Besides the Costs of Supporting Refugees, What Holds Back the Lebanese Economy?

Sunday, November 18, 2018
Opinion by Jean AbiNader

Although much of the rationale presented by Lebanon blames the Syria refugee crisis as the main factor in its economic decline, its infrastructure and deficiencies predate this crisis. Recognizing why Lebanon’s infrastructure is inadequate and how it has failed to exploit earlier support commitments are important for understanding what can be done to advance the likely success of the new agreement.

This blog, the second of two, reviews articles by The Lebanese Center for Policy Studies (LCPS) that survey how Lebanon’s budget process is unable to make badly needed capital investments in infrastructure and question the value of yet another donors conference in supporting Lebanon’s revival without a broader vision of Lebanon in the future.

A useful background is provided in an article that examines the weaknesses in Lebanon’s current fiscal regime that every Paris conference has pointed out: Lebanon’s government lacks resources to adequately invest in its own country given an oversized public sector that employs 35% of the workforce at low compensation and payment on the national debt (15% of GDP) that swallows up any potential investment funding. On the revenue side of the ledger, the tax system avoids taxing the wealthy and uses indirect taxation that falls largely on consumers in the middle and lower classes. As the report states, “The structural reasons for the poor quality of the country’s infrastructure, which predates the Syrian crisis: first, fiscal mismanagement has severely constrained fiscal space for capital expenditures, and second, the poor management of resources allocated to infrastructure projects has fostered inefficiency and corruption.”

Budget constraints due to inadequate revenue sources, rising expenditures, the lack of national budgets from 2005-2017, and “limited scrutiny over the effectiveness and efficiency of budget allocation,” are identified as key drivers of the government’s woes. Historically, it can be noted that until Lebanon’s civil war (1975-1990), Lebanon’s government was largely made up of technocrats that sustained a viable, credible, and functioning government. During the war, people had to rely on local political bosses and alliances for basic services, which enabled political warlords to create dependent constituents, politicizing government functions, and exacerbating a system of rewards based on sectarian affiliation.

Government jobs became an extension of this patronage system as its ranks swelled from 11% to 35% of the workforce.

Since the reconstruction period in the early 90s, less than 2% of GDP has been devoted to capital expenditures; Lebanon ranks next to last in capital investments compared to other countries in its classification. Currently, government expenditures, interest payments on treasury bills, wages for public employees, and transfers to support the power sector constitute around 80% of the state budget.

Lebanon defies fiscal normalcy. The lack of an approved budget between 2005 and 2017 meant that expenditures became a function of continually extending existing programs, preventing the reallocation of funds to capital investments. For example, “personnel costs increased at 8.4% per annum on average from 2008-2016,” since this was merely extending what already existed.

Ironically, the reports notes that “by increasing the share of tax revenue to GDP by the 2.8% needed to be at par with peer countries, Lebanon could raise an additional $1.25 billion per year in revenues, which is equivalent to pledges made by donors ($11 billion over 10 years)” with no concessionary financing terms.

It ends with an ominous note: “Given the high entrenchment of the political elite with the private sector, increasing taxation of high-income earners and large corporations is unlikely to occur by itself and requires pressure from both international donors and civil society.”

Lastly is an article highly critical of potential CEDRE benefits for Lebanon. “Assuming that the borrowing of money is warranted (and this is at best debatable), and that the accountability and transparency preconditions are secured (and this is frankly impossible), CEDRE’s ‘technical’ proposal in terms of project selection is unsound.” This is due, it says, to the lack of an overall integrated vision that links projects to economic and social development of the larger society. Currently, it is more of a list of projects than a vision for Lebanon.” One might say it is the Lebanese version of trickle-down economics, akin to “we build it and the rest takes care of itself.”

As the article states, “It is impossible to measure the impact of infrastructure investment on livability and economic development without a holistic, multi-sector analysis of the integrated vision these investments are supposed to realize.”

“They reduce infrastructure to a list of big-ticket items, and conflate the notion of ‘national development’ with the construction of individual highways, dams, sewage treatment plants, power plants, fiber optic networks, and air and sea ports. Infrastructure development cannot simply comprise a laundry list of individual capital intensive projects.”

These articles raise central questions about how to best benefit from the Paris IV/CEDRE conference so that development is inclusive, sustainable, credible, and impactful on the quality of life of the Lebanese people.