Business

Something old and something new

by Marianne Stigset
written by Marianne Stigset

From the brilliantly colored glazed-brick and tile murals of Mesopotamia to Antoni Gaudi’s surrealist mosaic creations, ceramics have been a mainstay in the evolution of Mediterranean art and design. Keeping the tradition alive is Uniceramic, one of the first companies to produce floor tiles in the Middle East and one of the region’s largest producers today.

Registered in 1973 by founder Joseph G. Ghorra, Uniceramic’s launch coincided with the outbreak of the civil war in Lebanon in 1975, but the unfavorable environment honed the survival skills of the company, and came in handy as it expanded its market share over the years to encompass other regional flashpoints such as Iraq.

“It was very difficult during the war,” general manager Nabil J. Ghorra recalls. “You see in our industry, gas is the main energy component that is used. It’s highly flammable, and it doesn’t like bullets and bombs much. Since we had to bring gas in every day, it was neither the easiest nor the safest thing to do at the time. Then the Israeli invasion pushed into the Bekaa where we have our plant. Most of our raw material was close to where the Israelis were, so we had to re-excavate and look for other places to find material.”

Today the company’s 42,000 m2 plant is still located in the Bekaa, near Chtaura. Its staff has grown from 138 employees in 1975 to 375 in 2005 and its production capacity has increased twelve fold over the same period. By 1996, the company went public, becoming one of only three industrial companies listed on the Beirut Stock Exchange.

The key to Uniceramic’s production increase says Ghorra, lies technology, allowing more cost effectiveness.

“We have increased our production capacity twelve fold between 1975 and 2005, but without having to increase our number of employees by the same amount. And this month we are set to increase our annual production from 4.3 million sqm2 tiles to 6.5 million sqm2.”

Increasing production falls into the company’s two-pronged corporate strategy, based on consolidating Uniceramic’s domestic market share, while simultaneously expanding internationally.

Although the tile market in Lebanon peaked back in 1995 at 10.6 million sqm2 of tiles only to decline steadily for the following six years, it has experienced a strong recovery since 2001, reaching 10.4 million sqm2 in 2004. Unexpectedly, the figures for first quarter of 2005 read even better than last year’s.

“We witnessed a 20% increase from the first 3 months of 2004,” says Ghorra. “The market is still growing.”

In a bid to keep its share of the market pie, which increased from 26% in 2002 to over 30% in 2004, Uniceramic is taking on the market with more products, new products and an added line of interior design and architectural services.

“We used to be just manufacturers, but we saw that in Lebanon, imported goods are perceived as being better than local products,” Ghorra explains. “The Lebanese prefer Western products over Lebanese products, just as they prefer Lebanese products over other Middle Eastern products. There is a stigma there. So we had to add value to our product. We were known as a good product, but not a particularly beautiful one. That is why our “Reflection of Beauty” campaign was launched 3-4 years ago.”

Uniceramic began opening its own showrooms, displaying full-fledged ceramic bathrooms and kitchens. Initially conceived purely as a mean to inspire customers, with no sales taking place so as to not compete with the company’s wholesalers, demand from customers became such that Uniceramic eventually began selling its products, but at a higher price.

“The customer is interested in a bathroom, he is not interested in a tile,” notes Ghorra. “(Despite increasing our prices) we discovered that people still preferred to buy from us because of the service – people are ready to buy for the service. We had architects at the showroom giving them advice and this was an added value for them.”

In parallel to this, Unicermic expanded its domestic sales channels to include retail networks and projects, in addition to wholesalers.

For now, the strategy seems to be paying off. Despite a 40% dip in business due to the political upheaval sparked by the February 14th attack (which notably slowed the construction industry down as Syrian workers fled), Uniceramic is hoping to make a 50% higher turn-over than last year, and more than a 50% increase in profits.

Focus on exports

Part of this increase is set to come from the company’s export market, which boasts clients in 20 different countries and constitutes 40% of total sales. Hitherto, the bulk of Uniceramic’s export’s have gone to the region, which Ghorra views as holding significant potential.

“In developed countries, the highest consumption per capita is 6.5 sqm2 tiles per capita,” he says. “In Lebanon, we are now at a peak, with 2.5 sqm2. In some other countries on the Middle East, they are only at 0.5 sqm2. So the potential for market development is huge.”

Yet seeking out the potential in a volatile region is a path fraught with pitfalls, which Uniceramic is all too familiar with. Prior to its March 2003 invasion, Iraq represented one third of the company’s total exports. Since then, sales have come to a halt.

“We have offices there, but I haven’t been to Iraq in a year and we have no direct sales to the country anymore,” says Ghorra. “But a lot of Iraqis now live in Syria, and they buy our products from there, which is one of the reasons why Syria has now become our biggest export market.”

Although the Middle East has treated the company well, Ghorra says he is ready to get involved in more stable markets and Uniceramic is now focusing its efforts on expanding its market share in Europe and the United States.

“At the end of the day, you want to make profits,” he says. “You want to show shareholders that this company is making returns on investment – this is how you grow, by gaining the confidence of the market. If you are constantly focusing on putting out fires, you don’t get to do that. We are surviving quite well, but we will be focusing more on Europe and the United States from now on, so as to stabilize demand, and be able to grow.”

The challenge of high energy prices

Yet expanding into less volatile regions will not protect Uniceramic from the challenges posed by out-of-control energy prices, which have chewed of quite a chunk of the company’s revenues since the war on Iraq. Despite hitting record sales worth $20.9 million in 2003, Uniceramic suffered a loss of $1.36 million in 2003.

“When we realized that the war in Iraq was imminent, we feared that the regional countries that exported into the Iraqi market would dump all their products on Lebanon, which has a more open economy,” Ghorra explains. “So as to not lose our market share, we decreased our prices, based on President Bush’s prediction that oil prices would fall after the war. Our sales soared and our market share increased by 8%, but the price of oil kept going up. Essentially, we ended up with a large gap in profitability.”

With 30 to 40% of production costs stemming from energy, boosted sales could do little to save the company’s profits. Worsening the situation was the strengthened Euro, which racked up the prices of imports of spare parts and raw material.

However the strong Euro has not exclusively brought woes to the company.

“It did also have a positive effect,” says Ghorra. “People import less from European countries such as Italy and Spain, as it gets more expensive. We penetrate that segment of the market.”

By 2004, Uniceramic re-adjusted its prices and with sales only slightly below the 2003 figures at $20.7 million, closed the year with a net profit of $96,251.

Unfair trade

The threat of foreign competition however, remains a dark cloud on Uniceramic’s otherwise promising horizon. Since Lebanon’s implementation of the Greater Arab Free Trade Area’s clauses, demanding the gradual reduction of tariffs and taxes, Lebanese companies have found themselves competing with regional tile makers propped up by heavily subsidized products.

“There’s unfair trade going on,” says Ghorra. “In Egypt, tile fabricants are buying gas at subsidized rates. For 1000 kilocalories of energy, they pay 0.4 cents. We pay 6.11 cents – 14 times more. In addition to that they have cheap labor and all raw material locally available. In 2002, there were almost no imports coming from Egypt into Lebanon. In 2003, 211,000 sqm2 of tiles were imported. By 2004, this number had reached 1.3 million sqm2, and in the first 3 months alone of 2005, we have seen 903,000 sqm2 imported.”

Facing the risk of being down priced out of the market and forced to delocalize, Uniceramic is engaging in government lobbying, so as to introduce measures to limit imports from subsidized foreign industries.

“The government needs to protect us,” Ghorra argues. “Otherwise, why would investors come to Lebanon, if profitability is better elsewhere? This country needs to create 10,000 new jobs every year, but the government needs to give the incentives and the opportunities to the industries to use this labor and create new jobs.”

But the manager of the company, which saw itself rewarded the prize for best Industrial Company with an Internationally Renowned Brand in 2004, remains upbeat about the future.

“We are strengthening our trading capacity, stabilizing and securing our market shares abroad, launching 75 new references in tiles in June and July, and we will become quite aggressive on the domestic market in order to fight for our market share and consolidate.”

Uniceramic appears set to keep up tradition for quite some time to come.

 

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Special Section

Picking up life Insurance Clients

by Executive Contributor
written by Executive Contributor

With a premium volume of $180 million in 2004, life insurance realized a rise of near 30% over 2003 and accounted for more than 31% of the total reported premium pie of $577 million. Bank-affiliated insurance companies, such as Audi’s Libano-Arabe, BLOM’s Arope and Bank Byblos’ Adir, as well as specialist firms Sogecap (linked with Societe Generale and SGBL Bank) and Bancassurance (an enterprise of Fransabank and BLF) fared very well in their development while the traditional life insurance leaders, Alico, maintained the top role in market share. Another convincing performance came from SNA, which supplies Bank of Beirut as well as several smaller banks with bancassurance products. Executive asked representatives of life insurance companies and bancassurance specialists about the achievements and potentials of these lines.

How do you see assess the role of bancassurance for the Lebanese insurance market and where are the growth potentials and untapped niches?

Pierre Talhami, manager, Beirut Broker Company

So far, bancassurance has proved to be excellent for us. In 1996 we were the first to introduce such products to Lebanon in form of four products which were developed with the Italian Assecurazione Generali. Today we have 9 bancassurance products that are sold at all Bank of Beirut branches. These are in three categories: life and capitalization; personal accident; and general accident insurance.

Recently, we were the first to introduce medical insurance policy sold over the counter and underwritten directly, with no medical check required until 45 years of age and only an interview with the doctor for people between 45 and 55. This policy is priced 50% below the market price for health insurance and targets mainly young and healthy people with a $500 deductible on hospitalization under a policy that covers up to $125,000 in total medical expenses, at a cost of $300 per year, which is $25 per month. It can be combined with a loss-of-income compensation policy that provides the insured from the second day of hospitalization with $200 a day in compensation if due to an accident or $100 per day from the third day if due to sickness. At only $3 per month for this B-Compensated product, we introduced combo sales of health and loss of income compensation products in January 2005. 

Over the past three years, using bancassurance products developed by SNA, we sold 7,000 new policies in 2002. In 2003, most of these policies were renewed plus we sold 7,200 new policies, followed in 2004 by sale of 7,600 new policies and again renewal of most existing policies.

Beirut Broker handles business for Bank of Beirut and our target is for 40 % of all Bank of Beirut clients to buy at least one bancassurance product over the counter. As of now, about 18% of the client base holds a policy. We feel that we are very well positioned in the market because we have one of the largest distribution channels. 

How do you assess the potential of Lebanese insurance firms to penetrate regional markets with bancassurance products and which companies do you anticipate to succeed in the Lebanese insurance market?

Rene Klat, general manager, Adir Insurance

We have developed bancassurance that does not exist as such in Middle East and Arab world. Thus we have specialties that we could develop in the Middle East. As we are part of the Bank Byblos Group, we will definitely follow the ownership of our bank in Sudan and Algiers. We are also trying to make a partnership in Jordan with local banks and insurance companies but I must admit that things are sometimes slow in this region. I could also mention Syria but there is no insurance law in Syria. However, we have been following corporate clients of Bank Byblos for quite a few years there.  

We hope that with the intentions of the United States to spread democracy there could be a lot of development in the region but I hope especially that there will be an economic opening.

The Lebanese life insurance market is big. We have a retirement plan with 5,000 policies in force over two years. I think now that everyone has confidence in the Lebanese economy we can all hope that the young people who brought the revolution will insist on new faces. We have fantastic people and a lot of wealth in many areas, from human resources and climate to history and archeology.

However, I always state that there is no hope in the mid-term for insurance companies that are not backed by big banks and in the long-term for those that are not connected to international insurance companies. In 2004, we could prove the profitability of the investment by our international partners by distributing $1 million to shareholders. They are very happy with us. We are a real institution.

Where are the best development potentials for life insurance providers in Lebanon and how do you expect the domestic market to develop?

Jean-Francois Jaboulay, general manager, Sogecap Liban

We are the second company in life insurance after Alico and 2004 was a very good year for us. It was only our fourth year of activities but we managed very well.

In 2004 we had lower growth than in 2003 and it was our intention to go this way. In the moment, term life products are the best for us while the line of capitalization products doesn’t give us much profit because the law doesn’t allow more than 50% of life premiums to invested outside. We could do very well if we could place 100% of every contract in specialized unit-linked products.

Sogecap are very proud of the unit-linked products we are providing in France, Europe and even North Africa. Our best unit-linked products in the “audacious” category gave over 25% over the last 18 months and the secure ones over 20 % over 18 months, and we don’t want to spoil our reputation with a product that would offer less interest. 

We want to find new channels and partnerships with banks or brokers. Our products now are not fit for brokers and we are building products that are fit for partnership with brokers.

The future of the country can give the insurance industry a lot of hope for development The Lebanese market is still cornered by laws and needs modernization. It should also concentrate a bit. If the market is modernized, it can develop very well and give a lot to the country. There is a need for more awareness on capitalization products.

The people have a need and start contracts but a number of these contracts fade out after three to four months for economic reasons. The need is larger than the economic capacity.

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Special Section

Not A Fire Sale

by Thomas Schellen
written by Thomas Schellen

It takes but a few steps to walk from the site of the first bomb explosion that shook Lebanon in March in the aftermath of the Hariri assassination and anti-Syrian protests to the offices of one of the country’s largest insurance brokerage firms, Beirut Broker. The offices of the brokerage in fact suffered some slight damage from the blast in March and in a perfunctory nod to the heightened awareness for security, the doors of the no-frills office building in New Jdeideh now remain closed and have to be buzzed open during business hours.   

Inside, the mood is cautiously upbeat, despite a very slow period in the last three months. “The entire retail business saw basically no growth in the last couple of months; that was not at all our expectation for 2005. In 2004 we grew and started feeling that clients are more and more accepting bancassurance,” says the firm’s manager, Pierre Talhami. Bancassurance is the distribution channel of standardized insurance products through bank branches, which the brokerage handles for its parent company, Bank of Beirut.  

Predictably, the first quarter of 2005 was not extremely kind to Lebanon’s insurance providers. They apparently did not have to pay out huge claims for damages incurred by businesses from the bomb that killed former Prime Minister Rafik Hariri, former minister for economy and trade, Bassil Fuleihan, and 19 others, nor were they called upon to cover damages from four subsequent bombs that cost several lives and millions in destruction of property. But being spared spectacular claims costs did not mean that insurers would have benefited from increased demand. To the contrary, consumers kept their purse strings tight in face of the uncertain times they were confronted with and sales of retail insurance products suffered in consequence.

In the corporate segment, things looked somewhat better, though. While businesses did not respond to the security crisis by investing in more insurance protection, they on the other hand also did not turn their back to the need for insurance in the knowledge that covers for damages incurred because of acts of terrorism would be prohibitively expensive if at all available.

“Lebanese people are used to the fact that terrorism is not a cover you can buy in Lebanon,” said Talhami. Beirut Broker has a substantial business on the corporate side, as it assists Bank of Beirut and its corporate clients in assessing insurance needs when discussing loan financing. In the corporate segment, the firm found that by and large, companies carried on buying general insurance products as they encountered the necessity. This left the insurance industry during the aftermath of 2/14 exactly there where it has been perennially: following economic trends set in other sectors. And these, as we all know, were pretty dismal over the past three months.  

This is not to say that the insurance industry’s progress, which had been accelerating over the past two years, is in danger of stalling. The process of consolidation and natural selection of viable companies in the overpopulated, sector is also continuing. Many of the sector’s reputable companies could improve their results in 2004. Some, like life insurance specialist Sogecap, moderated their growth purposely while others achieved tremendous portfolio increases. Arope, the insurance daughter of BLOM bank, reported a 71% increase in total premiums to $24.7 million, which included a more than fivefold boost of its previously smallish life insurance portfolio. According to unofficial company figures, a number of insurers achieved some growth in the first quarter of 2005 even as players across the industry conceded that they had expected much more and could only hope to catch up in the second half of the year. “It is a slowdown in our progression. Our plan was to grow more than we did but we are still 5 to 10 % above production of last year,” said Rene Klat, general manager of Adir Insurance.

Prospects also remain interesting for the development of Islamic insurance where the Arab Finance House (AFH) plans to market TAKAFUL products in cooperation with Bahrain-based firm Solidarity, one of the world’s foremost providers of financial protection that is Sharia-compliant. According to Mounir Sinno, marketing manager and spokesman for AFH, the two institutions already signed an agreement and are preparing to offer TAKAFUL products in Lebanon probably before the end of this year.

Yet although being large by regional standards and despite impressive growth of life insurance business and respectable improvements in general insurance premiums by leading companies – often those providers whose shareholders include local banks and/or international insurance firms – the total insurance premium volume in Lebanon still measures about 1 against 100 when compared to the country’s banking deposits.

Market mechanics and private sector initiative have worked in the past five years to gradually increase the degree of insuredness in the business community. While in the mid to late 90s only about a quarter of enterprises in Lebanon could be counted upon to be fortified with well-rounded insurance protection, industry experts generally agree that coverage today extends to an estimated 40 to 50% of enterprises. This is in a major part due to the fact that more and more businesses rely on bank finance for their development and banks in turn oblige them to obtain the appropriate insurance covers, and as such the trend can be expected to continue.

To make the logic of insurance more compelling in Lebanon, administrative action and legislative initiative remain major needs. Industry insiders say the Insurance Control Commission at the ministry of economy and trade could do more in advancing the professionalism of insurance companies than monitor their financial soundness, in which the ICC achieved clear progress with field audits and improved supervision.     

The main item to advance the insurance industry in this respect is the further enhancement of the insurance law. A new draft law stipulation a clearer industry structure, higher capital requirements and stronger teeth for supervisory entities was presented in April 2004 by then minister of economy, Marwan Hamadeh, but expectations for the law’s quick implementation by its admirers did not get fulfilled.  

Insurance legislation is a clear need not only as far as better legislation on the sector’s activities but also in relation to legislation to make insurance products more attractive under tax perspectives, such as allowing tax deferrals on both employee and employer contributions to individual or group retirement plans. While consumers bought life insurance in recent years at a faster rate than before, life products with a savings element still have to become more attractive when compared to the simpler and in the short run cheaper term life products, which offer protection of one’s family in case of sudden death or accident but do not serve the insured as tool for wealth creation and financial security later in life.

Law givers in developed nations widely provide incentives to personal provisioning for old age by deferring the tax burden on contributions into retirement plans. As long as this is not the case in Lebanon, the concept of individual retirement provisioning is deprived of a psychologically and financially important support factor.  

Another obstacle to growth in the life insurance sector is the ceiling on investing funds abroad. This has become even more of an issue as the interest rate environment in Lebanon has dropped from the unsustainably high levels of the 1990s and the turn of the century. In light of the deficiencies of the local financial market – the anemic bourse and the absence of alternatives to bank deposits – the regulation that 50% of the amounts managed by life insurance companies have to be kept in the domestic market means that insurers cannot unfold their full potential to develop attractive products. This applies especially to unit-linked life insurance products, where returns from the savings component of the policy depend on the performance of sophisticated investment strategies. “The Sogecap unit-linked knowledge is worldwide. If we have to keep 50% in country, we cannot do the products we are best in,” said Jean_Francois Jaboulay, general manager of Sogecap Liban.

With expectations for quick adoption of new insurance-related legislation appearing over-optimistic in light of the sector’s relatively low priority in the economy and more pressing needs consuming the political realm for at least several more months, the hottest issue and best opportunity for the insurance industry right now is institutional self-improvement. The insurance industry association ACAL has for the past few years been involved in lobbying for insurance but its role has been impeded by fragmentation of interests and somewhat incomplete structures.

As demonstrated by a near total absence of studies and publications and a gap of several years even in providing figures available from insurance firms on its website, ACAL has not been able to formulate the positions of the industry as convincingly as it could have. Some insurance professionals have criticized the association as a body where the large number of small firms with restricted ambitions for sector improvement has held developments back. Others said it is high time for ACAL, which is holding elections for its president and part of its board early this month, to establish a position of director general or secretary general, in the aspiration to make ACAL function more like the role model in finance sector associations, the Association of Banks in Lebanon (ABL). “I hope that the profile for the position of secretary general will be devised. The president of ACAL, who has to take care of his own company, does not have the time to do everything,” said Klat. 

In 2004, ACAL shone in organizing the 25th General Arab Insurance Federation conference, whose list of registered participants included more than 900 insurance professionals from around the Arab world and beyond. With this record attendance, the event highlighted the growing regional awareness of insurance development and raised new hopes for faster development of activities in key Arab markets.

While some countries, notably Bahrain and Saudi Arabia, are making good on their programs for competently regulation and opening up their insurance markets and partly Beirut-based Medgulf Insurance was included on the top of the Saudi Arabian Monetary Agency’s list of companies that have completed the application process required for operating in the kingdom’s insurance and reinsurance market, the development of the insurance sector in the region is overall anything but a fast affair. Syria, another market where many Lebanese companies are keen to build insurance capacities, is still awaiting its insurance laws. Lebanese insurance companies that already have a presence in the neighboring country deny the existence of problems in pure economic interaction and are upbeat about their business relations and acceptance of Lebanese firms there, but nonetheless operate in an environment not comprehensively covered by insurance legislation.

Given the slow evolution of the domestic and regional insurance markets, no radical changes appear to be in the cards for Lebanese insurance firms in the near to mid term future. Internationally, the outlook for insurance continues to focus on prudent underwriting in order to maintain profitability in changeable investment environments. Natural catastrophes, as demonstrated painfully by the Tsunami that devastated so many parts of Indonesia, Sri Lanka and other countries bordering the Indian Ocean, continues to be the leading concern for insurance providers worldwide. However, as terrorism risk has been increasing around the world and especially in developed countries, the provision of protection against the damages from a terrorist attack is becoming an issue of increasing importance for the world’s insurance leaders.

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State department

Parallel lives

by Washington Correspondent
written by Washington Correspondent

Last month saw many Americans – Republicans mostly – quick to seize on the perceived  similarities between Pope John Paul II and former President Ronald Reagan.

True, both men played all-important roles in helping bring about the fall of communism and the demise of the Soviet empire and playing important roles in shaping the 20th century and getting rid of oppression; one as president of a thriving democracy, and the other as the spiritual leader of the world’s 1.1 billion Catholics. Their alliance against communism seemed natural after all, but the similarities do not stop there.

Both Reagan and the pope were the targets of assassination attempts in the same year. The pope’s would be assassin, a Turk by the name of Mehmet Ali Agca, was reportedly working for the Bulgarian intelligence services who, in turn, could have been acting for the benefit of the Soviet KGB. The Soviets – or at least a certain hierarchy within the Kremlin – understood the danger a Polish pope represented.

Reagan on the other hand was shot by John Hinckley, Jr., an unstable young man, obsessed with the actress Jodie Foster and her role in, Taxi Driver, a movie that allegedly made a deep impression on him. Now you know why they give films “R” ratings.

In fact both men started out as actors; the pope playing a few minor roles on the stage in his native Krakow, where he founded an underground theatre company, writing and acting in plays that dealt with oppression. Reagan had a longer career in acting, appearing in 57 films, once with a chimpanzee.

They also loved the outdoors; as a younger the man the pope skied and was a something of a soccer player, while Regan was a high school footballer and accomplished horseman, never happier than on his California ranch.

Nancy Reagan, the former president’s widow was quoted as saying of the two men, “they were very much alike, both “Great Communicators.” In one of his more memorable speeches, Reagan, facing the Berlin Wall said in typical Hollywood fashion, “Mr. Gorbachev, tear down this wall,” while on his first visit to his native Poland as pontiff, Pope John Paul II defied the communist authorities telling his fellow Poles, “Do not be afraid.” This was later seen as the landmark speech that led to the snowball effect that eventually brought the Eastern Bloc out of communism.

Similarly, both men suffered political setbacks, but managed to remain relatively unaffected, their popularity intact. Indeed, Reagan was often referred to as “the Teflon” president, emerging relatively intact from the debacle that was the Iran-Contras weapons deal, in which the Reagan administration was found to be selling arms to Iran, then engaged in a war with Iraq, to fund the Nicaraguan Contra rebels fighting the Leftist Sandinistas. Additionally, the bombing of the U.S. Marines headquarters in Beirut, in which 241 American servicemen died, happened on Reagan’s watch. In both cases the president avoided blame.

The pope, likewise, lived through one of the worst reported crisis in the history of the Catholic Church when the scandal of sexual abuse of children by priests came to light. Hundreds of priests, primarily in the United States, were accused of sexually abusing children, with some cases dating back decades. The Catholic Church was blamed for not acting, instead, at times, covering up the actions of the delinquent priests.

Never since its founding has the shortage of priests been so acute as on John Paul II’s reign. Many analysts blame this on the pope’s insistence on maintaining celibacy in the priesthood, keeping an all-male priesthood and demanding condom free sex in an Africa riddled with Aids. For his part Regan is also accused of ignoring the real dangers of AIDS, although this is easier to say with the benefit of hindsight.

Later in life, both men were struck by terrible debilitating diseases; the pope by Parkinson’s and Reagan with Alzheimer.

Similarities followed the two men in death as well; both received grandiose funerals. In Washington, National Airport was renamed Ronald Reagan Airport, and one of the largest buildings in the city was named the Ronald Reagan Building. A nuclear aircraft carrier was named after him.

“Their legacies are tainted by the same thing that made them strong leaders: their unbending beliefs that both believed came from a higher source,” wrote Larry Mendte, an anchor with CBS. Since the pope’s death, many Catholics have demanded that John Paul II be made a saint. Maybe this is where the similarities should end.

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For your information

Riad Salameh

by Executive Editors
written by Executive Editors

Governor of the Central Bank Riad Salameh has been widely credited with steering a prudent monetary course during his time in office. Now with Lebanon on the verge of a new chapter in its history, Salameh talks to Executive about his confidence in people power, the outlook for interest rates, Basle II compliancy, and the continued stabilizing role of the central bank in a period of national change. He also warns that it is too early to predict a contraction in Lebanon’s economic growth

The IMF readjusted its GDP growth expectation for Lebanon to 4% in 2005 and even less (3.5%) in 2006. What is your expectation for GDP development in 05 and 06?

It is unrealistic to base expectations on the past two months. These were crisis months and any attempt to read into them future predictions might give the wrong picture. We need to wait for the summer season. INSEE [the French National Institute for Statistics and Economic Studies] will make a proper assessment and then release figures.

So the IMF was hasty in its forecasts?

As I said, these were devastating months for the country. The Central Bank needs time to really know what weight to give this period?

In February 2005, gross public debt increased by 5.9% in comparison to Feb 2004. Can one even dare to envision an end to the debt spiral?

One area in which Lebanon is vulnerable is in the growth of its debt. This and other matters of fiscal reform are the priority of the government. It is feasible that debt growth can be contained. There is $20 billion in Lira and other currencies and $10 billion in debt held by the central bank. Paris II is holding $2.5 billion. Any improvements in the management of the public entities will lead to more rational interest rates for the country.

Given the increased confidence in Lebanon will we see another donor conference?

We have heard that statements that there will be international, economic support for Lebanon but in what form we don’t yet know?

What would Riad Salameh like to see?

I guess one could use the same structure as Paris II and by that I mean long-term loans from other countries. With the IMF, Lebanon has a small quota and the process takes too long.

What have we learnt from the lessons of Paris II? Why should the international be convinced of Lebanon’s willing to comply with loan obligations third time around?

Many of our [Paris II] obligations were let down by a lack of political support. Today, the government is under pressure to create a modern economy and generate employment. There is power from the people. They have the awareness. They have demonstrated and they have ambition and politicians are sensitive to the needs of the people.

In theory

[Laughs]Yes. In theory

While understandable giving the current situation, the current high interest rates are affecting banks’ profitability and damaging to debtors? When can expect a drop in rates?

Interest rates are dictated by the markets and have increased in a rational way. Global rates are rising and are not the same as four years ago. They will come to a more realistic level when the international markets develop more confidence in Lebanon. What we need to do is reduce the premium by improving our economic performance by improving our country rating, which will allow us to bring interest rates on our debt down. For the moment we are paying a premium over Libor of 5% and we need to decrease it to 2%. In terms of the outlook, I can say that rates will remain stable or decrease mildly.

What has the central bank agreed with the BIS for Lebanon to ensure that Lebanon fulfills all its Basel II obligations? Are we on course for parallel development with the rest of the G10 nations?

We will comply with Basle II but the only criteria with which there is a question mark is the Lebanon’s dollarization and the weighting on foreign exposure, which does not apply [to Lebanon] and the Bank of International Settlement needs to understand the realities of this. We can be integrated into Basle II with these exceptions. Today, in the Lebanon we have a high capital adequacy and exposures in terms of mis-matching has progressively improved.

In the absence of a Lebanese equivalent of the US Chapter 11, local banks often take advantage of struggling businesses. Can we expect our own Chapter 11 anytime soon? 

There is no law and I am not sure that the Lebanese culture could bear such a law. However, the central bank recently issued Circular 41, which addresses those companies with doubtful debt and allowed them to repay with real estate or have a structured debt repayment for up to ten years. As a result $1 billion of the doubtful debt has been resolved and by 2005 the debt portfolio will be in a perfect situation.

So there is no need for a Chapter 11 style law? The current situation is satisfactory?

Yes especially since Circular 41

Do you foresee any changes in the role of BDL in the “new Lebanon”?

The law that created the central bank is 40 years old but it was a modern law for its time and is still relevant. The changes that are likely to happen in Lebanon in the coming months will be political and the central bank will continue to perform independently of this and continue to do its job.

Did you think that the cover of the April issue of Executive accurately captured the mood of the month?

The Superman cover? [laughs] in my opinion it was better than any interview. But we held out, didn’t we?

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For your information

Country risk ranking drops

by Executive Editors
written by Executive Editors

Lebanon saw its global country risk ranking drop by two notches, reinforcing its low position among the Middle East and North African (MENA) countries, according to Euromoney magazine’s twice-yearly survey. Ranked 109th globally, down from 107th in September 2004 – behind Cape Verde and Ecuador – Lebanon ranked 14th out of 19 MENA countries, scoring 36 points, well below the regional 49.14 average.

The country’s overall score regressed by 7% from the previous survey and declined by 3% on a year-on-year average.

The survey evaluates individual country risk by assigning a weighting to nine categories ranging from political risk to economic performance, debt indicators and access to bank finance. Lebanon maintained a perfect score on debt default and rescheduling, reflecting the country’s clean record in honoring its debt obligations, and also scored high on political risk and debt indicators. Lebanon scored lowest in credit ratings, access to bank finance and discount on forfeiting.

However the survey was conducted before the February 14th assassination of former premier Rafik Hariri. Since then, analysts say investors have tended to adopt a wait-and-see attitude, with no significant capital flight from the country having been registered since February.

Lebanese economist, Kamal Hamdan, maintains a positive outlook on the situation if the government meets its economic and fiscal obligations.

“Should this happen, we will be in good shape, because we are still benefiting from the effects of Paris II as well as this ‘beatific optimism’ as we characterize the behavior of investors here. It’s an optimism that goes contrary to rational economic behavior and leads investors to keep their capital and investments in Lebanon, despite the risk involved. This behavior has saved the economy from crashing time and again since 2001, and it looks as though it continues to do so.”

Beirut wins human resources award

Beirut was nominated first city in the Middle East for human resources (HR) by FDI Magazine, a publication of the Financial Times Group. Lauded for the standard of its schools and internationally recognized universities, the survey assessed the Lebanese capital to have the highest proportion of graduates among any city in the region, and came first for the quality of its academic institutions.

According to FDI, Lebanon’s 41 universities and 377 technical colleges have made it a center for regional learning.

“The educational sector has benefited from the country’s democratic institutions, and the fact that there has been no state interference in higher private education,” said Samir Makdisi, professor in economics at the American University of Beirut (AUB).

The survey indicated that Beirut’s high skills pool was a contributing factor in attracting foreign direct investment (FDI), which reached $2 billion in 2003.

“I haven’t seen the empirical evidence tying the level of education with the country’s FDI, but there is no doubt about the fact that a higher level of education contributes positively to economic growth and development,” Makdisi noted.

A high level of education combined with affordable wages by regional standards, make Beirut a city of choice for recruiters.

“All Arab countries like to recruit in Lebanon, especially Saudi Arabia, Qatar, Dubai and Bahrain,” said Dominique Safa, recruitment manager for the Beirut-based HR company Recruiters.

Makdisi painted a more nuanced picture. “Salaries aren’t necessarily lower across the board, there is a disparity. At the top level in businesses such as banks or private institutions of higher education, salaries are higher, making Lebanon more competitive with regards to other Arab countries, but not with the Gulf.”

Beirut was followed by Haifa in Israel, Doha in Qatar and Jubail in Saudi Arabia, as part of the survey designed to select the Middle Eastern Cities of the Future for 2005-2006.

Cutting down Cedars

Cedars, the second biggest-selling cigarette brand in Lebanon, has witnessed a drop in market share since February 2005, with some shop owners reporting a decrease of up to 50% in sales. The national brand which shot through the ranks of best selling cigarettes in the country largely due to its low price (LBP 750 per packet) is understood to be the smoke of choice for the country’s estimated 400,000 low-wage Syrian workers.

“Between 2000 and 2005, we experienced a 100% increase in sales,” says Antoine Madi of the Regie Libanaise des Tabacs et Tombacs, which produces the brand. “We did no marketing, nor any promotion. Sales went up due to the quality of the brand and its low price.”

Until January 2005, Cedars averaged annual sales of 80 million packets, giving it a 20% share of the Lebanese market, estimated at 7.5 billion “sticks” a year. It by-passed sales of leading international brands Winston, Viceroy, Gauloises and Gitanes, and briefly challenged Marlboro as the country’s leading brand. Since February however, perhaps as a result of many Syrian workers returning home, Cedars has slipped to second place.

 “We see two reasons for this,” said Madi. “An increase in counterfeited products on the Lebanese market, which is challenging our product, and the mass departure of Syrian workers in the country since the assassination of former Prime Minister Rafik Hariri.”

Illicit trade and counterfeited products remains a significant problem in Lebanon and the region. “It’s a big issue in this country,” said Naushad Ramoly, head of Corporate and Regulatory Affairs at British American Tobacco’s Levant and Yemen operations. “It’s a lose-lose situation for everybody: the consumers get products of poor quality, the country loses tax income and the tobacco companies suffer a drop in revenue.”

Habib Abdel Massih, the owner of a grocery store located next to a construction site in Gemmayzeh, says his shop has witnesses a 50% drop in sales of Cedars.

“The Lebanese prefer smoking Marlboro, Winston or Lucky Strike,” he explains. “They don’t trust the Regie to provide a quality product. Cedars is predominantly smoked by Syrian workers and the Lebanese living in the mountains.”

Apprenticeship put on hold

The Lebanese Broadcast Corporation (LBCI & LBC-SAT) much trumpeted plans to launch a pan-Arab version of NBC’s hit business TV show The Apprentice have been put on hold.

The 15-part series, scheduled to air in October, a month after the premiere of the rival CEO show, had already made announcements for casting and had signed up business mogul Mohamed Ali Alabbar as host.

Yet a media spat between Alabbar and the producers of CEO clouded the show in controversy from the start, leading to rumors of a pullout by the colorful chairman of the real estate development company Emaar-Dubai.

“The decision to put the show on hold until a more appropriate time was a unilateral decision made by LBC, which we were merely informed of,” an aide said, on condition of anonymity. “Mr. Alabbar will abide by their decision, but he had not expressed any desire to pull out of the show.”

LBC has refused to issue a public statement on the matter, but sources close to the production team say the casting has been put on hold and the shooting of the show postponed.

As of yet, none of the leading advertising agencies in Lebanon have entered negotiations on a sponsorship contract for the show, one of the largest sources of revenue for reality TV shows – another indication of the delays in launching the program.

A FreemantleMedia franchise, The Apprentice pits several contestants against each other in a bid to showcase their business savvy. Contestants are teamed up and made to solve a variety of business problems, negotiate deals and manage projects. The winner of LBC’s Apprentice was scheduled to walk away with a $300,000 a year senior position at Emaar-Dubai, working alongside Mr. Alabbar.

Bullish trade fair

In yet another testament to the continuing violence ravaging parts of Iraq, for the second year in a row, the country’s main trade show, dubbed “Rebuild Iraq,” was forced to kick off April 4th in a foreign capital.
In one sense, however, the setting for the four-day conference and expo in nearby Amman could not have been more appropriate: Jordan and last year’s host Kuwait have become the undisputed gateways for a deluge of consumer and industrial goods currently flooding the Iraqi market.
Unfortunately, for many Iraqi producers, the import binge has come at precisely the moment when they are least able to compete, leading to fears and impassioned complaints by some that Iraq’s productive sector is in danger of collapsing altogether.
In a sign of the frustration, one conference participant, who identified himself as “ one of the 25,000 Iraqi industrialists who are out of work,” upbraided an (inexplicably) bemused William Lash, US Assistant Secretary of Commerce, for having been more concerned with implementing a near zero tariff policy than supporting the already fragile domestic industrial sector.
In separate interviews after the conference, both Lash and Dr. Mehdi Al-Hafedh, Minister of Planning in Iraq, defended the Iraqi government’s ultra laissez faire approach to the country’s fragile post-war economy.
“All of our colleagues,” said Lash, “Ambassador Bremmer and all of his team spoke with the private sector and the interim government… When you are trying to attract capital in a very challenging environment you need to be as open as possible. The long-term future for Iraq is for opening her markets and opening her doors to capital, technology, ideas and partnerships, not restricting it.”
For his part, Al-Hafedh was less diplomatic in his assessment of the industrialists’ complaints. “Their problem,” he said, “is to always depend on the state, which is over now. We are in need of goods from outside in order to satisfy the needs of the local market. [Our policies] might be reviewed in the future, but the current need is to encourage imports from outside.”]


Investors head to Ras Al Khaimah

Ras Al Khaimah (RAK), among the UAE’s least developed emirates, is now positioning itself as a serious place for investment. To help promote this process, the World Bank is organizing an Investors Conference to be held in RAK 28-29 May. Under the heading “Invest and Live in Ras Al Khaimah” the conference aims to draw attention to RAK’s undoubted investment strengths. For a start, industries like glass, packaging, sanitary goods, pharmaceuticals, and tableware, which involve huge investments, are already exporting to more than 100 countries. Nevertheless, there is a lot of potential for more investments in manufacturing. RAK has also just begun to develop it tourism capability, and hopes to attract investors for constructing more hotels, golf courses and many forms of water based recreation and sport. All of this of course will act to promote other sectors, including real estate development, as has happened in Dubai. RAK’s public and private sectors launch a few weeks ago of the new real estate company, RAK Properties has thus been a timely move to promote real estate, leisure facilities and tourism.

RAK has considerable land that can be made available strategically for residential, commercial, and service industry development. A comparison of land prices between RAK and other emirates indicates great potential for this. Besides lower-cost land, RAK should be able to capitalize on its good environment and recreational facilities to attract investors. Strengthening of land use planning and management institutions is one of the priorities of the emirate. With the UAE Highway reaching RAK very soon, travel times to Dubai are being greatly reduced. This enhanced connectivity should make it increasingly feasible for people and businesses to locate in RAK and take advantage of the lower cost land there. More advanced transport such as high speed trains will eventually cut even these times down to make commuting to RAK even simpler. Travel from RAK to Dubai airport via the UAE Highway will be no more than 45 minutes. Success in this respect will establish RAK as a world-class investment destination in its own right.

Details of the coming “Invest and Live in Ras Al Khaimah” conference are available at investinrak.com.

Haifa not there yet

Dubai-based magazine Arabian Business recently published a list of the ten richest Arab singers. Top of the bill was Egyptian heartthrob Amr Diab with no less than $37 million, closely followed by Fairuz with $34 million. Diab’s fortune stems from record sales, concerts and – a staggering $17 million – from advertisement deals among which most notably his contract with Pepsi.

Taking into consideration Diab’s worldwide reputation spanning a 20-year-career, $37 million is not an unlikely nestegg. The same is true for Fairuz, one of six Lebanese singers on the list. The diva does not do commercials but has been performing for over half a century and currently charges up to $500,000 for a concert.

Less convincing were the alleged earnings posted for Elissa and Nancy Ajram. Elissa, whose duet with Chris de Burgh brought her brief international recognition, makes the fourth spot with a staggering $31.5 million. Music insiders say that this is far too high a figure for a singer whose first of her four albums was released in 1999. Nancy Ajram has supposedly clocked up $16.2 million, not bad for a 22-year-old with only two albums under her belt and a $500,000 Coca Cola endorsement. 

One notable absentee was starlet, Haifa Wehbe, who along with Nancy Ajram is Lebanon’s hottest selling artist and who was recently voted most popular Arab singer at the Lebanon’s Murex d’Or awards.

Wehbe’s manager, the alluringly-named Cynthia, defended her client’s pulling power by reminding Executive that Haifa, who charges $40,000 for a private concert, has just released her second album and will soon sign her first major advertising deal that would propel her into the big league. With an average of two  concerts a week in the summer season, Haifa has to work quite a bit before she sings herself into the top earners list, which is propped up by Zahleh’s favorite daughter Najwa Karam, who has to make do living on $13 million.

Danny Richa gets top job

Danny Richa, managing director of Impact BBDO in Beirut was elected President of the Lebanon Chapter of the International Advertisement Association (IAA) on March 30.

Richa is confident that, if Lebanon’s political situation changes for the better over the next few months, the sector as a whole will, despite the political setbacks, be able to match last year’s ad figures, which showed growth for the first time in years. 

“Lebanon has been here before,” he said. “In any other country the consequences of the crisis would have been much more disastrous.”

Richa believes that Lebanon’s leading advertisement agencies have been spared the current economic and political crisis. “We mainly work with international clients and brand builders who plan their strategies months ahead and so far all kept their promises,” said Dani Richa. “Unfortunately, it is the smaller agencies that suffer.”

Advertisement expenditure in Lebanon has been in gradual decline since 1999, when it peaked at $105 million, falling to $80 million in 2003. According to Stat Ipsat, TV advertisement expenditure decreased from $56 million to $33 million, press advertisement from $36 to $24, while only outdoors increased from $12 to $18 million over the same period.

“Last year we crawled back into the low eighties” said Richa. Hopes were high that growth would continue in 2005. According to some experts however, the 2004 figures did not signify a structural change for the better, but were boosted by the massive multi-media campaign for the Dubai Palm Island resort.

The IAA is a tripartite association representing the interests of advertisers, advertising agencies and the media with over 3,500 members in 89 countries.

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The Buzz

Better to be safe than sorry

by Marianne Stigset
written by Marianne Stigset

The February 14th attack, followed by the bombings in New Jdeideh, Kaslik, Sad al-Boushrieh and Broumana have seen increased demand for private security services from banks, shops, hotels, malls and large institutions, as well as real estate developers with substantial works in progress.

Unfortunately, pro-active security remains a novel concept in Lebanon. The current “boom” is still largely ad hoc, temporary and price-sensitive. In fact, security providers say, it’s a regional thing. Lebanon conforms to the Middle East pattern of taking a reactive, rather than preventive approach to private security.

“This is the trend,” says Jinane Zod, assistant managing director of Zod Security. “People only react once the damage is done.”

Although not exactly a revolution, industry insiders believe there might be a gradual shift towards a more preventive-oriented approach to security.

“The measures we are taking now are permanent,” says Shoughari. “It’s a trend happening throughout the Middle East – just look at the last bomb attack which hit Cairo. We are now faced with a new environment, locally, as well as internationally. The enhanced security measures are here to stay.”

Yazigi believes it is too early to tell whether the panic attack which hit the Lebanese will result in any long-term changes, but does detect a trend in the region towards greater security awareness.

One security firm that spoke to Executive, admitted that his company witnessed a 5% increase in demand after February 14th but that figure soon rocketed to 100% after the Jeddah bomb attack.

Demand has mainly focused on electronic surveillance, monitoring systems more than security guards and Youssef Mohamed Beydoun, vice-president of the Syndicate of Security and Safety Professionals in Lebanon and general manager of Beydoun Fire and Security, estimates that overall sector business has spurted by 30-35%.

“Most of this new demand is coming from the banks,” he said. “It has now become a priority for everyone to increase their security coverage, but banks in general are especially afraid of robbery and hold-ups due to the current political and economic climate.”

Demand for security guards has also surged. They are an easily deployable form of security service, especially when it comes to carrying out vehicle and personal checks, yet they still trail behind electronic surveillance systems in terms of what is wanted in today’s market. Security firm, Protectron, has estimated the hike in demand for security staff to be at around on normal business 25%, although it admitted that tight budgets force many companies to employ their own staff in a security role.

And maybe this is why the industry sees the employment of extra security guards as a stopgap measure. “We can already see a drop in demand,” says Lotfallah Yazigi, president of Securitas in the Middle East. “It was a reaction to panic. People [in office and apartments] would get together and chip-in for a guard to watch the premises for two weeks to a month, but contracts wouldn’t go much longer than that. It was a quick-fix for peace of mind but most people can’t afford this type of service in the long-run.”

Many major banks, hotels large companies and institutions, such as the Phoenicia InterContinental, which has incurred minimal costs in upgrading an already comprehensive security infrastructure, already have adequate systems in place as part of their commitment to comply with international standards and regulations issued by their head offices and who systems and procedures are regularly assessed by external consultants.

“We haven’t hired more people,” says Jana Sleen of the Safir Heliopolitan hotel. “What we have done is increase the number of security guard shifts and tightened security measures, especially with regards to all cars coming into the hotel. Half of our staff is from Protectron and the other half is our own staff. But otherwise, we already had cameras in place everywhere.”

The Beryte Hotel reported to have increased security staff by four, at an additional cost of $3,000 per month, to which will be added the installation of surveillance cameras, at $2,000-3,000.

“It’s an additional cost, but one that everybody has to incur right now,” says Jihad Shoughari, operations manager for the hotel. “After the attack, the army and the police went around to all the hotels in the surrounding area and asked for the films of the surveillance cameras. We have now in the process of ordering 3 or 4 more.”

But it is the banks and shops – for obvious reasons – that have had to burden the cost of maintaining confidence among their client base. Byblos Bank has retained the services of the international Group 4 Total Security, while ABC’s popular Mall in Achrafieh has hired 20 new security guards, at an estimated $7,000 a month, and is reportedly in the process of installing a new surveillance camera system. Supermarkets Monoprix and Spinneys have also committed themselves to assuring their customers with cursory vehicle checks.

Universities, embassies and international organizations have for their part made few requests for additional security services. Virtually all embassies have their security equipment sent to them from their respective countries and are prohibited from purchasing any local products.

The UN, whose offices in central Beirut were reinforced with cement blocks and sandbags following the attacks, claims this was a measure that had long been in the pipeline.

“We asked the government two years ago to make this arrangement around the building, because the UN building in Beirut was non-compliant with international regulations that have been established for the institution – it had nothing to do with the attacks,” says Elias Daoud, head of security for the UN building. “Otherwise, nothing has changed.”

Despite the recent hike in demand for security services, some industry insiders are not convinced that it will necessarily entail an overall increase in the quality and profitability of the sector. According to Haled Jaber, general manager for Security Engineering, there are no rules in Lebanon governing security services. “We tried to push for this through the creation of a syndicate, but it turned into a forum for social events. Every company now has its own standards. We now have a lot of security providers in Lebanon, probably some 100-150, but out of these, I would say there are only 10 which are really professional, offering high quality services and products.”

“Right now the market is booming, but it’s not really profitable,” said one manager of a security company offering, “human guarding”. “Salaries remain low, contracts are offered on a short-term basis. A lot of people working as guards view it as temporary employment, it’s not one they invest in to make a career out of.”

Partly in response to this lack of regulation and partly – or mostly – in response to the recent events in Lebanon and the region, Securitas will be opening the Swiss Academy for Security in Lebanon in May – a first for the region – to train professional security guards at every level.

And who said there was lack of job creation in Lebanon?
 

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Business

Conflicts of Interest

by Michael Young
written by Michael Young

In April, New York’s Columbia University issued a report that, while focused on a matter related to its Middle East studies program, may end up having a broader impact on the study of the region in the United States. More specifically, what occurred at Columbia highlighted the uneasy relationship between education and public funding, and whether universities can use tax dollars to advance what, to critics at least, are ideological agendas.

The Columbia story revolved around whether Middle East studies professors (principally Joseph Massad and Hamid Dabashi) had abused their position by intimidating students, but also by imposing their pro-Palestinian sympathies in the classroom. When the university administration initially failed to respond to some students’ complaints, the latter made a film documenting their grievances, which was produced by a pro-Israel outfit known as the David Project.

Spurred into action by the film, Columbia appointed a panel to look into the students’ accusations. However, this only led to new controversy when, as a New York Times editorial put it in early April, the administration appointed “one member who had been the dissertation adviser for a professor who had drawn criticism and [appointed] three members who had expressed anti-Israel views that, critics allege, might incline them to soft-pedal complaints.” While the panel report was subsequently considered objective, the university had merely created a new point of contention in order to end another.

The Columbia hullabaloo will not go away easily, largely because it has become so deeply politicized. As Massad told a Times interviewer, “I am simply an entry point for right-wing forces that want to destroy academic freedom.” Massad and his allies believe the issue is whether they can continue to defend the Palestinian cause on U.S. campuses in the face of what they consider a pro-Israel onslaught. For supporters of Israel, the issue boils down to whether the university is the right place to advance, often aggressively, a particular ideology, particularly one which many of them dislike.

There is no consensual answer on either side. However, there is a legitimate protest that has continued to dog the debate, namely whether it is up to the public to continue financing, through Title VI of the National Education Act, Middle East studies centers in American universities where the ideological disputations are taking place. The act, passed in 1958, was designed to allow public funding for area studies on the grounds that the added knowledge could served American national security interests. Partly, this meant that scholars would more readily take one issues relevant to U.S. foreign policy. Over time, however, as the Israeli-American scholar Martin Kramer wrote in his influential pamphlet Ivory Towers on Sand, an indictment of U.S. Middle East studies, the funding became “a secure semi-entitlement” where many academics gradually came to reject the very principle of Title VI funding, namely collaborating with the government on policy issues.

Instead, funded Middle East centers began resisting official efforts to take advantage of their expertise by arguing that academic freedom demanded drawing a clear line between government and university. This self-imposed isolation, in turn, made government less reliant on scholars. Kramer quoted a 1981 Rand report on Middle East studies as saying: “We found in talking with faculty at area centers that their own training often makes it difficult for them to translate scholarly research into an applied format useful to policymakers.”

This perceived irrelevance effectively marginalized Middle East studies centers in American policymaking circles, to the advantage of more practical think tanks. Yet as French Middle East scholar Gilles Kepel recently warned in the Financial Times, “This battle, over the ‘right’ and ‘wrong’ approaches to teaching the region’s politics, history and culture, has already caused considerable damage to academia and is now jeopardizing U.S. ability to decipher a complex area in which America is deeply engaged.”

Meanwhile, the notion that academic freedom meant taking money from the government while giving nothing in return proved unsustainable. That’s why the House of Representatives recently passed the International Studies in Higher Education Act (which is currently being debated in the Senate), to provide greater oversight over federal funding to study centers. Many Middle East academics have reacted by crying “censorship”, and Massad’s insistence that both he and academic freedom were being targeted by “right-wing forces” was directed both at the House legislation and at people like Kramer.

There is little evidence for the charge. The House act protects against anything that would “mandate, direct, or control an institution of higher education’s specific instructional content, curriculum, or program of instruction.” However, if one mistrusts government, doesn’t it make more sense to simply forego its money and search for “independent” funding in the private sector? In that way, disputes like those at Columbia would be less about “censorship” and more about actual competence and significance.
 

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Economics & Policy

Talking Economics

by Thomas Schellen
written by Thomas Schellen

There could not be a greater difference of mandates for two successive governments in any country’s history. The current cabinet of Prime Minister Najib Mikati has been charged with terminating a protracted phase of managing Lebanon under a mixed set of priorities, wrapping up the past and handling one single, existentially important practical task: fair elections. For the next government, the responsibilities are overwhelming and broad. Nothing less than an entire new culture of governance is required, new accountability to the electorate and the national interest, new policies and new efficiencies must be developed.

While many areas demand a new approach, beginning with re-ascertaining of the state-defining monopoly of enforcing laws and maintaining internal peace, the practical test of governance effectiveness will be the management of the economy. Here, the competition of interests that ruled the past is in dire need to evolve into a broader competition of authentic interests, concepts, and, above all, competencies, where solutions for national economic challenges are sought, based on a concise understanding of facts, where goals are set and realities are addressed without impediments from hidden agendas and concealed untruths.

The contenders in the Lebanese public decision-making arena are presently formulating their agendas and establishing their positions. The spirit of founding new political parties is surging and a host of new and old political parties and individual contestants are drawing up their programs, which they want to deploy in managing the new Lebanon. Executive wanted to know what economic visions the leading individual and party contenders stand for, what socioeconomic priorities they have and how they aim to implement them. This month its speaks to Dr. Selim Hoss (Third Way), Carlos Edde (National Bloc), Nayla Mouawad (Independent), General (retd.) Michel Aoun (Free Patriotic Movement) and Dr. Ahmad Mallie (Hizbullah)

Selim Hoss: Third Way

With his training as economist and experience in government between 1998 and 2000, Selim Hoss describes himself today as a person active in politics without personal political aims. Hoss is affiliated with the Third Way.

In his economic vision, Hoss holds up the concept of a regional common market and far-reaching integration. Referring to the examples of the United States, China and the European Union, he argues that the Arab region has a stronger case for forming a united realm than the EU, which he calls the “most significant development initiative of the 20th century.” In Hoss’ perspective, a large, unified market is key for achieving a superior economy.

In the matter of the national debt burden, the former prime minister sees the Lebanese public debt under the perspective that no country is free of debt. Pointing out that while in office, his cabinet drew up a 5-year plan aiming to reduce the public debt burden from then 124% to 96% of GDP, Hoss emphasizes the formula of reaching a point where the rate of growth of GDP will be higher than the rate of growth of public debt.

In his view, no country today is free of debt and the focus should be on creating a virtuous economic cycle of development rather than attempting to reduce the debt. “At this point, we can say this year will be better than last and next year will be better than this. The position must be to put the country on the right track,” Hoss says. For this task, he would seek to initiate a new five-year plan aiming to instigate GDP growth and ultimately reach negative growth of the public debt.

In terms of managing the debt, he calls special attention to the unregistered portion of the public debt, such as government dues in social security, to health service providers and contractors. While considering foreign debt to be a potential source of external pressure and thus generally preferring domestic debt, Hoss concedes that the use of debt instruments is inevitable.

On the issue of fiscal revenue, the introduction of Value-Added-Tax (VAT) was one item in the original five-year plan of the Hoss cabinet in 1998. In consideration of the financial burdens that VAT caused for many low and middle-income earners, the politician sees customs duties and VAT as necessary but is averse to increasing either VAT or customs. Hoss favors going for direct taxes as much as possible and increasingly reach the richer classes with taxation.

In matters of international treaties and trade agreements, Hoss is supportive of Lebanon’s accession to WTO and the Euro-Med Agreement. On the Greater Arab Free Trade Area, which went into effect January 1, 2005, he notes that implementation needs to be honest. He considers protection of Intellectual Property Rights (IPR) as important measure, without which Lebanon would loose a lot. The Lebanese law on banking secrecy he would uphold as much as possible under the constraints of the requirements by the international community, but not at any price.

Boosting key industries

In Hoss view, banking and tourism as leading economic sectors deserve further growth incentives because they can be developed effectively and with good results. Additionally, he would want to promote the development of the agricultural and manufacturing sectors. A key concern for him in relation to agriculture is that rural populations can utilize their productive capacities where they are and do not feel urged to migrate to the cities. Because of the fiscal situation, Hoss prefers private investment over subsidies as means to promote the development of economic sectors.

In Hoss’ policy, foreign investment should be strongly encouraged by continued free market environment, liberal labor laws and creation of special investment zones, which, however, should offer equal benefits to foreign and local investors. He is for privatization as a way to encourage foreign and local investments but frowns upon the concept of using privatization as means in trying to settle the public debt.

In the socioeconomic arena, Hoss proposes to tackle the unemployment problem mainly by reactivating the economy, fighting the recession, furthering the tempo of development and expanding the realm of technical education. He supports the transition from the current system of end-of-service indemnity payments to a national pension scheme but in the question of increasing the minimal wage, he calls for a careful study of the matter and its impact on finances before undertaking such a step.

The veteran politician agrees that corruption has impeded Lebanon’s development severely and emphasizes that democracy is identifiable by accountability, of which the country has had a blatant lack. He considers it a major objective for Lebanon to combat corruption by improving democratic practice.

Carlos Edde: National Bloc

The reduction of corruption and financial waste and the introduction of sound administrative policies are cornerstones in the economic vision of Carlos Edde, leader of the National Bloc.

Coming from a liberal perspective, the party’s policy is built around affirmation of economic opportunities. Thus the National Bloc puts the rebuilding of credibility of institutions and political leaders on top of its agenda for change, to be followed by taking initiative to solve the problem of wastage. Based on fair elections, the party’s recipe for governance would be to build a government on the grounds of credibility and competence. According to Edde, this does not imply a government of technocrats but of people who have at the same time political stature and sufficient understanding of Lebanon’s problems to carry out policies.

Emphasizing personal integrity of politicians as requirement of utmost importance, Edde says that the National Bloc’s approach to leadership also underlines transparency and the open description of problems and, if necessary, bitter solutions.

In matters of the public debt, Edde affirms that it is most urgent to address the debt of 200% of GDP, which in his opinion the country could only sustain because it’s banking sector is also of very large size. In managing the debt, reduction of wastage in the public system plays a priority role for the party, along with measures to raise funds from privatization. Further tools in dealing with the public debt should include using of the gold reserves and research into a possible devaluation of the artificially overvalued Lira.

While Edde would consider depreciation of the Lira at the current juncture to be Russian roulette and proposes looking at organized devaluation as a means to promote investments, his long-term strategy would be to float the currency, under the precondition that an accountable government is firmly installed.

Indirect taxation

Also on the revenue side, the National Bloc policy emphasizes to reduce public wastage before looking to increase taxes. Under reasons of practicality, Edde suggests to rely strongly on indirect taxes instead of having “an army of tax agents”. Albeit unfair in socioeconomic terms, indirect taxes are easier to collect and can help in attracting investors to Lebanon as tax haven, is Edde’s rationale. Personally a non-smoker and non-drinker, he would very much favor taxing alcohol and tobacco products at substantial rates. Customs duties should be maintained as source of revenue in absence of direct taxes, but not to the point of making smuggling too profitable.

Membership in international treaties WTO and Euro-Med is supported by the party under the perspective that it not only promotes economic development but also opens the country more strongly to ideas, good laws, and quality standards. The party is also pro-GAFTA but cautions that Lebanon needs some protection against dumping of agro products. The National Bloc aims to create an environment where other countries can be at ease in dealing with Lebanon, which includes safeguarding of IPR. According to Edde, the banking secrecy law is a sentimental issue for the party, because it spearheaded its introduction in Lebanon. Today, however, he would seek to have it meet international standards and be amended in ways to make it impossible for civilian or military public servants to stash away funds illegally and also oblige persons wanting to stand for office to reveal their relevant financial information before assuming public responsibility. Edde reasons that banking secrecy cannot be allowed to facilitate corruption and it was never meant to do so.

In selecting economic sectors for development, the National Bloc includes banking on its list because of its high degree of development and additional potential. Special priority in Edde’s view, however, should be allocated to becoming a country that attracts outsourcing of services because of its skilled labor force and other advantages. The party wants to support tourism and the potential for IPR sensitive industries to be based in Lebanon, such as publishing. The agricultural sector should receive incentives for shifting from commodity produce to top end and higher value products. A specific resource that Lebanon should develop in the opinion of the National Bloc is water, under the perspective of supplying it profitably to the region.

For Edde, the public sector should not play a large role in the economy but he supports to implement investment incentives for Foreign Direct Investment (FDI), saying that one cannot expect people to invest in Lebanon because they like Lebanon. In such incentives, the party agrees to full freedom for movement of capital and profits and views the creation of special investment zones favorably but would not concede to rights for unlimited foreign ownership of real estate.

Michel Aoun: Free Patriotic Movement

Preparing to return to Lebanon from Paris, the head of the Free Patriotic Movement (FPM) outlined for Executive his movement’s four main policies. The FPM intends to rebrand itself by creating a political party and introduce a program shortly after the arrival of the former general and head of government. For the purpose of this investigation, Executive retains the term FPM as descriptor of the political group.

In Aoun’s words, the economic recovery of Lebanon is one of four main objectives on the FPM agenda for Lebanon in the process of building a new state. The first objective is to reinvigorate political institutions and confine political debates within national institutions. The second objective is to restructure the national security forces and undertake a fundamental purge of this institution in order to enable it to safeguard the country from any drift towards instability. The third objective is to reform the judiciary as a precondition for economic recovery. The fourth objective is to devise a recovery plan for the economy.

Genuine reforms

In its economic vision, the FPM sees the departure of Syrian forces and intelligence units from Lebanon as giving positive signals to the market forces but warns these signals would not translate into genuine economic drivers unless genuine reform is put in place. As such, the FPM’s economic recovery plan entails a two-step approach of first addressing the public debt and encouraging growth.

According to FPM official and economic expert Sami Nader, the future party assesses the national debt as solvable after achieving a further reduction of the interest rate paid on the debt. Its economic policy aims to devise means that will increase the primary surplus, decrease the amount of the debt and create a framework and tools that will enable Lebanon to become a regional financial center that protects and catalyzes private initiative.

On the revenue side, the FPM regards the VAT and corporate tax rates as appropriate for the country, while it favors a lowering of customs duties. The central tool that the group seeks for increasing fiscal revenue is an enlargement of the tax base, so rather than increasing taxes to have more people pay.

In relation to international treaties, the group supports Lebanon’s membership in WTO, Euro-Med and GAFTA under a no fences, no borders philosophy. Intellectual Property Rights should be enforced in full and the Lebanese banking secrecy law should be maintained in compliance with international laws.

Besides finance and banking, the FPM favors to provide development incentives to enterprises in tourism, information and communications technology (ICT), media, and health care. Its means of choice in providing public support for development of economic sectors would be tax breaks and indirect subsidies, such as loan guarantees, in addition to empowering a strong financial market place.

Labor policies

On the socioeconomic front, the group follows a line of trusting in market forces to increase employment opportunities in combination with promoting market-oriented education, examples being computer training and capacity building in tourism. It is not in favor of an increase in the minimum salary and opposes any increase in public spending to provide employment but the FPM takes a positive approach to the presence of Syrian labor in Lebanon, provided that foreign labor is properly licensed and regulated. The group supports a reform of the social net, with introduction of tiered pension and social care system. It also is for privatization, naming utilities and telecommunications as primary candidates.

According to Michel Aoun, the FPM was not in agreement with late Prime Minister Rafik Hariri’s economic policies, because they hampered economic development and created high costs by pouring money into unproductive projects. He would seek to cooperate with any party willing to do so and also rely on technocrats but emphasizes that a clear plan and political leadership will be required for facilitating reform in Lebanon and that the reform is likely to involve a change of both policies and people. In Aoun’s words, “I think there will be radical change, we cannot work without morality, we cannot work without technology, we cannot work without honesty. Many things have to be established in our society. The corruption was generalized (sic) in our system and accepted by society. We have to establish some morality.”

Nayla Mouawad: Independent

As member of parliament and contender for the Lebanese presidency (she is the widow of the assassinated ex-President Renee Mouawad), Nayla Mouawad has been a strong individual power in the political arena and leader of the Qornet Shehwan opposition gathering. In preparation for the future, the MP is currently pursuing the realization of long-held ambitions to form a nation-wide political party with representation from all communities.

In the views of Mouawad and her associates in the founding a political party, human capital and globalization are important guideposts. She maintains that a well-established slogan for Lebanon should be that human capital is the fuel of its economy but that the impact of this slogan has been eroded in the past three decades and must be restored through improving education and vocational training. A core target in her economic vision is to bring Lebanese society and Lebanese individuals to interact with globalization and create an environment to empower and free society and let individuals fulfill their potential, maximizing the competitive advantages of Lebanon in a post-industrial global society.

Cleaning up public sector

Further priorities are slimming of the state’s administrative machinery, the elimination of corruption and clientele structures in public administration and a review of expenditures for the armed forces.

In dealing with the economic situation and addressing the public debt, Mouawad admits that the debt is heavy by any standards but manageable by economic growth, for which she sees great potential in attracting foreign and expatriate Lebanese investors if the cost of government is reduced and corruption is curbed. Efforts to contain the debt would have to begin with its stabilization and promotion of economic growth, lest attempts of debt reduction could lead to greater impoverishment of the population. While she would have preferred floating the Lebanese currency several years ago and considers a high share of debt in foreign currency to carry elements of danger, she regards the decision for using foreign currency debt instruments as irreversible under present circumstances and would not seek to liberate the Lira.

For discussing fiscal reform and ways to increase fiscal revenue through specific taxes, Mouawad’s team would require more data, which have not been available until now. In general terms, the group’s policy for fiscal reform would include a progressive scheme of taxation on individual incomes for a certain period of time. Indirect taxes should play a lesser role and customs duties should be phased out gradually over 10 to 15 years, in order to facilitate Lebanon’s integration in international trade agreements.

In context of her globalization-oriented vision, Mouawad stands for accession to the WTO as quickly as possible and for a very strong relationship with the EU under the Euro-Med agreement. She strongly advocates adoption of the laws required for WTO accession, noting that they had been initiated by late former minister of economy, Basil Fuleihan, and undertaking a campaign to explain these legislative initiatives to the public. In relation to GAFTA, Mouawad seeks a gradual implementation of the Arab trade area. The total implementation of Intellectual and Industrial Property Rights carries a leading function in her policy, which envisions a capacity of Lebanon that could rival that of Israel in generating revenue from IPR. Mouawad’s team sees the preservation of Lebanon’s banking secrecy law as important and supports the law as it stands after having been modified to meet international standards for prohibition of money laundering.

In promoting economic development, Mouawad would prioritize substantially lowering the cost for telecommunications in order to enable the internet and communications infrastructure to serve as basis for economic growth in businesses such as call and contact centers. ICT and new technology enterprises could be the main engine of job creation in Lebanon and provide economic opportunities in all parts of the country. After ICT and related enterprises, banking and health care would be sectors high on the list of priorities for economic development, along with agriculture.

In the area of privatization, Mouawad favors fast privatization of the electricity utility and creation of competition among telecommunications providers. She supports economic interaction with Syria and is an advocate of facilitating employment and earnings opportunities in rural areas, for which she sees a strong potential based on the experiences of the Rene Mouawad Foundation in rural production of high quality food products, namely olive oil, that could successfully be marketed internationally.

Dr. Ahmad Mallie: Hizbullah

Executive inquired with the Party of God, Hizbullah, about their economic policy and vision. When Dr. Ahmed Mallie, member of the party’s politburo, agreed to discuss the matter with Executive, he stated that the party appreciated the economic achievements of late Prime Minister Rafik Hariri but did not agree with all of his policies. Comparing Hariri’s economic approach to that of European politicians Margaret Thatcher and Silvio Berlusconi, Mellie elaborated that the Shiite party was oriented more strongly to provision of services under the theme of social justice. Mellie also confirmed that Hizbullah is looking at increased participation in governmental responsibilities after having been preoccupied over many years with its leading role in the Lebanese resistance.

On the matter of economic policy and the party’s positions on specific development issues, Executive subsequently communicated on two separate occasions with Hizbullah media liaison Hussein Naboulsi who informed us at our first attempt that the party does not presently have an economic policy or an economic expert authorized to speak on behalf of Hizbullah. In response to a second inquiry one month later, Naboulsi again related that the party is not ready to discuss issues of economic policy with Executive.

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Society

Fast Track to Growth

by Executive Staff
written by Executive Staff

Until the assassination of Mr. Hariri and the subsequent uncertainty, Lebanon had, for the previous 18 months, enjoyed relatively robust economic activity, which allowed for the replenishment of reserves, better GDP growth in 2004, vigorous financial sector liquidity, and, through swaps, more efficient management of the country’s debt stock, which in turn allowed for the lengthening of Lebanon’s foreign debt’s maturity.

The fact that these positive gains were set back by one, albeit enormous, bomb blast, proves that no post-war government has yet been able to build the necessary foundations to reduce the vulnerability of the economy to unexpected trauma, nor for that matter set up a sound economic base to generate recurring revenues, diversify the economy or create jobs.

This situation has not been helped by the Lebanese government’s failure to implement administrative reforms – especially the privatization program demanded by the 2002 Paris II conference – and by shelving attempts to reverse the current political and social status quo, which has so far been characterized by corruption, waste and incompetence.


 

Palestinians would make an ideal blue-collar labor force in Lebanon, if allowed to work more freely

International donors, investors, lenders and rating agencies repeated time after time that Lebanon badly needs to implement structural reforms, meet Paris II objectives, and build a basis that would allow successive governments to comfortably service and repay debt.

Today, there is a consensus that any political impasse will lead to an erosion in international confidence that would precipitate a financial crisis. It is therefore time to act with maturity and vision and tackle problems head on.

A brave new world

Any post-election government should be bulging with technocrats and specialists, species that, with a few exceptions, have been overlooked by all post-war governments, who saw them as an obstacle to the self-interest, cronyism and corruption that has defined the Lebanese political system for the past 15 years. It is imperative that they now be given free reign to reform and restructure the country, in particular focusing on:
 

Political and geopolitical risks
Consolidating economic development and improving external liquidity
Maintaining long term growth rates
Implementing a serious policy of privatization
Debt and overall fiscal management

Sound politics are crucial for a sound economy

Political stability is crucial if the pillars of a healthy social and economic structure is to be created.

It is important that Lebanon recovers its full democratic character by allowing for consistent, regular and impartial elections. The extent of popular participation must be significant and clear for the world to see, as this is generally considered one way of building up international credibility and reassuring foreign investors, just as a country with a perceived Third World election process is certain to lose credibility with the international community.

Lebanon must have a consistent and high degree of consensus on economic policy objectives and global trade and financial organizations. There must be a strong will to carry out reforms and privatization, and political institutions must be unanimous on issues of that ilk.

Politicians and public institutions have to show, through meticulous marketing, a strong capacity to adapt to changes in political trends on an international, regional and domestic basis. Any stubbornness and inflexibility will be immediately be interpreted negatively.

Lebanon must show a degree of reform in leadership succession.

Lebanon must reduce to a minimum, internal and external security risks. This has partially been accomplished and the departure of Syrian forces should enhance the security aspect even further.

Public Sector bliss

The Lebanon of the future will have to ensure that the public administration become more of a meritocracy. In Western countries, particularly in Europe, the public sector is the major source of employment amongst the youth and specialized professionals. In Lebanon, the abysmal image of the public sector is fuelled by incompetence across the board and by the complete lack of accountability of civil servants, who have no concept of serving the interests of the people. An efficient, competent public administration, free of unnecessary bureaucracy, would be key in attracting foreign investments and restoring confidence in the local economy.

Regional obligations and political realities

Another priority for any new government is the Palestinian “problem.” Any Lebanese government must face up to the fact that the 400,000 Palestinians in Lebanon must be given a less constraining economic status and be allowed to work freely within the country. Lebanon must therefore seek financial aid to allow for the smooth integration of the Palestinians, whose would be re-injected into the domestic economy. A blue collar Palestinian workforce would also be more stable than any foreign workforce, as it would be born and bred in Lebanon. The integration of Palestinian workers would, in time, give Lebanon important economic links with neighboring countries in the Levant, namely Jordan, Palestine (the West Bank and Gaza), and, in the event of a peace treaty, Israel.

Reaffirming a tradition

Since its independence, Lebanon has always been a market economy and, although this tradition is not in danger, it is still important for the country to emphasize its commitment to the concept. Lebanon has always been an example in terms of economic liberalization in the region, especially amongst other Levant countries and in North Africa, but has been lacking economic reforms and restructuring since the end of the war to genuinely play the free-market role. Living standards, income and wealth distribution have been erratic at best for the last fifteen years, and very little has been done to diversify both the economy and the revenues generated, mainly as a result of incompetence, corruption, waste and racketeering, leaving no room for resource endowment. The result is a complete reliance on free entrepreneurship and the private sector, and very little economic guidance and help from the government.

Any future government will have to risk investing in projects that will yield significant economic and social benefits in the medium to long term and cannot forego opportunities just for the sake of avoiding financial or political risk. The development of the water and transport sectors – arguably the most strategic at the moment – is crucial to the future diversification of the Lebanese economy and the creation of jobs. Although Lebanon is blessed with substantial water reserves, due to its favorable geographic layout and weather, nothing is being done to exploit them.

The creation of an efficient water distribution system would create significant revenues for the country and establish Lebanon as a strategic geopolitical nexus, ensuring its long-term protection by the international community from bellicose neighbors. Selling water to its neighbors, while being self-sufficient at home, is a scenario that many countries would have worked hard to realize decades ago. Likewise, a developed motorway and rail network, linking Lebanese ports and cities to neighboring countries would not only create important direct revenues, but also make Lebanon a regional hub in the modern sense. The development of water resources and their distribution, as well as transport links (mainly through toll roads and passenger and freight railways) would boost GDP exponentially, easily doubling the current GDP figure of US$19 billion.

Water, rail and toll roads must all be privatized, with the government maintaining a golden share in these newly privatized companies, and having a say in their strategies. Such projects must take a regional dimension, as the Lebanese market on its own is too small. Privileged relations with countries like Syria, Iraq and Jordan are crucial to the future economic prosperity of Lebanon, which as a country, must exploit its comparative advantage in terms of know-how, geopolitical positioning (on the Mediterranean coast and in between Europe and the rest of the Middle East), and wealth in water resources, to position itself as a regional intermediary and springboard.

Improving growth prospects

Lebanon will only achieve consistent economic growth through:

Economic diversification, such as creating new sectors (ecology-related, technology, capital markets, specialized finance houses, heavy industry, etc.), developing existing ones (light industry, tourism, banking and telecommunications), and using current subsidies spent on inefficient public sector companies such as EDL (which drains the public coffers with US$1 billion in subsidies on a yearly basis) to invest on economic diversification and job creation.

The restoration of confidence and trust in the domestic economy and economic infrastructure, through the eradication of bureaucracy and corruption, setting solid and realistic political objectives related to the economy, and updating the existing infrastructure.

The re-building of the middle class and their savings base. One way of facilitating this is to keep the taxation as light as possible to avoid impacting the country’s savings. It would also discourage capital flight and slow the “brain drain”.

The creation of tax incentives, especially to woo expatriate Lebanese.

The development of the country’s capital markets provide companies and banks with alternative sources of funding.

The consolidation of its position as the sole Arab bond issuer to develop as a regional capital markets hub, hopefully leading to an influx of regional companies, seeking to raise funds both in terms of debt and equity.

Other ways to ensure economic growth include the development and proper re-organization of a wide range of economic sectors such as :

Tourism: despite the mini-boom in 2004, the sector is still severely under-exploited, due to a lack of adequate marketing and communication. Major infrastructure investments and a committed, long term policy from the government are essential if Lebanon is to realize its full potential.

Industry, which is suffering from high operational costs (electricity, fuel, social security on labor, etc.), unfair competition from neighboring countries and a lack of understanding from bankers, who generally penalize industrial companies heavily in terms of debtor interest rates. Lebanese industry desperately need private equity and venture capital funds, as well as specialized financial institutions that would cater to their financing and financial advisory needs.

Banking and finance, which is still desperately undiversified. New types of institutions need to be created and developed, mainly on housing finance, public works finance, financial engineering and securitization, industrial finance, etc. The current banking sector must also be restructured (even if it means changing the law) to resemble the Honk Kong model. The latter divides banks into three categories: savings banks, merchant banks and international universal banks. The central bank would decide on the classification of each bank.

Agriculture, which is currently in an abysmal state. Subsidies for that sector have been constantly diverted and dilapidated, and there has never been a state master plan for that sector. Lebanon’s weather is so appropriate that the country can ultimately become a net exporter of agricultural products, mainly in fruits (including exotic) and vegetables. Lebanon should seek to emulate the Chilean model, which has made Chile the most efficient agricultural country, deriving a large chunk of its revenues from this sector.

Real estate. Here it is essential that the political climate remains stable over a long period of time, that interest rates on deposits decrease and that legislation and fiscal stability be maintained over long periods of time. Real estate suffers significantly from constant changes in legislation and fiscal regime, which drive away investors.

ICT, with rock solid patent and copyright laws, and significant subsidies to develop research and development. The potential of the Lebanese in this sector is significant but under-exploited. Lebanon should also position itself, in a similar vein to India, as a major outsourcing of ICT services for Western countries.

Trade and transport. Here, laws must be fine tuned to allow everybody to trade freely. A climate of competition must be created and exclusive agencies must be become a bad memory. Trade barriers must also fall and Lebanon must join the WTO and the Euromed. As mentioned earlier, transport is crucial for the development of the economy, and Lebanon is ideally positioned to become a hub for at least the Levant region in the next decades, if an efficient motorway (with toll roads) and rail network system, linked to Beirut and other cities’ ports and Beirut airport, are built as soon as possible.

Health care. Lebanon has a comparative advantage in terms of the quality of its doctors and hospitals, and should develop a strategy to become, like Cuba, a regional centre. Subsidies must be diverted from inefficient state-controlled sectors into the health sector, which should become one of the best in the world.

General services, which will be efficient once efficiency is realized in the above sectors. Education, however, should become part of the new government’s priorities, as the country enjoys a considerable comparative advantage in this area. An education second to none would attract expatriates, foreign companies (their executives and families), and students from all over the Arab world. Job creation in this field is potentially significant too.

Privatization and a tight monetary policy are key

The development and diversification of the economy cannot be successful if they are not accompanied by privatization and a healthy monetary policy. The Banque du Liban (BDL) and the Ministry of Finance have done as much as they can given the past constraints, but today these areas are a priority.

Lost opportunities

The privatization program has been stalling since its inception by the Hoss government in the last quarter of 1998. Any privatization in an emerging market such as Lebanon has been very difficult to achieve, as international investors of equities are less keen on emerging market securities offered by institutions in countries such as Lebanon, especially in the wake of the Asian and Russian crises of 1997-98, which brought the emerging market trend to an end and the stock markets’ bear years of 2001-2004 rang the death knell for any emerging market initial public offering (IPO).

The current poor state of the Beirut Stock Exchange (BSE) is a reflection of the failure of the Lebanese privatization program and of the Lebanese government’s lack of judgment as to the timing of such a program. In short, Lebanon missed a major opportunity in terms of privatization. Were the government to have privatized in 1995-97, when emerging markets were so fashionable, more than US$10 billion would have flooded into the state’s coffers. EDL could easily have been sold for around $1 billion back in 1996, but can’t even attract one strategic investor for less than 10% of the 1996 price. In fact, today it is in such a mess that privatization for a symbolic $1 is the only option available.

The aim of any future government is to commit politically and unanimously on privatization, and announce to the world’s financial markets its intention to resume the privatization program, this time seriously. A privatization authority or ministry must be put into place, which task would be to monitor the entire privatization process and ensure transparency at all times, while road shows and presentations to international investors must be carried out on a regular basis at the same time that a serious restructuring of state enterprises is accelerated.

The privatization of any state company must carried out in such a way as to include:

A major strategic shareholder (an international company involved in the same field and whose role would be to actively manage the newly privatized company).

A diversified local and regional investor base that would include the state.

Finally, privatization must not be carried out just for the purpose of raising fresh money. It must be done to improve public services. EDL could easily be sold for nothing, on the condition that whoever buys it manages it properly and ensures a good service to end users. The state would benefit from such a privatization in the medium to long term, as electricity services become more efficient and less costly to the local industry while tax revenues (i.e. taxing the private electricity company) increase over time.

Other companies to be privatized and which could yield significant cash returns are the tobacco regie and the fixed line telecommunications company. The introduction of affordable broadband internet services is imperative for the development of the telecommunications sector and for the establishment of Lebanon as a regional hub. The state should also sort out the mess that had been created in the mobile phone operators’ case, and restore its credibility with international investors. The mobile phone saga was a shambles, never to be repeated and any new government must seek to actively make amends with investors in order to restore credibility.

Fiscal husbandry

Privatization must be done in parallel with a national debt restructuring, which would include swaps and debt consolidation. The later would only be possible within a favorable and less risky political environment, as it would imply the help of supranational institutions such as the World Bank. In the case of debt consolidation, the latter would lend Lebanon substantial sums amounts ($ billions) over a long period of, say, 20 years, at favorable interest rates. Such a loan would then be used to repay most or a large chunk of the existing public debt, which is due in the next five years, giving, as a result, enormous breathing space to the economy.

Such a debt structure would allow Lebanon to reach financial equilibrium within five to six years. Of course, interest rates will have to decrease across the board, as the country improves its credit rating and the general risk level (particularly the political risk) is reduced significantly. In particular, debtor rates will have to be dropped, as local corporates are currently using their entire cash flow to service debt and are left with spare cash to invest in their businesses. Interest rates on deposits will also have to be dropped accordingly.

Other immediate measures to be taken by a new government would be to :

Reform the pension system and social security. An adequate state pension plan ensures the renewal of the work force, particularly at public sector level, and allows for the creation of jobs for the younger generation. For the moment, civil servants work beyond their retirement age, as their pension is insufficient to sustain them in their old age. Therefore, younger people have fewer opportunities for work, as all possible positions are filled, and are forced to emigrate.

Develop a more effective institutional and legal infrastructure, emphasizing on company protection from bankruptcy and implementing practices that are conducive to the functioning of markets, including property rights legislation and bankruptcy, contract and collateral laws.

The government must also :

Monitor the local banks’ progress in implementing the Basel II regulations for banks, through the national supervisor or the Banking Control Commission (BCC). Basel II will focus more on risk and capital management and on a more efficient way of lending, which can only be beneficial to debtors.

Use gold reserves, amounting to around $4 billion at current prices, either as collateral for cheaper long-term debt or sold outright for cash that could be re-invested in a government development fund. The current law forbidding any government to use or sell gold reserves is obsolete and must be annulled, provided, of course, that the future government be held responsible and accountable in case of fund misappropriation.

Conclusion

Lebanon has had two wars within a period of 30 years: a military one that ended in 1991, and an economic and social one that is now almost over. Two generations of Lebanese were lost in this devastating period, which nevertheless must serve as a strong lesson for future generations. Lebanon must adapt to world trends and build strong political and economic pillars as well as use its abundance of capable technocrats who would make it their absolute priority to build a realistic and efficient political consensus and strategy, which would drive the economy forward for the coming decades.
 

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