With the death of the former prime minister, Rafik Hariri, among the most enduring aftereffects will be its putting an end to the feeling, no matter how misguided, that Lebanon could always pull economic rabbits out of its hat. That is probably as good a definition of economic confidence as any, and as Hariri’s years in office show, even when his policies stumbled, he could yet peddle Lebanon as a profitable bet.
When he came to power in late 1992, Hariri’s reconstruction strategy rested on three pillars, with a fourth serving as both cornerstone and illustration: a return to monetary stability; circumvention of the state bureaucracy, when desirable; and rehabilitation of Lebanon’s shattered infrastructure. The last leg of Hariri’s plan was to rebuild Beirut’s old city center, which would show what Lebanon was capable of, but also highlight a key ingredient in the prime minister’s vision, namely that the country’s destiny was to be largely reliant on the services sector.
Finding the money
Monetary stability was the first priority, inasmuch as the steady decline, and indeed virtual collapse, of the pound in spring 1992 was one of the reasons for the resignation of the government of Omar Karami in May. To get business running, Hariri, once he took office following parliamentary elections in summer, had to deliver predictability. The government set a relatively fixed parity between the U.S. dollar and the Lebanese pound, one which has fluctuated little until today. It was also obliged to allow the use of both currencies in daily life, even as it focused on slowly increasing the attractiveness of holding pounds.
Throughout 1993, the Hariri government consolidated demand for the pound, so that by the fourth quarter of the year the currency had gained value despite the inflationary pressures of a 120 percent increase in the minimum wage. In an interview at the time with the French-language business magazine Le Commerce du Levant, central bank governor Riyad Salameh noted that his priority was to “re-Lebanize” the economy and reverse the trend that had led to 70 percent of deposits being held in dollars. His second priority, as he put it, was to recapitalize the banking sector in accordance with international agreements, a step that would also allow the central bank to boost its foreign currency reserves to buttress the pound.
In parallel, the government began issuing high-interest pound-denominated T-bills, so that by the third quarter of 1993 the value of the domestic debt had increased by an estimated 8.7 percent, equivalent to $3.21bn. The structure of the debt changed too, as treasury bills came to supplant direct advances to the state. This dual approach of increasing pound demand and bolstering stability by increasing central bank reserves succeeded in stabilizing the currency.
Hariri’s second priority was to address the wreckage of the Lebanese state. This he did by both circumventing the state bureaucracy to put reconstruction on a fast track, and focusing on infrastructure rehabilitation. The former was perhaps one of the more controversial decisions of the prime minister, since critics could not understand how state institutions could be resurrected by being left to atrophy. In retrospect, however, Hariri was right in understanding that the bloated civil service would become a playing board for political gamesmanship, which would have held up reconstruction.
That did not mean, however, that all ministries were neglected; only those the prime minister did not consider a priority. The key finance ministry, for example, was effectively placed in the hands of close Hariri collaborator, minister of state Fouad al-Saniora, who over the years streamlined its tortuous structures and procedures, mainly to attract foreign investment, but also to rationalize and consolidate the state’s revenue base. In contrast, ministries such as Labor and Oil were left to wilt, or to become declining redoubts of political patronage.
The most noteworthy of Hariri’s structural innovations was to tie the Council for Development and Reconstruction (CDR) directly to the prime minister’s office, and, more significantly, to its budget. The CDR was set up in 1977 to channel funds into reconstruction, but had fallen by the institutional wayside due to the continuation of the Lebanese conflict. Under Hariri, however, it was revived and took the lead in issuing calls for bids and negotiating infrastructure projects. Hariri’s critics in parliament and the political class complained that the growing centralization of economic power in the prime minister’s hands made much more difficult legislative oversight of reconstruction. They were right, and that was precisely the prime minister’s aim. Reconstruction was indeed accelerated, but the relevant state institutions were hardly the better for it.
Lost Horizon
The third prong in Hariri’s postwar revitalization project was the core of his program, namely rehabilitating infrastructure. In March 1993, the Hariri government unveiled what it grandiloquently called the $12bn Horizon 2000 reconstruction plan, which was, in fact, little more than a series of broad spending targets. However, the priorities involved were revealing. The 10-year plan broke down spending into a number of phases, tilting it in the first three years (1993-95) heavily in favor of electricity ($550m), telecommunications ($462m), roads ($212m), and water works ($161m), as well as the Beirut Airport ($150m) and ports ($115m). The spending projections were hardly accurate, nor were the eventual projected budgetary surpluses that, gradually, were to go back into paying for the program. However, it was evident that the prime minister was not keen to spend money on such sectors as manufacturing and agriculture, which together accounted for less than 14 percent of anticipated spending in the first three years.
Critics charged, with some justification, that Hariri never had any intention of going through with the later stages of the program. Rather, he was keen to pour money into revitalizing infrastructure for services, while using the promise of more socially-oriented spending down the road as a lever to secure wide-ranging support for his plan. Ostensibly, private sector investment was expected to match the debt-financed public sector reconstruction and fill in where the latter had come up short. It is also probably true that the prime minister was gambling that Middle East peace would be secured sometime by the mid-1990s, at which stage the high deficits that his program entailed would be gradually eaten away by post-regional-peace investment and improved government taxation on more profitable businesses.
Ultimately, Hariri’s gamble on peace was lost. While Palestinian-Israeli and Syrian-Israeli negotiations seemed at various times to be near a resolution, final agreement remained elusive. Moreover, with Lebanon closely tied into the Syrian negotiating track, there was never a prospect for a separate deal with Israel, nor did Hariri contemplate taking such a route. By the time the post-Madrid process came to a halt in 2000, following the inability of Syria and Israel to reach agreement and the outbreak of the Palestinian Intifada, Hariri had been out of office for two years, his onetime optimism on peace anathema to a regime that had, by then, embraced militancy.
For all its success, infrastructure rehabilitation was probably the darkest black hole of the Hariri years. In the political climate of those years, financial transparency was a splendid fiction as members of the political class, and their allies in Syria, were offered lucrative contracts, largely as a tradeoff to ensure the smooth advance of the reconstruction process. While Lebanon was being rebuilt at an often remarkable tempo, the costs of the enterprise, both legal and illegal, were far above what they needed to be.
Combined with the insufficient tax collection rate and the massive cost burden of financing the oversized and inefficient administration, its employees and civilian and military retirees, this trend was instrumental in denying the government the ability to take a hold of budget spending, with deficits routinely running in the 35-50 percent range as a percentage of expenditure. Sorrow at Hariri’s demise should not lead one to ignore that his governments’ policies were substantially, though not entirely, responsible for leading the country into a cycle of spending that has expanded Lebanon’s gross debt today to some $35bn, equivalent to 190 percent of GDP.
Hariri’s focus on rebuilding the old city center of Beirut was both showcase and hook for his far broader rehabilitation effort. When the war ended, it was clear to officials that the exceptionally intricate ownership status of downtown properties, many of which had been destroyed during the war, might delay reconstruction of the area indefinitely. Hariri helped engineer a shrewd, but ultimately controversial plan whereby a private company, Solidere, would be given control over much of the area, and compensate property owners with shares in the company. While this was undoubtedly a necessary sleight of hand to avoid a tsunami of legal action over property rights, many owners complained that the valuation of their properties was far lower than market value – and indeed that the process was characterized by inconsistency and favoritism. Nor were those worried about conflict-of-interest issues reassured when the prime minister himself invested heavily in Solidere.
In parallel, those more concerned with how the rebuilt area would integrate Lebanon’s different communities, and itself be integrated into Beirut, complained that only the rich would benefit. They were perhaps right, but also missed the point: the Solidere area was mainly designed to appeal to the prosperous middle classes, international companies, hotel chains and wealthy individuals willing to buy into its high-end residential properties. There was no problem of integration either, as people from all communities converged on the downtown area to eat, play, shop or, indeed, invest. Hariri was also vindicated when the area became – at the expense of many other not-always-pleased neighborhoods one might add – a popular destination for foreign tourists, many lodging in hotels in and around the Solidere area.
Death of a salesman
Perhaps the most intriguing aspect of the Hariri phenomenon was how the former schoolteacher, accountant and contractor could also be a remarkable salesman and showman. His was a soothing voice of assured profit, which would draw investors toward the good news while carefully concealing the bad. That talent is surely one of the reasons why Lebanese confidence remained afloat, when already during the mid-1990s international financial institutions, including the World Bank, were anticipating a collapse of the national currency.
Here it is well to remember that among the 1993 finance-sector goals, the recapitalization of banks was certainly accomplished. The re-Lebanization of the economy was less successful and dollar deposits remained high – which in the end may work in favor of the Lira’s stability. More troublesome is that, with the exception of the improvement in fiscal revenue generation through the introduction of VAT, the economic problems behind the severe currency worries of 2002 persist today unabated. The Paris II conference, which could not have happened without Hariri, bought Lebanon some time to implement structural change. With Hariri gone, however, and with no change on the horizon, this time is running out.
Even before Hariri’s assassination, analysts were sounding economic alarm bells. In a January 2005 report, Moody’s concluded that “for GDP to keep growing, confidence has to be firmly reestablished, which entails governmental reforms such as privatization to be pushed forward, the level of government debt to decrease and private investment to rise.” In an implicit rebuff of those saying that the central bank might weather a serious financial crisis (an assurance repeated by Riyad Salameh after Hariri’s death), it warned “the high level of reserves since the Paris II conference could drop drastically if confidence were to decline, which could happen since reforms have been postponed.”
The Economist Intelligence Unit, it its first-quarter 2005 report, observed: “There remains no prospect that the moribund economic reform program will be rejuvenated until a new government is appointed after the May general election.” While it did note some positive developments in the economy, including improvement in the government’s liquidity position and effective management of the tax system, it also noted: “The government’s long-troubled privatization plans have also made no progress and the dismissal, in effect, of the reformist Mr. Hariri in September has ended any realistic prospects of the program moving forward.”
This implicit association of fiscal reform with Hariri, though it may have conveniently overlooked his contribution to the debt in the first place, was indicative of a more general mood among investors: namely that he alone had the standing to bring in international donors to help Lebanon restructure its due payments, but also to effect economic reform. Was this view entirely accurate? Perhaps not, but there is a growing consensus, expressed by not a few investors and businessmen, that the post-Hariri phase will be one of wait and see, as far as their ambitions in Lebanon go. The dynamism of the post-September 11, 2001, period, when many Arab visitors preferred Beirut to airport search queues in the United States and Europe, may have taken a hit.
There are no good sides to the death of so overpowering a figure as Rafik Hariri was in postwar Lebanon. However, if one had to venture some statement of optimism, it might be that reliance on a single individual for periodic economic resurrections is never advisable. Perhaps in Hariri’s death Lebanon might wean itself away from that belief. It was to the former prime minister’s credit, however, that he always looked better than the alternatives, and that even today, though he’s gone, what is on offer looks so much less reassuring.
