The participation of the private sector in decision making is
an essential prerequisite for sound policies. This is because
it leads to policies that are compatible to the private sector
needs, reduces uncertainty in government decisions and fosters an
environment for investments. One factor attributed to the growth in
East Asia is the deliberation council, through which businesses and
government ministries and agencies discuss, debate and design policy
that is relevant to the economic sectors. In a 1997 World Bank
study, 48% of firms in South and South East Asia participated in decision
making compared to 30% of firms in the Middle East and North
Africa (excluding Lebanon), 28% in Sub-Saharan Africa, 17% in
the Commonwealth of Independent States and
16% in Central and Eastern Europe.

To what extent do Lebanese firms participate
in decision making? At first glance, it is
expected that involvement of firms in policy
making would be high. After all, Lebanon is a
private sector-based economy that avoided the
trap of statist or socialist policies that confounded
its neighbors for some time. But the
reality is in fact quite different. A survey of 250
firms conducted by the Lebanese Center for
Policy Studies in 1998 found out that only
16% of surveyed firms are involved in policy making
in one way or another. This is a lower level than firms in other Middle Eastern countries and even in Sub-Saharan
Africa. It seems that economic policy making is often done
in a vacuum with little involvement of the private sector.

A closer look at survey results shows more revealing findings.
Although just 12% of industrialists and 13% of agricultural firms have
participated in designing policies, 80% of the surveyed banks did
affect policies. Consequently, the banking sector has been performing
very well since the end of the civil war. Its record is fairly obvious:
a high growth rate of 23% in assets, 46% in shareholders’ equity in
1997, while deposits to GDP now stand at 170% (exceeding that of
developed countries), total assets to GDP of 200% (higher than high-income
economies). No sector can match the record achieved by the
banking sector. Hence, what makes the banking association — the sole
representative of banks — more effective in influencing policy making
than other associations? Three factors are at play.

The first factor is attributed to the importance of the sector in the eyes
of policy makers. Sectors that are considered to be compatible with the
beliefs and ideology of politicians for whatever reason tend to perform
better than other sectors. Hence, it is no surprise that the banking sector
— which is considered to be a pillar of the economic system in
Lebanon — has always enjoyed certain privileges. Before the establishment
of the banking association in 1959, the government had already
passed the Banking Secrecy Act. Later, it institutionalized the importance
of the association by requiring the central bank to consult with
the association on matters related to the sector. After the end of the civil
war, the government again placed the banking sector at the core of its
vision. The central bank and the banking association worked closely
together to modernize the sector. On the opposite side of the spectrum
lie industry and agriculture, which the government does not
consider to be crucial economic sectors. Hence,
the demands of their respective associations were either ignored immediately or met on an
ad hoc basis to avoid any escalation or tension.
Neither the policy makers of the independence
era nor those of the post-civil war period
have given these two sectors any significance.

The second factor that has affected the relationship
between the state and associations is
the financial leverage the former has had on
the latter. For instance, the banking sector
played a crucial role in financing the government
deficit. This was particularly important just after the end of the civil war when foreign
lending was not available. The banking sector bought 90% of
government T-bills. No other business association could match the
leverage that the banking sector had.

The third variable is the quality of the associations. Here I refer to
the objective, size, level of representation, dynamism and the activities
of the association. Business associations that have well-defined
goals representative of their sectors, are financially resourceful and practice
democratic rules in elections tend to be more effective. Again, the
banking association is a case in point. It has clear goals, represents all
the banks in Lebanon, has a relatively high budget, which allows a larger
scope of activities, and conducts elections every two years.

The absence of an accountable political system that would have
allowed the associations to lobby ministers and members of parliament
makes their work harder. However, until then, some work
needs to be done to the internal structure of the associations. Are
they ready to meet this challenge? That’s not clear.

Remember all the glowing clichés you’ve heard about
Lebanon? A bastion of capitalism within a sea of controlled
economies, a regional hub, the Switzerland of the Middle
East. With relatively low tax rates and banking secrecy, Lebanon
must be one of the freer economies in the Middle East, if not the
world, right? Think again.

The Heritage Foundation and The Wall Street Journal, in their
recently released 2000 Index of Economic Freedom, ranked
Lebanon as number 90 among 160 countries (see chart), placing
it in the “mostly unfree category.” Lebanon found itself even
with such countries as Guyana, Madagascar and Moldova. Even
worse, it scored one point below Mongolia and three points below
Guinea and Ghana, while Fiji, Nigeria and Papua New Guinea
ranked just below Lebanon, tied at number 94. (Ratings are based
on 1998 statistics.)

Conducted annually since 1995, the survey has become something
of a benchmark for measuring the ease of doing business
in a country. Rankings are based on ten
broad factors of economic freedom: trade
policy, the fiscal burden of government,
government intervention in the economy,
monetary policy, capital flows
and foreign investment, banking,
wages and prices, property
rights, regulation and the
black market. Each factor is
scored from one to five and
averaged to determine the final grade. The
higher the score, the greater the government
interference in the economy and the lower the economic
freedom. Hong Kong topped the list of “free”
economies with a score of 1.3. Trailing the pack are repressed
economies like North Korea, which scored five. Lebanon’s score
was 3.2, below average, not only by world standards, but also by
regional standards. Among 17 countries in the Middle East,
Lebanon ranked 11th.

The study showed a direct correlation between the per capita GDP
and the level of economic freedom. “Countries with greater economic
freedom have a faster rate of economic growth and a higher
standard of living,” says Nassib Ghobril, an analyst at Lebanon
Invest. “The study is used by policy makers and investors to
assess the investment climate in a country. If a company were to
set up an office here, obviously it would want more business-friendly
policies. It’s not the country of choice. Why not set up in
Jordan, or the UAE, which is second only to Bahrain?”

Why did Lebanon score so poorly? Ghobril points to three important factors.
First, Lebanon scored a maximum of five on trade policies. High
tariffs and surcharges on imports are the main culprits.
According to IMF statistics, trade taxes account for more than
70% of the total taxes collected by the government. In an attempt
to control the high deficit, the government has increased tariffs over
the past several years. This will make the country’s hopes of joining
the WTO and the Euro-Med agreement difficult, as both deals
would require a general phasing out of trade barriers.

Lebanon has signed free trade agreements with Syria, Egypt and
Kuwait as well as the Arab common market agreement. “But still
overall the tariffs are considered very high,” says Ghobril.

Lebanon also scored five in the “black market” category, largely on
account of its rather porous border with Syria and its thriving
business in unauthorized cable television and pirated software.

Lebanon’s score was also disappointing
– 3.5 – on the fiscal burden of government, which includes income and corporate
taxation plus government expenditures. With a top income
tax rate in 1998 of 10%, Lebanon received a two for taxation. But
that was averaged with a score of five for expenditures, which were
almost 44% of GDP in 1998. Even in some areas where Lebanon
prides itself on openness, the results were disappointing. The
country received a three, “moderate barriers,” for capital flows and
foreign investment. According to the US Department of Commerce,
“Lebanon offers the most liberal investment climate in the Middle
East, with no significant restrictions on foreign investment.” The
report disagrees: “It restricts the amount of real estate a foreigner
may own and needs an efficient investment approval regime.”

It was not all bad news, however. Because of a “low level of
restrictions,” Lebanon received a two for its banking sector and on
prices and wages. As another bright spot, the index showed a modest
improvement from last year, when Lebanon scored 3.25. But
the score for 2000 is still far below its 1997 score of 2.95. And not
everyone agrees with the index’s rating. Kamal Hamdan, an economist
with the Consultation and Research Institute, feels that
Lebanon was under-rated in a number of areas. Trade barriers may
be high by international standards but by regional standards they
are not unusual, he argues. Hamdan also questioned how Lebanon
scored a five for black market, while Nigeria, which he believes has
a far worse problem, scored a three. The five for government expenditures
is also unfair, he says, because the survey calculates the
money spent on debt servicing. “I think Lebanon should be among
the top 30 to 50 countries,” he says. Marwan Iskandar, head of MI
Associates, agrees: “I think that these measures are rather arbitrary.
I would not give much credence to a study like this.”

There are reasons for hope and despair for next year. The “black market”
rating may improve if the new intellectual property rights law,
passed by parliament last spring, is enforced. On the down side, corporate
tax was raised from 10% to 15%, while the top income tax bracket
was increased from 10% to 21%. That could affect next year’s score.

OK, so Lebanon might not be a bastion of capitalism, but at least
it’s a nice place to live, right? Well, actually no, according to another
survey by international consulting firm William M. Mercer. It
ranked Beirut 168th out of 218 cities based on quality of living. The
survey was based on 39 standards including political, economic and
environmental factors, personal safety and health, education, transport
and other public services. Among the notable cities that beat
Beirut were Medellin, Colombia, the cocaine capital of the world,
and Cairo, Egypt, where the smog is so bad that a walk on the Nile
can cause lead poisoning. At the top of the list were Vancouver,
Canada and Zurich, Switzerland. At the bottom: Brazzaville and
Pointe Noire, Congo and Khartoum, Sudan. Well, at least in
Lebanon, we can ski in the morning and swim in the afternoon. Then
again, who would bother?

The first few days of February are probably not
a time finance minister George Corm would like
to relive. Before his 2000 budget could be
passed through an unruly parliament, Corm
was the target of three sessions of scathing
attacks. With some of the nastiest remarks
struck from the record, Corm was accused of
hallucinating and his policies called failures. The
“Cormic genius” was blamed for slowing economic
growth, increasing unemployment and
precipitating the brain drain.

By Peter Willems and Kirsten Vance

But were these accusations fair? EXECUTIVE spoke with the
finance minister, analysts and economists to discuss the
issues. “It doesn’t matter if the budget deficit comes in a little
above or below the target. It’s still way too high. There’s no reason
to rejoice,” says Nassib Ghobril, an analyst at Lebanon Invest.

Within the 2000 budget, the deficit is targeted at 37%. Last year the
government aimed for the budget deficit to be reduced to 40% and beat
it by hitting 38%. (The government also beat its total deficit expectations
of 44%, coming out with 42%.) “The target this year is still
high, which means they will most likely meet it,” says Ghobril.

Why didn’t the budget come out with a lower target? “On the
expenditure side in 1999, we were able to cut heavily on a lot of allocations,”
says Corm. “This year, knowing that we have had a social
crisis over eight or nine years, we increased allocations for education,
social services and health services sharply. With this we have
only a 37% budget deficit.”

By speculating if the government will hit its target this year, one
has to first look at the revenue side. The government’s plan to bring
in $3.57 billion (an 8% increase compared to last year) was based on
a GDP growth rate of 1.8%. “We know that economic growth was
practically zero in 1999, and what we expect for this year is not any
better,” says economist Elie Yachoui. He may not be far off.

According to The Economist Intelligence Unit’s (EIU) first-quarter
report on Lebanon, the GDP growth rate is forecast at 0.5% for 2000.

Not so, says Corm. “It’s impossible to calculate
the growth rate in Lebanon. Anybody
who says ‘I can calculate it’ is a charlatan. I
will not believe in any growth rate. I have
published the estimates of the IMF that
spent three weeks here in June, and they
know Lebanon. They are specialized in this
country, and they said 2% last year.”

More
specifically, the minister pointed out that
there is no link between economic growth
and tax receipts in Lebanon for now. The tax
system concentrates on the productive sector,
“which is highly concentrated on a few large
taxpayers. The tax system is not diversified.”

An improvement in tax collection, even
with a low growth rate, would have a greater
impact on increasing revenues than strong
economic growth alone, Corm argues.

That leads to another sore point. Freddie
Baz, the advisor to the chairman at Banque
Audi, stresses several important paths that the
government must follow to bring down the
deficit. One is improving tax collection,
instead of raising taxes in a recessionary
environment. It has been estimated that there
is a 70% tax evasion rate. “When I feel that my
tax administration is behaving well for taxpayers, and the taxpayers continue to evade
us by under-reporting profits, then I will take
measures,” says Corm. “But there is corruption
with tax officials; it’s very well known.
I’m moving forward. I’ve taken measures
against four people. But in this country,
progress has to be incremental unless you go
to a military dictatorship, a Pinochet of some
kind, which I’m not a part of.”

Getting tax collectors in line is essential. But
some think that enforcing tax collection is just
as important. “All taxpayers must be equal
in front of the law. We have an army. We have
internal security forces. We can turn to them
to increase collection,” says Yachoui.

Even though improving tax collection
is a slow mover, tax reform is on the cards for
2000, including taxing properties built illegally
on the coast and a turnover-based tax on
corporations. Also to come around in 2001 is
the introduction of VAT, designed to bring in
the sharpest rise in overall tax revenues and
allow the government to reduce customs.

Several economists argue that there is not
enough transparency in Lebanon for VAT to
be effective. “The international experience is that it induces people to become more transparent, especially those
who invest,” says Corm.

There are complaints about the government’s slow pace in privatizing
state enterprises. Some argue that speed is of the essence in order to
take a bite out of the debt. “There are two ways to privatize: Either you
do it the Russian way – selling to the mafia – which our government
won’t do, or we do it according to the best practice,” says Corm. “A
lot of progress has been made. There is the law that has been finished.
It should be approved by the parliament within the next two months.
It took ten years for privatization to be completed in Morocco.”

Privatization should generate between $4 billion and $5 billion by the
end of 2003. But according to Yachoui, if that’s broken down to $1.25
billion between 2000 and 2003, and debt servicing continues at $2.5
billion annually, privatization will not even cover debt servicing, which
devours 45% of government expenditures.

Yachoui stresses that privatization
is not nearly as important as changing the government’s monetary
policy. He believes that because the monetary policy is too tight,
interest rates are too high. If interest rates were reduced, that would help
relieve debt servicing and increase liquidity in the market. Corm also
sees the importance of loosening up the monetary policy.

Also on the side of expenditures, public sector wages account for
33% of expenditures. According to one report, the government has
up to 60,000 redundant employees. The general consensus is that the
bloated public sector must be trimmed, and better now than later. But
Corm argues that reducing staff is a misconception and is not on the
government’s agenda. “The 33% includes the army and those on pensions
who are not active in service. If you reduce the number of civil
servants, they will soon be on a pension. So the impact in terms of
saving on the budget is nil. There’s a lot of talk about this issue, but
it’s told by people who don’t know what they’re talking about.”

But don’t forget: This year’s budget is only one part of the five-year
plan. The government’s objective is to reduce the budget deficit from
11% to 4.5% of GDP and the debt from 130% to 96.3% of GDP, along
with reaching an annual economic growth rate of 5% by 2003. “It’s
a good budget,” says Baz, “but it won’t be a speedy way to reach the
final objective. To reach the final objective in a short period of time,
this is not the way.”