LEBANON - The Challenge Of Globalisation - Part 9.

Lebanon has some in-built advantages that should make it one of the countries best equipped to tackle the challenges of globalisation. Its highly entrepreneurial people form an extremely wealthy worldwide diaspora, having demonstrated their business skills even during the tough civil war years from 1975 to 1990. Business networks built over decades in the Arab World and in the West helped a big number of Lebanese people to withstand the worst difficulties associated with recovering from a civil war. But the war had severely eroded Lebanon's position as a Middle Eastern entrepot and banking hub, and recovery is proving to be more difficult than some had thought.

Lebanese economic performance since the end of the civil war has been uneven. The economy made some impressive gains after the launch of "Horizon 2000", a $20 billion reconstruction program in 1993 during Prime Minister Rafic Al Hariri's previous tenure in office. Real GDP grew 8% in 1994 and 7% in 1995. But Israel's Operation Grapes of Wrath in April 1996 stunted economic activity. Real GDP grew at an average annual rate of less than 3% per year for 1997 and 1998 and only 1% in 1999.

The situation is no better this year. In July, the IMF projected that the economy will grow by just 1.3% in 2001. It has forecast a budget deficit of 22.8% of GDP and a rise in gross public debt from 153% of GDP in 2000 to 176% this year. Poverty has greatly increased along with wealth disparity. Yet, harking back to a Phoenician trading tradition, Lebanese businessmen and technocrats are generally confident of dealing with the socio-economic and political issues arising from globalisation. Entrepreneurship is seen as something of a "cultural trait" which most Lebanese are proud of. Lebanon has never faced the "oil curse" and made its wealth primarily on the basis of the people's business skills. There are few leaders of note who are inclined to promote centralisation or socialist tendencies as the solution to the problems facing the country.

Unlike most other countries in the Middle East, Lebanon is well prepared for the challenges of globalisation. A global outlook towards business was the main reason for its pre-1975 status as the prime business hub in the region. Lebanon has historically been committed to the principles of the free market. Successive governments in Beirut since 1990 have been focusing their efforts on one thing: reviving the country's role as the top business centre in the Middle East. But this has proven to be difficult. One main drawback is that the political situation in the region and within the country, combined with an entrenched corruption (see following pages).

Any deterioration in the regional situation automatically has a negative impact on Lebanon's prospects. And the situation in the Middle East is currently the worst it has been for more than a decade. Israeli troops have re-entered and re-occupied parts of Palestinian territories handed over during the mid-1990s. Hardline Israeli Premier Ariel Sharon has shown he is prepared to risk war to prevent further handover of territories controlled by Israel. There seems to be no prospect of an end to violence between the Israelis and Palestinians, which means there is little chance of a calming down of the Lebanese-Israeli frontier. That, in turn, degrades investor confidence in Lebanon.

The political situation within the country does not inspire much confidence either. Although many observers have welcomed the return of Hariri to the premiership, in the hope that he will dynamise the economy as he did during the mid-1990s, the situation is somewhat different today - especially on the regional front. In Syria, the most important neighbour of Lebanon, the stabilising influence of late president Hafez Al Assad is missing.

For its part, the US has adopted a hands-off approach adding a further element of instability. By comparison, the situation between 1992 and 1996, during Hariri's first tenure, was much more optimistic - with the Arab-Israeli peace process having delivered the Declaration of Principles between Israel and the Palestinians in 1993 and a treaty between Israel and Jordan in 1994.

Positive Signals: On the other hand, there have been some positive signals since Hariri took over. On July 25, 2001, Finance Minister Fuad Saniora, a key Hariri aide, launched a Eurobond offering of $400 million with a maturity of seven years. Subscriptions hit $600m in two hours, with $130m coming from overseas. The budget for 2001 permits the government to issue $2 bn worth of bonds as part of a programme to restructure public debt of $25 billion out of which foreign debt is $7.5 bn.

Hariri has reiterated that his government would continue to restructure the economy and cut waste despite internal political opposition. An EU-Lebanon free trade accord is high on his agenda. But while his promises have been welcomed, foreign donors are being cautious and verifying that reform measures are being implemented before providing assistance. The French Development Institute, which has replaced the French Aid Fund, has opened an office in Beirut to make sure that the government is fulfilling the conditions required to obtain financial and economic assistance from the French government. These conditions include combating money laundering and reducing, or at least bringing it under control, the bloated expenses of the Lebanese civil administration.

It is important to note, however, that Lebanon has many friends in the West, with France in the lead. In the coming months, shortly after the IMF issues a report on the Lebanese economy in October, it is expected that Hariri and French President Jacques Chirac will host an international conference to support Lebanon economically. This was disclosed after a July 24 meeting in Paris between the two leaders. Chirac has also played an active role in securing European and World Bank pledges of $438m in aid to boost Hariri's financial reform pledges and privatisation programme.

Reportedly, Chirac and Hariri have agreed on a step-by-step approach concerning conditions imposed by the EU and other financial institutions. Thus every time Lebanon makes progress toward fulfilling the donor conditions, they will provide tangible assistance toward supporting the sagging Lebanese economy. So the current months until end-2000 are regarded as a crucial period for Hariri to come up with a reasonable plan to rescue the Lebanese economy.

Potential Drawbacks: It remains to be seen whether such external assistance based on a French-Lebanese understanding will be sufficient to revive the Lebanese economy. Critics point out that even if Hariri manages to get key globalisation oriented reforms - like privatisation - moving at a faster pace, the net improvements will not be sufficient to help the economy recover. As one example, it has been noted that even if the prime minister manages to privatise key elements of Lebanon's public sector, such as the electricity sector and Middle East Airlines, it will only generate about $5 billion. This is enough just to service the national debt for about a year and a half.

The critics add that privatisation of the public sector, which has become so deeply embedded with cronyism and patronage, requires a calm political environment and the absence of an external threat. Neither is available at the present time. To make matters worse, internally there is a corrosive debate on the sensitive question of "the Syrian presence," which could have negative consequences for domestic stability. The critics note that good intentions are not sufficient, as the collapse of the previous Hoss government showed.

The Hoss government had a strong programme for the privatisation of state companies and a focus on fiscal discipline. The banking and insurance sector saw some reforms in 1999 and a new insurance legislation aimed at consolidating the sector was introduced during that year. But domestic political instability and resistance to change among entrenched vested interests - or cronyism - prevented any significant reform measures from being implemented, especially in terms of privatisation.

Apart from vested interests, there are other impediments to privatisation. For example, in the electricity sector, at present, about 40% of all Lebanese do not pay their electricity bills. This is due to the efforts of various political leaders to exempt various groups from payments in recognition of their "donations" to the war effort. Now that the war is over the Lebanese government remains unable to collect these payments and any effort to enforce payment may prove to have violent consequences.

The Issue Of Syrian Labour Mobility: One of the worst examples of globalisation from a Lebanese perspective is the movement of Syrian labour into Lebanon. It is estimated conservatively that over 1.4 million Syrian unskilled and semi-skilled workers have entered Lebanon in recent years and virtually swept away the Lebanese citizens who fall into the same category. The Syrians, facing much worse conditions back home, are willing to work for less leaving many Lebanese jobless.

The influx of Syrians began in 1991 after the first post-civil war government, backed by Syria, announced the official removal of most travel restrictions between the two countries. According to Lebanese economic experts, cited by the 'Middle East Intelligence Bulletin' in their February 2001 issue, the Syrian labour force is roughly distributed as follows: construction (39%), seasonal agriculture (33%), municipal and sanitation jobs (20%), services, including street vendors and taxi drivers (8%) and industry (2%).

The influx of Syrian workers benefits, apart from the workers themselves, mainly Lebanese elites who own businesses that require unskilled labour. Lebanese employers prefer to hire unskilled Syrian workers over their Lebanese counterparts because the transaction is off the books, allowing them to avoid paying the required minimum wage, evade the social security system and demand long working hours. For the Syrian workers, the benefits are huge. It is estimated that a Syrian taxi driver in Beirut can earn up to $200 per month - around twice the salary of a university professor in Damascus.

Working class Lebanese have suffered, however. Over the last several years, the unemployment rate has hovered around 30% for the Lebanese labour force as a whole. The situation is regarded as being worse for unskilled workers, who cannot compete with their Syrian counterparts. Those who manage to get jobs are often forced to accept wages driven down by Syrian competition and dismal working conditions, and to forgo health insurance and other benefits they once enjoyed.

Some observers believe that the influx of workers is one of the main factors behind the growing resentment against the "Syrian presence" in Lebanon. Grassroots opposition is spreading among the poorer sections of the public, they believe, and is not necessarily limited to the Christian community in the country although it is portrayed in that light. Moreover, Lebanese economists have been pointing out the damage inflicted on the economy as a whole. The economist Bassam Hashem has estimated that the Syrian labour force deprives the Lebanese treasury of an estimated $3 billion per year in permit fees and taxes.

The issue is growing in political significance as well, so much so that high-level government officials have been obliged to comment on the matter. In November 2000, Premier Hariri said: "Perhaps certain jobs that are now being done by Syrians should be done by Lebanese workers". This is an issue that will grow more in importance for Lebanon, especially as the rate of labour force growth in the country is expected to increase.