Continuity in economic policy in postware Lebanon: the record of the Hariri and Hoss governments examined, 1992-2000.

INTRODUCTION

FOR SIX YEARS (DECEMBER 1992-NOVEMBER 1998), Rafiq Hariri and his economic team were in charge of managing the Lebanese economy. While some of Hariri's economic polices had popular support, most were controversial ones that triggered mixed and sometimes overtly hostile reactions. But despite official criticisms that Hariri's policies received between late 1998 and the summer of 2000, his detractors failed to articulate an alternative set of economic policies. The Hoss government continued most of the policies initiated by Hariri and in certain instances, as with privatization and foreign borrowing, pursued them with much greater vigor. Undoubtedly, the Hoss government introduced certain changes in specific economic policies. (1) Nevertheless, what was preserved from the Hariri years was far more fundamental than what was changed. In light of this basic continuity in economic policy from the Hariri to the Hoss years, Hariri's return to the premiership in November 2000 seemed quite logical.

THE LEGACY (OR HEAVY BURDEN (2)) OF RAFIQ HARIRI: 1992-1998

Hariri's record in office, particularly in the economic policy domain, generated both praise (3) and sharp criticism (4) Hariri's admirers credited him with at least five major achievements: 1) raising the Dollar value of the Lebanese currency (LL) after years of steady (and in some months very steep) deterioration (5); 2) bringing annual inflation rates down to single digit figures (6); 3) launching (and partially completing) a highly ambitious investment project for the reconstruction for the commercial district in downtown Beirut and the modernization of Lebanon's basic infrastructure; 4) simplifying the tax code, providing tax holidays for new investors, and lowering the maximum tax rate to 10 percent (all these measures were designed to increase incentives for local and foreign investors) (7) and 5) (perhaps most importantly) restoring regional and international confidence in the Lebanese economy.

Hariri's critics, on the other hand, brought forward a long list of charges against him. They accused him inter alia of: 1) betting on the quick success of the Middle East process, and subsequently spending billions of US Dollars (of largely borrowed money) to develop Lebanon's infrastructure, in the hope that borrowed finds can be easily repaid once peace arrived; (8) 2) allowing Lebanon's public debt rapidly to mount until it reached dangerous levels towards the end of his term (in 1998); 3) causing real interest rates on deposits in LL to raise owing to excessive government borrowing and the insistence on protecting the value of the LL; 4) overspending on infrastructure development, while under spending on productive projects in agriculture and industry and on social projects (i.e., health care and education; 5) lowering direct taxes which helped the rich, while raising indirect taxes (such as the gasoline tax) whose impacts were mostly felt by the poor and middle classes; (9) and 6) (perhaps most seriousl y) turning a blind eye to rampant corruption among ministers, bureaucrats, local and foreign businessmen bidding on state contracts, as well as among his closest aides. Critics alleged that widespread corruption during the Harm years cost the treasury vast sums of money, estimated by some sources at billions of U.S. Dollars. (10)

Reality is far more complicated than the claims of-either group. At the outset of his term, Hariri was able to generate wide support for his currency stabilization and reconstruction programs. As the costs of these programs mounted, and successive Hariri governments failed to tackle other economic and social problems (such as unemployment, low wages, poverty particularly in the outlying regions in the Biqa' valley and 'Akkar, administrative red-tape, rampant corruption in official circles and poor quality of social services) criticism of Hariri intensified. It must also be pointed out that Hariri's heavy-handed style of governing and his tendency to bypass parliament, the state bureaucracy, and even some of his ministers on important decisions earned him the enmity of many powerful politicians and opinion leaders. Finally, Hariri's troubled relationship with property owners in downtown Beirut, (11) organized labor (particularly after the election of Ilyas Abu Rizk to the presidency of the Confederation Genera le de Traveilles libanais -- CGTL -- in July 1993), (12) and, on particular occasions, with business associations such as the Association of Lebanese industrialists -- ALI- and the Beirut Traders Association -- BTA -- subjected some of his economic policies to sustained criticism from organized economic interests. (13)

While Hariri continued to give priority to currency stabilization and channeling investments to reconstruction and infrastructure development projects, he showed enough pragmatism to reverse course on several occasions (14) and to make concessions to vested economic interests, particularly those of labor, public school teachers and Lebanese University professors, industrialists and merchants. Three or four years into office, Hariri also started showing alarm at the problems of recurrent budgetary deficits and mounting public debt.

In an effort to bring down the budget deficit; the 1998 budget included higher taxes and lower spending on infrastructure development than previous budgets. Subsequently, the budget deficit as a percentage of public expenditures was about 10 percent lower in 1998 than the previous year.

Hariri's problems started in 1996 when his government faced a storm of opposition in parliament over the 1996 budget. Although at the end of the day parliament passed the budget in almost the same form as submitted by the government, Baaklini, Denoeux and Springborg wrote:

During the 1996 budget debate, for instance, attacks by deputies against the government's financial priorities led to a long and frustrating debate. At the end of the day, however, parliamentarians had little to offer by way of alternative suggestions, and the Chamber as a whole ended up ratifying the final document presented by the government. This episode did great damage to the Chamber's credibility. (15)

The recorded budget deficit for 1996 (51.19 percent) was much larger than the projected 37 percent, and the net public debt (domestic and foreign) mounted to LL16,544 billion. (16) Economic and political uncertainties -- triggered by the rising public debt, concerns about the exchange rate, and the consequences of the Israeli military operation in April 1996 (the so-called Grapes of Wrath operation) -- all contributed to the slowdown in the rate of economic growth to four percent (from 6.4 percent in 1997) (17). The trend of the economic slowdown was to accelerate in 1997 and 1998, culminating in the recession of 1999 and 2000. Table 2, below, shows nominal GDP in US$ and growth in real GDP for the 1992-2000 period.

Throughout 1997 and 1998, Hariri struggled to improvise solutions for mounting economic problems and to ward of challenges to his authority from parliamentarians, some of his ministers, and organized labor. Following the 1996 parliamentary election, the government resigned and Hariri was nominated to head a new government. During the negotiations leading up to the formation of the new government, Harm had to make several concessions, and include ministers loyal to either President Hrawi or Speaker Bern in his government. (18) A few months later it became evident that the Premier could no longer count on the automatic support of a majority of his ministers for his policy choices; circles close to Hariri began to lament the absence of ministerial harmony (ghiyab al-insijam al-wizari), hinting at the desirability of a cabinet reshuffle. In the summer of 1997, Hariri faced a mini-rebellion from within his cabinet. At the 24 September meeting of the Council of Ministers, Hariri presented an ambitious plan that inc luded two main components: 1) borrowing up to US$1 billion on international markets to cover overdue payments to private hospitals and autonomous state bodies (particularly The Council for the South and the Fund for the return of the Displaced) and continue spending (albeit on a reduced scale) on necessary infrastructure, economic and social programs; and 2) raising indirect taxes and customs, particularly on gasoline and car registration and inspection feeds. (19) While there was little opposition to the borrowing part of the plan, the cabinet split (12 to 12) when it came to the LL5,000 additional tax on every twenty-liter tank of petrol. Hariri then suggested lowering the petrol tax to LL3000; a second vote was taken and Hariri lost 13 to 11 causing him to walk out of the Council of Ministers' meeting. (20) On the eve of Hariri's unprecedented defeat before his ministers, some commentators expected him to resign; but the Premier bit the bullet, insisting that he had no intention of resigning. (21) A few da ys later, he resumed his dual quest for fresh sources of finance (22) and a cabinet reshuffle that would enable him to drop at least some of the ministers who had openly defied him.

In the autumn of 1997, Hariri and Berri came close to collision over Hariri's perseverance in seeking a cabinet reshuffle, and the 1998 proposed budget that included more austerity measures, more indirect taxes and more foreign borrowing than previous budgets. Competition for Syrian backing (each coveted the position of Hafez Assad's strong man in Lebanon) and the ambition of each leader to play the role of local kingmaker in the upcoming presidential election complicated relations between Berri and Hariri. (23) In the conflict between Bern and Hariri, Hrawi assumed a neutral stance, refusing to back his embattled premier. It was only after Syria intervention that the crisis was dissolved in early December with an agreement among Hrawi, Hariri and Berri on a so-called "reform paper" (al-warquah al-islaphiyya). (24) Formally adopted by the Council of Ministers on 4 December, al-waraqah al-islahiyaah included a financial component as well as an administrative reform one. (25) On the financial side, it endorsed Hariri's suggestion for raising US$2 billion in foreign loans to be used exclusively for covering part of the anticipated budgetary deficit in 1998 and transferring part of the domestic debt to foreign debt. On the administrative reform side -- and a gesture towards Harm's critics (including Berri) who had repeatedly accused the government of wasteful spending and squandering precious resources -- the paper called for merging certain ministries and state agencies, tightening lax supervision over state employees, and freezing hiring in the government sector. Very few commentators expected any of the reform measures included in the paper to be adopted.

The adoption of the reform paper was nevertheless politically expedient, in order to restore a measure of normalcy to relations between the "three presidents" and to provide Hariri's third government with a much needed shot in the arm before it sent its 1998 budget to parliament, where it was expected to face stiff opposition. But before parliament met to deliberate the 1998 budget, Hariri and his ministers were summoned before parliament on 17 December 1997 to answer questions from deputies and to defend their policies. The intensity of parliamentary attacks reflected the growing sense of unease among parliamentarians about the consequences of four years of Harirism on the Lebanese economy and society. This sense of unease was reinforced by the unrest in Baalbeck and Hermel where the army had to step in to crush a mini-insurrection by Sheik Subhi Tufayli (the former head of Hizbollah) who in the summer and autumn of 1997 escalated his "revolt of the hungry", calling on residents of the Biqa' and Hermel to de monstrate and to stop paying their taxes and their electricity, water and phone bills (26); as well as by well publicized reports about the size of the budgetary and trade deficits (and by consequence the level of public debt), corruption in the administration, the magnitude of the poverty problem, and the disappearance of Lebanon's middle class. (27)

Getting the 1998 budget approved by parliament was no easy task. Similar to December 1997, the government's economic and social policies were subjected to intense attacks; although parliament approved the budget (with some amendments) at the end of the day, as is always the case in Lebanon. (28) The approval of the 1998 budget did not ease economic difficulties, for the economic slowdown continued. Not only did high interest rates, large budgetary and trade deficits, and bureaucratic red tape deter potential investors, many also preferred to await the outcome of the 1998 presidential election. Saddled by internal divisions, and facing a wary parliament and public, and with only lukewarm Syrian support, Hariri's third cabinet became largely a caretaker government in the remaining months of Hrawi's presidency. In the spring and summer of 1998, Hariri nevertheless scored two minor victories with the successful flotation of two Eurobond issues totaling US$1 billion (i.e., half the US$2 billion that parliament had authorized the government to raise). As the proceeds of the issues were used to help cover the budget deficit and transfer part of the domestic debt to foreign debt, they had no positive impact on economic growth. Hariri also managed to persuade the Saudi government to deposit US$600 million with the Lebanese Central Bank, a measure that was designed to hedge against any depreciation in the value of the LL as a result of the uncertain economic and political situation.

August witnessed renewed tensions between Hariri and Berri over Hariri's refusal to recall parliament from its summer recess to consider a new pay scale for public sector employees, particularly public school teachers and Lebanese University professors, who threatened to strike in protest against low salaries. (29) Hariri's reluctance to issue the decree recalling parliament was triggered, not only by his refusal to consider any increases in public sector salaries until the government secured the resources to finance such increases, but also by his fears that the extraordinary parliamentary sessions would provide his enemies with a platform from which to attack his policies. Despite the erosion in the level of public support for Hariri, very few Lebanese doubted that he would be asked to form the first government in Lahoud's term. Most Lebanese were genuinely surprised by the dramatic tam of events in late November 1998, which culminated with the formation of a new government by Salim Hoss.

THE MANAGEMENT OF THE BUDGET DEFICIT AND PUBLIC DEBT UNDER HARIRI AND HOSS

While opinions about the Hariri years vary markedly, analysts agree that major economic indicators deteriorated during his term in office. One such indicator was the acceleration in the net domestic (public) debt from LL3,097.7 billion in 1993 to LL19,544 billion in 1998 (around 530 percent). As a percentage of GDP, the net domestic debt rose from 33.6 percent to 110 percent for the same years. (30) Recurrent budgetary deficits were behind the acceleration of the public debt. The budget deficit rose from LL1,103 billion in 1993 to LL4629 billion in 1997 (around 319 percent increase). As a percentage of GDP, the budget deficit rose from 8.3 percent to 23.48 percent for the same years.

Tax reform, the expansion of indirect taxes, as well as greater efficiency in collecting taxes all failed to bring state revenues in line with rising expenditures. The rise in government expenditures was triggered by three factors: the rise in spending on reconstruction and infrasructure (especially until 1996); moderate rises in the wages, salaries and compensatory benefits of army officers and public sector employees (especially judges, Lebanese University professors, and public school teachers); and a much more rapid growth in interest payments on the public debt. While the share of interest payments in public expenditures rose moderately from around 26.51 percent in 1993 to 29.74 percent in 1998, interest payments as a percentage of public revenues rose more steeply from 42.23 percent to 52.96 percent for the same years. (31)

By 1996, Hariri and acting Minister for Finance, Fouad Saniora (32), were beginning to show signs of concern, even alarm, at the mounting public debt and the failure to bring down the budget deficit. The proposed budget for 1997 was to include a substantial cut in capital expenditures. (33) In July 1997, the Hariri government drastically increased custom duties on imports of used cars; it also increased duties on most luxury imports. These measures were extremely unpopular and were bitterly fought by importers, particularly dealers in used cars.

The strong public reaction against the June 1997 measures, and the criticism they received in parliament (and from some ministers), forced the government to rescind most of them. High domestic interest rates and opposition to further increases in taxes and customs pushed Hariri and Saniora to tap private international capital markets for commercial loans denominated in foreign currencies. Encouraged by the successful floatation of two Eurobond issues in May and October 1995, Hariri and Saniora fought in 1996 and 1997 to secure more foreign loans in an attempt to switch part of the local debt to foreign debt to benefit from lower interest rates.

Table 3 shows that for every year since 1995 (with the exception of 1996) the rate of increase in the foreign debt was significantly higher than the rate of increase in the domestic debt. Hariri's successors persevered in this strategy of switching from domestic to foreign borrowing. The floatation of foreign currency denominated treasury bonds became the principal means for managing the public debt. Between 1995 and 1998, the Hariri governments raised around US$2.5 billion through the issuing of foreign currency denominated treasury bills. In 1999 alone, the Hoss government raised around US$1.2 billion through the same mechanism. (34) In this respect, there was hardly any difference between the Hariri and Hoss governments.

But what changes did the Hoss government introduce as far as the management of the budget deficit and public debt, and how significant were these changes? The remainder of this section attempts to answer these questions. In its ministerial statement read before parliament on 14 December 1998, the Hoss government vowed to give priority to the problems of budget deficit and public debt. (35) While short of specifics, the statement called for greater efficiency in tax collection, broadening the tax base, reforming the civil service, and eliminating unnecessary government spending. In more than one place, it stressed the need for austerity measures, and for greater budgetary rigor on both the spending revenue. sides, in order to "get the economy out of the vicious circle created by high debt that contributes to large budgetary deficits that in turn add to the public debt and future deficits. (36)

More detailed measures for tackling the deficit and debt problems were spelled out in the "five-year program for financial reform." Approved by the cabinet on 12 June and presented to parliament the next day, the "five-year program" spelled out specific targets for lowering the budget deficit and public debt over a five-year period, and a host of measures to achieve those targets. (37) For the first time in Lebanon's history, a detailed plan for fiscal reform was discussed with business leaders and then endorsed by both the executive and legislative branches of government. The five-year program specified the following targets for lowering the budget deficit and public debt, and increasing tax returns and overall public revenues to be achieved by 2003 (1998 base year). 1:Lowering the budget deficit as a share of public revenues from 56% to 18%, and as a share of GDP from 22.7% to 5.4%; 2:Lowering the public debt as a share of GDP from 118.8% to 96.3%; 3: Reducing interest payments on the debt to 8.7% of GDP; 4 : Raising tax returns as a share of GDP from 12.5% to 20% and overall public revenues from 16% to around 23%. To achieve the above financial targets, the plan identified a host of measures to enhance public revenues from tax and non-tax sources, including: 1. Broadening the tax base, modernizing the tax system and making it more progressive; 2. Introducing a turnover tax on businesses to be changed by 2001 to a value added tax (VAT); 3. Improving the financial performance of public sector entities, particularly Electricite du Liban, and the national (fixed) phone company; and 4. Launching an ambitious privatization program (that would cover the national casino, the airline carrier, communications, electricity and water) with the target of raising at lease US$4 billion to be used entirely for paying off part of the public debt.

The "five-year plan" provided the basis for the 1999 budget, which (after months of delay) was submitted to parliament on 12 July 1999. Except for raising the maximum tax rate on individual and corporate earnings (and exempting a family of five, earning less than LL1 million per month, from paying any income tax), the 1999 budget was not that different from the Hariri budgets, especially those prepared since 1996. As in the past, indirect taxes were to provide the bulk of state revenues. While practically all indirect taxes were raised, the most significant tax hikes included: LL2000 increase in price of each 20 liters of gasoline, four cents a minute surcharge on mobile (cellular) phone calls; and LL500 (33 cents) additional levy on every box of imported cigarettes. (38) Although parliament approved the budget, with only small modifications, (39) most deputies, including the Speaker of the House, objected to the new taxes, particularly to the increase on cigarette (and other tobacco)imports. (40)

Table 2 provides a more detailed look at the changes in the tax code introduced by the Hoss government, while Table 3 compares the distribution of taxes between direct and indirect taxes in Lebanon and a sample of Middle Eastern countries. Both tables are self-explanatory, although it is worth noting that Lebanon has the highest reliance on custom duties.

Throughout 1999 the Ross government strove to keep the deficit within the 45 percent limit set in the budget. In this task it was more successful than previous governments; it held back spending at the 1998 levels until July, then increased it moderately, while increasing revenues at a faster rate via raising most taxes and exerting greater rigor in collecting taxes and other government dues. Greater financial discipline came at a price, however; it accelerated recession and tighter budget controls on spending by socially oriented ministries (such as Education and Health); this hindered the latter's ability to deliver proper services. Budgetary constraints pushed the government to seek parliamentary authorization to issue more foreign currency denominated treasury bills to help cover the budget deficit and manage the public debt. Aware of the magnitude of the debt problem, parliament was quite forthcoming in this area. In 1999, it authorized the government to issue up to US$2 billion in new foreign currency d enominated treasury bills; and in 2000, it gave its authorization for raising a further US$1 billion. (41) By turning to foreign borrowing, the Hoss government was following in the footsteps of the previous Hariri governments. It is worth noting here that Hoss had been a staunch critic of Hariri's foreign borrowing. When soliciting parliament's support (in July 1999) for the US$2 billion issue, Hoss had to admit that he was acting contrary to his previous convictions; he justified his turnaround by referring to mounting ecnomic difficulties and the heavy burden left by the Hariri governments. (42)

A further instrument for tackling the budget deficit and public debt problems--privatization--was highlighted in the ministerial statement of the Hoss government and it received considerable attention in the "program for financial reform" and in the 1999 and 2000 budget proposals. In this domain, the Hoss government was willing to go well beyond what previous governments were willing (or better able) to do in terms of unequivocally embracing privatization as a strategic option, and introducing to parliament (in May 2000) the necessary legislation to set the privatization process on track. (43) The Hoss government had an ambitious program for privatization in the postal, telecommunications, electricity and water sectors. Lebanon's national airline carrier (Middle East Airlines) was also designated as a prime target for early privatization. Estimates on the proceeds from privatization vary markedly. Most economists agree with the government that privatization could yield anywhere between US$4 billion and US$5 b illion over a three year period (2000-2003). (44) In touting the benefits of privatization, Minister of Finance, George Corm, claimed at one point that a successful privatization program could yield as much as US$10 billion to US$12 billion. These figures are utterly unrealistic and were mentioned only in passing. (45)

The pursuit of privatization by the Hoss government was a mere intensification of a trend started in the Hariri period. It is worth noting that Harm was the driving force behind the establishment of Solidaire -- a private company (of which Hariri was the major shareholder), that was granted as the exclusive licensee to rehabilitate the infrastructure and develop the commercial district of downtown Beirut. Hariri also backed the issuing of BOT licenses to Lebanon's two private mobile phone companies (Libancell and Cellis), and took the first steps towards privatizing the postal service. Two further examples from the Hariri period suffice: a) commissioning Sukleen (a private company) to collect garbage and clean the streets over all of greater Beirut (naturally for a fee) and b) initialing an agreement in 1996 with the World Bank, in which the government committed itself to allow the private sector into the electricity sector. (46)

Thus, with the exception of moderately raising direct taxes, the approach of the Hoss government to the problems of the budget deficit and public debt was remarkably similar to that of the Hariri governments. It was based on the same three elements introduced during the Hariri years: higher indirect taxes, foreign borrowing and privatization.

ATTITUDES TOWARD FOREIGN INVESTMENT

Attracting direct foreign investment (DFI) was a main pillar of Hariri's economic program. His Finance Minister Saniora, sought to lure DFI through inter alia lowering corporate taxes, creating free zone areas, and establishing an autonomous investment authority--The Investment Development Authority of Lebanon (IDAL)--to assist foreign investors with administrative matters. The flow of DFI during the Hariri years was well below expectations and was highly concentrated in real estate and telecommunications. Bureaucratic red tape (which continued despite the establishment of IDAL) and growing economic and political uncertainties, especially after 1995, impeded the flow of DFI. At a more fundamental level, the small size of the Lebanese economy, as well as the interrelated problems of weak access to international markets and high local costs of production, limited the opportunities available for DFI. Although Hariri and his ministers were mildly successful in clearing administrative obstacles and reassuring inve stors about the prospects of the economy, they failed utterly in the more difficult task of changing the economic fundamentals. The size of the Lebanese economy remained quite small (growing very slowly after 1995), and hardly any progress was made in the areas of opening new markets and lowering the high local costs of production. In a nutshell, the Lebanese economy was not substantially transformed during the Hariri years and did not have a competitive edge over other regional economies in attracting DFI. There are only partial statistics on the development of DFI in the Hariri period. According to one report, prepared by the Economic and Social Commission for Western Asia (ESCWA), DFI grew by US$166 million between 1996 and 1998 (from US$64 million to US$230 million.) (47) The report describes this amount as miniscule.

At the level of rhetoric, the Hoss government maintained the same positive attitude towards DFI. (48) Not only did Hoss give numerous addresses and press statements in support of DFI, but he also (and in the fashion of his predecessor) visited prestigious projects financed by Arab entrepreneurs, showering praise on their founders. (49)

Policy wise, the Hoss government preserved the autonomy of IDAL (while changing its chairman and expanding the range of services offered), and continued to give priority to removing bureaucratic obstacles to DFI. (50) One early initiative of the Hoss government was to issue a memorandum to all Lebanese embassies abroad, asking them to play a more active role in attracting prospective investors, particularly from among the expatriate community and immigrants from Lebanon. (51) While the memorandum had no effect on increasing the flow of DFI, it probably helped to reassure the international community that the Hoss government planned no major departure from the course set by its predecessors, not at least in the area of foreign investment.

Although the Hoss government raised corporate taxes, it insisted that this move would have no adverse effects on foreign investment. (52) According to Finance Minister Corm "the reduction in taxes by the previous government did not improve the investment climate." (53) Corm went on to say that the Hoss government was raising taxes "because of the budget deficit and tackling the budget deficit would create confidence among different kinds of invests" (i.e., local and foreign). (54) The Director-General of the Finance Ministry, Habib Abu Saquer, reiterated the same message. He observed: "Contrary to what people say, higher taxes are not the major reason why direct investment is low...Most countries in the world have higher taxes and yet the level of direct investment is much higher than here." (55)

While in the opposition, Hariri accused the Hoss government of not doing enough to bring in DFI. Hariri and his allies exploited a few well-publicized cases of Arab investors withdrawing from the Lebanese market, allegedly because of bureaucratic obstacles, to discredit the Hoss government. (56) Hoss reacted very angrily to the charges that his government was not being effective in attracting DFI. He and his ministers lashed out at the former premier, accusing him of orchestrating a campaign to scare away foreign investors by instructing his private television station (Future Television) to broadcast negative reports about economic conditions and the climate for foreign investment since his departure. (57) Not to be outdone, Hariri made the investment climate issue a major theme in his 2000 parliamentary election campaign. In one of his campaign speeches he noted: "We have to encourage investment by removing obstacles from the way of all investors, not by increasing obstacles under the pretext of implementing administrative, legal and other procedures." (58)

In reality, the change of government in late 1998 had little effect (positive or negative) on the inflow of DFI. Remaining bureaucratic hurdles, and the inadequacy of Lebanon's legal system are partially responsible for the limited ability to attract DFI (59); but the main responsibility rests with the basic economic fundamentals which remain unfavorable, namely: a small local market, limited access to foreign markets, and high local costs of production by regional standards. (60) When it came to changing the basic economic fundamentals, the Hoss government was no more successful than its predecessors had been.

STATE-LABOR RELATIONS UNDER THE HARIRI AND HOSS GOVERNMENTS

The relationship between Hariri and labor was confrontational, characterized by repeated clashes over issues of wages, consumer prices (particularly the price of gasoline), workers' fringe benefits, foreign workers, the independence of the labor movement, and political freedoms. (61) Hariri's unwillingness (for fiscal reasons no doubt) to heed the demands for higher salaries by public sector employees, particularly teachers and professors at the Lebanese University, earned hi the wrath from a vocal component of the organized labor force. During Hariri's term in office, the CGTL called for several general strikes and for public demonstrations; the government responded by banning "unapproved" public demonstrations and giving clear orders to the army and internal security forces to disperse any demonstrations. There was also a personal side to the conflict between labor and the Hariri governments. Ilyas Abu Rizk (elected CGTL president in 1993) was a strong willed man, who tried to advance an economic and politi cal agenda, which ran contrary to that of Hariri. The two men, rarely, if ever, got along.

Hariri's departure from office was welcome news to the labor leadership. Relations between labor and the Hoss government got off to a good start with parliament approving a new pay scale for public sector employees (62) and the government lifting the ban on public demonstrations. Reports about the impending prosecution of state officials who allegedly abused office during the Hariri period, and talk about the possibility of recovering at least some of the money they had supposedly embezzled, encouraged the CGTL to believe the the Hoss government was about to put the Hariri era on trial. In late Juanuary 1999, Hoss became the first prime minister in Lebanon's history to preside over a ceremony (and deliver a speech) at the CGTL headquarters; (63) two weeks later Abu Rizk paid an official visit to the Finance Ministry, a first for a CGTL president. (64) But the honeymoon was a brief one, prematurely ending with the adoption of the "five-year program for financial reform" to which labor strongly objected. The op position by Hoss to the election of Abu Rizk to the presidency of the National Social Security Fund (NSSF) further contributed to the rift. Under pressure from business groups who threatened to resign en masse from the NSSF Board, the Ministry of Labor annulled the results of the 19 March election that Abu Rizk had won. In a subsequent election, held on 16 April, the government's representative, Maurice Abu Nader, won the presidency. (65) Abu Rizk felt that he was the victim of a government-business conspiracy (with the participation of six labor delegates on the NSSF Board who voted for Abu Nader on 16 April), and threatened to resign from the presidency of the CGTL (which he did not). (66)

In April, the CGTL held its first demonstration to protest against the new taxes included in the 1999 budget, and to demand higher wages. (67) The demonstration drew a modest crowd and was not accompanied by a general strike; in all likelihood, it failed to have much impact on the Hoss government. (68) While the demonstration was ostensibly held for the above state reasons, Abu Rizk saw in it an opportunity to vent some of his anger at the Hoss government for engineering his overthrow from the NSSF presidency.

By July 1999, the CGTL was ready to present a detailed critique of the "five-year program." (69) On 23 August, Abu Rizk held a press conference, at which he leveled four main criticisms against the aforementioned program: 1) it does not address the social issue, on the contrary it holds the specter of laying off public sector employees, holding down real wages instead of upwardly adjusting them, and withdrawing fringe benefits that workers need; 2) it fails to offer any substantive solutions to the budget deficit and public debt problems, for even if the targets for economic growth set in the plan are achieved (which Abu Rizk doubted) the budget deficit in 2003 would still constitute 96% of GDP; 3) it preserves the fiscal policies of the Hariri governments with their emphasis on raising indirect taxes and proposes a new indirect tax (the value added tax to be introduced in 2001); and 4)it does not seek to lower interest rates, whereby the government could save annually up to LL220billion from every one point decrease in interest rates. (70)

In May 2000, the CGTL agreed to take part in tripartite negotiations with the government and business associations aimed at taking the crunch out of the economic crisis, but it abruptly withdrew from the negotiations when it sensed that neither the government nor business groups had any concrete solutions to the problems that the workers were bitterly complaining about. (71) By late spring, the CGTL renewed its attacks on the Hoss government over the familiar issues of low wages, high indirect taxes (particularly on gasoline--estimated by CGTL sources at LL6,000 per 20 liter tank), and the failure to increase state revenues from such sources as a tax on the banking sector and settlement payments from large tourist establishments which had been built on public seafront property. (72) The CGTL was further aggravated the laying-off of thousands of workers from failing economic establishments. (73) In a strongly worded statement, issued on 22 June, Abu Rizk accused the Hoss government of "strangling those of low income and the poor by its fiscal and economic policies, whose failure had been proven by deepened economic recession...and the spread of poverty to afflict 50 percent of the Lebanese populations." (74) Abu Rizk concluded his statement by issuing a thinly veiled threat: "The Lebanese people who achieved the miracle of liberating the South [from Israeli occupation] will not stand-by idly and watch as the government destroyed them with its defunct policies." (75) Eventually, Hoss had to respond to the mounting attacks and criticisms by labor. In a televised press conference on 5 June, he noted that to pull the economy out of its doldrums the government had to give priority to improving the investment climate, and attracting foreign and expatriate capital. He went on to warn that raising wages, in the prevailing economic conditions, would only exacerbate unemployment. (76) Hariri would not have put it any differently. Naturally, the CGTL was not pleased or impressed with Hoss's brief and negative response to its complaints and demands. Abu Rizk accused Hoss of having turned his back he had strongly backed while in the opposition. (77)

The Hoss government's approach to labor issues was not fundamentally different from that of Hariri. The Hoss government held the line on wages, resisting CGTL pressures to raise the minimum wage. As for foreign workers, the Hoss government maintained the same liberal, almost laissez faire, attitude of previous governments. While the government raised the fees for bringing in foreign workers from India and Southeast Asia and charged more for work permits, this was done for purely fiscal reasons and not as part of a plan to regulate foreign employment. Syrian workers continued to work in Lebanon without work permits.

The only concession that the Hoss government made to labor was to recognize its right to hold public demonstrations. The CGTL organized two demonstrations against the Hoss government in April 1999 and July 2000. While the second demonstration drew a larger crowd than the first, (78) it still failed to impress the government, which insisted that most of those who joined the demonstration were driven by political reasons and not by economic ones. The Hoss government achieved a level of insularity from labor that Hariri could only have dreamed about. While it allowed demonstrations, it took little account of the demands by protestors. This insularity from labor demands (and indeed all public demands) came at a price. By the spring of 2000, not only workers but also a vast majority of Lebanese had lost faith in the ability of the Hoss government to achieve anything. On 3 September 2000, Hoss paid the ultimate price that a politician pays for pursuing unpopular policies and for failing to get the economy moving; t he entire slate of candidates he headed in Beirut's third district lost to a Hariri backed list. Hoss became Lebanon's first incumbent prime minister to lose his parliamentary seat. (79)

RELATIONS WITH BUSINESS

Business groups have always exerted a measure of influence over the setting and implementation of economic policy in Lebanon. The relationship between government and business is a complex and multifaceted one. The government needs the business sector to generate growth, employment and revenues to the state via taxes. Business needs the legal and regulatory framework provided by the state; it also needs the state to arbitrate the conflicts that arise among rival business interests (such as merchants versus industrialists), as well as conflicts between labor and business.

Undoubtedly, Hariri enjoyed a far smoother relationship with business groups than he did with labor. Nevertheless, his governments clashed on a number of occasions with business associations over such issues as: l)the back taxes owed by businessmen (particularly merchants) to the government; 2)wage increments to private sector workers (until 1996); 3)fringe benefits to workers (particularly the transportation and educational allowances that businesses under government pressure had "agreed" to pay to their workers); 4)interest rates which increased the costs of borrowing to businesses; and 5)custom duties on imports of raw materials, and consumer goods.

While ideologically closer to business than to labor, Hariri did support increases in the minimum wage and upward adjustments of wages in the private sector to correct for inflation in 1994 and 1995. Business groups objected to government mandated wage increases, but had to implement them (80) Mounting economic difficulties after 1996 persuaded Hariri to refrain from pushing for further wage increases. The Hariri governments pressured businesses to provide every worker--albeit on a temporary basis--with a LL60,000 per month transportation allowance and an educational allowance for his/her children (depending on the number and ages of children). Business groups, particularly ALI, fought hard against the introduction--and then yearly extension--of these allowances. In spite of opposition from business, governmental concerns about labor's reaction to the withdrawal of this concession ensured its continuation.

To expand state revenues, Hariri's Finance Minister, Fouad Saniora, pursued relentlessly the issue of back taxes that businesses owed, particularly to cover the war years when the government was not collecting taxes. With Hariri's approval, Saniora devised various schemes that included incentives for businesses that paid back taxes in time and penalties for businesses that failed to pay. The issue of back taxes was the source of continuous friction and frequent clashes between the Hariri government and business groups, particularly the BTA. Hariri's policy of backing high interest rates (pursued in part to protect the value of the national currency) created problems for those business sectors that relied on borrowing (mainly merchants and industrialists), and was not popular with either ALI or the BTA, but the policy was extremely popular with the banking sector (which benefited from high interest rates) and the Association of Lebanese Banks.

The Hoss government departed, only in small measure, from the Hariri approach to business. It mostly, however, persevered in the Hariri line. It stood firm on the issue of not raising wages in the price sector (as the Hariri government had done since 1996). It also insisted that businesses keep on paying the educational and transportation allowances to their workers, but resisted all labor pressure for expanding the allowances. It pursued the issue of back taxes with the same vigor as the Hariri governments had done. Finance Minister George Corm (like his predecessor) devised schemes to lure businesses to pay their back taxes; these included the same elements of rewards and penalties. (81) To put off paying their back taxes for as long as possible, businesses invoked the same arguments of harsh economic conditions, the difficulty of assessing revenue from sale made in US dollars given the daily fluctuations in the exchange rates (particularly during the war years and in 1991 and 1992), and the unavailability of business records from the war years. Both the Hariri and Hoss governments tackled the issue of back taxes from a financial and not a legal standpoint. They were primarily interested in augmenting state revenues, and not in prosecuting delinquent businesses. Sensing that money (and not applying the law) was the issue, businesses lobbied extensively to reduce the amount owing in back taxes, and to defer payment for as long as possible.

The Hoss government, however, departed in two main ways from the approach of the Hariri governments in its dealings with business: 1)it increased income and corporate taxes despite the opposition to this move across the business community; and 2)it sought and achieved a moderate reduction in interest rates, a move that was popular with merchants and industrialists, but not with the banking sector (or even with the Lebanese Central Bank). (82) While not insignificant, the changes in the areas of interest rates and taxes should be seen as adjustments to the course set by the former premier, and not as serious deviations from it.

Whether under Hariri or under Hoss, the dialogue between government and business was much more civil that the dialogue between government and labor. Despite its greater civility, such dialogue produced only a few concrete results for business, (83) primarily because the government had to weigh in the competing demands of labor, and give utmost priority to its own fiscal requirements.

CONCLUSION: CONTINUITY AND CHANGE IN ECONOMIC POLICY SINCE HARIRI

The election of a new president and appointment of a new government in late 1998 had only a very limited effect on the direction of economic policy. Those who had criticized Hariri for years adopted essentially the same economic policies and in some cases pursued them even more aggressively. The continuity in economic policy from Hariri to Hoss can be explained in terms of a host of interrelated factors operating at the domestic, regional, international and ideational levels. (84)

Starting at the local level it is imperative to understand the gravity of the economic situation facing the Hoss government upon its assumption of office. The public debt had reached dangerous levels, and was expected to grow even further. (85) Servicing the debt alone in 1998 consumer 75.47 percent of public revenues (42.39 percent of public expenditures). (86) With the salaries of public sector employees consuming another 59.22 percent of public revenues (35.42 percent of public expenditures) the government had very little room for maneuver. (87)

The increase in taxes on personal income and corporate earnings was implemented mainly for political and economic purposes, i.e., to show that the new government intended to distribute the burdens of adjustment more fairly. The Hoss government was under no illusion that direct taxes would, at any point, surpass indirect taxes or even come close to matching them in importance. Hence the Hoss government had to follow in the steps of the Hariri governments and to increase virtually all indirect taxes (including the much hated gasoline tax) to keep the budget deficit within reasonable limits. Recourse to privatization and to borrowing in foreign currencies at commercial rates were hard pills for the Hoss government to swallow, but swallow them it did. As one commentator put it: Hariri chose privatization, while Hoss endorsed it because he had no other choice. (88) As for labor demands for higher wages and more fringe benefits, floss and his ministers had to act with their heads and not their hearts. The economic slowdown that had started in 1996 turned into a recession by 1998. Given the growing number of failing establishments that were downsizing their labor forces, the timing was not right to shove a wage increase (even if a small one) down the throat of business. Pragmatism, tacit (albeit not public) approval of most of the policies pursued by Hariri (especially in the area of managing the public debt), and fear of rocking the boat and thus frightening local and foreign investors all contributed to the decision to stay the course.

At the regional level, one can point to at least two factors that were behind staying the course: 1)continued anxiety about the prospects of reaching a peace agreement between Syria and Israel that would make peace between Lebanon and Israel possible; and 2)the very special economic ties with Syria that precluded the possibility of taking any action to protect Lebanese workers and producers against the inflow of cheaper Syrian labor and products (particularly agricultural goods).

As in all developing countries, some of the strongest constraints on policy choice stem from the international environment. (89) As a small and highly indebted country (with a growing portion of its debt owed in foreign currencies), Lebanon could ill afford to jeopardize its international creditworthiness by reversing course on key issues like privatization, foreign borrowing, curtailing the budget deficit, freezing wages, and protecting the value of the national currency. Concerns about Lebanon's international creditworthiness explain the very nervous reaction of the Hoss government to a June 2000 report by the credit rating agency "Standard & Poor," which threatened to downgrade Lebanon's credit ratings, unless serious efforts were made to tackle the budget deficit and public debt problems. (90) When in September, "Standard & Poor" implemented its threat and downgraded Lebanon's ratings from BB- to BB+, Minister Corm responded by blaming the move on the spending policies of the previous Hariri governments, and on the news that Hariri was likely to become prime minister again. (91)

The need to protect Lebanon's international creditworthiness explains the adoption by both the Hariri and Hoss governments of such measures as: raising taxes and lowering public spending (especially since 1996); maintaining high interest rates; narrowly restricting the bank within which the Lebanese currency is allowed to fluctuate; freezing wages (since 1996); endorsing privatization; and in general following the advice of the IMF and the World Bank.

In a nutshell, the Hoss government was as amenable to advice (pressure) from the EU, the World Bank, the IMF, and similar bodies, as the Hariri governments had been. In the summer of 1999, the IMF gave its full backing to the policies adopted by the Finance Ministry to bring the burgeoning budget deficit under control, Given the neoliberal orthodox nature of such measures, this had been expected. (92) In April 2000, the EU Beirut representative signed a financial protocol with Finance Minister Corm, pledging Euro 50 million in support of the government's financial reform program; the first part of the grant (Euro 30 milllion) was disbursed on 23 August. (93) Also in the summer of 2000, the World Bank threatened to withhold loans to the electricity sector, unless the Hoss government submitted to parliament the necessary legislation to commence the privatization process in this sector. (94) The Hoss government responded promptly, sending to parliament a bill in this regard. (95) As Lebanon's need for soft loans to finance necessary infrastructure works increases and as the size of the foreign debt also rises, the role played by the international environment in constraining the policy choices available to decision-makers is expected to escalate.

The adoption of the above policy measures by different governments is also an indication of the great hold that neoliberal ideology (or orthodox neoliberalism) has over the minds and actions of the Lebanese political and economic elite. (96) This unwavering faith in the private sector can be seen, among others, in the statement by Finance Minister George Corm: "We are proud of the private sector...The business community achieved miracles during the war. You kept factories, shops and banks open. It was a patriotic effort that has allowed this country to look today as well as it does." (97) He went on to say: "Today, I'm looking for a new partnership between government and the private sector to boost the morale of the local business community. Our motto must be 'export or die...'" (98)

But the historic dominance of neoliberal orthodoxy in Lebanon goes beyond support for the private sector. A statesman like Salim Hoss -- who when in the opposition had many reservations about particular aspects of neoliberal ideology (particularly freezing wages, privatization and foreign borrowing) -- felt that once in office he had little choice but to implement all of the tenets of neoliberalism. The Hoss government maintained the freeze on nominal wages, endorsed the currency stabilization policy, and pursued both privatization and foreign borrowing with even greater vigor than the Hariri governments had. A few months after losing power, Hoss commented on the continuity in economic policy between his government and that of the returning Hariri, particularly with regard to tightening government spending, seeking new government revenues including from privatization, and improving the economic climate for existing businesses and potential investors. (99)

But is Lebanon alone in its continued pursuit of neoliberal economic policies, despite changes in government? Not really! Throughout the Arab world, one sees growing evidence of the rise to dominance of neoliberalism in inter alia: the yearning for open markets and DFI, the reduction in governmental social spending and the broadening of the tax base, the welcoming of advice and intervention from the World Bank, and the breaking of old alliances between regimes and labor in favor of new alliances with local and foreign entrepreneurs. Sons succeed their fathers (to positions of leadership) and prime ministers succeed one another, but the overall trend of liberalizing the local economy (while keeping the political system closed) and furthering the process of integration into the global economy continues unabated, and in certain instances, intensifies.

TABLE 1

NOMINAL GDP AND REAL GROWTH RATE OF GDP, 1992-2000 (FIGURES IN LL
BILLION)

GDP      1992  1993   1994    1995    1996    1997    1998    1999

Nominal              9,110  11,122  12,996  14,957  16,200  16,800
Real %                 8.0     6.5     4.0     3.5     3.0     1.0

GDP        2000

Nominal  16,800
Real %      0.0

Source: Ministry of Finance; BDL, Annual Report, selected years; Audi
bank, Annual Report and Quarterly Report selected issues.
TABLE 2

CHANGES IN THE TAX CODE INTRODUCED BY THE HOSS GOVERNMENT, EFFECTIVE
2000

                           TYPE OF TAX

PERSONAL INCOME TAX                  Make more progressive, with
                                     maximum rate
Increased from 10% to 20%

BUSINESS INCOME TAX                  Made more progressive, with
                                     maximum rate
Increased from 10% to 20%

CORPORATE TAX ON PROFITS
Flat rate increased from 10% to 15%

BUILT PROPERTY TAX                   Made more progressive, with
                                     maximum rate
Increased from 10% to 24%

CUSTOM DUTIES
Increase on most luxury goods by up
 to 25%.

MISCELLANEOUS
Increase in fees on work permits
 for foreign workers, passport and
 cellular phone calls.

Source: Lebanon Opportunities, September 2000, p. 43.
TABLE 3

BREAKDOWN OF TAX REVENUES IN PERCENTAGES: SELECTED MIDDLE EASTERN
COUNTRIES

          Taxes on income,    Tax on goods and  Tax on
         profit, and capital  services          international
           (direct taxes)     (indirect taxes)  trade
                                                (custom duties)

Egypt           35.8                27.3             20.7
Jordan          20.0                43.3             34.6
Lebanon         18.6                43.3             59.1
Morocco         27.1                52.0             19.5
Syria           26.1                 4.0             14.3
Tunisia         19.2                27.5             30.6
Turkey          39.9                39.7             17.9

         Other taxes
         (indirect)



Egypt           16.2
Jordan           2.1
Lebanon          4.1
Morocco          1.4
Syria           55.6
Tunisia         22.7
Turkey           2.5

Source: Lebanese Center for Policy Studies, 1999; quoted in Lebanon
Opportunities, September 2000, p. 41.

ENDNOTES

(1.) These changes included raising the maximum tax rate on individual earnings and corporate profits to 15 percent, lowering interest rates on LL deposits by a few points a more rigorous approach to curtailing corruption in the administration, and forming the Economic and Social Council. These changes in economic policy were outlined in the Five-year Financial Reform Program, that was prepared by the Ministry of Finance, approved (with some amendments) by the Council of Ministers at its 23 June 1999 meeting, and submitted the next day to Parliament for consideration (although the government was under no constitutional obligation to do so). The text of Al-Khutah al-Khamsiyyah lil Islah al-Mali was obtained courtesy of the Ministry of Finance. A one page summary of the program (in English) is included in UNDP, Lebanon Development Corporation Report 1999, Report prepared by the Office of the United Nations Resident Coordinator in Corporation with the Council for Development and Cooperation, September 1999, p. 7 .

(2.) Al-turkah al-thakilah (heavy burden) is how ministers in the Hoss government, some parliamentarians and commentators refer to the impact of Hariri policies on the Lebanese economy.

(3.) For a highly favorable review of Hariri's first three years in office see Raouf Abu Zaki's cover story, Hariri: Rajul Al-'am (Hariri: Man of the Year) in Al-Iqtisad wa Al-A'mal (Economy and Business) January 1996, pp. 27-31. See also Abu Zaki' editorial on the eve of Hariri's departure from office Al-Iqtisad wa Al-A'mal, year 21, No. 229, December-January 1999, pp. 22-23. For Hariri's own defense of his economic program see his Al-Hukm wa Al-Mas'uliyyah: Al-Khurugh min al-Harb wa Al-Dukhul fi Al-Mustaqbal (Government and Responsibility: Leaving the War and Entering the Future), Beirut: Al-Sharikah al-Arabiyayah al-Mutahidah lil-Sahafah, July 1999.

(4.) Hariri's economic program and (according to critics) authoritarian style of government ensured that he had his share of critics, including, inter alia, former prime ministers 'Omar Karami and Salim Hoss (the latter replaced Hariri as prime minister in November 1998), deputies Najah Wakim and Nassib Lahoud, former deputy Fouad al-Sand (deputy from 1992 to 1996), and Ilyas Abu Rizk, leader of the labor movement from July 1993 until April 1997. While Hariri's relations with President Ilyas Hrawi were on the whole smooth (except for a few well-publicized episodes of disagreement) he had a more problematic relationship with Speaker of the House Nabih Berri. The sharpest disagreement between the two men (over Hariri's efforts to reshuffle his cabinet and his plans to raise an additional US $1 billion in foreign loans) took place in the summer and autumn of 1997, with politically and economically destabilizing consequences. Hariri's insistence on having the final say on matters brought before the council of Min isters led some of his ministers (particularly Mahmoud Abu Hamdan, Minister of Housing and Cooperatives," Suleiman Franjieh, Minister of Health, and Elie Hobeikah, Minister of Hydraulic and Electrical resources to openly criticize him). Several economists, particularly Kamal Hamdan, Eli Yashoui, and Philippe Chammas also critiqued various aspects of the Hariri economic program. For one critical review of the Hariri period see Mohammad Ibrahim Shams al-Din editorial in Al-Nahar, 28 August 1999, p. 12.

(5.) The US $ value of the LL appreciated by 30 per cent in October 1992, after Hariri was named Prime Minister, the value of the pound continued to appreciate albeit at a very moderate rate, until the exchange rate stabilized at around 1.624 in June 1995, and at a range between LL 1.501 and LL 1,514 for each US$ since September 1999. See Middle East Economic Digest (MEED), 2 June 1995, p. 5; and MEED 16 June 1995, p. 12. Current values for the exchange are taken from Al-Nahar newspaper.

(6.) In the areas of reversing the deterioration in the exchange rate and ending hyperinflation, Hariri's stabilization program was more successful than similar programs pursued in Latin America in the late 1980s and 1990s, where "[I]n the best cases, inflation stabilized at about 20 percent..."See Eduardo A. Gammara, "Maker-Oriented Reforms and Democratization in Latin America: Challenges of the 1990s" in William C. Smith, et. al. (eds.) Latin American Political Economy in the Age of Neoliberal Reform (Miami: North-South Center Press, 1994), p. 2.

(7.) At the initiative of the first Hariri Government, parliament passed Law No. 282/1993, which reduced the maximum tax on individual earnings and corporate profits to 10 percent. See Abdallah Dah, Ghassan Dibeh and Wassim Shahin, The Distributional Impact of Taxes in Lebanon: Analysis and Policy Implications (Beirut: Lebanese Center for Policy Studies, Lebanese Economic Tribune series no. 6, 1999), p. 8. The reduction in the tax rate, accompanied with greater rigor in collecting taxes, raised state revenues (from direct taxes) from LL. 191 billion in 1995 to LL401 billion in 1998. See Al-Diyar, 13 August 1999, pp. 21-22.

(8.) A report issued by the Council for Development and Reconstruction (CDR) estimates expenditures on reconstruction and infrastructure development between December 1992 and the end of 1997 at US$ 4.2 billion, of which close to US$ 2 billion (US 1,986.5 million) came from foreign loans. See Al-Nahar, 14 March 1998, p. 10.

(9.) Dah, Dibeh and Shahin, The Distributional Impact of Taxes in Lebanon: Analysis and Policy Implications, p. 14.

(10.) For a brief and critical overview of the Hariri economic program see Judith Palmer Harik, "Democracy (Again) derailed: Lebanon's Ta'if Paradox" in Bahgat Kourany, Rex Brynen and Paul Nobel (eds.), Political Liberalization and Democratization in the Arab World, Vol. 2, Comparative Experiences (Boulder, Colorado: Lynne Rienner Publishers, 1998), pp. 144-145.

(11.) Hariri was a partial owner and the principal backer of Solidere, a private company that was given exclusive rights to develop the downtown business area in Beirut. Solidere was accused by property owners of forcibly buying (sequestering) their properties at less than their market value. See William Harris. Faces of Lebanon: Sects, Wars and Global Extension (Princeton: Markus Winer Publishers, 1997), p. 286. Hariri's claim that his backing for Solidere was not motivated by private gain was branded "empty talk" by the former head of Beirut's Engineers' Syndicate, the late 'Assem Salam. Salam, an ardent critic of Hariri, had the following to say about the reconstruction policies of Hariri. "When he [i.e., Hariri] invests a hundred million U.S. dollars he is looking to make 500 million; the billion he wants it to earn 2 billion, and the two billion four, and the four eight billion." He went on to note: "... no one questions him, no one tells him no. The whole state has become his private estate to dispose o f as he pleases." 'Assem Salam, Al-l'mar wa Al-Maslahah Al-'Amarah wa Al-Madinah (Reconstruction and the Public Interest: Architecture and the City), p. 143.

(12.) For a review of state-labor relations during Hariri's term in office see Sami E. Baroudi, "Economic Conflict in postwar Lebanon: State labor relations between 1992 and 1997," Middle East Journal, Vol. 52, no. 4, Autumn 1998, pp. 531-550.

(13.) For a review of government relations during the Hariri years with ALI and the BAT (as well as the relationship among the two associations, refer to Sami E. Baroudi, "Business Groups and the Representation of Business Interests in post-war Lebanon: The case of the Association of Lebanese industrialists" Middle Eastern Studies, Vol. 36, No. 2, July 2000, pp. 23-51; and Sami E. Baroudi, "Conflict and Cooperation Among Business Associations in Lebanon: Relations between the Beirut Traders' Association and the Association of Lebanese industrialists" Middle Eastern Studies, forthcoming.

(14.) Beginning in 1995, for example, limited measures were introduced to offer protection to agriculture and to help industry with both protection and some concessionary lending. This was a departure from earlier policies, which left the problems of agriculture and industry to be handled entirely by the private sector.

(15.) Abdo Baaklini, Guilan Denoeux and Robert Springborg, Legislative Politics in the Arab World: The Resurgence of Democratic Institutions (Boulder, CO: Lynne Rienner Publishers, 1999), pp.101-102.

(16.) UNDP, Lebanon Development Cooperation Report 1999, p.5.

(17.) In an interview with Al-Mal wa Al-'Alam, Central Bank Governor, Riad Salame, blamed the economic slowdown in 1996 on the consequences of the Grapes of Wrath operation, and the slowing down in construction due to the oversupply of luxury flats. Al-Mal wa Al-'Alam, June 1997, p.28.

(18.) After 100 deputies designated him, Hariri was asked to form his third government on 24 October 1996. Al-Nahar, 25 October 1996, p.3. Following 15 days of intense bargaining between Hrawi, Berri and Hariri (and Syrian mediation), the government saw the light on the evening of 7 November 1996. See Al-Hayat, 7 November 1996, p.1.

(19.) Al-Nahar, 25 September 1997, pp.1,4; and Daily Star, 25 September 1997, p.1; for a summary of the plan see: Al-Nahar, 23 September 1997, p.6; and Al-Diyar, 26 September 1997, pp.22-23. For criticism of the Hariri US$1 billion plan see the remarks of former Speaker of the House, Hussein al-Husseini in Al-Nahar, 8 September, 1997, p.4.

(20.) In the second vote the following ministers voted against the petrol tax: Elie Hobeika, Suleiman Franjieh, Ghazi Seif el-Dine, As'ad Hardan, Nicholas Fattoush. Fares Boueiz. Nadim Salem. Chahe Barsoumian. Talal Arslan, Yassin Jaber, Mahmoud Abu Hamdan, 'Ali Harajli, and Ilyas Hanna. Fattoush, Salem, Boueiz, Barsoumian, and Hanna were close to President Hrawi, while Hardan, Jaber, Abu-Hamdan and Harajli were considered Berri's men. See Al-Nahar, 25 September 1997, p.1; Daily Star, 25 September 1997, p. 1; and Monday Morning, 29 September 1997, p.5.

(21.) The prime minister did so in a live broadcast on Future Television. See Daily Star, 25 September 1997, p.1.

(22.) After considerable bargaining, the 1998 budget, approved by parliament on January 26, 1998, included parliamentary authorization to borrow up to US$2 billion on international markets through the flotation of Eurobond issues. The money was to be used exclusively to help cover the 1999 anticipated deficit and to transform part of the local debt to foreign debt to take advantage of lower interest rates. See Al-Nahar, 27 January 1998, p.4.

(23.) Writing in Al-Safir, Ibrahim al-Amine commented that Hariri could never understand why despite his stature, personal wealth and international contacts, Damascus always hinted that Berri (and not Hariri) was its principal ally in Lebanon. Al-Safir, 10 August, 1998, p.2.

(24.) See Al-Nahar, 8 December 1997, p.11; 29 December 1997, p.6; 1 January 1998, pp.11-12.

(25.) Ibid.

(26.) Sheikh Tufayli, who had considerable following in the Baalbeck-Hermel aea, declared his "revolt of the hungry" in the middle of 1996. His followers intensified their protest activities in the summer of 1997, especially after Tufayli called for civil disobedience on 4 July 1997. The Hariri government tried a mixture of sticks and carrots to deflate Tufayli's movement. It said that it was willing to spend up to LL150 billion (a little under US$ 100 million) on development projects in the region. In September, the government raised the pledged amount to LL260billion (around USS 250 million) to be financed out of the US $1 billion Eurobond issue. Tufayli remained a thorn in the side of the government, until the end of January 1998 when, following clashes between Tufayli's men and Hixbollah forces, the army raided Tufayli's headquarters on 30 January killing a former deputy who was with Tufayli and losing two soldiers. Tufayli was able (allowed?) to escape. As for the money the government promised, it did no t materialize because of what happened at the 24 September 1997 cabinet meeting, where Hariri's proposal to borrow up to US$ 1 billion and to raise the gasoline tax (to help finance the loan) was defeated. For coverage of the "revolt of the hungry" see: Al-Nahar, 27 June 1997, p.12; 4 July 1997, p.12; 6 August 1997, p.1, 12 August 1997, p. 1; 3 September 1997, p.1; 27 October 1997, p. 8; 13 November 1997, p.2; 1 February 1998, p7; Monday Morning, 11 August 1997, p.9; and The Lebanon Report, No. 1, Spring 1998, pp. 9-10.

(27.) For a sample of reports on poverty and the erosion of the middle class see among others: Antoine Haddad, "The poor in Lebanon," The Lebanon Report, No. 2, Summer 1996, pp. 36-42. See also: AJ-Nahar, 7 November 1996, p. 10; Al-Masira, 30 December 1996, pp. 28-33; Al-Diyar, 6 October 1996, pp. 19-20; Al-Nahar, 17 October 1996, p. 18-19; 14 December 1996, p. 6.

(28.) The budgetary debate lasted for seven days from 20 to 27 January. For coverage of the budget debate see: Al-Nahar, 21 January 1998, pp. 3-5; 23 January 1998, pp.4-5; 26 January 1998, pp. 4-5; 27 January 1998, pp. 4-5; and Monday Morning, 26 January 1998, p.6.

(29.) Under the Taif constitution, convening an extraordinary session of parliament requires either a decree signed by the president and prime minister or a petition from 65 deputies.

(30.) UNDP, Lebanon Development Cooperation Report 1999, p.6.

(31.) DBL, Annual Report, Selected Issues.

(32.) Hariri retained the post of Minister of Finance throughout his years in office; Fouad Saniora was the acting Minister.

(33.) The need to cut capital expenditures was clearly stated in the preamble (fadhlakat) to the 1997 budget as proposed by the Council of Ministers. See Al-Nahar, 27 January 1997, p.6.

(34.) Ministry of Finances figures quoted in Al-Nahar, 7 September 2000, p. 11.

(35.) Text of the ministerial statement (al-bayan al-wizari) of the Hoss government was provided courtesy of the Presidency of the Council of Ministers.

(36.) Ministerial statement of the Hoss government.

(37.) The "Five-year program..." was drawn by two economists close to the Hoss government: Makram Sader, Secretary of the Association of Lebanese Banks, and Charbel Nahas. See Al-Anwar, 15 July 1999, p.5.

(38.) See Al-Safir, 8 April 1999, p. 7.

(39.) The budget was approved by 73 votes, with 15 abstentions, and 40 MPs not attending. See Monday Morning, 26 July 1999, p. 12.

(40.) See Al-Diyar, 24 April 1999, p. 20.

(41.) See al-Nahar, 2 November 1999.

(42.) For the statement by Hoss see Al-Mustaqbal, 16 July 2000, p. 3.

(43.) Parliament adopted a privatization law on 10 May 2000, authorizing the Council of Ministers to create a privatization council, headed by the Prime Minister, and to begin the process of soliciting buyers. The law, however, required the cabinet to obtain parliamentary approval on a case by case basis for every public enterprise that would be privatized. For the text of the 10 May 2000 privatization law see Al-Safir, 10 May 2000, p. 7; and Al-Nahar, 11 May 2000, p. 8

(44.) See in particular the remarks of Nasser Saidi, Minister of the Economy and Foreign Trade, carried in Al-Nahar, 11 May 2000, p. 8; and the remarks of George Corm, Finance Minister, quoted in Al-Diyar, 13 October 1999, p. 18. See also Al-Nahar, 29 November 1999, p. 9. An IMF mission that visited Lebanon in July 1999, put the anticipated proceeds of privatization at US$ 4 billion; half of it to come from the communications sector. Report quoted in Al-Safir, 17 July 1999, p.6.

(45.) Quoted in The Daily Star, 23 August 2000, P. 4. In one of his last (public statements on the subject, Corm claimed that privatization in the (telecommunications sector alone (fixed and mobile) could yield between US$ 6 (billion and US$ 7 billion. Quoted in The Daily Star, 16 September 2000, p. 7.

(46.) The agreement was approved by parliament on 8 February 1997; see Al-Safir, 8 July 2000, p. 7. It was only in July 2000 that the Hoss government adopted a comprehensive plan to restructure the electricity sector that explicitly invited the private sector to participate in the areas of electricity generation, distribution and billing. See Al-Safir, 15 July 2000, p. 8.

(47.) Report quoted in Al-Nahar, 29 September 1999, p. 7.

(48.) See for example, the remarks by Hoss cited in Al-Mustaqbal, 4 January 2000, p. 17.

(49.) See Al-Mustaqbal, 2 July 2000, p. 10.

(50.) For the work of IDAL under the Hoss government see Al-Nahar, 10 March 2000, p. 6; Al-Safir, 24 March 2000, p. 7; and Al-Nahar, 24 March (2000, p. 6, 11. For Hoss's remarks concerning strengthening IDAL see AlMustaqbal, 13 November 1999, p. 11.

(51.) For the text of the memorandum titled, "The investment climate in (Lebanon and government intentions," see Al-Iqtisad al-Lubnani wa al-Arabi (The Lebanese and Arab Economy), Chamber of Commerce, Industry and Agriculture in Beirut and Mount Lebanon, Issue 429, March 1999, pp. 30-31.

(52.) See the remarks of Hoss before a conference on investment, quoted in Al-Iqtisad wa Al-A'mal (The Economy and Business), Year 21, No. 15, June 1999, p. 25.

(53.) Quoted in Al-Mustaqbal (Beirut), 2 July 1999, p. 15. Quotation translated from Arabic by author.

(54.) Ibid.

(55.) Quoted in The Daily Star, 24 July 1999, p. 4.

(56.) There were several stories that received wide coverage by the local press and Future Television about foreign (mainly Gulf) investors voicing criticism about remaining bureaucratic hurdles, corruption, and an overall negative climate for investors. For one such story about an unidentified Saudi investor see AZ-Diyar, 16 July 2000, p. 14.

(57.) See for example, the accusations made by Hoss against Future Television during his campaign to win one of the parliamentary seats for Beirut in the 2000 election; quoted in Al-Safir, 14 August 2000, p. 8.

(58.) Hariri' s remarks were made at a dinner held in his honor by the lawyers and engineers in his Future Management and can be found on his website. http://www.hariri2000.com/news.htm#3.

(59.) For lingering bureaucratic obstacles see, for example, the remarks made by Raouf Abu Zaki, Al-Iqtisad al-Lubnani wa al-Arabi (The Lebanese and Arab Economy), Chamber of Commerce, Industry and Agriculture in Beirut and Mount Lebanon, Issue 429, March 1999, p. 26.

(60.) By high local costs is meant mainly: high prices for land, labor (wages) and electricity, as well as high interest rates. For an overview of such obstacles see the editorial by Raouf Abu Zaki in Al-Iqtisad wa Al-A 'mal (The Economy and Business), Beirut, Year 21, No. 14, May 1999, pp. 4-6.

(61.) Sami Baroudi, "Economic Conflict in Postwar Lebanon: State-Labor Relations between 1992 and 1997,) Middle East Journal, Vol. 52, No. 4, Autumn 1998, pp. 531-550.

(62.) The new pay scale increased salaries in the public sector by around 30 percent effective 1 January 1999. Al-Anwar, 7 December 1998, p. 10.

(63.) See Al-Safir, 29 January 1999, p. 5. For a positive evaluation by Abu Rizk of the Hoss government during its first few months in office see Abu Rizk's interview with Al-Iqtisad al-Lubnani wa al-Arabi (The Lebanese and Arab Economy), Issue 429, March 1999, pp. 32-33. See the remarks of Hoss made before a conference on investment, quoted in Al-Iqtisad wa al-A 'mal (The Economy and Business), Year 21, No. 15, June 1999, p. 25.

(64.) See Al-Diyar, 14 February 1999, p. 9.

(65.) Al-Diyar, 18 April 1999, p. 21; Al-Nahar, 19 April 1999, p.9.

(66.) For coverage of the NSSF episode see Al-Diyar, 20 March 1999, p. 21; 4 April 1999, p. 21; Al-Nahar, 6 April 1999, p. 8; Al-Diyar, 20 April 1999; Al-Nahar, 21 April 1999, p. 8.

(67.) See Al-Diyar, 9 April 1999, p. 21; Al-Anwar, 10 April 1999, p. 8; Al-Diyar, 10 April 1999, p. 21; Al-Anwar, 21 April 1999, p. 8; Al-Diyar, 21 April 1999, p. 21; Monday Morning, 26 April 1999, p. 7.

(68.) One source described the 21 demonstration in the following manner: In the lead were long-time union activists (the old guard) followed by some communist youth, and a group of men dressed in black (because the demonstration took place during 'Ashoura) belonging to the Amal movement and Hizbollah. Al-Nahar, 22 April 1999, p. 7.

(69.) See the statement issued by the CGTL's executive council (al-majlis al-tanfeezi) quoted in Al-Anwar, 3 July 1999, p. 8; see also Al-Anwar, 23 July 1999, p. 8.

(70.) See Al-Anwar, 24 August 1999, p. 8; Al-Diyar, 24 August 1999, pp. 21-22.

(71.) See Al-Nahar, 14 August 2000, p. 7.

(72.) See, for example, the statements of Abu Rizk, cited in Al-Nahar, 10 June 2000, p. 6; Al-Anwar, 30 June 2000, p. 8; Al-Diyar, 30 June 2000, p. p. 10; and Al-Nahar, 11 July 2000, p. 8. See also the CGTL report of 9 July, quoted in Al-Safir, 10 July 2000.

(73.) According to one report, at least 8000 workers petitioned to the Ministry of Labor in 1999 and early 2000 to object to their dismissals from around 40 failing establishments. Al-Safir, 12 July 2000, p. 7. See also Al-Safir, 13 July 2000, p. 7; 14 July 2000, p. 7.

(74.) Quoted in Al-Nahar, 23 June 2000, p. 6.

(75.) Ibid.

(76.) See Al-Nahar, 5 July 2000, p. 6; and Al-Safir, 5 July 2000, p. 7.

(77.) See Al-Safir, 6 July 2000, p. 7; Al-Nahar, 6 July 2000, p. 6.

(78.) The Amal movement, the Kataib party, the Liberal Nationalist Party and the Progressive Socialist Party all backed the 13 July demonstration. See Al-Mustaqbal, 12 July 2000, p. 9.

(79.) Hoss's electoral defeat received extensive coverage in the local press. See for example: Al-Nahar,4 September 2000, p. 1; 5 September 2000, pp. 2,4-5; Al-Safir, 5 September 2000, pp.1-2; Al-Nahar, 7 September 2000, p.1; The Daily Star, 8 September 2000, p.2; Al-Nahar, 8 September 2000, pp.2, 10, 12; 9 September 2000, p. 10.

(80.) Starting in 1967, raising the minimum wage and adjusting wages to reflect inflation could be done through a decree adopted by the Council of Ministers, without requiring an act of parliament. See Sami E. Baroudi, "Economic Conflict in Postwar Lebanon: State-Labor Relations since 1992," op.cit., pp. 533-535.

(81.) See for example the draft law submitted by the Finance Ministry for consideration y the Council of Ministers for settling back taxes. Al-Safir, 14 August 2000, p. 9. The draft law for settling back taxes was approved by the Council of Ministers and signed by President Lahoud in late September 2000. It was expected to be submitted for parliamentary consideration and approval once the new parliament convened in late October 2000. See Al-Nahar, 6 October 2000, p.6.

(82.) For the opposition to lowering interest rates from the banking sector and the Central Bank see: Al-Nahar, 22 January 2000, p. 8; Al-Diyar, 19 February 2000, p. 17; 5 March 2000, p. 17; 2 April 2000, p. 17; Al-Safir, 9 May 2000, p. 7; Al-Nahar, 12 May 2000, p. 9. For the former Finance Minister's own account of his confrontation with the Central Bank and commercial banks over interest rates see George Corm, Al-Fursah al-Di'i'ah fi al-Islah al-Mali fi Lubnan (The Last Opportunity for Financial Reform in Lebanon) (Beirut: Sharikah al-Matbu'at lil-Tawzeen wa al-Nashr, 2001).

(83.) For a summary of the points agreed upon between the Hoss government and business representatives see Al-Safir, 29 August 2000, p. 9. These included among others: 1)allowing industrialists to import fuel directly (still awaiting final approval by the petroleum ministry; 2)setting the rates at which back taxes should be paid (awaiting parliamentary approval); 3)giving businesses up to three months to register their new full-time employees with the NSSF (awaiting changes in the by-laws of the NSSF); and 4)eliminating penalties for not making due payments to the NSSF (as in 3). The dialogue had also achieved significant progress with regard to eliminating customs on imports of raw materials and further lowering them on intermediate products that do not have local substitutes. At the time of writing, none of these agreements had been translated into concrete government actions. This will probably have to await the formation of a new government.

(84.) By ideational level, I mean the economic ideology of the governing elite. For the importance of the ideational level see Stephan Haggard, Pathways from the Periphery: The Politics of Growth in Newly Industrializing Countries (Ithaca, N.Y.: Cornell University Press, 1990). See also Gary Gereffi and Donald Wyman, "Determinants of Development Strategies in Latin America and East Asia," in Stephan Haggard and Chung-in Moon (eds.), Pacific Dynamics: The International Politics of Industrial Change (Boulder, CO.: Westview Press, 1989), p. 48.

(85.) According to the figures of the Finance Ministry, the public debt reached US$ 22.3 billion at the end of 1999 and was expected to grow to US$ 25.2 billion by the end of 2000. Quoted in Al-Safir, 22 August 2000, p. 7. Given a GDP of US$ 16.6 billion (1999) this gives a debt/GDP ratio of 134 percents.

(86.) All figures taken from Banque du Liban, Al-Taqrir al-Sanawi il al-Am 1998 (Annual Report for 1998)(Beirut: Banque du Liban, 1999), p. 46.

(87.) Ibid.

(88.) Layla Khouri, Al-Mal wa al-'Alam (Money and the World), New Year Special Issue 1999, January 1999, p. 27.

(89.) For the role of the international system in constraining economic policy choices see: Gereffi and Wyman, op. cit., pp. 41-44.

(90.) For the reactions of the Finance Minister see Al-Safir, 9 June 2000, p. 9. A subsequent report by credit rating agency "Moody's" also warned the government that it would downgrade Lebanon's ratings unless the government put greater effort into controlling the budget deficit and pursuing privatization. For a summary of the report see The DailyStar, 9 September 2000, p. 7.

(91.) The same "Standards & Poor" report also downgraded the ratings of three leading Lebanese banks that had heavily subscribed to Lebanese foreign currency denominated treasury bills (Eurobonds). For a summary of the report see The Daily Star, 19 September 2000, p. 1; and Al-Diyar, 19 September 2000, p. 1. For the statement of Minister Corm, see Al-Mustaqbal, 20 September 2000.

(92.) Extracts from the IMF report backing the measures adopted by Finance Minister Corm appear in The Daily Star, 17 July 1999, p. 4.

(93.) Al-Sharq (Beirut), 24 August 2000, p. 7; Al-Safir, 24 August 2000.

(94.) Al-Safir, 8 July 2000, p. 7.

(95.) Al-Nahar, 14 July 2000, p. 6; Al-Safir, 15 July 2000, p. 7.

(96.) For the role that neoliberal ideology played in the rise of an open economy in Lebanon in the first decade following independence, see Carolyn Gates, The Merchant Republic of Lebanon (London: Center for Lebanese Studies, in association with I.B.Tauris, 1998). For informative treatments of the influences of orthodox neoliberalism in Latin America see, among others, the chapters in William C. Smith, et. al (eds.), Latin American Political Economy in the Age of Neoliberal Reform; and John Peeler, Building Democracy in Latin America (Boulder, CO.: Lynne Rienner Publishers, 19998), Chapter 5, "Economy, Society and Democracy," pp. 141-164.

(97.) The Daily Star, 28 October 1999, p. 7.

(98.) Ibid.

(99.) Salim Hoss, "Afaq al-Siyassah al-Iqtisadiyyah" (The Horizons of Economic Policy), Al-Nahar, March 2001, pp. 1, 12.

Sami E. Baroudi is Associate Professor of Political Science at the Lebanese American University, Beirut.