lebanese government’s failure to implement administrative reforms, especially the privatization program demanded by the 2002 Paris II donors’ conference, and by shelving attempts to reverse the current political and social status quo, which has so far been characterized by corruption, red tape, clientelism and incompetence. Today, there is a consensus that any political impasse will lead to an erosion of international confidence which would precipitate a financial crisis and subsequent deterioration in socio-economic conditions. It is therefore time to act with vision and tackle problems head on.

Knowing that politics and economics go hand in hand, it is essential to have a socioeconomic plan to direct the efforts of all economic players and policymakers. This will achieve the popular support needed to face and overcome the painful challenges ahead. Any post-election government should be bulging with credible and competent decision-makers, who will adhere to the principles and objectives laid out in this paper and be given free reign to reform and restructure, not to mention rebuild, the country’s economic and legal infrastructure.

Public sector reform and decentralization: a modern and flexible government:

The Lebanon of the future will have to ensure that the public administration becomes more of a meritocracy. In Western countries, particularly in Europe, the public sector is the major source of employment among youths and specialized professionals. In Lebanon, the public sector’s abysmal image is fueled by incompetence across the board and by a complete lack of accountability for civil servants, who have no concept of serving the interests of the people. An efficient, competent and modern public administration would be key to attracting foreign investments, creating jobs, and restoring confidence in the local economy.

The situation in the Lebanese public sector is not very different than what is observed in many developing countries: red tape, redundant employees, below-par productivity, an ageing workforce and machinery and the like. Similarly, the suggested remedies are those that have been called for by international organizations: reducing the size of the public sector, decentralizing decision-making, introducing new technology and reducing contact between employees and citizens to lower corruption, revamping the civil service, increasing productivity and eliminating inefficient budget-draining programs, which necessitates a stiff repression of corruption.

Economic development and growth: increasing productivity and efficiency:

Since its independence, Lebanon has adopted liberal economic policies, and its economy has been governed by market forces. Although this strategic laissez faire policy is not in danger, the 15-year war increased government intervention in the economy, created obstacles for the private sector, imposed a heavy burden on the fiscal budget and indirectly reduced economic efficiency and productivity. In addition, the war not only placed the country in a stand-still mode but put the domestic economy at a large disadvantage vis-a-vis the world and the region. The outcome for Lebanon at the turn of the 21st century can be summarized by the following: economic infrastructures have fallen behind, living standards are worse, wealth distribution has become polarized and inequitable, the economy is less diversified, sectors are dominated by oligopolies, corruption reigns, and the government fails to play its correct role as visionary and market regulator.

After years of slow growth, the economy picked up in 2004 with an estimated 5-percent growth rate. To sustain this high rate, structural and grassroots measures are required. The lifeline offered by the Paris II conference, coupled with a growth in exports and a promising tourism industry, cannot maintain the positive momentum in a globalized world unless particular attention is given to increase factor productivity. The liberalization process and the opening of markets must be accompanied by internal measures to increase competitiveness, which can be best achieved by increasing productivity and introducing a competition culture.

At the Lebanese level, and since the overwhelming composition of the economy is made up of micro, small or medium enterprises (SME), any long-term plan to promote economic growth must target SMEs. The World Bank Country Assistance Strategy (now being finalized) can serve as a platform to launch numerous projects across the country, covering infrastructure development but also capacity building, SME development, industrial modernization, and so forth. Finally, local mise-a-niveau programs coupled with free-trade agreements and a new export promotion agency provide Lebanon with an opportunity to access more foreign markets and increase exports and the export/import coverage ratio from the current 19 percent to 50 percent in five years. This ratio was less than 10 percent several years ago and, with proper polices, exports can become the driving engine behind economic growth – and could be the main source of growth if we were to include the exports of services.

Fiscal Policy: A New Tax Policy after the VAT and the 1990’s policy:

The public debt is the main challenge facing any future government, probably for the next two decades. After Paris II, and if there is to be any chance at another donors’ conference, genuine structural and institutional reforms must be introduced at all levels. The government can begin with short-term measures to inject a positive momentum, but structural reforms such as privatization and public-sector reforms cannot be postponed any longer. The government and the Central Bank have been innovative in the debt-management and restructuring policy, and more of the same must follow but with longer-term and more diversified instruments.

Today, 15 years since the end of the war and following two waves of fiscal restructuring and the emergence of a more developed statistical database permitting a better analysis of the tax burden (at least at the fiscal level) the government must revise its tax policy, introducing new instruments, changing strategies and rates, and undertaking what is necessary to promote private investment and greater economic activity.

In sum, the fiscal reform policy must rely on three basic pillars: increasing the primary surplus and rationalizing expenditures; introducing institutional reforms to improve credibility, transparency and better planning; and initiating structural reforms to increase competitiveness and economic growth.

Privatization:

Growth and modernization of the economy (and not to generate revenues) require privatizing state-owned enterprises. This can take several forms, including build-operate-transfer deals, management contracts, full or partial sale and partnership with strategic international investors. This remains the main pillar to take the Lebanese economy to an emerging-economy status from one of developing postwar reconstruction.

The privatization program has been stalled since its creation by the government of former Prime Minister Salim al-Hoss in the last quarter of 1998, when a framework law was passed and a Higher Privatization Council was later created.

In the late 1980’s and 1990’s a privatization boom was taking over many developing and emerging markets, attracting billions of dollars in investment and state-of-the-art technologies that eventually transformed their economies and developed their capital markets.

On the other hand, and specifically in Lebanon, the privatization wagon was missed: The Beirut Stock Exchange remains a ghost institution, the Higher Privatization Council first became paralyzed and was then dissolved, BOT telecom contracts prematurely were canceled, and litigation and disputes with international investors took place – all of which dropped Lebanon off the radar screen of the international community at a time when local state enterprises were disintegrating, losing market value and efficiency, and costing the government millions of dollars annually.

While restructuring and legislative development – including the introduction of a competition law and a regulatrory authority remains a prerequesite to any sucessful privatization program, the government must politically and fully commit to the privatization option and announce its intention to resume the privatization program. The Higher Privatization Council must be re-established with a wider mandate in order to monitor and regulate the entire privatization process and ensure transparency. The state should also sort out the mess that had been created in the mobile phone operators’ case and restore credibility with international investors.

Privatization is not – and should not be considered – an option to generate revenues to meet short-term fiscal needs. Rather, it must be viewed as a process that will yield dynamic economic benefits. In fact, there is a consensus following international practices which proves that privatization, among other things, accomplishes the following:

1. It attracts foreign and domestic direct investment, and injects capital.

2. It develops capital markets.

3. It invites new technologies and increases productivity.

4. It provides better service at lower cost to domestic consumers.

5. It promotes economic efficiency and competitiveness.

The list of candidates to be privatized in Lebanon is not as long as in regions where the state formerly owned and ran the economy – such as East Europe or North Africa – but it does include most state-owned service providers such as telecommunication, power and energy, transport facilities and authorities, water authorities, MEA and the tobacco regie.