The signing of the trade agreement between Lebanon and
the UAE in May poses serious questions about the
prospects of the industrial sector, the objective of the government’s
trade policy and the challenges of globalization.
These matters will become more acute as other agreements are
signed with Arab countries, Europeans through the Euro-Med agreement
and the world via the WTO.

The agreement with the UAE, which calls for tariff reductions
(50% before the end of the year, 25% in 2001 and zero tariffs in
2002) is part of the Arab Free Trade accord. When the agreement
was signed, some industrialists threatened to relocate their factories
to Dubai. Although hardly any industrialists call for an import substitution strategy, most, if not
all, ask for protection in the form of higher customs duties.

Some industrialists have been more
pragmatic, requesting tariff protection until
they can deal with high production costs.
Otherwise, they rightly state, they will become
vulnerable to overwhelming competition.

On the opposite end of the spectrum, free
market zealots believe that it’s high time to liberalize
and open borders. This will essentially
boost growth, increase efficiency and productivity,
enlarge the market for our products,
decrease prices, improve quality and so on.
These free trade proponents believe that the
industrial sector is not a significant player in the economy since it contributes 17% to GDP and employs 14% of the
labor force, while Lebanon is a country of services. I confess that
I have purposely polarized these two opinions to better show the
fallacies of both.

The first argument, put forth by industrialists for tariff protection,
is actually less fanatic than it sounds. They basically want more time.
Industrialists advocate higher tariffs on imported goods in order to
allow them to restructure their firms so they can become more competitive
and export. This, at first, sounds convincing. After all, the
industrial sector is facing innumerable problems from uncertain government
policies and bureaucratic obstacles, as well as paying the
price of outdated equipment, lack of financing, low productivity and
the high cost of energy, labor and land. Removing tariffs, particularly
on finished goods, no doubt, will make things even harder.

But to believe that trade protection will make the industrial sector
more competitive is hardly convincing. It will save the industrial
sector from the unforgiving forces of competition and the market
but only for a while. This is because Lebanon will eventually and inevitably reduce all tariffs. The point is that lifting customs
might break the back of the industrial sector, but keeping tariffs
in place will hardly make industries more efficient.

Hence, the key to sustainability and eventually competitiveness lies
elsewhere. Industry will not emerge from the mess it’s in without a
clear and conducive government policy so that investment and
modernization can take place. In other words, the problem is in the
process of policy making. What’s needed is a transparent, serious and
pragmatic mechanism to set an objective and strategy for the industrial
sector given the regional and international changes. Customs
duties could then be used as a tool to achieve this objective.

The second argument has to do with the benefits of trade liberalization. Few people dare to say otherwise,
fearing to be labeled old-fashioned,
communist-fanatic or closed-minded. In any
case, conventional wisdom is that openness to the
region and ultimately the world will boost
growth from lower trade barriers. This goes
through various channels which include an
increase in exports and foreign direct investment,
more job creation and the spillover effect
that raises productivity.

An empirical analysis on several countries by
Dani Rodrik, a professor of economics at
Harvard University, shows otherwise. In fact, he
argues that though countries that have grown faster had also witnessed an increase in
exports, the reverse is not true. One could thus argue that exports
are a source of “learning and technological externalities” for
Lebanon, allowing firms to learn from sophisticated markets
abroad. Rodrik shows that this is true. Exporting firms are indeed
technologically more dynamic, they “tend to have larger plants
that better utilize scale economies, employ a mix of better skilled
workers, and generally outperform non-exporting firms.”

But these firms are in fact dynamic and successful for other reasons.
It is actually because they are dynamic that they export. So
again Rodrik shows that there’s little proof that efficiency benefits
accrue from exporting activities.

To recapitulate, industry cannot develop simply by advocating
protectionism. But it’s equally true that opening up the borders
will not reap the list of benefits advocated by many. The solution
lies somewhere in between: open up the borders selectively to
meet your industrial investment strategy.

Sami Atallah is an economist with the Lebanese Center for Policy Studies. The views
expressed here are those of the author and not necessarily those of the LCPS.

A visitor arriving in Lebanon might be impressed by the bustle
of construction at the new airport. Estimates indicate
that by completion, the total cost will run upwards of $800
million. But not all that glitters is gold. Problems at the airport are
affecting trade and the livelihood of companies operating there.

A big problem, not surprisingly, is customs. “The customs
building is something out of the middle ages, it’s dirty, littered
with garbage and nothing works,” says Ibrahim Chehab, general
manager of Lebanese Air Transport (LAT). The erratic customs
procedures and charges, which are often subject to bribes or
wasta, slow the passage of goods. An organized and efficient customs
system would increase cargo and ultimately increase the revenue
for the government, says Chehab. He previously worked as
a cargo manager at Sharjah airport. “It’s small compared to
Dubai’s airport, but their warehouses are full because the government
has a flexible policy and business is booming,” says
Chehab. LAT does cargo and passenger handling as well as
maintenance assistance for 17 international airlines, including Air
France, British Airways and KLM.

The government halted a $15 million BOT project to build a modern
customs building with a warehouse capacity of 200,000 tons a year
and where airlines could have bonded warehouses. “The existing facilities
can absorb 100,000 tons, but Lebanon is only getting 50,000 tons**;**
that’s what stopped the project,” says Fadi Saab, chairman of Trans
Mediterranean Airlines. Customs regulations can impact the cargo
business, adds Saab, but other areas such as industry and trade also
need a boost for the sector to improve. The plans to modernize and
computerize the facilities are encouraging for Saab.

But Chehab believes a better option would be to create a ‘cargo village.’
For 15 years, land would be given rent-free to airlines and cargo
companies to build their own offices and warehouses. “Politicians think the airport is only for
passengers and forget
that cargo is a
gold mine,” says
Chehab. He cites
Singapore as one of
many cities that have
become hubs as the
result of such a project.

The government
did have a plan
to take ownership of
additional land. But
the project failed
because it exceeded the allocated budget for the airport, and
there was political pressure due to its proximity to residential areas,
according to an engineer at the airport’s civil aviation department. “We
don’t have an inch of land to give to companies,” he says.

But land aside, politics have already scuttled one similar completed
project. Last October DHL (see “Down and out in Beirut,” January
2000) invested $2 million in new airside offices that included warehousing
and an area for customs clearance. Those facilities are sitting
idle because no customs officers have been stationed there,
despite promises from both the current and previous government.

Another problem is the high rental fees. Last August, law number
nine increased the rent for offices occupied by airlines or
appointed agents from LL 100,000 to LL 500,000 per m2 and the rent
of hangars and warehouses from nothing to LL 250,000. For LAT
that meant an increase from $7,500 to $35,000 per month.

The new law gave a 50% exemption to local companies that
have scheduled flights, but LAT doesn’t have scheduled flights.
Though the law has since been modified to include companies
without scheduled flights, the ministry of transport is trying to
collect the full fee. The civil aviation authority disputes complaints of high
fees. “It was proven that we have the lowest such fees in the
world, and we need them to cover the operating costs of the airport,”
says one official.

The companies that LAT represents also complain about additional
fees, such as $150 per hour to use the travel counters and
charges of LL 50,000 to LL 150,000 on outgoing passengers. And
on top of the substandard warehousing facilities, the airport has yet
to install telephones and televisions as well as sufficient passenger
seating, arrival and departure monitors. Even with all the
fees it collects, the airport management has failed to provide
good services in return.

With political and economic issues heading the government’s
agenda, it’s hardly surprising that the rights of
the disabled were put on the back burner. Following
concerted efforts by advocates, the most that law 243 of 1993 stipulated
was that disabled people “have the right to be employed,”
says Jerius Khouri, vice-president of the national association for
the rights of the disabled. “But it didn’t require companies to hire
a certain percentage of the disabled or fine them for not obeying the
law.” The law didn’t even eradicate an antiquated and discriminatory
Turkish law that actually denied handicapped people
access to public jobs.

All that was changed when parliament approved a new anti-discriminatory
law in March. “It cancels or amends unfair texts, clarifies
unclear texts and adds new texts,” says Rita Saba, head of
human resources at the rights and access program of the ministry
of social affairs. On employment, the law guarantees equal opportunity
for individuals with disabilities. It stipulates that disabled people
will represent 3% of public jobs in all categories.
Private companies with more than 60 employees must reserve 3%
of positions for those with disabilities. For companies with 30 to
60 employees that figure is 1%. Failing to comply will result in a
fine, but the amount has yet to be disclosed. Companies with a staff of less than 30 are not bound by the law to employ disabled people,
but doing so will procure tax exemptions.

“The purpose of the law is to ensure the rights of the disabled on
a long-term basis,” says Saba. It’s an important step towards moving
the status of the handicapped in society from marginalization
to total integration. But the law must still be enforced. “We have to
turn it into applied rules,” says Khouri, who is blind and works as
a freelance journalist and translator. That will require coordination
between the ministries. “Coordination committees must be formed
within each ministry,” says Saba. “Without them we will not be able
to apply anything concerning the law.”

The law also specifies that all public buildings must be accessible
to people with disabilities. “But the criteria still have to be set in
the implementation stage,” says Saba. Adapting the workplace will
be an important component. “As far as I know, most workplaces are
not accessible for the physically disabled,” says Khouri. That
includes making toilets and elevators accessible to wheelchairs.
Solidere showed vision by building in accordance with international
standards that allow for accessibility, but it will be a while before
building specifications become obligatory by law. When they
do, owners of buildings under construction that fail to abide by
specifications will be fined. Tax exemptions will be given to
property owners who restructure existing buildings.

No statistics are available, but it’s safe to say that the number of handicapped
people presently employed is negligible. The Dr.
Mohammed Khaled Social Foundation cares for the physically
handicapped, for whom it provides training in carpentry and sewing. The foundation employs 12
physically handicapped people,
mostly paraplegics.

“They can’t move their legs,
but they can move their
hands. They have brains and
are intelligent,” says Abdul
Hafiz Elladki, the foundation’s
general director.

One barrier to employment
is that just a small percentage of the handicapped population is educated, according to Raif Shwayri, the director of
the Al-Kafaat Foundation.
Before the 1993 law, handicapped
people had no access to
public schooling. Though the ban was lifted, schools are still not accessible to the disabled.
Additionally, no public transportation is available for the handicapped,
making it difficult to get to work or school. Al-Kafaat is a specialized
organization that caters to socially and physically disadvantaged
people. The organization provides daily transportation for its
4,500 beneficiaries, 2,000 of whom are physically impaired. The government
needs specialized buses for the physically handicapped.
“To integrate the handicapped in society, society must be equipped to
receive them,” says Shwayri.

Compiling the cases

Exactly what percentage of
Lebanon’s population is disabled?
Two studies have been
done: one by the ministry of social
affairs in cooperation with the
United Nations population fund
(December 1995 to May 1996) and
the other by the Central
Administration for Statistics
(1997). The studies put the figure at
1% and 1.5% respectively.

According to a source at ESCWA,
“the figure is way too low.”

Recently the ministry of social
affairs began issuing identity cards
for disabled citizens who meet the
classifications set by the ministry.
“Certain health problems are not
classified, such as extreme cases
requiring medical equipment that
we cannot provide and minor
ones,” says Rita Saba of the ministry’s
rights and access program.

The card is required for disabled
people wanting access to services
provided by the ministry, such as
technical aid. To date 24,493 cards have been
issued, indicating 24,763 disabilities
(some have multiple disabilities).
Of these 6.79% are visually
impaired, 11% hearing impaired,
38.7% mentally disabled and
52.2% are physically disabled.

While many people are reached
through ‘outreach services’ provided
by collaborating NGOs,
such as Arc en Ciel, most people must apply for the cards in person at
the ministry’s offices. For this reason, the figure isn’t a good indicator of the real number of the disabled,
which likely stands at 6% to
7% of the population.

In the eyes of most spectators, the row has
turned into a complete fiasco for the government
and has been sorely mishandled
by Issam Naaman, the minister of post and
telecommunications. International rating
agency Standard & Poor’s (S&P) recently
included the government’s inability to find a
solution to the cellular issue by October in a list
of factors that could lead to a possible sovereign
downgrade for Lebanon. In a telephone interview
with EXECUTIVE, the minister brushed
aside S&P’s warning: “Let them go to hell. We
know what we’re doing.”

But the view from the sidelines tells a different
story. “This could have been resolved
quickly, privately and profitably for the government had they been more
politically astute,” says one analyst. And so the dispute has dragged
on. Many point to the vested interests at play as the major culprit: the
politically powerful hoping to get their fingers in the pie and push forward
companies with which they have or hope to form alliances.

Kamal Shehadi, a consultant on telecom privatizations in the
region, points to the government’s failure to adopt a consistent telecom
policy and law in keeping with the information age (see pp.
27-29). “Other reasons, such as the myopic approach to telecoms as
the cash cow for public finances, at the cost of encouraging
growth and investment in the sector and Lebanon catching up with
the information revolution, must have played a big role,” he adds.

And with elections just around the corner, a solution is probably
not in the cards anytime soon.

Naaman is still hunting down that elusive $300 million in fines
for each LibanCell and Cellis. But neither has received a detailed
explanation of that figure. The minister even threatened that the government
could break the build-operate-transfer (BOT) contracts and seize the two companies’ assets if an agreement is not reached
through talks. But negotiations are made difficult when the two
sides are virtually on non-speaking terms. This does not bode well
for possible future investment. “No investor will invest in a country
where governments decide to shut down a business simply
because it is more profitable than its original business plan had predicted,”
says Shehadi.

Both cellular operators have submitted requests for arbitration to the International Chamber of
Commerce in Paris. “We maintain that we have not
violated our contract and that arbitration is the best
path to resolve the different interpretations of the contract,”
says Hussein Rifai, chairman of LibanCell.

Recently, Naaman has been touting a ‘much better offer’ from Vodafone than what Lebanon’s two cellular
companies are willing to pay for their contracts
to be converted into licenses. The UK-based company
has apparently expressed its readiness to pay $1.5 billion for a license. Contacted by EXECUTIVE,
Vodafone denied making any such offer, oral or written, to the Lebanese government, even insisting that
there are no negotiations between the two parties. “If that’s true, it means
they are not telling the truth. I have all the evidence,” says Naaman,
refusing to elaborate. According to the minister, he is conducting meetings
with representatives of three mobile phone companies that are
interested in investing in Lebanon. “Vodafone for me is a ghost,” says
Sima Hafez, marketing director of Cellis, which submitted an offer in
writing. “He said Vodafone’s offer is better than ours. What are the conditions
of Vodafone’s offer? Nobody knows.”

All this comes in the wake of offers by LibanCell and Cellis to
pay $1.35 billion each for licenses that were snuffed out by the government.
Of that amount, $900 million would be paid upfront with
the rest coming in over the 20-year life of the license that would
allow competition. “Our offer was more than fair and exceeds any
price paid until now for a GSM license,” says Rifai. Indeed, in a
study prepared for the Lebanese government in September 1999,
Booz, Allen & Hamilton assessed the price of a license at between
$800 million and $950 million, based on four different scenarios.
While LibanCell points to the unprecedented high price per population
of the offer, that is the proper index for startups, according
to Shehadi, not going concerns. Nonetheless, the price is fair on a
per subscriber basis, he says: “It compares favorably with prices paid for going telecom concerns in
Europe, where the revenue per subscriber and per
capita income are higher.”

At the council of ministers, sentiment was split. The
nay camp included Naaman and Michel Murr, the
interior minister. Naaman listed his reasons for rejecting the offers at a recent press conference: the
initial installment is too low, the length of the license
too long and the right of first refusal for UMTS, the
third generation of mobile phone systems, should not
be included. Those in favor included Georges Corm,
the finance minister and Nasser Saidi, the minister of economy and trade. “I proposed transforming the
BOT contracts into licenses in December ’98, so I believe it should
have been done then,” says Saidi, adding other issues like competition
and new technologies need to be considered.

The matter appears to be shelved for the time being as the government’s
decision was, er, not to make a decision. Instead the unresolved
dispute was passed onto the auditing department’s lap, with
the operators’ offer not accepted, but not officially refused either, and
it was announced that a law would be drafted to allow a UMTS tender.

“The government should not have accepted the operators’ offer
without making modifications that would ensure a fair and level playing
field for LibanTelecom, the state-owned operator, and other
new entrants to the market,” says Shehadi. “However, that does not
justify the decision reached.”