Executive Magazine

How corona could fulfill a long-held economic worry

by Thomas Schellen March 12, 2020

written by Thomas Schellen

At the time of writing (March 12) the number of known coronavirus infections had exceeded 126,000 and that the death toll was above 4,600 persons. Governments around the world have dedicated increasing medical, social, humanitarian, and financial resources toward bringing the threatening virus under control. At the same time, worries over the economic impact of the global pandemic have geared up to the point when the metaphor of a black swan (an outlier or rare financial crisis) has been employed by some financial experts.

In terms of what (rather than a black swan) might more neutrally be dubbed a combination of a pandemic and potential global recession, companies around the world are showing impacts, from manufacturers in China and South Korea to the internet giants on the west coast of the US, and banks and financial firms in New York and London. The latest new and massive disruption to the world economy by March 12 was an announcement by US President Donald Trump that passenger travel from Europe would be severely restricted. With equity markets tumbling further as the second week of March got underway, it was impossible to estimate where the corona fall would reach its bottom. Publicly traded companies in developed markets saw the share prices drop in broad ranges, led downward by listed tourism and travel companies, such as airlines and cruise operators but also event management companies. Travel and tourism companies, listed or not, anywhere in the world concomitantly experienced weakened demand besides falling market valuations.

Thus potentials for drastic contractions of business in countries heavily affected by the coronavirus outbreaks, such as China and South Korea, are emerging in tandem with a parallel contraction of global business. According to customs data released in China last month, exports fell by 17.2 percent and imports fell by 4 percent for the first two months in 2020 when compared with January and February of 2019. Expectations cited in media went as far as speculating on economic growth dropping to as low as 2 percent in the first quarter of 2020, compared with 6 percent growth in Q1 2019. The associated temporary stoppages of corporate activity have, moreover, been estimated to deny the global economy supplies of components of up to 50 billion dollars just in the month of February.

Among major European economies, industrialists in Germany expect a continued recession in their sector. The manufacturers’ association Bund Deutscher Industrie, which already had to deal for the last six quarters with contracting production, said recently that it expects German industries to be stuck in recession throughout 2020, attributing this assessment not to political factors such as trade conflicts with the United States but to the global spread of the coronavirus and its economic implications. In the same vein, financial analysts in Italy have uttered expectations of a national recession in 2020. In Britain, expectations are for a stagnation in the first and contraction in the second quarter, while analysts in France also expect a recessionary development. On the bottom line of global economic expectations, economists in Germany, the UK, the US, Japan, and other G7 countries were speculating about a prolonged global recession engulfing OECD countries, with minor economic powers and small countries likely to be dragged along for a bad ride.

Recession, recession everywhere

The idea of a recession is deeply embedded in the mind of the average economist. This is to say, academic economists theorizing about cycles of expansion and contraction have been wedded to such concepts for at least a hundred years, since research of business cycles by scions of the profession—persons such as Nikolai Kondratieff, Wesley Mitchell, Arthur Burns, Simon Kuznets, and Joseph Schumpeter—elevated business cycle theories into international economic orthodoxy. Of course, cultural knowledge of multi-year economic cycles is much older. The central academic temple with air of quasi-religious authority on business cycles in the US, and with it expectations of recessions, is the National Bureau of Economic Research (NBER), which regularly surveys large numbers of economists what their expectations are in this regard.

Last year, around the middle of 2019, NBER surveys showed a heightened predilection of economists to expect a recession—but basically a garden-variety one, nothing undue or severe—to hit the US at some point in 2020, most probably toward the year’s end. By reckoning of many economists later in 2019, however, the onset of a recession in 2020 seemed counter intuitive to the upbeat economic sentiment that was prevailing then—when the mood was once again shifting to increased optimism over the good performance of US stock markets and promising data on economic trends in production and employment.

But in the first quarter of 2020, widespread expectations of a recession could not come as total emotional shock, especially taking into account not only data on the economy but considering external impacts such as a natural catastrophe, including an epidemic. Catastrophes or wars have long been understood to constitute potential triggers for a contraction and alteration of the business cycle, which in itself is not predictable in terms of its periodicity of shifting between expansions and contractions.

(By the definition of the NBER a recession does not consist of two or more not consecutive quarters of linear GDP contraction but rather the period between the top of a business cycle and its trough, consisting of “a significant decline in economic activity spread across the economy” that lasts for more than a few months and is usually reflected by developments of real GDP, real income, employment, industrial production, and wholesale-retail sales.)

Still, it is noteworthy that global moods have been fluctuating from initial optimism over abilities of markets to rebound and continue their long, slow expansion of the past ten years (the beginning of the latest expansion period in the US economy according to NBER was in June 2009) to concerns over a prolonged global economic downturn, or recession. This recession may now be spreading from large producer countries in East Asia, due to skyrocketing fears of epidemics in previously complacent “advanced” societies at the top of the global wealth roster of high GDP, plus nervous financial markets in the US, Europe, and Asia. Although central banks are responding across developed economies, many observers concur that the banks’ capacities to soften the corona impact may be minor, due to generally challenging monetary environments that stand against intervention capacities of these banks.

The virulent trigger

The trigger for all this involves the coronavirus, which, although far from being lethal in direction of an extinction level event in the manner of a scientific horror movie, was discovered to be highly infectious and capable of spreading despite immense efforts of containment by quarantining entire provinces and metropolises. Surrounded by a combination of justified medical concerns and an “infodemic” (a term used by the World Health Organization) entailing unwarranted panics, uncontrollable online rumor mongering, and outpourings of criminal energy by some who seek to cash in on those rumors and fears, the virus outbreak’s impact on economic activity negates some recent signs of recovering national strengths—such as the improvements in the US economy, moderate growth in China and, albeit feeble, post-Brexit optimism in the UK.

But even more concerning might be the impact on countries that in the current global GDP growth scenarios have already been marked by worrying signs of debt, anemic growth, unemployment, or recession. These run from weak economies in emerging markets like India, Brazil, and Turkey to political troubles in Iran, Iraq, and a number of developing and least developed countries under autocratic rule. Added to those are economic upheavals driven by social inequality and dissatisfaction in Chile and Hong Kong, next to deep troubles of economies in hotspots of inflation and debt like Argentina, Zimbabwe, Venezuela, and as of last year, Lebanon.

Disease is a scourge of humanity, no question about it, and new infectious diseases carry with them a combination of new health risks and even greater fears. This was the unmistakable case with the coronavirus epidemics and its races around the world in the first quarter of 2020. Still, the question remains puzzling: Why or how would a virus with the number of confirmed infections in the tens of thousands versus a global population estimated at 7.8 billion and the mortality rate—except for the highly aged—residing in the single percentage digits produce recessions that affect numerous countries?

Peculiar anatomy of the corona recession

Economically speaking, there are at least five downturn factors to the development of the coronavirus recession, which will affect individual economies, regional economic blocks, and the global economy. In a headline capture, these factors relate to both the real economy, and there specifically also to globalization, as well as the financial markets. This is an unusual pairing of factors when one considers that most of the notorious recessions of the past century were related to either speculation or brought on by financial crises.

In a more detailed tally, the multi-faceted factors that are fueling the corona recession, imply that it will be a potentially large and severe economic downturn—comparable in the words of some analysts to the Great Recession of 2008/9. These factors appear to entail the impact of the disease: preventive and cautionary measures on productive people and reduction of their full ability to work; supply chain disruptions; challenges to finances and debt situations of corporations, medium and small businesses; upheavals in equity markets; and some divergent developments in the sector with an overweight on sectors exposed to contractionary impulses versus sectors that are likely to realize gains from producing goods or services that see an increase in demand due to the virus.

To be still more detailed, the first and most direct response to the comprehension of a new and highly infectious respiratory virus (other than momentary stonewalling by Chinese and later Iranian bureaucrats against full acknowledgement of the dangers related to the coronavirus) affected people and their workplaces. Swathes of people—in case of China, millions in Wuhan, a mega-metropolis of ten million people, plus in the surrounding Hubei province with a total population of nearly 50 more million—were sent into lock down quarantines. Demonstrating the rapidity of change in political responses and issuance of quarantines was the example of Italy, where a declaration of restrictions on northern provinces were expanded into nationwide measures. Responses and containment attempts furthermore multiplied in form of restrictions of cross-border travel into countries bordering heavily affected areas. In a side note, in the second week of March new infections in Hubei province were associated with travelers coming from Italy and Iran, hinting at the double possibility that the spread of the virus in the original hot zone of infections is slowing while infected persons now are found among those coming back from countries with subsequent infection waves.

With workers asked to stay in home quarantines and movements of individuals being restricted, affected workplaces from factories in Wuhan and manufacturing plants in South Korea to a corporate office in Bavaria to Microsoft and Google sites in Seattle to churches, cultural attractions, universities, and bank offices in northern Italy had to implement closures that ranged from hours (for disinfection) to weeks of unscheduled vacations or home office work, with varying and not small concomitant results for employee productivity. Within weeks, these epidemically induced reductions in work and productivity spread around the world.

While theoretically of limited economic impact under the temporal nature of such extreme measures, the reduction of work productivity extending into several weeks and perhaps even the major portion of a quarter has repercussions on output that reverberate for many additional weeks or even months by impacting production and sales of goods.

A related and actually more severe economic impact to follow these local restrictions on manufacturing became visible in form of supply chain disruptions, as globally interdependent factories faced shortages of vital components in their productions even if they themselves were not affected in form of having to keep employees at home. Supply chain disruptions in the globalized economy generated ripple effects of inabilities to maintain production at desired levels across multiple countries due to non-deliveries of parts and components under supply chains that have grown to unprecedented length, complexity and—as is visible now—vulnerability. Thus supply chain disruptions caused by non-concurrent corona production outages and transportation problems have impacted globally industries from mobile phone producers to vehicle manufacturers to the point that some industry leaders in developed economies started advocating against hasty abandoning of cost-saving lengthy supply chains.

The supply chain disruptions at multinational corporations as well as emergence of bottlenecks in industries that affected smaller enterprises translated quickly into financial problems ranging from payments of suppliers to servicing loans and credit lines by the affected companies, which in turn sent central banks and fiscal policy-makers into overdrive of initiating monetary and fiscal measures from reduction in the prime interest rates by the Federal Reserve and the Bank of Canada, and likewise steps by the Bank of England, to releasing of special credit facilities and billions of dollars in emergency measures and financial relief such as tax holidays for affected companies across countries, beginning with China where the People’s Bank of China initiated support for the local economy with a February 2 announcement that it would perform reverse repurchase operations worth 1.2 trillion yuan renminbi ($173 billion), alongside other financial relief operations mounted on local to national levels. Other countries to pass or say they contemplate fiscal measures to date include the US (an $8.3 billion package was adopted in Congress, of which $3.1 billion were earmarked to the federal department of health and human services), Japan, the UK, Australia, the European Central Bank (the ECB is expected to proclaim stimulus measures on March 13) and various EU countries. In Hong Kong measures even extended to provision of cash payments to residents (known as Santa Claus or helicopter money) in hope of creating economic stimuli that would balance Hong Kong’s losses of economic activity due to demonstrations and now health-related reductions or absences of consumption.

Correlated to the real economy’s sufferings were not only financing difficulties but also significant falls in equity markets. Seeing both economy-wide contractions in equity price or many companies and double-digit drops of stock market indices, billions could be lost in market capitalizations. After an upbeat mood early in 2020, markets dropped from February highs in the developed world and saw trillions of dollars wiped away from the global equation of wealth and corporate valuation in the first part of March. These losses in turn—under the concept of equity prices being key drivers of corporate investments into production, facilities and labor—spell trouble in form of negatively impacting willingness to invest by the listed companies, as well as signal possible reticence of households to consume.

Finally, but also importantly, in specific sectors, recessionary impacts became visible immediately. Also reflected in their market capitalization and share prices, large airlines and tourism economy players from hotels to cruise companies saw dropping demand, facing the need to revise flight schedules and frequencies as well as reduce their capacities that they had allocated for expected levels of corporate and leisure travel in 2020 that will not be fulfilled. Hospitality enterprises from multinational holiday operators to SME-sized restaurants likewise were forced to revise their expectations that usually can count on office workers on lunch break or on Chinese tourists visiting the sites from Bali and Macau to Sydney, San Francisco, Paris, Rome, and London. Event organizers from large international trade exhibitions and conferences to cultural happenings and sports events had to cancel activities planned for the month of March and April and uncertainty has even risen over the staging of the multi-trillion dollar global sports spectacle of the 2020 Olympic Games, which are planned to be staged in Tokyo, Japan.

One can expect some business to also derive increases in demand due to the coronavirus eruption and a few to capitalize on the fears that relate to the new health threat. In the latter category, shady communications outfits and providers of useless and fear-driven goods or services will reap criminal revenues. On the side of respectable services, some remote services—from home schooling and online tutoring to delivery services for daily consumables—will likely benefit in varying degrees (some of the added gains might be counterbalanced by higher cost of sick leaves) but this will not affect the economic equation enough to provide an equilibrium to the downturns of tourism, travel, conferencing, event, and hospitality services. This inability of balancing losses with new windfall gains must be expected, especially if the trade-offs between higher demand for some manufactured goods such as home entertainment, medical devices manufacturers, pharmaceutical companies, healthcare services, and preventive disinfectant and protective supplies providers are counter-weighted against weakened demand for cars, smartphones, restaurant supplies, airplanes, oil and other commodities, and reduced production capacities due to supply chain disruptions.

Long-term effects and concerns

Whatever can be expected to disrupt the global economy in upcoming quarters in form of the usual suspects—whether trade disputes, inequities brought on by neoliberal fixations, nationalism and populism nourished by social fears, parochial sentiment or even patriotic ambitions, economic fallout from the need to mitigate climate change, elections, selfish politics, and now the corona recession—the detrimental or difficult-to-mitigate impacts can hardly be estimated as far as key national economies and global interrelations at a point when even the impact of a corona recession in the first half of 2020 might be felt globally for an unforeseeable number of months.

Furthermore, it seem far from inconceivable that the economic impact of the coronavirus outbreak, as well as any other recession scenario that may play out across multiple countries in the coming months, could be damaging to aspirations of achieving crucial social goals such as the sustainable development goals. Such follow-on problems from the fight against hunger and poverty to the long-term battle to improve control of diseases could affect the global poor more than—as of this writing—the coronavirus’s hard impact in terms of increased mortality rates in even the most severely affected societies.

Many of history’s more notorious recessions—among the overall immeasurable number of sectoral, national, and transnational recessions since the enigmatic agrarian revolution of multi-millesimal age or even since the first industrial revolution some four centuries ago—were rooted in speculation (such as the famous tulip mania) or in finance and the overbuilding of asset values in “bubbles”—such as asset bubbles involved in the knickerbocker trust recession over a century ago, the 1997 recession in southeast Asia or the “subprime” real estate bubble in the United States between the early 2000s and the bursting of this bubble in 2007/9.

As such, many noted recessions began in the financial world. By contrast, the corona recession of 2020 seems to involve factors in the real economy of production and repercussions to globalization and the complexification and extensions of supply chains thereunder alongside with financial elements involving buildup of corporate debt and equity asset bubbles on stock exchanges. This might then justify seeing the corona recession as an outlier to the usual recessions with an extreme impact that could transcend or be qualitatively different to recessions related to classical boom-bust swings or overheating asset prices.

In longer-term outcomes and structural ramifications, a global corona recession starting in 2020 and extending for who knows how many quarters could lead companies and countries to rethink some supply chain aspects and result in shortening of these chains; it could take some of the heat out of tourism markets that had been stoked by China’s travel hunger that rose in parallel to the country’s wealth increases. It could exacerbate nationalist economic orientations and populist fear responses to alien cultures.

However, taking trends and behavior patterns of people under more careful consideration, it is at the same time almost unimaginable that a corona recession, even if severe, could radically dial down globalization and supply chain interconnections, international lust for foreign travel and tourism, or clamp cultural exchanges shut. Shorter term ramifications for some of these activities—which correspond to human desires for cheaper and better goods, fun and discovery of the stranger—will be their minor adjustments, plus economic repercussions that will hit some companies, industries, and countries which are overextended and candidates for capitalism’s creative destruction.

However, in the scouting of economic horizons and the possibility of further unexpected disruptions of economic life, additional factors may have to be considered. As human interaction with planetary environmental factors is both intensifying and lacking in responsiveness, the future is likely to experience new contributing factors to economic recession arising from natural catastrophes, including recurrent patterns of sudden epidemics and the impacts of climate change. The insurance industry—led by the European behemoths in the reinsurance business—already started worrying years ago about the accumulation of risks in coastal regions around the world that have been candidates for heavy impacts of feared rise in sea levels.

Aggregation of risks in scenarios where increasing urbanization and continuing globalization of supply chains and integration or interdependence of financial markets and real economies are driving forces, appear logical in the continuation of global integration and concentration of economic and financial power, market dominances, and corporate wealth that is not mitigated by redistribution and diversification efforts.

Moreover, just as intensifying business cycles of indeterminate duration but relentless economic interwoven-ness might be on the horizons, the cultural cycles of exposure to epidemics under conditions of ever increasing competition for overlapping living environments of animals and the human species are to be considered. Over the past few decades, hunting of—protected or not—wildlife as well as the exploitation of domesticated animals such as cattle and chicken have been associated with formation of viruses and outbreaks of new diseases. Such epidemics seem to recur in cultural biological cycles that correspond to expansions and contractions of concern over self-protection, regulatory controls, and enforcement of veterinary standards—which gives every reason to speculate that such epidemic cycles will also in future be observed and contribute to economic recessions.

The figures for coronavirus in this piece were accurate as of March 12. As it is an ongoing situation these numbers will rise.

March 12, 2020 0 comments

Last Word Opinion

Life for Lebanon’s migrant domestic workers worsens amid crisis

by Aya Majzoub March 6, 2020

written by Aya Majzoub

Hardly anyone in Lebanon has been left unscathed by the economic crisis, the worst since the end of the civil war in 1990. Its impact has been most devastating on communities already marginalized prior to the crisis. The situation for the estimated 250,000 migrant domestic workers, for instance, who are excluded from labor law protections, has gone from bad to worse.
Prior to the economic crisis, individuals and businesses used US dollars and Lebanese lira interchangeably at the official exchange rate of LL1,515 to the dollar. But as economic growth stalled, and remittances from the Lebanese diaspora decreased (dropping by 7 percent in 2017), dollars became increasingly scarce. Banks introduced informal capital controls, restricting the dollars people can withdraw or transfer abroad. As a result, the value of Lebanese lira has dropped by almost 40 percent in the unofficial market since October 2019, and the price of imported goods has risen exponentially.

Businesses have either been forced to close or have drastically reduced their operations. InfoPro Research, a Beirut-based market research and polling firm, estimated that between October 2019 and February 2020, more than 220,000 people lost their jobs. They also estimated that one third of all companies have reduced their workforce by 60 percent, and half of the companies surveyed have reduced salaries by more than 40 percent.

Already vulnerable

Domestic workers, who lack any protections under the law and have virtually no access to judicial redress, have also suffered severe consequences. Many domestic workers have reported that their employers slashed their salaries—if they paid them at all. But even the more fortunate workers who are still receiving their salaries in full have seen their money’s value decrease by almost a third as the Lebanese lira depreciates. A worker who used to earn LL300,000 per month could transfer $200 to her family abroad. Now, the same salary can get her as little as $120 at the unofficial exchange rate, which fluctuates day to day at the sarraf (exchange shop). Projections indicate that the lira may depreciate even further.

Making matters worse, even though some migrant workers stand to effectively lose out on half of their pay or more, they cannot readily leave their employers or advocate for better pay or conditions. Their presence is regulated under a kafala (sponsorship) system—which former Labor Minister Camille Abousleiman likened to “modern-day slavery”—under which they cannot leave or change jobs without their employer’s consent. Giving employers this level of control over workers’ lives has led to an array of abuses that Human Rights Watch has been documenting for years, including non-payment of wages, forced confinement, no time off, and verbal, physical, and sexual abuse.

In December, the Philippines embassy in Lebanon said that more than 1,000 Filipino workers who “have recently lost jobs and income opportunities” registered for their free repatriation program. At the time of writing, no other embassy has offered similar services to its nationals in Lebanon.

Right old wrongs

For years, the Lebanese government has been shirking its duty to protect migrant domestic workers, leaving employers, recruitment agencies, and embassies to manage the working relationship—often with disastrous consequences for the workers. As the economic crisis worsens and the situation of migrant domestic workers becomes even more precarious, the government should no longer look the other way.

Last year, a colleague and I represented Human Rights Watch in a working group headed by the International Labour Organization and established by then-Labor Minister Abousleiman to dismantle the kafala system. In July, we sent the minister our recommendations for legislative and policy changes. If these changes were carried out, they would help create a fairer labor relationship, including by allowing domestic workers to choose to terminate their contract. However, the minister resigned soon after the outbreak of nationwide demonstrations, before he had a chance to see these reforms through.

The new Labor Minister, Lamia Yammine, has an opportunity to correct this historical injustice. Dismantling the kafala system will not solve the economic crisis, but it will ensure that the tens of thousands of women who left their homes and families to work in Lebanon are not left to bear the brunt of it.

March 6, 2020 0 comments

Economics & Policy Oil and gas Opinion

Long road ahead as Lebanon begins exploratory drilling for offshore oil and gas

by Diana Kaissy March 6, 2020

written by Diana Kaissy

Drilling of Lebanon’s first offshore well started on February 27. All eyes are pinned on Byblos 1, waiting to find out whether it is a dry or a commercial well. It will take at least three or four months before there will be a conclusive result, however. What is critical to understand is that this is merely an exploration phase. Lebanon has not yet joined the new group of oil and gas producing countries—in fact there is still a chance it might never do so. What is even more critical to realize is that even if the stars align for Lebanon and offshore oil and gas is discovered—and at a volume that would make its extraction commercially viable for energy companies—that becoming a new oil and gas producing country will take time.

Take Guyana as one sobering example of the length of time it can take to see results. It was only after 16 years of exploration and 40 dry wells that Guyana made its first offshore oil discovery in 2015. A similar example in the Eastern Mediterranean is that of Zohr field, an offshore natural gas field located just off the coast of Alexandria, Egypt. Ten years of failed attempts and a number of dry wells in the Shorouk Block led France’s Total to walk away and sell its share to Italy’s Eni. Two months later, Eni made the biggest discovery in the Eastern Mediterranean—the Zohr field has an estimated 30 trillion cubic feet of gas, making it likely far larger than nearby Leviathan gas field offshore Israel. What these examples tell us is that exploration for oil and gas takes times, patience, and a degree of luck.

At a time of complete economic meltdown and critical liquidity shortages, it is expected that Lebanese politicians will try to position the potentially lucrative oil and gas sector as Lebanon’s savior in the making. This is exact opposite of what they should be doing. Unleashing expectations, in these desperate times, could trigger use of a resource-backed borrowing mechanism—as was witnessed in countries such as Mozambique. Such loans usually prove detrimental to developing countries, especially those using their future revenues from natural resources as collateral. For a country such as Lebanon, which is already nearing its breaking point because of the heavy debts, resource-backed borrowing could prove to be the straw that breaks the country’s back.

What Lebanon can do right now, while waiting for a potential discovery of offshore oil and gas, is engage in certain immediate reforms that can help to ensure that all its citizens have an equal opportunity to economically benefit from current exploration activities.

A number of services and goods are expected to be provided across the supply chain to support the exploration phase. Subcontracts are usually awarded by the rights (license) holders during this stage to companies that are able to offer a number of services. Examples of such services are a local logistics base, platform supply vessels—such as boats to transfer equipment to and from the drill vessel—and a supply of marine gas oil. It is vital that the names of all companies currently subcontracted are revealed and that beneficial ownership disclosure is implemented as soon as possible.

Ensuring that no politically exposed persons own the companies providing goods and services during the exploration phase will help to ensure that the Lebanese have an equal economic opportunity to benefit from this nascent sector. Moreover, beneficial ownership disclosure in Lebanon is required by law, as per article 10.7 of Law 84 (2018) on enhancing transparency in the petroleum sector.

A journey of a thousand miles starts with a single step and finally, at the tail end of February 2020, we have started on the road toward offshore oil and gas discovery in Lebanon. But nothing is guaranteed. Managing our expectations and ensuring from the get-go that Lebanese have equitable economic chances of benefiting from this sector will help us not to falter down the line if a commercially viable well is discovered in Lebanese waters.

March 6, 2020 0 comments

Economics & Policy Opinion

Crowdsourcing solutions to Lebanon’s crisis

by Basil Mahfouz March 6, 2020

written by Basil Mahfouz

To overcome the current crisis, the new Lebanese government will need to develop innovative policies—quickly. Currently, authorities are following a conventional model by seeking ideas from a bureaucracy of civil servants and consulting agencies. Perhaps a more effective way for the government to find solutions is to engage citizens directly via a digital crowdsourcing campaign.

Crowdsourcing is obtaining information and ideas by asking for input from a large group of people, often sourced via the internet. It is based around the theory of collective intelligence, where Swiss researchers estimate that a million individuals working independently have a 97.7 percent likelihood for solving any problem.

The most basic form of crowdsourcing is to run an open online contest for solutions to specific challenges. The relevant ministry drafts and posts a challenge for citizens to respond to with ideas. The proposals can either be voted upon online by peers or judged by a selected committee of specialists. A successful example of this model is challenge.gov, a platform developed by the United States for members of the public to compete to help the government solve public problems. Since 2010, the site has run nearly 1,000 challenges to find solutions for more than 100 federal agencies.

This competitive crowdsourcing process is simple, cheap, and effective—but it limits innovation. By competing, citizens are not incentivized to work together and build upon each other’s proposals.

A more complex, collaborative model could yield better results. In 2013, the Finnish environment ministry invited 700 citizens to participate online to reform the off-road traffic law. Using a blend of online engagement platforms, citizens shared around 500 ideas, 4,000 comments, and 19,000 votes throughout the process. A Finnish Parliament review of the exercise found it beneficial to democracy by 1) providing access to a large pool of knowledge for policy-makers, 2) opening an avenue for civic participation with the potential to increase citizen engagement, and 3) providing a point of contact between citizens and lawmakers that was likely to increase trust—if done well. The paper did caution, however, that crowdsourcing was not an end within itself and would need to be directed toward a specific goal or policy target.

More complex and collaborative crowdsourcing models are more difficult to run and more susceptible to design flaws. How decisions are made, who gets to participate, and how participants contribute could improve or hamper the process. Online crowdsourcing could also marginalize those who are not digitally literate or have no access to the internet.

As a result, a Lebanese model should follow a merged online and offline concept. A platform where citizens can submit ideas should be developed, with the ideas voted upon publicly and filtered. In parallel, specialists across the Lebanese community, both locally and globally, could be invited to form large, digitally-enabled panels to develop expert proposals informed by citizens’ proposals. Ultimately, these proposals would be submitted to government actors as prospective policy solutions to be debated internally, and implemented.

A 2017 paper, published in the bimonthly journal the Public Administration Review, found that “properly designed crowdsourcing platforms can empower citizens, create legitimacy for the government with the people, and enhance the effectiveness of public services and goods.” Applying crowdsourcing solutions for Lebanon could yield multiple benefits. First, Lebanon has exceptional talent. Whether locally or abroad, members of the Lebanese community are innovating and pushing the boundaries of science, technology, and the arts worldwide. The caliber of solutions they submit could be much better than those proposed by a government committee or consulting firm. A digital, open approach would bring the estimated 8 million-strong Lebanese diaspora directly into the governance process, allowing the crowdsourcing campaign to leverage expats’ knowledge about successful solutions implemented abroad.

Second, crowdsourcing innovation could increase faith in the new government from a skeptical public. By providing citizens with an open, transparent space to discuss problems and contribute solutions, the Lebanese have an alternative means to express themselves beyond protesting. Such a move would shift the conversation from what is wrong and who is to blame to how to solve our problems.

Finally, a progressive digital crowdsourcing campaign would send a positive signal to the international community. It would position Lebanon as a pioneer in digital governance, willing to try innovative new ways to overcome its crisis, as well as highlight a real commitment toward democratic inclusion in regulatory reform.

March 6, 2020 0 comments

Economics & Policy Opinion

Lebanon must kickstart its economy

by Paul Abi Nasr March 6, 2020

written by Paul Abi Nasr

Lebanon is concurrently being hit with multiple crises, generating the perfect economic and financial storm. Net foreign reserves are at an all time low and hard decisions will have to be taken regarding the restructuring of the sovereign debt in all its forms. As the financial and monetary discussion is taking center stage it is crucial not to lose sight of the only way out of this crisis: a strategic vision for an economic recovery.
In order to keep hyperinflation at bay, reduce the drain of foreign reserves at the central bank, and project an aura of confidence when entering into potential negotiations to restructure Lebanon’s debt, we need to address the balance of payments conundrum.

We currently import around $20 billion a year, while exporting a little less than $3 billion. The deficit of $17 billion needs to be covered by inflows of hard currency. Lebanon enjoys a special status with an outsized diaspora that sends remittances in a systematic fashion to the tune of around $7 billion every year.

The very large remaining gap was depleting reserves at alarming rates, forcing BDL to come up with schemes to replenish them by proposing very advantageous rates to attract funds. The whole system was unsustainable and is now headed toward collapse.

We need to reduce the trade deficit to a manageable $7-8 billion, which can only be achieved by reducing imports to around $12 billion and increasing exports to around $4.5 billion. Such a drastic transformation should not cripple growth but rather set the stage for job creation and policies that promote environmental sustainability.

A quick look at our annual imports yields some clear targets for import reduction:

Fuel: Lebanon needs approximately $3.8 billion of imports every year (at current oil prices). In 2019 the country imported closer to $6 billion. There is a general consensus across all stakeholders—BDL, importers, and customs—that around $2 billion worth of fuel was being smuggled to Syria, hence the discrepancy.

Gold and rough precious stones: At roughly $1.6 billion, these are overwhelmingly transiting through Lebanon with very few used in manufacturing.

Cars and trucks: A gradual return to pre-2008 levels of imports can be achieved over the next three years. The current approximately $1.7 billion in imported vehicles will have to be forgone and local stocks used in the meantime.

Luxury items: A repositioning of the shopping habits toward a slightly lower price segment will induce a ticket reduction (the average ticket is what is being paid at the cash register in shops). An estimate based on private sector figures across the various sectors shows that we will witness a reduction of around $450 million for 2020.

Another approximately $2.5 billion would still be required to bring the deficit to a manageable level. This could only be achieved by import substitution.

The manufacturing sector generally runs at 60 percent production capacity and no capital expenditure would be required to increase production to the required target. An increase of 50,000 jobs would be required to fulfill this uptick in production, and another 100,000 jobs would be created in the other economic sectors (per UNIDO, every manufacturing job created would generate another 2.2 jobs in other sectors).

The sector currently employs around 150,000 Lebanese employees and another 50,000 to 60,000 foreign workers. The difficulty in accessing hard currency is inducing a rapid replacement of the foreign workforce with a more willing local one. A total of 200,000 jobs would not be hard to achieve should we provide the manufacturing sector with the basis for success.
A selective access to officially priced hard currency is central to the success of such an endeavor, it would give the manufacturers the opportunity to keep all costs in the local currency, greatly reducing the effect of inflation and rebuilding part of the purchasing power that has been lost.

A review of the tariff code needs to be taken to reduce under invoicing and protect eventual foreign direct investments in the manufacturing sector.
It is also crucial to crackdown on smuggling—the informal economy has crippled all the sectors and drained the public finances. The World Bank estimates the informal economy at 40 percent of GDP.

The manufacturing sector is also the easiest to audit and increasing its share of GDP to 25 percent will disproportionately increase tax collection.
The economy is in a dire state, but we can jolt it back to growth. We need to prioritize our efforts and make sure any use of the remaining resources we still have are invested in productive, job-creating, deficit reducing sectors—and manufacturing will be central to such a strategic vision.

March 6, 2020 0 comments

Economics & Policy Eurobonds Opinion

Lebanon needs an IMF bail-out—minus the austerity

by Sami Halabi & Jacob Boswall March 6, 2020

written by Sami Halabi & Jacob Boswall

The clouds have been forming above Lebanon’s financial sector for years, and now the storm has come with just one silver lining: most of the debt owed to creditors is held by Lebanese. Theoretically, this means that financial institutions and Lebanese bond holders are the ones who need to sit around a financial kitchen table and discuss how we preserve the collective long-term interest of the country. But that lining is beginning to thin, and fast.

The latest discussion about whether to pay the next segment of dollar eurobonds has been sullied by Lebanese bondholders offloading their debt holdings to international hedge funds—at a significant discount. Such firms have little to no interest in Lebanon or its financial stability, evidenced by the fact that they have just bought up enough of the bonds (25 percent) to have veto power over default negotiations for all 2020-dated bonds. In other words, instead of filling the moat, manning the towers, and stocking up with provisions, local financial institutions with a stake in Lebanon’s long-term financial stability just lowered the draw bridge with financial barbarians at the gate. If Lebanon does not want to surrender then it needs to wise up, fast.

Learn from others

Fortunately, hindsight is 20/20 and offers up good lessons for the prudent. Lebanon can learn from our Mediterranean cousins in Greece, who, five years into their financial crisis, finally changed tack with the creditors that were pummeling their economy with so-called reforms. But in waiting so long before coming to the table with concrete counter proposals, Greece found its creditors were in no mood to negotiate. We all know what happened next: all reasonable counter proposals—ranging from GDP-linked debt repayments and a stimulus plan to kickstart the economy—were dismissed by the Troika of the International Monetary Fund (IMF), European Commission, and European Central Bank as unreasonable, and the eurozone almost cracked. As for Greece, the country’s debt-to-GDP ratio worsened after a 25 percent contraction, youth unemployment rose to 48 percent, 400,000 Greeks emigrated, and fascism reared its ugly head in politics.

Yet lacking a financial package would have even more devastating effects on Lebanese society, and all depositors would be punished for the mistakes of Lebanon’s irresponsible financiers and politicians. Economists at Bank of America Merrill Lynch have predicted a necessary bail-in of around 50 percent in a disorderly scenario, if spread evenly across all depositors and without taking into account further devaluation of the Lebanese lira. In effect, this would mean unfairly liquidating small and medium account holders’ deposits in an attempt to recapitalize Lebanese banks. If possible, we must avoid this scenario.

Accepting that external financial assistance is necessary to avoid social collapse and food shortages, careful attention must then be paid to the conditions imposed by the creditors. Lebanon’s options are scarce; the tantalizing $11 billion promised at CEDRE in April 2018 is unlikely to arrive any time soon given that most reforms attached to the soft loans and grants remain unimplemented, and good will from the international community has been replaced with frustration over the lack of progress. Gulf countries and the US will also be loath to fund a cabinet formed by Hezbollah and its allies, while the IMF’s second largest contributor, Japan, has its own grievances with Lebanon over its harboring of international fugitive Carlos Ghosn.

As Lebanon enters into negotiations with the IMF and other donors (namely France), it needs a negotiation strategy that can save the country from financial collapse, but also tap into the funds needed to do so. This requires different thinking.

Throw out the rule book

A typical IMF plan that increases regressive taxes, enacts fire sales of the public sector, and cuts up the public sector without careful consideration of the social effects will be neither accepted nor useful. Levying regressive point-of-consumption taxes would come down heavily on the estimated one third of the Lebanese population already in poverty, and impact those the World Bank expects to enter into poverty as a result of the ongoing crisis—in total half of the Lebanese population. To avoid impacting those most vulnerable, upper income earners would need to pay the price through a progressive haircut on the top account holders in the country and an increase in the top tax tier—currently at a ridiculous 22 percent.

In fact, the IMF estimates that improving collection in the current system could raise the tax-to-GDP ratio from around 13-16 percent to 34 percent, some $18.6 billion annually. This would be enough to pay for the electricity sector reforms proposed at CEDRE some 3.5 times over, or raise the estimated $20-25 billion we need in the form of an IMF loan in less than two years. Should there be a need for immediate tax revenue on consumption, one avenue would be to increase value-added tax on luxury products—maybe it is time to start taxing yachts.

Second, any sale of state-owned assets will need to be preceded by long-planned and legislated reforms in each sector. For instance, as the prime sector for privatization, the telecom sector would need to empower its currently toothless regulator to ensure that public monopolies do not become private ones. Same for the public electricity utility, Electricitié du Liban, for Beirut Port, and for Lebanon’s national carrier, Middle East Airlines.

Third, simply slashing and burning the public sector, which pays out more than 300,000 salaries a year, would only make poverty levels in Lebanon that much worse. No doubt the civil service needs to be at the top of the list of necessary reforms, but these need to be carried out fairly. This can start with implementing the organizational structures developed by the Office of the Minister for Administrative Development and filling empty full-time positions in the civil service with those who are currently on temporary contracts—based on merit, not religious affiliation.

Ensure fair reform

Naturally, political and business elites who have long gamed the system and built patronage structures across the public and private sectors will not like such reforms—but they have little choice. Further regressive and punitive financial measures will not be accepted by a society that has simply had enough.

A country’s bargaining power in debtor-creditor negotiations increases if it has secured other financial assistance in advance, and we need all the bargaining power we can get. But as much as we need the IMF, we also need to preserve the long-term interests of Lebanon and its financial standing. Time and again, the classic IMF package has proved ineffective in bringing financial stability to countries around the globe—quite the opposite in fact. But the IMF also knows this, and has been keen to change its stripes. Case in point, the IMF offered Argentina a package that it ostensibly knew it would default on, which it has. But Lebanon is not Argentina, we do not have the size, importance, or leverage of a large South American player. Nor are we like EU-member Greece. We must acknowledge our relative weakness on the international stage as we lower the drawbridge for the IMF. If we cannot strike a deal that will protect those most in need, however, then we must be willing to walk away, batten down the hatches, and prepare for the oncoming siege.

March 6, 2020 0 comments

Hospitality & Tourism Labor Special Report

Lebanon’s economic crisis weighs heavy on F&B outlets and hotels

by Nabila Rahhal March 6, 2020

written by Nabila Rahhal

In Lebanon’s service-oriented economy, the hospitality and tourism sector is largely considered a beacon of strength. Its direct contribution to GDP by end of 2018 was 6.5 percent (according to the World Travel and Tourism Council) and it employs 150,000 people, the biggest employer after the public sector, per the tourism syndicates of Lebanon (the Syndicate of Owners of Restaurants, Cafes, Nightclubs and Patisseries [SORCNP] and the Syndicate of Hotel Owners in Lebanon).

Throughout the frequent periods of regional political instability and local insecurities in Lebanon, the hospitality and tourism sector has been among the first sectors to bounce back, demonstrating its resilience numerous times. The current economic crisis, however, is unprecedented in recent memory, and is stretching the industry to its limits, according to those to whom Executive spoke.

No sign of let up

A month into the thawra (revolution), in mid-November 2019, Executive spoke with both F&B and hoteliers to gauge the impact of the situation on their businesses.

Restaurateurs told Executive they had been feeling the belt tighten since late 2017. Among the factors at play was an oversupply of venues and an increase in taxes on some imported foods under the 2018 budget, which had negative impacts on the already dwindling purchasing power of local Lebanese and increased the costs on F&B operators.

Several hotel managers, however, told Executive that they had been having a record 2019 up until mid-October, when thawra-induced street protests impacted tourism levels and hotel occupancy rates fell to single digits almost overnight.

The situation has not improved much since, despite hopes that the holiday season of December would help the hospitality sector bounce back. Georges Ojeil, area general manager of Le Gray Beirut and Campbell Gray Amman, tells Executive that the former hotel’s location in close proximity to the protests is now a curse whereas, in better days, it was an asset to be in the heart of Downtown Beirut.

Maya Bekhazi Noun, general secretary of the SORCNP, says that F&B operators were hopeful that December would bring with it some expats and an increase in nights and meals out. As such, operators who could, waited until 2020 to judge whether they would be able to sustain business in the long run or be forced to shut down. Others were not able to ride out the immediate impacts of the ongoing financial and dollar liquidity crisis. Figures from online restaurant directory Zomato recorded 108 closures in October alone, followed by a further 56 in November and 78 in December. Come January, a further 241 outlets had closed.

No call to raise a glass

Operators who were betting on a successful December to save their business were met with disappointment. Bekhazi says that although sales in the F&B sector were higher in December 2019 than they were in October or November, they were still nowhere near what is typical for a December in Lebanon. “It was a very, very shy month—not the usual festive month season at all—and we did not have the kind of activity that could make a big difference in the long run,” she says.

The main challenge the sector is facing, she explains, is one being faced across the Lebanese economy: the dollar liquidity crisis and increased price of the dollar in the unofficial foreign exchange market, which is impacting both the ability of businesses to secure necessary funds to pay importers and their bottom lines. “Today, as restaurant owners, we spend most of our day identifying which suppliers take Lebanese lira versus dollar or checks versus cash,” Bekhazi says. “Most of them are now asking for cash in dollars while very few of our customers are paying their restaurant bills in dollars anymore—and when they do it is by credit card, not cash. So, we are having to buy dollars at the market exchange rate, which can reach LL2,400 to the dollar on some days, while as restaurants we follow the official rates of LL1,515 on our POS.” She explains that restaurants cannot increase their prices by much for fear that consumers will no longer dine out, and so this is a losing situation for the sector.

Doors shuttered

Given all these factors, it is no wonder then that 241 F&B outlets closed and only 99 opened in January 2020, with a net loss of 142 outlets. The high number of closures versus openings is indicative because the Zomato compiled data (see figure below) indicates that from June to December 2019 the numbers of outlets closing versus opening have by and large equaled out. This high turnover could have been down to a variety of factors such as operators migrating from a location that is losing popularity to the latest hotspot or a restaurant owner replacing an unsuccessful concept with a new one in the same location. As such, it was not a very concerning when it came to employability nor could it be read as a negative trend in F&B.

The number of openings in January, however, was less than half the number of closures, and those in the industry predict that this gap will only get wider. This has grave implications for the sector’s 150,000 employees, many of whom now find themselves jobless, Bekhazi says. According to a February press release by the SORCNP, 25,000 employees have already been laid off since early September 2019. She estimates that an even larger figure has seen their hours—and so their pay—reduced, with some venues now closing several days a week or shutting down sections of their hotel or restaurant to cut down on costs. Ojeil says that due to the very low occupancy rates they have not been able to pay salaries in full at Le Gray and have introduced a 40 percent pay cut. “We had to do this because it is now a game of how much cash we have in the bank and how we can manage with that,” he says.

The situation is bleak, but despite this Lebanon’s hospitality and tourism sector is still managing to draw on its famed resilience to support some employees in these difficult times. Many Lebanese F&B operators have businesses in the Gulf or Levant—be it a consultancy or an expansion of their outlets—and so are benefiting from that cash flow to sustain their venues in Lebanon, Bekhazi says. They are also using these locations and the networks they have developed in the region to secure jobs for some of their Lebanese employees.

Some hotels are also benefiting from sister properties by sending their employees to work there, thereby reducing their cost and ensuring that at least some of their staff is getting fully paid. Ojeil tells Executive that they will soon be sending 10 percent of their workforce to Campbell Gray properties in Zurich, Bahrain, Liberia, Scotland, and Amman, where they will stay for an initial three-month period.

The main indicator of Lebanon’s economic crisis, namely the weakening of the Lebanese lira to the dollar, could also act as a pull for tourists, as a more favorable exchange on the dollar will work to their advantage and increase their purchasing power. This was seen in Turkey in 2018 and in Greece after 2016, where the low costs drove tourism from the EU.

With spring comes the time for summer planning, and so it would do well for tourism stakeholders in Lebanon to devise a marketing strategy that can attract visitors—and their hard currency—to the country once again. As the sector that has proven the quickest to bounce back after a crisis, the hospitality and tourism sector is best placed in terms of recovery. For Lebanon’s hotels and restaurants who can afford to wait out this period, bluer skies could be as close as summer 2020.

March 6, 2020 0 comments

Economics & Policy Labor Opinion Special Report

Lebanon must move toward universal social protection

by Lea Bou Khater March 6, 2020

written by Lea Bou Khater

Decades of social and economic injustice were a driving factor in the social unrest that burst onto Lebanon’s streets in mid-October 2019, unfolding into a revolution. Lebanese had been pushed to breaking point by the effects of a longstanding economic malaise that has since worsened into a ongoing financial crisis with job losses, lowering of wages, and informal capital controls preventing people from accessing their money. But while the immediate, painful effects of the crisis are being debated widely in the Lebanese discourse, less attention has been paid to long-term risks. Most significantly, the impacts on the levels of poverty in the country and the state’s ability to care for those left behind.

Lebanon has long been an unequal country in terms of wealth. A study covering 2005 to 2014 by Lydia Assouad, a fellow at the World Inequality Lab, found that 10 percent of the Lebanese adult population had captured 45 percent of wealth. More recently, data from a leaked 2020 document by the Banking Control Commission of Lebanon showed that 1 percent of depositors held 52 percent of deposits in 2018. The country is a textbook case of a neoliberal state: a rolled back welfare state that maintains a laissez faire relationship with businesses and investments at the expense of the well-being of residents whose social protection becomes secondary. In other words, the state’s laissez faire relationship with the private sector—illustrated by regressive taxation policies or the floated privatization of public enterprises—dismantles the commitments of the welfare state in guaranteeing social and economic justice through progressive taxation and the provision of public services and universal social protection.

Left behind

As it stands, Lebanon’s current system lacks developmental logic, resulting in inefficient social protections that exclude a significant portion of the population—44 percent of residents do not benefit from any form of social protections according to 2018 figures from the Central Administration of Statistics (CAS). The inability of the Lebanese government to provide these protections is a breach of the social contract between the state and its citizens. Formal social protection devices are restricted to health insurance, family allocations, and end-of-service indemnities through the National Social Security Fund (NSSF). In addition, public sector employees—estimated by CAS at around 300,000 people, including the army and security forces—are covered through different institutions. Excluded from existing social protections are unemployment insurance and insurance for disability and work accidents. These fragmented and uncoordinated schemes leave many behind, including those working in the informal economy such as seasonal laborers, construction workers, and domestic workers, as well as the self-employed, unemployed, and retirees.

In lieu of the states’ role, there is a heavy reliance on services provided by organizations that further weaken the ties between citizens and the state while conversely maintaining the pervasiveness of traditional sectarian patron-clients relationships—what Professor of International Affairs Melani Cammett dubs “compassionate communalism.” The Ministry of Social Affairs (MoSA), for example, has been outsourcing social services to around 250 civil society organizations (CSOs) that are in charge of delivery for around 40,000 beneficiaries. In other words, the MoSA funnels around 60 to 70 percent of its annual budget—public funds—to CSOs that tend to have sectarian denominations. Partnerships between the state and CSOs require strong governmental oversight, with clear procedures for contracting and monitoring—this is not currently the case. It is necessary to reconsider the extent of delegation of social services in order to secure effectiveness, efficiency, and equity.

Lebanon does have a National Poverty Targeting Program (NPTP), implemented by the MoSA with the support of a World Bank loan, which is used to deliver direct cash assistance as well as other services and exemptions to some 42,000 poor households selected from a database of 140,000 households. With the backdrop of the financial crisis, the NPTP has been scaled up with a $400 million loan that was earmarked in the 2020 budget. However, currently the only anti-poverty policy of the government, the NPTP requires a great deal of revision with the aim of improving its administrative structure, household database, benefit package, use of its financial resources, and oversight.

Before assessing the needs of impoverished Lebanese, it is also necessary to determine how many citizens live below the poverty line. Yet this has proven difficult. A report by the CAS and the World Bank in 2011/2012 had 27 percent of the population under the poverty line but dedicated most of its pages to explaining why it could not be compared to previous studies and its many methodological limitations such as a high non-response rate. Working without data has long been the norm in Lebanon, impacting the state’s ability to provide for its citizens’ needs. Without accurate data of the levels of poverty in Lebanon, this situation will only get worse.

Moreover, there is a consensus among social protection practitioners that targeted cash assistance can only be effective in reducing poverty when accompanied by universal social policies that encompass the population at large. Ideally, funds allocated to different health protection schemes, including those targeting healthcare under the NPTP, should be consolidated into a universal health coverage scheme. Lebanon pays too much for relatively too little in terms of healthcare. Poor households spent around 12.7 percent of their income on health in 2012, a high proportion by international standards (the World Health Organization defines a large health expenditure as one that exceeds 10 or 25 percent of the total household expenditure or income).

Distorting effects

With restricted and inadequate social protections, the Lebanese diaspora has long been playing the role of social security for their families—in 2018 the World Bank estimated remittances to Lebanon at $7.2 billion. However, this safety net has social consequences. Alenjandro Portes, director of the Center for Migration and Development at Princeton University, argues that remittances tend to have a palliative effect on the country to which they are being sent, consolidating the ruling elite despite increasingly deteriorating political and economic conditions—with the result of taming or at least delaying the struggle for change. As soon as remittances drop, poverty previously cushioned by migrants’ transfers hits hard. Remittances to Lebanon have decreased five times year-on-year and expanded three times in the 2010 to 2017 period, with 2017 noting a drop of 7 percent that has yet to be recovered. With the current crisis and the lack of trust brought on by opaque capital controls, it remains to be seen what impact this will have on remittance levels moving forward—and by extension if it will have an effect on poverty levels in the country.

Bleak horizons

The unfolding economic crisis is expected to further deteriorate living standards with the now de facto depreciation of the national currency, the unofficial capital controls, hidden haircuts, and ensuing price inflation. Looming austerity policies aimed at streamlining state expenditures and increasing revenues—those suggested in the 2019 Article IV consultation by International Monetary Fund (IMF) such as raising value-added tax, increasing fuel excises, and eliminating subsidies to the state electricity utility Electricitié du Liban—would have the greatest impact on the poor and middle classes that are already struggling to make ends meet. These proposed indirect and regressive taxes would put additional strains on economically vulnerable Lebanese and the few social protection schemes that exist.

The crisis and expected austerity policies are also likely to increase underemployment, unemployment, and informal employment (see article). Unemployment was estimated at 11.4 percent of the total labor force in 2018, and 55 percent of workers are not registered at the NSSF, falling under the informal economy, according to a 2019 CAS labor survey. While there are no firm figures, since October 2019 Lebanon has already witnessed business closures, layoffs, salary cuts, and the decrease in real value of wages. The decrease of state revenues will also make it very difficult to pay the public-sector wage bill for the estimated 300,000 public sector employees.

In need of overhaul

It is important to implement wage-indexation and protect the value of NSSF end-of-service indemnities—which after 40 years of work would only cover a former employee for just over three years, excluding health insurance. In fact, today the state owes the NSSF sickness-maternity fund the staggering amount of LL2.4 trillion. In addition, the Lebanese public sector needs to be restructured in a way that streamlines excessive employment while protecting wages and benefits. Drawing upon critical phase of reforms and austerity policy, it is also necessary to launch the much-needed reforms of the labor code that would guarantee the rights of currently excluded workers and would sanctify the freedom of association that is crucial in the present and imminent struggle for social and economic justice. Labor reforms should urgently include the abolition of the kafala system which will exponentially improve the working and living conditions of migrant workers, particularly during the current financial crisis.

At this important juncture, the demands of protesters converge into bringing back the state for the protection of all its residents and the livelihoods of families, students, workers, elderly, and retired. For this, it is necessary to question and reconsider our harsh neoliberal economic model and its accompanying targeting protection schemes that foster and maintain deep-seated sectarian clientelism that in turn consolidate the autocracy of the ruling elite. We need to bring to the fore universal social protection, putting the state in front of its responsibilities vis-à-vis its residents, which is imaginable if we efficiently redesign our social protection policy. Reforms to social policy should be designed in tandem with the structural reform of our failing economic policy in order to ensure fair and sustainable development.

March 6, 2020 0 comments

Economics & Policy Labor Special Report

Job insecurity and unemployment on the rise

by Nabila Rahhal March 6, 2020

written by Nabila Rahhal

Businesses across all sectors in Lebanon, and the employees that are at their foundation, are suffering under a weakening economy. Indicators of this reality are in full display across the country and include the long lines in front of banks most mornings, the “for rent” signs now vying with the “70 percent sale” signs for space on store fronts, the restaurants and bars that only operate four days a week or have closed down permanently, and the reduced working hours of many factories and offices in Lebanon.

All of which, according to those interviewed for this article, is just the beginning. Although there is no reliable data regarding the current rate of unemployment in Lebanon and the impacts of the unfolding crisis, the World Bank warned at the end of last year that “unemployment, especially among youth, is already high and could further rise sharply” and that the poverty rate could hit 50 percent of the population if the economic situation worsens.

Whether it is the executive who has to decide on tough measures to keep the company afloat or the employee who is bearing the brunt of those measures through pay cuts, reduced hours, or being laid off, it is clear that Lebanon’s economic challenges are taking their toll on the country’s workforce. Executive sat down with business owners, syndicate heads, and lawyers to better understand the complexities of the labor crisis facing Lebanon and how it can be handled in a manner that would safeguard the dignity and livelihood of employees.

Long in the making

The current labor crisis in Lebanon did not emerge out of nowhere. The most recent statistics come from the Labour Force and Household Living Conditions (LFHLCS) 2018-2019 survey, conducted by the Central Administration of Statistics in partnership with the International Labour Organization and funded by the EU delegations in Lebanon. While the timing of the survey meant it was unable to capture the effects of the financial crisis that hit in Q4 of 2019, it serves as the best available base for assessing the labor market reality upon which the current crisis has been unfolding. According to the LFHLCS, the youth unemployment rate in Lebanon was 23.3 percent, more than double the general unemployment rate of 11.4 percent. Among university graduates the unemployment rate was even higher, at 35.7 percent. The LFHLCS had the Lebanese labor force at 1.79 million people, of whom 1.59 million were employed and 203,600 were unemployed. There was also a stark difference in labor force participation between men and women, with the former making up just over 70 percent of all those working. Attempts by Executive to quantify how these numbers have changed since October 2019 were unsuccessful, what can be said for certain is that the ongoing financial crisis has already exacerbated poverty and unemployment levels in the country.

What has changed in the past few months is the nature of the challenges facing businesses, especially in light of the restrictive banking policies imposed on them amid a dollar liquidity crisis that first began to show its effects at the end of last September. Nicolas Chammas, chairman of the Beirut Traders Association, explains that prior to October—and the onset of a civil thawra (revolution) in large measure sparked by economic pressures—traders had already been dealing with slow demand brought on by consumers’ decreasing purchasing power. Since these twin economic and political crises took sway, the main challenge for traders has been the devaluation of the lira in the unofficial exchange market, which has effectively meant a 40 percent loss for businesses trying to secure the dollars they need for importing goods, as well as more recent capital controls causing immense difficulties for businesses that need to settle accounts abroad. “We are stuck between a rock and a hard place,” Chammas says. “Traders don’t export so they have no way of getting dollars except through sales, which have dropped even further. The drop in sales can reach 50 to 80 percent depending on the sector, with luxury and durable goods—which constitute two thirds of traders’ businesses [in terms of operations]—hit the hardest.”

Maya Bekhazi Noun, general secretary of the Syndicate of Owners of Restaurants, Nightclubs, Cafes, and Patisseries, says that the hospitality and tourism sector has been suffering from consumers’ low purchasing power since late 2017. The lack of dollars and unofficial rates have hiked the costs of most imported goods, including foods, and so F&B operators who were already struggling prior to the October uprising were hit hard, she says, with restaurants and cafés among the first businesses to shut down or take extreme measures with their employees.

Riccardo Hosri, CEO of security system supplier Sacotel and vice chairman of the board at the Family Business Network Levant, believes it was the abrupt halt of credit facilities that was the last nail in corporate Lebanon’s coffin. “Banks took this unilateral measure without considering the other sectors, thereby completely blocking the operation of many companies which rely on these facilities for their mobility,” he says. “In this context, business owners are sometimes being forced to pay out of their personal wealth to honor their commitments to their suppliers, others are closing down or reducing their staff number or giving pay cuts.”

No money, no jobs

Employees pressured to sign a document should write “with reservation” by their signature.

Given these financially challenging circumstances, business owners and managers are under pressure to cut down on their costs to stay afloat and minimize their losses.

When no amount of cost reduction can make up for losses incurred, however, Lebanese business owners are increasingly turning to reducing salaries in parallel to a reduction in working hours or—when that is not enough—laying off employees. According to Hosri, Stronger Together—an organization of 150 Lebanese CEOs that formed after the crisis to try and mitigate its effect on their businesses—estimates there will be 300,000 job losses by end of Q1 2020. This figure that does not seem unreasonable given the current situation. Hosri also says that, based on his conversations with CEOs in Stronger Together, there is an average of 40 to 50 percent reduction in salaries across the private sector balanced with a reduction in working hours.

Chammas tells Executive that paying employees’ salaries in Lebanese lira—when their contract is in dollars—is already a 30 percent pay cut because of the difference between the official exchange rate and the market. But, in the many cases where businesses are almost at a standstill, he says, more drastic measures are being taken, including laying off employees—he estimates that thousands of employees have been laid off so far in the trade sector. “Simply put, when you cannot pay your supplier, your supplier will stop sending goods to Lebanon and you cannot keep your staff doing nothing,” he says. “Inventories are being slowly depleted and we will reach a point whereby many businesses will just go bankrupt.”

Paul Abi Nasr, CEO of Polytextile and member of the board of directors at the Association of Lebanese Industrialists, says some sectors have been so severely impacted by the crisis that even reducing salaries was not enough to make ends meet. “Some companies, especially manufacturers in the construction sector, went down to 20 percent sales and so had no choice but to let go of some of their employees,” he says. “It is unfortunate but they don’t have another solution and are on life support today.”

To reduce or to let go?

To some, a temporary reduction in salaries coupled with less working hours is a far better solution than laying off employees as it allows those employees to get at least some consistent income and to remain in the National Social Security Fund (NSSF). “I reduced the hours of the whole company by 20 percent,” Abi Nasr says. “This way I am being fair to everybody. Instead of having some being taxed at 100 percent, which in this case would mean being let go, and others still being paid 100 percent. This is actually better because you also reduce costs that are not related to salaries such as electricity.”

He says that by retaining employees but reducing their hours, a company can recover more quickly once this crisis is mitigated. “The second we find a solution, bringing back those 20 percent [working hours lost] is as easy as flipping on a switch,” Abi Nasr says. “But if you let go of these employees, bringing them back is very difficult if not impossible. Either they will have moved on somewhere else, or, if they do come back, they won’t identify with the company as a safe haven for them because they will think that if they let me go once, they may do so again.”

Chammas points out to the time investment loss when employers are forced to lose staff. He explains that companies have spent years training their employees and developing their skills and so, for those who have made staff cuts, it would mean starting all over again with a new team once conditions stabilize.

While few disagree that reducing salaries and hours is more favorable than termination, the argument would be to work toward a solution that would not involve either, if at all possible. “At the end of the day people would rather work and earn their full salary then stay at home and do nothing, earning half their salary,” Hosri says.

Milking it

The business owners and managers Executive spoke to voiced genuine frustration and sadness over having to lay off or reduce the pay of team members and it is evident that it was not an easy decision for many of those in charge of a company’s bottom line to take.

“The situation is that many companies, including ours, have been losing money for at least two years now.”
Riccardo Hosri, CEO of security system supplier Sacotel and vice chairman of the board at the Family Business Network Levant

Yet, it cannot be denied that some companies are using the economic situation as an excuse to downsize and let go of employees. “At the end of the day, corporations are run by humans and not computers and humans tend to be abusive” Hosri says. “But we cannot generalize, because there are a lot of decent people as well and I hope they constitute the majority.”

Karim Nammour, lawyer and member of Legal Agenda, says he has seen several cases of companies that have either fired a sizable number or all of their employees, using the excuse of the current economic situation—but he believes that not all cases were justified. “Nobody can argue that the economic situation is bad but it doesn’t mean the company’s situation is bad,” he says. “A lot of companies have the bulk of their business abroad, while many companies were not affected by the economic situation [in terms of of needing imports]. I cannot assume that just because the economic situation is bad then ipso facto all companies are doing badly.”

Hosri asks those who express their surprise that some companies that have been making money for years crumbled so early into the crisis to remember that the economy has been suffering for years. “Company owners and management are burdened from taking these measures but they are necessary,” he says. “The situation is that many companies, including ours, have been losing money for at least two years now. But back then, we had regular inflows and outflows and so could plan to get out of the crisis. Now it is different from two years ago.”

Employee rights

Here is where the law should step in to distinguish between companies that are really losing money and need to take these measures to survive and those who are just abusing the situation.

Nammour explains that article 50 of 1946 Lebanese Labor Code outlines the procedure to be followed if a company needs to lay off some of its employees due to economic difficulties or because it wants to restructure. “The article basically says that if employers want to fire employees for economic reasons, they should notify the Ministry of Labor (MoL) one month before they plan to terminate the contracts and agree on a program or procedure with the ministry that creates a framework for the restructuring of the company or the terminating of the employees,” he explains. “This is very important because it grants the MoL authority to overlook whether or not this step that the company wants to take is legal and justified.” He explains that, for example, the law would not consider it justified for a company that has suffered small operational losses for a year to claim it is not making profit and fire its employees.

If the law is followed, then an inspector would go through the company files case by case to see why particular employees were selected for termination, according to Nammour. This would ensure that companies do not use this as an excuse to fire employees who have been with them for a long time and whose indemnities would be very high otherwise. If the MoL agrees to laying off employees, they do not get any compensation, only the guarantee that they would be rehired within a year if the company reopens job positions, he explains.

In Nammour’s legal analysis, companies independently deciding to reduce employees’ pay by reducing working hours is also a violation of article 50. “If employers reduce salaries without going through the mechanism of informing the MoL and making a program, they would be changing a substantial condition of the labor contract and thus [this] can be considered a form of termination and the employee can then sue for arbitrary termination, which means they can ask for up to 12 months of compensation,” he says. “As an employee, I am working for my salary and I am expecting a certain amount, so when the salary is changed it is a substantial amendment to my contract and as such is considered by jurisprudence to be an unlawful termination.”

Malek Takieddine, lawyer at firm Al Jad, notes that, even without resorting to article 50, breaking a significant term of an employment contract—in this case working hours and pay—is against the law. Whether these legalities are understood or followed by business owners is less clear. Hosry tells Executive there is no transparency around the labor law, which makes it difficult for companies to know what is expected from them in this crisis. “How will the public institutions deal with corporations once this crisis is over?” he asks. “Now we are all on survival mode and no one cares if you make mistakes or not, but at some point things will settle down. When we make a decision [regarding our staff], we have to really consider the repercussions because we might pay the price later.”

Takieddine says that although the Lebanese labor law generally protects employees well, what lies between the letter of the law and the situation on the ground is a thousand shades of grey. He says many companies do not resort to article 50 because they have not paid their dues to the MoL or the NSSF and are not in good standing with them. Although he does not have precise figures, Nammour says there is a big discrepancy between the number of people fired, which he says is close to 160,000, and the submissions for termination received at the MoL.

What is happening on the ground, according to Takieddine, is that employers are not involving the ministry but instead agreeing on a pay cut with their employees—often by playing on their emotions and their fear of losing their job. “In principle, the contract signed by both parties should be honored,” he says. “But companies say we will either have to lay you off or close down, or you have to bear with us in this tough period.”

Labor cases take on average three and a half years.

In the case of termination, Takieddine says it is hard to prove that it is illegal. “Companies should not be biased against any specific employee but practically this is open to discretion and interpretation and we cannot assume that it will be fair in terms of which employees get terminated,” he says. “If an employee feels he has been wrongfully terminated, he can sue but it is hard to prove especially if the company followed all legal procedures.”

Even if an employee had a strong case for wrongful dismissal against an employer, Nammour says that the labor courts are overwhelmed and that labor cases take an average of three and a half years to be processed, which is very problematic for someone who has been unlawfully laid off. Moreover, even if more companies do follow the letter of the law and submit employee termination claims, Nammour says the MoL does not have enough inspectors to go around the businesses. “It is not enough to have a good law, you need it and the judiciary to be effective,” he says.

A black hole

All those interviewed for this article agree that this is just the beginning of a labor crisis that threatens to topple Lebanon’s already fragile economy and—arguably more importantly—its social fabric. “My biggest worry as a Lebanese is the social impact of the crisis, not now, but in June or July when we will have an unemployment rate exceeding 40 percent,” Hosri says. “When we have hunger—and we will have hunger—when the crime rate will shoot up because people will find themselves in a situation where they have to be aggressive to feed themselves and their children, when people will be out of schools and universities because their parents will be unable to pay tuition. When education is hit, the future of the country will be hit, and we would have eliminated the possibility of any real growth. If nothing happens very fast, at least for our generation, we can forget seeing a country we can live in.”

Facing the labor crisis is like standing at the edge of an abyss but there is time to avoid free falling into a pit of bottomless despair if action is taken fast. The government needs to formulate a strategy that would create jobs to reintroduce those who have been laid off to the work force and to provide opportunities for fresh graduates within their own country. And it needs to do so fast.

March 6, 2020 0 comments

Leaders Opinion

Facing the economic crisis with productive realism

by Executive Editors March 6, 2020

written by Executive Editors

It plainly is depressing. Practically every story in this issue of Executive starts—if not with the scary ad-hoc topic of the coronavirus—but with a reference to the dire economic straits that Lebanon is in. And even before the March issue went to the newsstands, the mood among some of our online readers seemed to be correspondingly explosive to this dismal perception: an online-first interview with a banking economist on the eurobond repayment question triggered a handful of instant, nasty, and non-quotable responses when it was posted at the end of February—a far more visceral response than had been garnered by an op-ed published the week prior that laid out opposing views.

That the Lebanese have become more vocally engaged with the country’s pressing economic issues can only be a good thing. But amid the op-eds, interviews, tweets, and blogs there must also be an acknowledgement that the national financial story of Lebanon is complex and at risk of biases on all sides of the debate. Somewhere in the midst of all this economic noise there is a viable path forward for Lebanon. Finding it, however, is proving elusive.

Throughout February there was talk of an economic rescue package from the new government of Hassan Diab. But governmental talk in the public’s eyes these days is not just simply cheap but discounted almost in totality, as any such talk suffers from the distrust that has become entrenched in the populace over a decade or more. Moreover, on the month’s most hotly debated question of macroeconomic concern, the cabinet, needing time to find its footing, proved unable to magically pull a solution for the pressing eurobond question—to pay or not to pay—out of its hat.

Amidst the looming deadline for payment and all the economic uncertainty that has colored the day to day lives of Lebanese for the past few months it is understandable that people are angry, both with the government and with the banks. The fact remains, however, that rage can be destructive but never productive. It needs to be remembered that the people’s civil thawra (revolution) and the national economic mess have sprouted from the same ground of arrogant political corruption and limited economic room for financial action, but that neither was directly causal of the other (whatever narrative to the opposite has been spun). Now is the moment to recognize once and for all—based on the various governmental calls for international help and latest appointments of foreign legal and financial firms on the eurobond and debt restructuring issue—that the mess of the Lebanese public debt has taken on a dimension which neither the state nor the banks appear able to manage out of their own power.

All this means that it is now a time to step back from discussions of local guilt or ideological debates over whether the elites are waging war on the less fortunate or, inversely, the lower classes at the elites. Like we need to substitute imports with local production, the mental striving to improve the situation needs to substitute ultimately pointless talks of blame and ideology with value-added thought—namely with realism, civility, and even a dose of humility.

Humility, through acknowledging that the economic and financial mess of Lebanon is larger than the country’s capacity of autonomous self-healing, should guide the country in dealing as constructively as possible with the international community and the multilateral financial institutions whose support is urgently needed beyond any question and reservation.

Realism will help the thought leaders among protesters and establishment to—hopefully jointly—direct their energies to the search for local solutions such as empowerment of better social safety nets, industry, or crowdsourcing, which might come without guarantees but nonetheless offers infinitely better prospects than remaining in a mode of paralyzed and action-less economic despair.

But the most important virtue to preserve and nurture is civility. As the country’s sustaining asset clearly is neither political prowess nor the ability to manage an impossible economy, civility means that if Lebanon wants to preserve its validity as human habitat and virtuous society, there is no room for any hate speech or violence against outspoken minds, such as that leveled this month against economic journalist Mohammad Zbeeb. Respect for critics as well as proponents of the banking sector must be ascertained in any however passionate discussion over the economic course of action, the paying or restructuring of public debt, or the need of financial market reforms for building a new economic future.

In this period of accelerating difficulties and fears, and with expectations of even greater social troubles in Lebanon, it is time to remember that the outstanding quality of the past four and a half months was the peacefulness of protests, which was maintained against all provocations and in all moments of temptation to turn into belligerent unrest. Maintaining this culture against the pressures of this period is the challenge of preserving civility.

March 6, 2020 0 comments