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Lebanon’s Economic Project: Lessons from the Past and Challenges for the Future. A Book by Dr. Mazen Soueid. Lebanon’s Economic Project. Why? For whom? How? What about?. Why?. Bridge a Gap Bring back economic discussion to where it belongs. Definition of Economics

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lebanon s economic project lessons from the past and challenges for the future

Lebanon’s Economic Project:Lessons from the Past and Challenges for the Future

A Book by Dr. Mazen Soueid

lebanon s economic project
Lebanon’s Economic Project
  • Why?
  • For whom?
  • How?
  • What about?
  • Bridge a Gap
  • Bring back economic discussion to where it belongs. Definition of Economics
  • Address Myths about Hariri Economic Vision
        • Why Hariri?
        • Why Now?
for whom
For Whom?
  • General audience
  • Non-experts
  • Simple Arabic language
  • “Democratizing Economics”
  • Krugman/Friedman Style
  • Paper on Paris Reform track
  • Back to 1992
  • Back to 1943
what about
What about?

Part I: 1943-1992

  • The four foundations of the Lebanese laissez-faire
    • Private sector/ Property rights
    • The stable exchange rate
    • Balanced budget
    • Free movement of goods and capital ( no restriction on current and capital account transactions

A model that worked (despite its many shortages)

and produced outstanding results

the lebanese economic model was based on 4 pillars
The Lebanese Economic Model was Based on 4 Pillars
  • Private sector initiative/property rights
  • No restriction on current and capital account transactions (free repatriation of capital)
  • Stable exchange rate vis-à-vis the US dollar.
  • Balanced budget
Model generated high growth rate and placed Lebanon in favorable position regarding other emerging markets
challenges pre civil war
Challenges: Pre Civil-War
  • Needless to say, there were several challenges that the Lebanese economic model (laisser faire) could no overcome
    • The imbalance in regional economic development (centered in Beirut and Mount Lebanon)
    • The widening of the gap between poor and rich (income distribution)
irfed study reveals 41 poor 9 very poor
IRFED Study Reveals: 41% poor, 9% very poor

The important reforms introduced by President Fuad Shehab (1958-1964) to address these challenges were later hindered by tension leading to the civil war.

why is it important to go back
Why is it Important to Go Back?
  • Hariri’s policies adopted in 1992 onward were an attempt to converge to the spirit of the Lebanese economic model with an objective to develop it further in the social perspective.
Several “endogenous” factors implied impossibility to reassert the liberal aspect of the economy (the first three pillars) without sacrificing “ temporarily” the 4th: Balanced Budget
the war shook and destroyed three of the four pillars
The War shook and destroyed three of the four pillars
  • Severe exchange rate depreciation
  • Fiscal deficit-debt: 50% of GDP by end of 1992
  • Private Sector impaired by destruction and damages to both infrastructure and supra structure

1990-1992: further deterioration

part ii reconstruction vs challenge
Part II: Reconstruction vs. Challenge
  • What were the choices?

→ Pro-growth or

→ fiscal tightening

the objectives were numerous
The Objectives were Numerous
  • Eject the economy from the vicious circle of inflationary financing, dollarization and exchange rate depreciation
  • Launch the private sector initiative to stimulate investment, growth and employment opportunities
  • Increase the real income of the Lebanese population and reduce poverty through social spending on education, health and safety nets
all these objectives were inter related
All these objectives were inter-related
  • Exchange rate stability essential for private sector investment
  • Higher private sector activity essential to generate revenues
  • Revenues were essential for social spending
  • Otherwise more exchange rate instability (1990-1992)
But given that situation of the country, of the treasury, and the population it was impossible to go back at once to all pillars, and priority was thus given to the two essential pillars:
    • Stability of the Exchange Rate
    • The Role of the Private Sector which was needed to put the economy on the path of reconstruction and growth
inability to balance the budget
Inability to Balance the Budget
  • This suggested the impossibility of returning to the 4th pillar: “ Balancing the budget”

Due to various reasons:

    • The impossibility to increase tax rates given the protracted effects of the war on the middle class
    • The need to increase capital expenditures to repair the damage after the war, catch up with growing need and meet with future needs
    • The need to rebuild the Lebanese administration, hire new staff in the educational health and judicial sectors
    • The need to increase the size of the army and internal security forces to meet the requirement of peace (15% of total spending was on defense between 1993-1998)
inability to balance cont
Inability to Balance cont…
  • Need to achieve through a series of rises on wages and salaries an increase in real income that reduces the gap that has been growing between purchasing power and cost of living
  • Need to achieve a slow but sure reduction in interest rate, which encourages capital inflows that are needed to finance the large investment needs and generate a balance of payments surplus that could see a build up of reserves at the BDL
  • Higher social spending, which was increased on average by 4% of GDP
division of expenditure by components 1993 1998
Division of Expenditure by Components 1993-1998

This shows the low margin of freedom imposed on fiscal policy

Margin no more than 25%!

debt as of the end of 1998
Debt as of the end of 1998

Debt totaled, as of the end of 1998, $18.5 billion, and was accounted for by

interest rates overall on a declining trend still very responsive to political and security shocks
Interest rates, overall on a declining trend, still very responsive to political and security shocks
two important events
Two Important Events
  • Extension of Hariri’s term
  • 1996 “Grapes of Wrath” Israeli war

Because of the second one:

    • Growth declined from 6.5% in 1995 to 4% in 1996
    • Revenues less by LBP 492 billion than expected
    • Expenditures were more by LBP 776 billion than expected
    • Primary deficit LBP 1039 billion instead of an expected surplus of LBP 229 billion
This reflects the fact that by the end of 1998, the Hariri reconstruction program was responsible for 17% of the debt: the rest was old debt + cost of financing primary deficit
  • Primary deficit: ↑ spending on security, social spending, lack of progress in reform, security and political stability
Contractionary fiscal policy based on the following premise:
    • Economic policy adopted over “Period I” led to higher interest rate which led to a crowding out of the private sector and lower growth rate.
several layers of faults in this approach
Several layers of Faults in this Approach

Growth rates achieved:

  • 1993-1995: growth reached over 7%
  • 1996-1997: growth declined to 4%
  • 1998: 3.6% growth declined to 3.6%
    • The decline in 1998 was not separated from domestic and political problems and security shocks as well as external development (the challenges facing the peace process)

Composition of Assets suggests that lending to public sector was at the expense of foreign assets and not at the expense of lending to private sector

there was no strong evidence of crowding out
There was no strong evidence of crowding out
  • Loans to the private sector increased by $12.14 billion between 1992 and 2000 (460%)
  • They increased by $21.65 billion between 1992-2009 (820%)
The fallacy in the analysis led to poor results at the economic level and to disastrous results at the deficit/debt dynamic level

→ GDP growth declined to -0.5% in 1999 and to 1.3% in 2000

→ Deficit increased from 13% in 1998 to 23% of GDP in 2000

→ Debt/GDP increased from 107% in 1998 to 146% in 2000

(The government had promised to bring it down to 96% by 2003!)

→ Debt Service increased from 70% of revenues to 90% of revenues

part iii 2001 2009
Part III: 2001-2009

No wonder then, when Hariri came back to power in late 2000, he reversed the course of the previous government and adopted pro-growth policies

→ Tariff Reform

→ Open Skies

→ Investment Law (IDAL)

→Privatization Plans

→Civil Service Reform

Some were passed others were blocked

paris i ii iii
Paris I,II & III
  • Paris I, II & III Conference Importance-covered in the Foreign Economic Policy Session- can been seen in the results recorded in terms of debt structure and costs
  • Financing at subsidized rates totaled around $20billion
  • In order to do the reforms that we need to do regardless!
progress achieved over the past 20 years
Progress achieved over the past 20 years
  • The progress achieved in the past 20 years of reconstruction, stabilization and reform could be best seen in terms of figures and numbers:
part iv how to adapt lebanon to the challenges that lay ahead
Part IV: How to adapt Lebanon to the Challenges that lay ahead

Define 3 big Transformations:

  • Graduations of the emerging countries into mature markets “BRIC”

→ pressure on commodity market → diversification vs. comparative advantage

  • Global financial crisis: redefine the role of the state: liberalization vs. deregulation
  • Fiscal crisis in Europe: The issue of productivity and reforms