Economic and Social Council in Lebanon

A modern perception of the current economic conditions

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Prelude:

In 1993, the government introduced and applied its economic policy aiming at linking two major goals: the first is to maintain and stabilize the macroeconomic situation, while the second is to initiate a reconstruction plan for the country which considers the demanded funds that exceeded the accessible available financial resources being available during that period. Policymakers were capable to partially achieve its attained objectives. However, the adoption of such policy for the following two decades of the reconstruction boom that the country witnessed during the post Taef Agreement has caused serious concerns in terms of real economy, and increased the fragility within the macro-economy, with these factors reflecting a serious threat to the economic balance, while not ignoring its initial unstable condition.

A shift towards a new economic policy that differs from the strategy prevailing for more than two decades is becoming more than a need, to undermine the fragile balance at the macroeconomic level and to improve the ascending –but simultaneously fair- distribution of wealth and income which guarantees economic justice. Currently, adopting such a policy is a necessity to achieve growth, under the condition if the policy is based on applying comprehensive economic stability and social welfare, and efficient consumption of natural resources.

The Economic and Social Council is involved at present in a major role to assist the government in formulating a socio-economic and environmental framework, which will, in turn, ensure the economic growth and sustainable development measures


Lebanese Economy: A Historical Overview:

During the three-decade period before the civil war, the country witnessed a booming economy resulting initially from attracting maritime activities and related activities, and later on attracting capital resources seeking investment stability and security. The proportion of exported goods with respect to that of the imported reached 72 percent, according to the World Bank figures in dating back to 1973. The monetary policy included two measures: depositing substantial gold assets to cover the monetary base, and accumulating gold reserves to enhance confidence in the emerging currency after separation from Syria. The combined effect of these two measures led to an increase in financial flows to the newly independent state.

In the mid-1950s, several services sectors were active, mainly financial services and tourism, and transportation including its three pillars: maritime, air, and land. The development of these sectors was integrated with the inflow of foreign capital besides the simultaneous role of the political authorities that accompanied these sectors’ activities through introducing the banking secrecy law and allocating credit facilities and investments for services companies. Establishments like ‘Middle East Airlines’ and ‘Casino Du Liban’ exhibit finest examples for institutions initiated during that period.

Lots of critics highlighted the observed prosperity within the macro-economy and discussed the importance of such economic policy which developed the role of Lebanese economy compared to those of regional countries. Majority of opinions and analyses during that period linked such advancement exclusively to the services sectors. It was considered that any investment opportunities to grow the status of the real sectors -precisely agriculture and manufacturing- should be limited to the specific sectors’ initiatives and its related resources, not to mention the absence of any policy that benefits productive sectors as is the case of services.

Regardless of the growth observed within economic indicators, the economic model at that stage indicates a structural discrepancy with a clear bias towards services sectors while utterly ignoring productive sectors. This approach has also led to unbalanced development and financial disparity among various social classes, resulting in increased poverty in regions lacking active tourism and financial sectors, and substantial evolution of misery among poverty belts. This governmental attitude severely neglected social affairs and was accompanied by unfair macroeconomic policy to deepen discrepancies between social classes.


General Assembly of the Economic and Social Council of Lebanon.

Macroeconomic indicators: Instable and biased system

Economists have indicated in their studies over the latest three-decade period the almost complete absence of a clear strategic macroeconomic policy. But the general view of the macroeconomy has been still firm. On the other hand, reports released by international institutions continuously alert and point out two weakness parameters that could severely undermine macroeconomic equilibrium through the twin deficits hypothesis or phenomenon, which is the result of the fiscal deficit and the current account deficit.

Current Account Deficit

Despite the persistent deficit in the current account (value and quantity of imports exceed exported goods and services), cash flows were sustainable, and government was able to finance this deficit. Lebanon has been attracting resources to finance its deficit, which shows the country’s favorable position in the perception of financing countries on the one hand, and the aptitude of its expatriates -within regional countries as well as international diaspora- on the other hand to arrange financial transfers exceeding $7.5 billion annually.

The deficit in the current account reflects structural concerns that imply limitations on the productive economy to produce and export goods and services. This has also led to a massive deficit in the balance of trade exceeding $16 billion by year-end, as estimated by reports released by the Central Bank. Moreover, only a part of these remittances that finance the current account is not long-term funds that enhance capital accumulation, do not generate investment prospects, and have no positive effect on creating job opportunities. The majority of these transfers originate from expatriates and diaspora who were forced to emigrate due to political crises and poor economic conditions which led to a narrowing labor market.

There is no doubt that the long-term and continuous deficit in the current account imposes specific orientation on the fiscal and monetary policies that aim at maintaining high levels of remittances as a solution to fund deficits, regardless of the negative implications of such policies on the economy. Financing the current deficit through attracting foreign capitals exposes the economy in general to wide-ranging cyclical fluctuations especially if these capital inflows are only available in the form of short-term investments, which was the scenario during the past quarter-century. There is a clear conflict between the monetary policies that call to attract deposits allocated to finance public debt, and the fiscal policies seeking to attract foreign direct investments (FDIs). The latter type of capita resources have a real effect in creation of job and enhancing economic growth rates. As a result, high-interest rates attract foreign deposits, while low-interest rates contribute to attracting production-oriented capitals, improving the economic cycle, and increasing growth rates.

Budget Deficit 

The budget deficit is the second factor that lies beneath the fragility in the national economy and the instability of continued budgetary deficit, which will also result in increasing the pace of public debt.

In reality, governments do not go bankrupt as per the narrow definition of monetary bankruptcy. The government’s ability, however, to finance its deficit is only limited to additional borrowing, will lead to insecure public debt plans and future borrowing potentials. But it’s worth mentioning that the general fiscal policies in Lebanon are dedicated to discharge the dangers of such critical issues, and still considering the accumulated resulting negative implications during the last two decades.

There is no doubt that the budget deficit led to hindering the role of fiscal policy tools in managing the economy as the fiscal authority solely assumed this economic role, without ignoring the limitations and consequences of this exclusive approach. The increased borrowing to finance interest costs of public debt does not facilitate job creation growth, but on the contrary, broadens the gap between incomes and sectors, thus increasing social disparities and causing more economic tensions. In addition to this, the comprehensive linkage between the banking sector and the debt tools weakens the credit rating of the economy as well as rating of the banking sector itself regardless of its solidity in terms of liquidity standards and solvency, the firm control of the fiscal authority, internal monitoring policies, and the conservative approach.


Post-Taef Agreement Economic Policy:

The economic policy in Lebanon, both related to monetary and financial aspects, was formulated to suit a specific economic era of the country’s history. Although it relatively achieved targeted objectives, the approach had its negative implications on the economy and society at later stages. The approach during this period can be summarized as follows:

The Era of Reconstruction and Beyond

The economic policy that facilitated the five-year reconstruction process between 1993 and 1997 has succeeded in saving the economy the risks of instability caused by the pressures of urban spending, as well as prices in the broad economic sense. The following points summarize the most important achievements of this policy:

Primarily, a fixed exchange rate of the Lira against the US Dollar has alleviated inflation rates at low levels, where this stabilization served as a reliable factor to realize equilibrium among different macroeconomic variables.

Secondly, the fixed exchange rate policy of the national currency during the two decades, besides high-interest rates compared to the prevailing global rates, attracted capitals and deposits from abroad which had a significant role in public and private borrowing.

Thirdly, the combination of fixed exchange rates and high-interest rates has enabled banks to achieve impressive and steady growth in all of their budgetary items over the last 25 years, reinforcing the robustness of the banking sector and its ability to finance the economy in the subsequent decades.

Regardless of the achievements and accomplishments of the economic policy in that era, it carried and still bears some real risks, including:

Firstly, from a social point of view, wage and purchasing power recovered only a fraction of what it has lost compared to its levels before the years of financial collapse between 1984 and 1992. Moreover, the economic growth -regardless of its fluctuating increase over more than two decades- did not witness a parallel decline in the rates of unemployment and immigration. On the contrary, such rates accelerated in the last seven years despite the observed economic growth, albeit at low rates. Such economic approach accompanied by the absence of social policy has resulted in widening the socio-economic gap, threatening to tear social and even national integration.

Secondly, the increase in interest rates has led to a decline in investment within the real and productive economy (agriculture and industry), and a decline in the accumulation of real capital, which in turn was reflected in declining employment rates.

Economic Policy: Disabled and Disabling Dimensions

Policymakers base the pillars of economic programs on two traditional approaches: monetary policy and fiscal policy, seeking the alignment and consistency of these two pillars to achieve two goals: economic growth and reducing unemployment. This should proceed in parallel to the context of macroeconomic stability, economically known as the golden triangle.

But the public budget deficit and the rapid growth of public debt have disrupted financial policy instruments. In other words, these fiscal tools are disabled to carry out any of their initial roles in managing the economy. The role of fiscal policy in the face of the cyclical economic fluctuations is impeded as they are directed to secure servicing the public debt, maintaining acceptable levels of the budget deficit, limiting any possible collapse of production in the private sector, as well as hindering the role in redistribution and re-financing the production of public services.

The monetary policy, which is usually entrusted to maintain the exchange rate of the local currency, has solely assumed the tasks of managing the economy. By its nature, the monetary policy is capable of carrying out only limited roles of fiscal policy which is countering the cyclical fluctuations of economic activities, but for sure with limitations. Monetary policy is also demanded to secure financial and capital inflows that fund public and private indebtedness. It thus preserves and accelerates a special form of growth that does not accompany imbalanced weights of accumulated capital in the production sectors and decrease unemployment rates.


Weak and Declining Investment Inflows

The followed monetary policy was able to attract exclusive deposits but was accompanied by constraints that prohibited the inflow of real long-term investments which are required to generate job creation growth. Corruption is the most important and most serious obstacle in this matter, followed by poor productivity in the public administration due to bureaucracy, lack of modernization of the legislative and procedural framework suitable to enhance investing environment as provided by other regional economies, and at last comes to the high-interest rates.

Corruption in the Concept of Political Economy and its Impact on the Flow of Capital

The precise definition of what constitutes the political economy of corruption shows the capacity of this issue to damage governmental and constitutional foundations. The basis of corruption is the greed of those within the circle of power decision and coercion –which are the two powers originally given by the authority of the state- who employ their power to seize public money, resources, and/or blackmail citizens.

This brief definition reveals how dangerous corruption can be on the structure of the state. The social contract, in its original and abstract sense, gives the state the right to resort to coercion in only three basic cases, while a fourth case emerges with the evolving of the market economy. First is the case is to achieve security, public order and the administration of justice derived from humanitarian and legal principles and frameworks. Secondly, to preserve private property and to ensure respect for contractual obligations. Thirdly, to impose duties and taxes. The fourth case involves the intervention of the authority to correct any imbalances that might emerge due to various market forces in the free-exchange economic model.

The before-mentioned show the strongest reason for the failure of the economic policy to attract capital directed towards investments, while to some extent succeeded in attracting deposits. In reality, the investor examines first and foremost how the authorities apply its power, as the profitability prospects of any investment depend on the legitimate use of power, and the investors’ rights to own their invested assets and how to manage them, and not to fear any loss due to power abuse. Therefore, an investor’s assessment of a country’s corruption index is at the forefront of the data he uses to calculate and evaluate the risks associated with any investment potential.

Weak Productivity in Public Administration

Bureaucracy and the absence of modern legislations are considered major obstacles to investment in Lebanon, as they tend to increase the cost of investment in terms of money and time. Lebanon’s low ranking on the ease of business is a proof that bureaucracy weakens the country’s ability to attract investments. For example, the issuance of a building permit in Lebanon requires an average of 244 days compared to just 49 days in the UAE, according to the Doing Business 2017 report by the World Bank. Based on this report, Lebanon ranks second to last among the Arab countries, only followed by Sudan. Here we note the importance of taking the necessary legislative and executive measures to implement the project prepared by Prime Minister Rafic Hariri’s government in the early 1990s to adopt the so-called ‘one-stop-shop.’ It is also necessary to prepare practical and direct decrees to implement e-government law.

High-interest Rates

This factor hinders foreign and local investments, as investors allocate a considerable weight to this rate when evaluating the feasibility of any investment project. High-interest rates on investment loans lead to the exclusion of investment projects, that might be feasible and profitable if compared with the return on investment at lower interest rates on loans.


The Economic and Social Council in Lebanon: A Modern Perspective.

As the Economic and Social Council for Lebanon, we seek development within various aspects, including economic, social, and environmental measures. Economic growth in this development framework is a goal defined by three criteria: financial stability, progress within social justice and equal opportunities through public spending, and the protection of natural resources from illicit exploitation. Violation of any of these constraints would demoralize the foundations on which the entire sustainable development path should be developed.

Critics recognize that committing to a strict control framework by the potential economic policy imposed by sustainable development will inhibit economic growth by traditional evaluation criteria. The traditional measurement of economic activity does not include the negative assessment of social and environmental degradation, nor any positive evaluation of any progress within these two fields.

The bases for calculating economic activity has now evolved where recent approaches include social and environmental impacts on economic growth. Human and natural resources are truly capital assets that have the greatest contribution to economic activity, and maintaining and developing them is the sole process to achieve real prosperity. The goal of good governance in this context is to achieve a sustainable balance between growth requirements on one hand and social and environmental criteria on the other.

The second and current version of the Economic and Social Council in Lebanon is composed of 71 elected members representing various economic bodies, trade unions and free trade unions, and industry experts. The office of the General Assembly consists of nine members, in addition to 10 specialized committees: The Committee on General Economic Issues, The Committee on General Social Issues, The Committee on Human Development and Human Rights, The Committee on Productive Activities, The Committee on Science and Technology, The Environment Committee, The Committee on Regional issues and Agriculture, The Committee on Labor, Occupations and Crafts, and the Youth and Sports Committee. This Consultative Council is a platform for discussion and interaction between various productive forces linking expertise that strives to develop an integrated socio-economic and environmental vision for Lebanon.

The council did not wait for the legislative and executive authorities to initiate and research issues, but it rather took a keen sense of the economic, social and environmental conditions in Lebanon, and called on stakeholders to present solutions for the current situation.

In this context, the committees per their competence, called upon the stakeholders in Lebanon to discuss common visions that facilitate the process of drafting recommendations to the executive and legislative authorities in Lebanon. The members of the specialized committees analyze the situation and implement the most effective policies to solve the crisis.

The Economic and Social Council and the Political Parties Document

Since its formation by year-end 2017, the Council has taken several steps to contribute to the society and presented ideas and proposals aimed at moving the economic cycle and absorbing the effect of the existing imbalance. One of the most prominent steps was requesting the Lebanese parties to present the economic aspect of their electoral programs to the Council, to formulate an economic vision that is compatible with the visions of most political forces in Lebanon. Accordingly, seven parties responded to this call and set up an economic dialogue table. In six meetings, representatives of these parties made an extraordinary effort to reach common ground, despite the different political and economic backgrounds from which they originate. The first agreement among them was the issuance of a document composed of 22 articles aimed at reducing public expenditure. This document intends to be at the heart of the ministerial statement of the upcoming government. It undoubtedly contributes -over three to five years period- to reduce the deficit in the general budget to below five percent of GDP, especially as political parties contribute to the preparation of the document and approval of such items are present in the executive and legislative authorities.

Current Economic Challenges and Approaches

The Economic and Social Council seeks to mobilize the parliamentary blocs and political decision-makers, in addition to the forces involved in the production process (employers and workers), to urge them to develop an economic policy based on activating productive sectors.

The Council’s Committee on Economic Issues has prepared an immediate action paper and a medium-term plan to stimulate economic growth. The Council’s General Assembly discussed and approved the paper in mid-October 2018. It seeks to stimulate equitable and sustainable economic growth and points out various topics of social and developmental dimensions. It also takes into account the citizens’ concerns and the realization of their demands and aspirations to ensure the sustainable human growth on the real economy, based on production which in turn requires a full package of structural reforms at the economic, financial and administrative levels.


Summary

Lebanon currently faces challenges due to structural weaknesses in its economy, including the lack of employment opportunities and the inability to create them, the deficit in both the budget and current account, in addition to a broad gap in the balance of trade, the increase in the size of private debt and obligations of the private sector (both businesses and households). This is in addition to the considerable weight of public debt on the economy and on the structure of interest rates in the domestic market, and the poor level of public services. Lebanon also suffers from situational factors such as the crisis of displaced Syrians, the decline in the value of remittances, and the slow pace of projects (extraction of oil and gas, electricity, etc.). Lebanon also faces challenges stemming from the absence of governance, including non-compliance with laws and regulations, weak state bodies and lack of power, and the absence of regulatory frames. All of these challenges are driving down economic growth and increasing unemployment rates.

Several steps are essential to activate the economy and improve growth to broaden the structure of the economy and its size, which allows the reformation of middle-income social class, re-distribute job opportunities and production aspects on a broader set of citizens, in addition to enhancing social safety nets (such as social security, pension funds, retirement system, etc.).

Reforming the judiciary system, enhancing its independence, and improving its effectiveness are transitory measures to improve the performance of state institutions and ensuring local and foreign investment potentials. It is also essential to provide an appropriate investment environment and financing structure, besides diversifying financing and funding means (expanding the activity of the Beirut Stock Exchange), and involving citizens in the capital base of the economic sectors. It is also important to commit to public-private partnership and expedite implementing decrees of Law No. 48 issued on September 7, 2017. Removing infringements on public property is a necessity, and effectively managing them for the benefit of the state, preserving the national heritage and proper investing of natural resources and assets for the sake of present and future generations through the initiation and transparent management of a sovereign fund.

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