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Business

Conflicts of Interest

by Michael Young May 1, 2005
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.
 

May 1, 2005 0 comments
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Economics & Policy

Talking Economics

by Thomas Schellen May 1, 2005
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.

May 1, 2005 0 comments
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Society

Fast Track to Growth

by Executive Staff May 1, 2005
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.
 

May 1, 2005 0 comments
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Watching the belly dancer

by Yasser Akkaoui May 1, 2005
written by Yasser Akkaoui

Never have the events that led to the civil war of 1975 been so clear. The subject that would ignite a Byzantine quarrel has been demystified by the events following the February 14 blast and put an end to the endless finger pointing.

A vulgar assassination with a ton of explosives, a series of bomb attacks intended to create civil unrest and most recently the arming of local militias, most notably those belonging to the Palestinians, with WWII missile launchers, is evidence that whoever is using these tactics is still lost in the 60s.

Back in the early 70s, while everybody’s eyes were transfixed to the waists of generous belly dancers at places like Grotte Des Pigeons, the armed Palestinian militias were surrounding Beirut, drooling over our cultural, financial and economic riches.

Once we sacrificed our sovereignty to the Arab cause, we became the playground of foreign sponsors of war. No one has paid as dearly for this cause as the Lebanese. The irony is that each time Lebanon tried to re-establish its sovereignty, it was accused of treason.

In this issue, Executive tries to make sure our future parliamentarians understand that this time their performance will be appraised with economic results. That is how today’s nations are run. It’s ok to think selfishly and put the nation’s well being first and any armed party that challenges sovereignty by maintaining a separate agenda that is not approved in parliament will be labeled a militia and dealt with by the state. Now is the time for those groups to join the army, acknowledge sovereignty and point their guns outwards, while the real wars of today are fought on the economic battlefields, where the spoils victory are translated into national riches.

They should also understand that real sovereignty coupled democracy is the prerequisite for any economic plan and genuine national movement to transform our country to a fortress where Lebanese lives, culture and investments can be protected.

Meanwhile, the Lebanese public is braving the bomb threats and taking to the streets, shopping and dining to show that they cannot be bowed by violence. But this time, while they are still enjoying the belly dancer, they are keeping one eye on their country, lest any conspiracy robs them of it again.

May 1, 2005 0 comments
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Grow up

by Yasser Akkaoui May 1, 2005
written by Yasser Akkaoui

With the rate of political assassinations slowing, life is returning to our city. The Lebanese have proved that they have little time for bad memories and even less interest in a propensity to save.

We are big spending, short-termists who have learned to live for the moment, but with such a precarious lull in the violence, we can’t but live each day as if it is our last.

Politically, the respite in targeted killings has been interpreted as a sign that, as usual, a deal was made between the Americans and the Syrians at the expense of Lebanon of course. However, judging by the relentless American pressure on Syria, the nation’s collective intelligence, this time at least, could be wrong.

The Americans simply decided not to use Lebanon as a front against Syria. They realized that some Lebanese politicians were capable of sacrificing their country, fragmenting its society, destroying all what has been rebuilt and witnessing the liquidation of all its politicians and thinkers (while the rest flee), all for the sake of other nations. The risk of loosing whatever democracy is left in this country would definitely have made the Americans look bad.

Simply put, Lebanese politicians are easier to tear apart than bring together. They are also unable to sit at a table long enough to reach an agreement. And if, by some miracle they do, they are experts in tearing up previous understandings. Our politicians always seem to look for la petite bete to start a war of words. And all the while, as their standing shrinks along with their petty quarrels, regional tensions take on nuclear proportions. One wonders how low they are prepared to go. The private sector has lost interest and has decided to go its own way, disappointed by its so-called leaders who have refused to grow up.

In this issue, we remember Dr. Basil Fuleihan, who was part of a movement for change at a time when huge ambition, not cheap sniping, was the order of the day.

At least, one year on from his death, the seeds of this dream of a beter Lebanon are still bearing fruit. Last month alone, the BCD, the much-maligned but nonetheless resilient, symbol of a new Lebanon, saw the investments from Kuwait and Abu Dhabi, of more than $1.2 billion. With this demonstration of faith in the face of an uncertain future, one is forced to ask who the true Lebanese are. Those who want to build or those who wish to dismantle.

The true Lebanese are builders.

May 1, 2005 0 comments
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Lebanon – Policy left hanging

by Michael Young May 1, 2005
written by Michael Young

Ask many Lebanese what the summer season this year meant to them, and the answer you get will probably be different than the upbeat assessments of Lebanese officials. Final figures are not out yet, but we can certainly feel that this year was a special one. However, for those in Lebanon not on vacation, we were able to measure this success most often through the breakdown in state infrastructure.

Capitalist culture is more than entrepreneurship; it’s the capacity to deliver on your promises, and Lebanon has yet to convince that it is a premier tourist destination. Here’s a layman’s view of this past summer:

On the negative side, Lebanon’s road, electrical, and telephone infrastructure were very weak links. Even in Beirut, the three-hour power cuts were not enough, as extra rationing was imposed. Outside of the capital the situation was near catastrophic, so much so that from Tripoli to Zahleh people took to the streets in protest. Resorting to generators imposed a financial burden on everyone, but particularly on those establishments catering to visitors, imposing higher costs on all. To run a country on haphazard, unregulated power generation is embarrassing when you lay claim to being an attractive tourist destination.  

The traffic situation was equally lamentable — in Beirut and from the capital toward places where tourists were likely to go. The northern highway until Jounieh was, as a norm, blocked most hours of the day, while even inside Beirut a combination of mediocre traffic management, road construction and a high volume of cars meant drivers could spend hours getting from nowhere to nowhere. This imposed further costs on the economy, well beyond what it meant for visitors from abroad. 

One can go on. The cellular telephone network was just as bad during the summer season as before. Conversations were routinely cut off, while on several days there was such volume in the system that people couldn’t even complete calls. Gasoline prices, at over a dollar per liter, were onerous, and while this reflected world prices, it was also the result of the uneconomical oil pricing system. If that wasn’t enough, as the summer ended the water began running out, so that in Beirut the national water company was roughly halving the amount of water distributed in winter.

Everywhere, the inability of the state to make basic services available shifted the financial burden onto providers and visitors, so that Lebanon was far more expensive than it needed to be. This year, most visitors were Lebanese expatriates or Arabs from the Gulf who seemed more willing to put up with this. But for the tourism market to grow dynamically, Lebanon’s appeal must spread to other target groups. The international financial crisis won’t soon be absorbed, so the country’s high prices could turn into a major Achilles heel down the road. Meanwhile, many tourists may decide that the headache of this year is not something they want to repeat for some time.  

On the more positive side, Lebanon was fun this summer, a place that managed to position itself on the radar as an international niche destination, whether as a party town, a cultural venue — given the many festivals organized around the country — or even as a gay destination, a detail that made its way into the New York Times last month, though precisely how the Lebanese authorities will react to this remains to be seen. The country is rarely boring, and even the beach infrastructure has expanded to include attractive locations all the way up the coast to Batroun, and new venues between Beirut and Sidon. The main problem is the high cost to get in, not to mention the sporadic cleanliness of the sea.

Most flagrant was the absence of any real sense that Lebanon had developed a unified tourism strategy. No one should want the state to organize Lebanon’s summer season; the state can barely organize our off season. However, government institutions could have thought up initiatives to clarify what was taking place this summer, or incentives to make the season more profitable and comfortable. Yet even simple things like an official tourism ministry brochure advertising and highlighting summer events, or more policemen deployed to regulate traffic on major thoroughfares at peak hours, were absent. Special passes to allow tourists to enjoy unlimited bus services, like all other efforts to expand or promote the use of public transportation, were simply off the agenda.

There are a host of strategies that countries will use to promote tourism, including discounts at specific tourism sites, coupons to go to certain restaurants or bars, or the opening of welcome centers in towns or areas to advise visitors about the nearby sights. These require coordination between the public and private sectors. It’s up to the state to set this strategy, even if it relies more heavily on private initiatives. Nowhere was this visible in Lebanon this summer, where the sense of free enterprise may have been high, but the imagination of officials hopelessly low. 

Michael Young

May 1, 2005 0 comments
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Special Section

Industry Vox Pops

by Executive Editors April 28, 2005
written by Executive Editors

Joint ventures with European companies are one method by which Lebanese manufacturers can enhance their position in Middle Eastern markets. Executive asked Roger Dib, director of Near East Consulting Group and partner in a joint venture between Italian kitchen manufacturers Snaidero and Indevco Group, how he evaluates the impact of the recent events on joint venture prospects for Lebanon and what risks he sees in the current situation.

Roger Dib

I have just signed a new agreement with a leading Italian manufacturer for distribution of their products and manufacturing of one line in Lebanon. They have not hesitated to come because the Lebanese market is only one of 10 to 12 points of distribution for them. However, if I couldn’t provide distribution in the region, it would be difficult. They seek distribution; we seek manufacturing, that’s the deal.

European companies are squeezed today. They have to work hard on their products, going to the US, going to China, going to the world. We can do perhaps one thousand times more sales for them with the same effort than they could themselves. Lebanese companies with distribution possibilities thus have a lot to offer to mid-sized European or Italian companies that don’t have the resources or interest to develop these markets. But you have to have critical mass to have a joint venture, meaning you need a network, a product, capabilities, and references, and it helps if you can throw in capital when seeking to attract know-how from EU firms.

In this, we are feeling much encouraged by what is happening in the Gulf. Gulf markets are being hit by a double positive stream of money now: the repatriation of funds and the revenue from the oil price increases, which has not percolated into the economy yet. However, it is very difficult to penetrate those markets if you have a product of solely Lebanese manufacture, unless it is a cultural product with distinct Lebanese flair, such as specialty coffee or a well-known fashion designer brand like Elie Saab.

Lebanese companies will have to have a strategy. What I worry about is that Syria is our gateway for exports to the Gulf. Thus I worry about what is happening in Syria and especially about racism that is directed against Syrians here. Racism should be behind us. The chambers of commerce and the professional associations should do much more in speaking out against racist violence directed against Syrian workers here. We need these people, and we cannot ignore that Syria is our gateway to anywhere.

The construction supplies manufacturers work in a field where the presence of Syrian labor is extremely high. Executive asked Elie Mattar of the marble and stone company Elie Mattar & Fils (EM), if an immediate impact of the events in February and March was felt on his enterprise, and about his outlook on investments, labor developments and business activities in the remainder of 2005.

Elie Mattar

For the time being, I will not do any investment. This means I will not buy any stock unless I have already taken the job. If you buy stock in our field, it does not perish or depreciate in value over time. But I am not willing to buy stock now. If the current situation will affect me, this will happen within three to four months from now in case that no new projects were to start. If the situation will improve within two to three months, I think that I would not feel a negative impact, because projects that are in progress will not be stopped. For big new projects, however, investors and customers from Arab countries are very important.

In my business, we work with cutting and sculpting stone. I have a very modern CNC stone cutting machine, which can work a large number of identical pieces at unmatched precision. The price of a machine-produced piece is however 40% higher than if a worker carries the job out by hand. On about 70% of the construction sites that we were working on last month activities stopped temporarily when the Syrian workers went home. We estimate that 40% of the Syrian workers went back to their country. This could become a huge problem with everything, not only for my factory but also in the entire construction sector. Lebanese law says that you cannot bring in new workers from abroad.

Seven years ago, my workers were all from India. However, with Syrian workers, you don’t pay for a work permit, residence permit, mandatory health insurance, and a return ticket to go home once every three years. I must also say that Syrians are perfect for this work, they are clean workers and very good with their hands. I wish I could find a Lebanese worker. But they are very demanding. You can’t get a Lebanese person to carry stone from here to there.

Information technology had been touted as a hope for Lebanon’s industrial growth. Executive asked Nizar Zakka, director at the Professional Computer Association, how she assesses the impact of the developments after 14/2 on Lebanon’s Information and Communications Technology (ICT) industry, what her concerns were and if expects the operational climate to improve.

Nizar Zakka

As representatives of the ICT industry in Lebanon, we have been working for the past ten years on enhancing the image of Lebanon in the ICT sector worldwide. We believe that last year, we reached a point where our image was good in all terms. What image is now being projected is one of democratization but also of instability. This is a new weak point. This means our government and us now need to work twice harder to improve our image. Our business is based on human resources. Instability will lead us to export more brains than software.

In terms of achieving economic results, we feel that we were reaching the point of prosperity. We were in the middle of a jump forward and what happened set our sector back big time The ICT sector had explored three pillars to base our development on by working on Human Resources, achieving industry standards and certification, and focusing on taking advantage of Lebanese knowledge of business applications and our clients. Now the industry needs to address a new factor, instability, which had not been part of the planning at all.

We decided as private sector to do the best in the frame we can and gave up on expecting progress in regulations. As far as the political climate, we don’t see a mature political atmosphere. Nobody is caring about prosperity. We believe that our late prime minister, Mr. Hariri, was really the only person who cared about prosperity of Lebanon. We all want truth, we all want freedom, but we also want prosperity. Thirty-five percent of our software products are exported. We ask for the tone of political speeches to be lowered, in order not to damage Lebanon any more. We are working with the Arab world and they are not used to such language. The instinctive reaction to such talk in the region is being scared and reluctant to invest.

April 28, 2005 0 comments
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Special Section

A hard summer for industry

by Thomas Schellen April 28, 2005
written by Thomas Schellen

The economic impact of the current phase of uncertainty is weighing differently on different sub sectors in the manufacturing industry. Overall, the toll on revenues, as far as it exists in the realm of industry, is just materializing, or will only emerge several months further into the year when current orders have been filled. This gives companies, fearful of their business prospects, a narrow window of about one quarter in which the country has to return to stability – otherwise they will face many difficulties.

Many industrialists, however, see a positive future for manufacturing in Lebanon, provided, of course, political developments go smoothly. The accomplishment of a wave of civil freedom has shown in many precedents to stimulate demand and liberate previously stifled growth potential in an economy. In an environment of respectful interdependence with its Arab neighbors, Lebanon could benefit exceptionally well from a democratic spring and peaceful reforms in the Levant, because of the private sector’s knowledge of markets, easy geographic access and business acumen.  

When it comes to the industry sector, the main internal challenge is the nation’s ability to maintain a high level of civility and peace in the ongoing political disputes, especially during the upcoming elections. The securing of good working relations with Syria throughout the political review process poses the other big challenge. However, even assuming that all political processes proceed smoothly, it is becoming clear that a return to political stability in and by itself will not be enough to improve the lot of Lebanese industrial manufacturers.

In a number of respects, 2004 was a rather good year as industrial exports continued their rise in value from $1.44 billion for 2003 to $1.64 billion in 2004, an increase of 14.1%. In parallel, investments into production capacities, indicated by importation of industrial machinery, also increased from $109 million in 2003 to $142 million last year, a jump of almost 30%. 

However, with a share of those increases attributable to the strong euro, growth of exports and investments into machinery are not necessarily indicative of a massive gain in industrial productivity, which remains a core need for the sector. Analysts and industry representatives also still see the target markets of Lebanon’s industrial exports as being in need of further diversification. Exports to Europe, with the exception of the, in economic terms, atypical exports of mostly jewelry to Switzerland, must still be regarded as a development goal rather than an achievement.

In exports to Middle Eastern countries, which have to be the main staple of expansion-minded local industrialists in lieu of a large domestic market, Lebanon faces a curious situation of having high production costs when compared to the region’s lower income countries with big populations but also to the much more affluent economies in the Gulf, even where their per capita GDP is several times that of Lebanon.

Both in terms of labor and energy costs, it is acknowledged that Lebanon is at a disadvantage when compared to other Arab manufacturing locations. Between these costs and the high cost of funding, the competitive position of Lebanese industry has seen no radical improvements for at least five years. The contribution of industry to the economy remains at about 20%, and a recently published 2005 overview by the Chambers of Commerce and Industry describes the sector’s situation very much in the same terms as it was in 2003.

Given that a big slice of last year’s real GDP growth of about 4% originated from tourism, including the consumption demand created by the foreign visitors, and that a foreign-nurtured construction surge accounted for another important portion of growth, the demand outlook for 2005 is muted and industry seems in no position to count on large domestic demand growth.

Officials at the chambers of commerce said however that it is too early to see the eventual effect of the February/March period on industrial revenues in Lebanon beyond the immediate damages of the 14/2 blast and seven lost days of production. According to chamber experts, exports of manufactured goods could continue at good levels, as there is reason for a slump in regional demand for Lebanese products resulting from the current crisis over the nation’s political future.

Industrial manufacturers working in collaboration with European firms have a distinct chance to further improve their position if they have a critical mass consisting of a regional distribution network, proven skills and ability to contribute capital to a joint venture, assured industry consultant Roger Dib.

However, a deterioration of relations with Syria could throw a huge monkey wrench into the gears of Lebanese manufacturing industry. Apart from being itself one of the largest markets for Lebanese exporters, “Syria is the gateway to anywhere,” Dib said.

The latest month for which reference numbers on exports are available is January 2005, with total exports of $125 million. Of six Middle Eastern countries that received about 47% of Lebanese exports in January of this year, Syria accounted for 11% ($13 million) and four others – the UAE, Saudi Arabia, Iraq and Kuwait – are land transport destinations via Syria. Turkey was the one major destination country in January, where land transit through Syria is not the only logical avenue for the bulk of exports. Thus, industrialists are of wide understanding that a closure of their borders with Lebanon by Syria would have a devastating impact on Lebanese trade.

In addition to Syria’s importance in reaching the export destinations most attractive to Lebanon, the sub sector of industry with the largest stake in easy-to-transport, high value-added exports harbors another massive fear over potentially devastating effects of domestic instability on regional business. This sub sector is the Information Technology industry with its high emphasis on delivering corporate software packages to customers in Arab countries.

As the manufacture of software products goes hand in hand with the provision of intensive after-sales services to corporate clients, regional decision makers would shy away from awarding contracts to Lebanese software manufacturers if political instability continued to cause any doubts over the ability of these companies to fulfill after-sales service contracts, the director of the Professional Computer Association, Nizar Zakka, told Executive. ”The people in our industry had a very bad month and everybody is worried about the future,” he said. “Today we don’t know where things will go. Our industry has a tolerance for fluctuating demand but if the cycle doesn’t accelerate after three to four months, the situation will be severe. It will become clear what the real effect is when the current contracts are fulfilled in a few months’ time.”

The pain that the information and communications technology sector is feeling over the current period is exacerbated by two exigent factors. Firstly, just a few days prior to 14/2, a joint venture of software multinational Computer Associates (CA) and Lebanese firm MDS Holding announced the opening of a call center in Beirut designed to serve CA clients throughout the Middle East with technical support.

Call centers, or contact centers, are today a huge economic phenomenon in serving corporations in technology, services, and manufacturing. In the past five years, the call center industry has grown exponentially in countries like India where the numbers of round-the-clock “seats” in contact center work places tallies at over 150,000. The Philippines, another leading growth country in the field, doubled their seats from 20,000 to 40,000 between 2003 and 2004, after achieving revenues of about $200 million in 2003.

At the launch of the CA – MDS joint venture for Lebanon’s first regional call center event, telecommunications minister Jean-Louis Qordahi announced that Lebanon was aiming to invite companies to establish call centers here and that the MOT had drafted specific “tariffication” to attract operators. He described the potential for such operations in Lebanon as “unlimited.” And although the new venture between CA and MDS started with only a handful of seats and qualifies initially as an inbound support center more than a contact center, the country satisfies important preconditions for developing a successful call center industry because of prevalent language skills, technical skills and service culture existing here.  

The new positive climate for private sector initiatives in ICT was also expressed in a recent survey on key IT trends in Lebanon’s PC penetration and internet usage. According to analysts SRI, who conducted the survey, “65% of Lebanon’s urban population has some level of use of computers”, and internet access is “in the ‘take-off’ stage with nearly one quarter of internet users getting their exposure to the technology in the last year alone.“

Such findings had heartened ICT companies in their expectations of renewed business growth for 2005 and beyond. The country’s sudden shift to political uncertainty hit the sector thus ever harder, by endangering fledgling opportunities and causing worries about a new slump in business in exports and at home. The latter concern is due to the fact that most corporate ICT customers in Lebanon consider investments into information technology as tool to enhance their business only when the need arises under favorable revenue developments.     

The second element is that this sector has been lambasted more than others by failures of the public sector to create a favorable environment for their operations. Based on the administration’s inability to institute the Telecommunications Regulatory Authority (TRA), reduce costs for internet connectivity and general communication by a meaningful margin, and establish an Information Technology zone, the PCA would not expect any new government to succeed in assisting the ICT industry. “We don’t believe that the next government will create the TRA. It will not create a tech zone,” said Zakka. “They are transforming an issue of prosperity into an issue of power. It’s a pie of which everybody wants a slice, and this won’t work. We don’t want them to help. The best way for them to help is really to leave us alone.”

With such fundamental distrust in the ability of any administration to instigate positive change, the question acquires urgency whether the next government of Lebanon will be able to address the need to make manufacturing in Lebanon more feasible and provide meaningful incentives to industry. Reduction of the price industry has to pay for electricity and other measures to lower the cost of production here have been long standing demands by the Association of Lebanese Industrialists. Irrespective of its composition, any new government tasked with the responsibility of steering the country after the upcoming elections will have to face the multiple challenges of improving public sector performance in support of economic growth, earning the trust of industry, and of carrying out a difficult reform process to remedy problems that have long plagued the country and put a strain on socio-economic relations. 

One of the issues looming large on the horizon is to make further progress in adapting Lebanon to European and WTO standards for industrial production, another is the need to devise and implement a strategy for ensuring the environmental compatibility of industry, including the relocation of manufacturing companies from irregular industrial zones to proper ones, better treatment of industrial wastes, and safeguarding of air and water quality.

In recent weeks, the issue of Syrian labor has been highlighted in many discussions. However, while numbers about the relations between Lebanon and Syria have been floated in the debate, these calculations appeared driven by political objectives and not by the desire to assess the real size and balance of gains or losses that the Lebanese and Syrian economies incurred from their relationship over the past decade.

In this debate, the issue of Syrian labor has been used to muddle the picture stir public opinion, using vague estimates and misstating the role of remittances by Syrian workers while neglecting to also account for example for the – far more weighty – importance of remittances from Lebanese expatriate workers in other countries for the Lebanese economy. Finding a solution for the presence of Syrian labor in Lebanon without replicating the erratic status quo where these workers are neither monitored in numbers nor covered by any social services will be a big challenge to any administration in the process of reforming both the relations with Syria and the shadowy aspects of the Lebanese economy.

In the meanwhile, however, Syrian labor remains important to Lebanese agriculture and construction but also to other sectors. As many industrialists assert, hiring of Syrian workers has a tradition here that precedes the presence of Syrian armed forces. Construction companies and suppliers of construction materials are among the first companies that will see problems mount if the current political crisis in relations with Syria carries on into the summer.

April 28, 2005 0 comments
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State department

White House speaks with forked tongue

by Washington Correspondent April 28, 2005
written by Washington Correspondent

The old Western cliché, “White man speaks with forked tongue,” may find application in current Bush policies as “White House speaks with forked appointments.” Condoleezza Rice at State, well received; John Bolton at the UN, bad move; Karen Hughes as ambassador at large, to win hearts and minds lost due to the war in Iraq; then Paul Wolfowitz – the architect of the war in Iraq – to head the World Bank, (and possibly lose those hearts and minds Hughes is supposed to win back). Can you say crossed signals or should we above all, beware of a wolf in sheep’s clothing?

Condi hits the ground running:

Still, President Bush’s vision of spreading democracy in the Middle East appears to be on a roll. Yes, Iraq remains a problem, but the rest of the region is moving as Bush’s second term policies are picking up momentum. Condoleezza Rice, who replaced Colin Powell, is the totem for this new era and she got off to a good start with the Europeans, patching up much of the damage caused by Defense Secretary Donald Rumsfeld during the Iraq war period.

Condi has managed to bridge relations with “Old Europe” and her ground-setting tour for Bush went off relatively well. Even Rumsfeld was able to indulge in some rare public relation building during a visit to Germany, making light of his earlier comments saying it was the “old Rumsfeld” speaking at the time.

It is clear that the second Bush administration has adopted a different approach in dealing with foreign policy issues, realizing that the big issues of the day – fighting terrorism, preventing nuclear proliferation, and “spreading democracy” – can be achieved with more ease when working with the European than trying to go at it alone. Over the past few weeks, Bush has repeatedly referred to “our European friends.”

And now for something completely different: 

If Rice’s nomination as chief US diplomat was well received in Europe, John Bolton heading to the United Nations was received, well, like a bolt of lightning. This is the same Bolton who once said the top 10 floors of the UN could be removed and no one would notice.

Bolton is a firm believer of America first. Democrats and Europeans see his appointment as a contradiction to Bush’s change of policy adopted by the second term administration. Bolton worries both friends and foes. Eurocrats in Brussels see in Bolton a serious enemy. Politicians in Paris and Berlin think Bolton is suspicious of European motives. They say he believes there is a Franco-German aspiration to build a super power that would rival the United States. His nomination hearing on Capitol Hill is sure to create a storm. Stay tuned.

Counter Bolt:

So we lost some hearts and minds (not to mention bodies and souls) and now we try to win them back. Enter Karen Hughes, one of President Bush’s chief advisers, nominated to be Under-Secretary of State for Public Diplomacy. This underlines the importance the Bush administration is giving diplomacy and the country’s image around the world in its second term.

Hughe’s nomination, say analysts, is in response to the often-negative perception of the United States, especially in the Arab and Muslim world. Both Rice and Hughes acknowledged that US public diplomacy efforts needed fixing. Rice admitted that the United States must do ‘much more’ to confront anti-US propaganda and increase exchanges with the rest of the world.

“Hostility towards America has reached shocking levels,” a report by Edward Djerejian, a former US ambassador to Syria, pointed out, urging a complete overhaul of efforts directed at the Middle East. “Our interaction with the rest of the world must not be a monologue,” Rice said. “It must be a conversation.” Agreeing with the secretary of state, Hughes said, “US public diplomacy should be as much about listening and understanding as it is about speaking.”

In her new job, Hughes will have a lot of speaking and listening to do. Her assignment includes engaging with the Arab and Muslim world. Probably one her first hurdles will be to explain why Bush selected one of the main architects of the Iraq war to fight poverty.

Wolfie to the World Bank:

Bush’s nomination of Paul Wolfowitz, current deputy secretary of defense, to lead the World Bank has had the effect of a mini-tsunami. Bush sees Wolfowitz as a “compassionate, decent man who will do a fine job.” Much of rest of the world seems to disagree, including many within the organization. They see Wolfowitz as the man who initiated the Iraq war, and all the troubles that came with it.

True, Wolfowitz comes with an impressive resume, yet many argue that his record as number two at the Pentagon was far from impressive. He is staunch neoconservative, who as a scholar headed Johns Hopkins University’s School of Advanced International Studies in Washington before returning for the third time at the Pentagon, where he put together the blueprint to topple Saddam. His reasoning was that Saddam had large caches of weapons of mass destruction. It was also Wolfowitz who argued that Americans would be welcomed as liberators.

Curiously enough, despite accusations of being anti-Arab and biased in favor of Israel, the 61-year-old Wolfowitz has been dating Shaha Ali Riza, a Tunisian-born gender specialist who has handled the bank’s external relations on Middle Eastern issues. She may have her work cut out. “The mood in the Bank is like a cemetery,” confided one bank staff member. “Everyone who can leave will leave.”

April 28, 2005 0 comments
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For your information

Fadi Khoury

by Executive Editors April 28, 2005
written by Executive Editors

For the last 10 years, Fadi Khoury, owner of the once-resplendent St. Georges Hotel on the Corniche, has been fighting what he calls a relentless hostile effort by Solidere to swallow up his property. At the same time, he has been nurturing a dream of returning the hotel to its former glory. That dream, which Khoury claims had become close to realization, was shattered on February 14 by the massive seafront explosion that ripped the façade of his hotel, destroyed his offices, killed five members of his staff, buried him in rubble and – ironically – killed his nemesis, Solidere icon and former prime minister, Rafik Hariri. EXECUTIVE spoke to Khoury about the effect of the explosion on him personally, on his business, and on Lebanon as a whole.

What effect has the explosion had on you?

I can’t think. It’s too dramatic. It’s unbelievable. We hadn’t conceived that such savagery was still possible. We thought we had moved on. This is a catastrophe for us. It’s just like a tsunami. Five of our colleagues are dead, many are injured and the effects of the injuries will remain with them. This is what has affected us most. Then, there is the damage to the hotel and the things we were constructing here. We have effectively been set back 10 years … 25 years. This is worse than things 25 years ago.

Where were you when the explosion happened?

I was on the staircase coming out of the St. Georges beach club. There was a covered entrance – which was smashed in the blast – and I was in that entrance. I received a phone call and stopped to concentrate on the conversation. The girl I was seeing out said she was going up [the staircase to the exit]. She went across the road and was blown into the air. Somehow she didn’t die. She’s bruised and still in shock, but she wasn’t among those who were very badly hurt. The people who were in our office were very badly hurt.

What were your immediate thoughts?

It felt like the apocalypse. I can’t describe it. I thought we were being bombed from the air. The first blast actually trapped me in the sense that I had nowhere to run, but was not smashed down. The second blast smashed me to the ground; [I was] hardly able to breathe, but still alive. I tried to see if I could lift whatever was on top of me, but I couldn’t, so I slid up the other way, towards the wall. I got out between a thick tree and the wall. Then, they pulled out one of the guys [from the rubble]. Another guy had already been pulled out before I had got out. Then, I walked out and saw total drama out there. There was smoke. We couldn’t get to the offices and then I was told that most people were dead. I was told who was dead and I couldn’t imagine that anyone else was alive, but it turned out that three were alive – two very badly hurt and one somehow didn’t get hurt. He’s an old eighty-five year-old man, short. I think it went right over him.

What exactly did you see both in front of and inside the St. Georges?

There were burned cars, crowds of people shouting. The shocking thing was the people being brought out by the Red Cross – one woman’s eye was practically outside her face. The St. Georges itself was ravaged. Everything was on the ground. It’s amazing what an explosion like that does.

What did the explosion interrupt in terms of the development of the St. Georges?

We hadn’t been able to reconstruct the St. Georges hotel properly. We were rebuilding it, but in a funny sort of way because we didn’t have the right permits. We were just trying to get through. In the winter, we had planned on having a very nice beach for the summer. We were developing the beach activity – in conjunction with the hotel – more and more so that at least we would have something going, like a restaurant winter and summer. We were thinking of bringing the bar back on a refurbished ground floor. We were very close to deciding that things would go positively, that there would be a change because of the coming elections and so on. We imagined unveiling the hotel as a surprise. It was a question of days before we were going to bring down the veils and light it up, to say: ‘Look, it’s coming.’ Obviously, it would have taken another year to get things finished because we still needed to work on the inside, on the decoration, and so on. Now, I have been set back in a very, very dramatic way.

How much damage has been done?

We have lost everything we spent over the last 10 years. We have damage in the area of $15 million.

What does this mean for you?

After 10 years of being bullied, this is like being slammed on the head with a big piece of wood. I must admit that I am astonishingly reactive to catastrophes in the sense that they don’t get me down, but this has got me worried. I’m beginning to think that maybe I should sit back and think, because if they [government officials] want to see the St. Georges Hotel rebuilt, they had better start showing some very, very positive signs and start helping us out. They could start by changing their attitude. We haven’t seen a positive attitude at all. On the contrary, there has been no positive sign.

When I called the governor of the city of Beirut, he offered his condolences, etc…. I said: ‘Stop the nonsense and give me the permits.’ Then he started blabbering all sorts of excuses instead of saying: ‘Yes, sure, now I will make an effort.’ I think we should have people in the government who are going to rebuild [Lebanon] and stop filling their pockets and making money out of the poor wreck that this country is. That is what has been going on. Roads are being built but they cost 10 times more than they should and that is not helping the country’s economy.

This huge blow comes on top of 10 years of dispute with Solidere, as well as with a government you say has been blocking the redevelopment of the St. Georges. Why has this been happening for 10 years?

I can’t tell really and it’s not really a subject I want to dwell on because it has to do with issues that, under the current dramatic circumstances, I’d rather not revive. But everyone knows the story of the St. Georges and Solidere. We are enemies because they have decided to attack us. We are friendly to everyone who approaches us in a friendly way, but they came in an unfriendly way, trying to take over and monopolize the St. Georges bay. It’s ridiculous. It goes against history and against Lebanon. The St. George is there. It’s positive. It can help everybody. Solidere, the city of Beirut and Lebanon can take advantage of a rebuilt St. Georges – there’s no need for it to belong to one particular group or one particular lot of business people. I feel that more and more businesses are run by mafias these days. We don’t belong to mafias.

Why has this impasse been maintained even after the events of 14/2?

They [the government] are not their own masters. Why would someone not pick you up if you are hurt? There must be something else that scares him, because they are afraid of something, I suppose. I don’t understand. I haven’t seen anyone from the so-called opposition defending the St. Georges publicly. They have defended it in private. Lots of people have often said to me how sorry they were about the situation, but I have never seen an official have the guts to stand up. Hopefully, they are going to show some guts and stand up for what they believe in.

Why do you think no one in the opposition has stood up for the St. Georges? 

Most people are oppressed.

You say you are going to have to sit back and think. Given the dramatic circumstances surrounding your condition, the apparent continuation of your dispute and the huge financial blow you have suffered, is this conceivably the end of the road for the St. Georges?

It will never be the end of the road for the St. Georges. The St. Georges is part of Lebanon’s heritage. It will continue – with or without me. But I don’t think I will continue hitting my head against the wall if people keep the wall in my face. I will finally step back and rethink the whole thing from a different perspective and from outside this country.

How likely is it that you will actually step back and leave the country?

I am stepping back at the moment to look at the whole situation, but I have not decided to step back all the way and leave the country. I’m waiting to see some signs of a positive attitude from the government soon, so that I don’t adopt a totally negative attitude. I haven’t yet seen that attitude from the government. I note that neither the minister of tourism nor the president of the syndicate of hotel owners has bothered to come here. I find this particularly surprising and shocking – the least they can do is come by.

If you did step back as you put it, that would entail selling to Solidere, correct?

I have no idea. If I step back it will be to think and when I think I will let you know.

So there’s nothing you can say at this stage?

No. I don’t want to say anything that is aggressive. I am an aggressive person.

There is nothing concrete you can say now about the future of the St. Georges?

No. As I said very specifically, I intend to think and I need time and peace and that is not what I have been getting, because I have been busy with people and their health and their problems and my problems and putting things back into a running order. I haven’t had the time to step back and think. I will step back and think, probably up in the mountains, on the ski slopes, if there is any snow left.

What have you been working on since the explosion?

We will have the beach ready. Of course, people are not going to come now because of the situation, but it will be ready. I’m encouraging all the people concerned to carry on with the beach, to implement what we were doing before the explosion. We will have an air-conditioned restaurant here and most of the beach looking as pretty as possible, with plants. But apart from that, we’re not doing anything. As I said, I want to sit back and think. Also, we can’t move. It’s totally paralyzed. We want to have access to the other St. Georges building – which is something that can be done in controlled manner.

We are imprisoned here. We have no water, no electricity. No one asks if we are able to live or eat. We are totally nonexistent. It’s a no man’s land and they are keeping it this way. I understand that they need to do things in an organized way to complete the investigation. However, I am an intelligent man and I think in a mathematical way and I know for sure that there is a way for us to go to our other building and close the doors so that people don’t go inside and also to take out some of the things we need to put the beach back on its feet. They [the government officials] just say, ‘No.’ Nothing else. No explanation. Why should they explain? There are no people to respect or to take into consideration; they are used to people being bombed and killed and so on. They never said anything about our five dead staff until people found out about it and it became more public.

Why is this happening and have you been told how long will it go on for?

Not at all. Why should they tell us? This is a country of hooligans. Nobody tells you anything. The citizen does not count. The proof of that is how they bomb people. The current state of affairs is obviously because of some sort of security system but the people in the government have responsibilities. Their main responsibility is to help us feel comfortable. We don’t feel comfortable.

What has the damage to the country and the hotel and tourism sector been?

The damage to the country is devastating. It’s very nearly back to square one – back to the way it was during the war. The things you hear and observe do not indicate anything very hopeful for the next month. I’m not a tourist, but I wouldn’t walk around the streets of Beirut today. You never know. You’re better off staying at home for a while. So, imagine what the tourists think if they’re coming from England or other countries. I don’t think people are coming anymore. Not for a while. I have no idea about the exact state of the restaurant and hotel sectors but I imagine they must be pretty badly hit.

Solidere was your foe. Hariri, as the symbol of Solidere and prime minister of Lebanon, was your nemesis. The explosion has taken him out of the equation. How does that make you feel?

I’m very sorry about what happened to Mr. Hariri. I don’t believe Hariri was alone in being against the St. Georges. He must have had his reasons. I’d rather not go into that anymore. Solidere is an infernal machine. It’s a terrible machine and should be stopped, but lots of people don’t want it stopped because they must have some interests. People outside this country don’t want it stopped. I don’t think any one person is responsible for what’s going on.

What impact on the St. George’s relationship with Solidere will the death of Mr. Hariri have?

I don’t know. I haven’t analyzed that. I’m not even thinking about doing anything with the St. Georges anymore. I hope no one will continue supporting Solidere in illegal endeavours. Beirut is ours, not Solidere’s. It is the Lebanese people who have been ousted from their houses.

Have you had any dealings with Solidere since the explosion?

No, as I said I’m not dealing with anyone at this point. I hope that after this, everyone will think back and change their attitudes, and maybe we will all become friends.

April 28, 2005 0 comments
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Since its first edition emerged on the newsstands in 1999, Executive Magazine has been dedicated to providing its readers with the most up-to-date local and regional business news. Executive is a monthly business magazine that offers readers in-depth analyses on the Lebanese world of commerce, covering all the major sectors – from banking, finance, and insurance to technology, tourism, hospitality, media, and retail.

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