Public Disclosure Authorized 103201 Lebanon Public Disclosure Authorized Promoting Poverty Reduction and Shared Prosperity Systematic Country Diagnostic Public Disclosure Authorized Eric Le Borgne Thomas J. Jacobs Public Disclosure Authorized Lebanon Promoting Poverty Reduction and Shared Prosperity Eric Le Borgne and Thomas J. Jacobs © 2016 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 19 18 17 16 This work is a product of the staff of The World Bank with external contributions. The findings, interpretations,  and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Contents Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix Abbreviations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Country Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Overarching Constraints Limiting Lebanon’s Development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Evolution of Confessional Governance and Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 The Symbiotic Relationship between Confessional Governance and Conflict. . . . . . . . . . . . . . . . 18 Organization of the Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Annex 1A The Economic and Social Impact of the Syrian Conflict on Lebanon. . . . . . . . . . . . . . 20 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Growth, Poverty, and Jobs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Economic Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Poverty and Jobs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Measurement of Monetary Poverty and Inequality (1961–2012). . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Insights on Poverty Based on Nontraditional Surveys (2010–14). . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Estimated Poverty Impact of the Syrian Crisis (2012–14). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Job Creation and the Twin Goals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Poverty and Inequality in Access to and Quality of Public Services. . . . . . . . . . . . . . . . . . . . . . . . . 50 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Lebanon’s Challenges and Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Overarching Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Nested Challenges and Constraints. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Strengths, Sources of Resiliency, and Opportunities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 Risks and Sustainability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 Macroeconomic and Fiscal Sustainability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 Political and Social Sustainability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .98 Environmental Risks and Sustainability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Infrastructure and Public Service Sustainability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Hydrocarbon Wealth and Risks: Conflict, Macroeconomic, and Fiscal Mismanagement . . . . . 102 Agriculture Sector Risks and Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 Prioritizing Challenges and Highlighting Opportunities. . . . . . . . . . . . . . . . . . . . . . . 107 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 Methodology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 Results of Prioritization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 Opportunities for Unlocking the Overarching Constraints. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 iii Mitigating the Impact of the Overarching Constraints on Development . . . . . . . . . . . . . . . . . . . 114 Opportunities for Unlocking the Nested Constraints. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 Appendix A  Statistical System and the SCD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 Appendix B  Economic Performance and the Civil War. . . . . . . . . . . . . . . . . . . . . . . 125 Appendix C  Supplemental Tables and Figures on Poverty and Access to Public Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 Appendix D  2013–14 Enterprise Survey: Additional Results. . . . . . . . . . . . . . . . . . 135 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 Boxes 2.1 Educational and Occupational Profile of Lebanese Emigrants. . . . . . . . . . . . . . . . . . . . . . . . . . . 37 3.1 Performance of the Information and Communication Technology Sector in Lebanon. . . . . . 67 3.2 EdL: The Poster Child of Confessionally Induced Waste in Public Spending That Plagues Public Finances, Businesses, and Households since 1981 . . . . . . . . . . . . . . . . . . . 68 3.3 The Impact of the Syrian Conflict on Lebanon’s Environment. . . . . . . . . . . . . . . . . . . . . . . . . . . 89 4.1 Impacts of Climate Change on Lebanon. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 Figures 1.1 Perceptions of Corruption and Elite Capture in Lebanon and Comparator Countries, 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1.2 Perceptions of Corruption in Policy Execution in Lebanon and Comparator Regions, 2010. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1.3 Flow of Funds from the Public Sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1.4 Governance Indicators in Lebanon, 1996–2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.1 Drivers of Growth on the Expenditure Side in Lebanon, 1994–2014. . . . . . . . . . . . . . . . . . . . . 26 2.2 Drivers of Growth on the Production Side in Lebanon, 1994–2014. . . . . . . . . . . . . . . . . . . . . . 27 2.3 Impact of Good Governance on Absolute Poverty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 2.4 Correlation between Transparency and Government Effectiveness Worldwide, 2014. . . . . . . 28 2.5 Household Budget Survey Response Rates in Lebanon, by Regions, 2011–12 . . . . . . . . . . . . . 31 2.6 Self-Assessed Economic Classes in Lebanon and Comparator Countries, 2013. . . . . . . . . . . . 32 2.7 Net Job Creation in Lebanon, by Sector, 2004–09. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 2.8 Characteristics of the Labor Force in Lebanon, 2010. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 2.9 Labor Force Participation Rates in Lebanon and Comparator Countries, by Gender, 2010. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 2.10 Emigration Rate in Lebanon and Comparator Countries, by Educational Attainment and Gender, Various Years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 B2.1.1 Specialization and Occupation of Lebanese Emigrants with Tertiary Education . . . . . . . . . . . 37 2.11 Labor Force Participation Rates in Lebanon, by Region, 2010. . . . . . . . . . . . . . . . . . . . . . . . . . . 38 2.12 Employment Status in Lebanon, by Region, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 2.13 Unemployment Rates in Lebanon, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 2.14 Informality Rate in Lebanon, by Wage Quartile, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 iv Contents 2.15 Mean Monthly Earnings in Lebanon, by Wage Quintile and Employment Status, 2010. . . . . 39 2.16 Main Sector of Employment in the Private Sector in Lebanon, by Education Level and Employment Status, 2010. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 2.17 Job Creation in Lebanon and Tunisia, by Size and Age of Firm, Various Years. . . . . . . . . . . . . 40 2.18 Growth of Firms in Lebanon and Morocco, by Age of Firm, Various Years. . . . . . . . . . . . . . . . 41 2.19 Firm Entry in Lebanon and Comparator Countries in the Middle East and North Africa, by Sector, Various Years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 2.20 Obstacles to Firm Operations and Growth in Lebanon, 2013–14. . . . . . . . . . . . . . . . . . . . . . . . 42 2.21 Consistency and Predictability of Policy Implementation as Obstacles to Firm Performance in Lebanon, by Age, Size, Sector, and Region of Firm, 2013–14. . . . . . . . . . . . . . 42 2.22 Delivery of Electricity Services and Firm Performance in Lebanon and Comparator Countries, Various Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 2.23 Delivery of Electricity Services in Lebanon, by Region, 2013–14 . . . . . . . . . . . . . . . . . . . . . . . . 43 2.24 Access to Finance of Firms in Lebanon and Comparator Economies, 2010 . . . . . . . . . . . . . . . 44 2.25 Financial Constraints for Firms in Lebanon, by Size of Firm, 2013 . . . . . . . . . . . . . . . . . . . . . . 45 2.26 Size of Informal Establishments in Lebanon, by Monthly Sales and Share of Firms, 2013–14. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 2.27 Biggest Obstacles to the Operations of Informal Enterprises in Lebanon, 2013. . . . . . . . . . . . 45 2.28 Willingness to Formalize and Main Constraints to Formalization of Firms in Lebanon, by Firm Size, 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 2.29 Perceived Benefits of Formalization in Lebanon, by Firm Size, 2013–14. . . . . . . . . . . . . . . . . . 47 2.30 Creation of Informal Firms in Lebanon, by Owner’s Nationality, 1984–2014. . . . . . . . . . . . . . 47 2.31 Remittances to Lebanon and Comparator Countries, by Size and Origin (various years) . . . . 48 2.32 Frequency of Remittances in Lebanon, by Role in Family and Length of Stay Abroad (various years). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 2.33 Investments in Education and Health of Lebanese Households, by Source of Funds (various years). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 2.34 Gap between Return on Capital and Economic Growth in Lebanon, 1993–2013. . . . . . . . . . . 51 2.35 Public and Private Access to Water in Mount Lebanon, by Income Classes (various years). . . . 52 2.36 Salinity of Public Water in Lebanon, by Income Class (various years). . . . . . . . . . . . . . . . . . . . 52 2.37 Test Scores on Math and Science in Lebanon, by Type of School, 2011. . . . . . . . . . . . . . . . . . . 53 2.38 Economic Background of Students in Lebanon, by Type of School . . . . . . . . . . . . . . . . . . . . . . 53 2.39 Circumstances Contributing to Inequality of Opportunity in Math Test Scores in Lebanon, 2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 3.1 Policy Making and Delivery of Services in Lebanon and Comparator Regions, 2012 . . . . . . . 58 3.2 Perception of Political Interference in Public Employment in Lebanon, 2007 and 2010–11. . . . 58 3.3 Perception of Political Interference in Public Employment in Lebanon and Comparator Economies, 2010–11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 3.4 Central Government Spending in Lebanon, 2002–13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 3.5 Cost of Public Sector Employees as a Share of GDP in Lebanon and Select Countries, 2010–12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 3.6 Fiscal and Primary Balance as a Share of GDP in Lebanon, 1991–2013. . . . . . . . . . . . . . . . . . . 63 3.7 Gross Public Debt in Lebanon, 1991–2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 3.8 Global Competitiveness Index in Lebanon and Comparator Countries, by Component, 2014–15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 B3.1.1 Fixed and Mobile Broadband Prices in Lebanon and Countries in the Middle East and North Africa Region, 2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Contents v B3.2.1 Cumulative Cost of Transfers to EdL, 1992–2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 3.9 Quality of Lebanese Public Finance Institutions, 2008–13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 3.10 Quality and Spatial Inequality in Delivery of Public Services in Lebanon and Comparator Regions, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 3.11 Quality of Public Policy Making and Service Delivery in Lebanon, 2006–2012. . . . . . . . . . . . 73 3.12 Perception of Civil Justice in Lebanon and Comparator Regions, 2014. . . . . . . . . . . . . . . . . . . 74 3.13 Trust in Key Public Institutions in Lebanon and the Middle East and North Africa Region, 2010–11. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 3.14 Ranking on Quality of Institutions in Lebanon and Comparator Countries, Various Years. . . . 76 3.15 Ranking on Corruption in Lebanon and Comparative Countries, 2003–04 and 2012–13 . . . . 76 3.16 Geographic Coverage of Public Services in Lebanon, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 3.17 Equal Access to Public Services in Lebanon, 2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 3.18 Trust in Institutions in Lebanon and the Middle East and North Africa, 2013. . . . . . . . . . . . . 80 3.19 Awareness of Citizens’ Needs in Lebanon and the Middle East and North Africa, 2013. . . . . 81 3.20 Gender Inequality in Lebanon, 2010–14. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 3.21 Gender Inequality in Lebanon and Comparative Countries, 2014 . . . . . . . . . . . . . . . . . . . . . . . 82 3.22 Indicators of Doing Business in Lebanon and Comparator Countries, 2013. . . . . . . . . . . . . . . 83 3.23 Key Constraints to Doing Business in Lebanon, 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 3.24 Regulatory Enforcement in Lebanon, 2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 3.25 Quality of Business Environment in Lebanon, by Region, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . 86 3.26 Access to Finance by Firm Size, Location, and Formal or Informal Status in Lebanon, 2013–14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 3.27 Costs of Environmental Degradation in Lebanon, 2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 3.28 Short-Term Foreign Liabilities and Total Foreign Assets in Lebanon, 1990–2012. . . . . . . . . . 91 4.1 Gross Public Debt in Lebanon, 2012–19. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 4.2 Gross Financing Needs in Lebanon, 2012–19. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 4.3 Effect of a Giant Oilfield Discovery on Internal Armed Conflicts, 1946–2008. . . . . . . . . . . . 103 A.1 Number of Microdata Surveys Deposited in the World Bank’s Central Microdata Library, as of April 21, 2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 A.2 National Absolute Poverty Rates in Lebanon and Selected Comparators, 2000–12. . . . . . . . 122 B.1 Real GDP at Chained PPP in Lebanon, 1970–2010. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 B.2 GDP per Capita at Chained PPP in Lebanon and Comparator Countries, 1970–2010. . . . . 126 B.3 Real GDP at Chained PPP in Lebanon and the United States, 1970–2010. . . . . . . . . . . . . . . . 127 B.4 Postwar Economic Performance in Lebanon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 C.1 Respondents to the World Values Survey in Lebanon and Comparator Countries, by Class and Education Level, circa 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 C.2 Respondents to World Values Survey in Lebanon and Comparator Countries, by Class and Employment Status, circa 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 C.3 Labor Force Status in Lebanon, by Household Income, 2010. . . . . . . . . . . . . . . . . . . . . . . . . . . 130 C.4 Poverty Rates in Lebanon, by Number of Household Members, 2012. . . . . . . . . . . . . . . . . . . 131 C.5 Poverty Rates in Lebanon, by Number of Children, 2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 C.6 Coverage, Human Opportunity Index, and Dissimilarity Index for a Select Set of Countries Based on Math TIMSS Score. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 C.7 Poverty Rates in Lebanon, by Labor Force Status and Educational Attainment of Head of Household, 2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 D.1 Largest Obstacles to Business Operations in Lebanon, by Firm Age, Size, Region, and Sector, 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .135 vi Contents Tables 2.1 Measurement of Poverty and Inequality in Lebanon, 1961–2014 . . . . . . . . . . . . . . . . . . . . . . . . 29 2.2 Job Creation in Lebanon and Comparator Countries in the Middle East and North Africa, by Firm Productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 3.1 Global Competitiveness Index in Lebanon, 2011–15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 3.2 Public Expenditure, Poverty, and Basic Needs in Lebanon, by Region, Various Years. . . . . . . 77 4.1 Risks of Conflict from Hydrocarbon Exports in Lebanon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 5.1 Heat Map of Identified Priority Areas in Lebanon. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 C.1 Marginal Effects from Probit Model Explaining Being in Bottom 40 Percent of Respondents Based on Self-Assessed Ranking of Income Scale in Lebanon, 2013. . . . . . . . . 130 C.2 OLS Regression Explaining Math TIMSS Score in Lebanon . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 Contents vii Acknowledgments This Systematic Country Diagnostic (SCD) was GP, CCSA, or unit Team members led by Eric Le Borgne (lead economist, IBRD), Jobs David Robalino, Haneen Sayed, Thomas Jacobs (principal country officer, IFC), Angela Elzir, Victoria Strokova, Abdoulaye Sy and Paul Barbour (senior risk management Macrofiscal Wissam Harake, Ibrahim Jamali, officer, MIGA) with a core team comprising Samer Matta, Léa Hakim Haneen Sayed, Husam Beides, and Peter Multilateral Investment Persephone Economou Mousley (Beirut office program leaders), Guarantee Agency Léa  Hakim (economist, IBRD), Mouna Couzi Poverty and income Tara Vishwanath, Sarosh Sattar, Aziz (country operations officer), Rapti Gooneskeere distribution Atamanov (principal economist, IFC), Bushra Mohammad Social safety nets Haneen Sayed, Dima Krayem (strategy officer, IFC), Carol Khouzami Trade and Amina El Zayat, Carol Khouzami, competitiveness Abdoulaye Sy, Massimiliano Calì, (operations officer, IFC), and Marcel Rached Peter Mousley, David Francis (investment officer, IFC). Transport and Ziad Nakat, Omar Wahab, Said The core team relied substantially on sector- information and Dahdah (transport), Victor Mulas specific expertise from across the World Bank communication (information and communication technology technology) Group’s units, global practices (GPs), and cross- Urban, rural, and social Chantal Reliquet, Ayah Mahgoub, cutting solutions areas (CCSAs). The following development Caroline Bahnson table identifies team members representing each Water Claire Kfouri of these units, GPs, and CCSAs, who had specific knowledge of and experience in Lebanon and who provided expert input throughout the SCD The team is grateful to the peer reviewers process. Joseph P. Saba (consultant; former Lebanon country director), and Raju Singh (program GP, CCSA, or unit Team members leader) for their insightful and constructive Agriculture Steven Schonberger, Josef Ludger comments. Finally, we would like to thank Loening Shantayanan Devarajan (chief economist), Education Noah Yarrow Ferid Belhaj (country director), Bernard Funck Energy Simon Stolp, Daniel Daurella (global lead), and Auguste Kouame (practice Environment and natural Maria Sarraf, Michael Vaislic manager) for their guidance, support, and resources ­ comments throughout the SCD process. The Finance and markets Peter Mousley, Gabriel Sensenbrenner, Pietro Calice preparation of the report greatly benefited Fragility, conflict, and Spyridon Demetriou, from the close collaboration and strong engage- violence Massimiliano Calì ment of the Lebanese government. Valuable Governance Joey Ghaleb (political economy), information and contributions were provided Francesca Recanatini, Lydia Habhab, Stephanie Trapnell (governance), Lina by Alain Bifani (permanent secretary and direc- Fares and Sepehr Fotovat (public general, Ministry of Finance) and Shadi tor ­ financial management) Karam (adviser to the prime minister). The Health Nadwa Rafeh, Dima Krayem team also thanks Rola Rizk Azour and Hassan International Financial Rapti Gooneskeere, Bushra Corporation Mohammad, Marcel Rached, Krayem (both from the UNDP) for insightful Carol Khouzami comments. ix Abbreviations ANS adjusted net savings BdL Banque du Liban EdL Electricité du Liban GCC Gulf Cooperation Council GDP gross domestic product GNI gross national income CPI consumer price index GTAP Global Trade Analysis Project HOI human opportunity index ICRG International Country Risk Guide ICT information, communication, and technology NBFI non-bank financial institution NGO nongovernmental organization OECD Organisation for Economic Co-operation and Development PLO Palestinian Liberation Organization PPP purchasing power parity SCD Systematic Country Diagnostic SME small and medium-size enterprise TIMSS Trends in International Mathematics and Science Study UNDP United Nations Development Programme UNHCR United Nations High Commissioner for Refugees xi Executive Summary Since independence, Lebanon’s political develop- creation has trailed high growth in the labor ment has been influenced primarily by its evolv- force, and jobs have typically been of low ing confessional system. However, this system, quality. More recently, both poverty and jobs ­ originally established to balance the competing have been negatively affected by the Syrian interests of local religious communities, is ­ conflict and, in particular, by the large influx of increasingly seen as an impediment to more refugees. Lack of quality jobs at home continues effective governance, as it has resulted in a paral- to push a large share of Lebanese, especially ysis in decision making and a general hollowing educated youth, abroad. out of the state. Lebanon’s confessional system In this context, the World Bank Group has has also proven to be extremely vulnerable to undertaken a Systematic Country Diagnostic external influence, which has bred and exacer- (SCD) to identify the main constraints that bated local conflict and violence. make it difficult for Lebanon to generate jobs The Lebanese economy has grown at a mod- (both in quantity and in quality), which is rec- erate pace over the past decades, but growth has ognized in the country as the pathway to reduc- been uneven due to large, frequent, and mostly ing extreme poverty and promoting shared “political” shocks. Real gross domestic product prosperity (the Bank’s twin goals). The SCD is (GDP) grew, on average, an estimated 4.4 percent based on a comprehensive analysis of available from 1992 to 2014, but this performance masks evidence (noting data deficiencies) and has the impact of many domestic, international, benefited from extensive consultations with political, and confessional shocks during this Lebanese experts, private sector representa- period. The latest such shock is the ongoing con- tives, members of the community of nongov- flict in the Syrian Arab Republic, which, given ernmental organizations, and the government the strong links between the two countries, is of Lebanon, among other stakeholders. generating large and negative spillover effects in The SCD posits that at the root of Lebanon’s Lebanon. The country’s macroeconomic frame- failure to generate inclusive growth and jobs is work has, nonetheless, proven resilient to all of the presence of two mutually reinforcing and the large shocks it has faced. pervasive (overarching) constraints. These are Lebanon has struggled to reduce widespread (a) elite capture hidden behind the veil of confes- poverty and to generate inclusive growth, as job sionalism and confessional governance and creation has been weak and poorly distributed. (b) conflict and violence (stemming, in part, from Poverty incidence has been elevated and broadly the broader dynamics of conflict in the Middle unchanged for the past 25 years. Since the end East). These overarching constraints impose a of the civil war, extreme poverty has hovered at heavy burden on the economy, with the  cost of between 7.5 to 10 percent; according to the confessional governance estimated at 9 percent of upper poverty line, about 28 percent of the pop- GDP annually. Illegal activities are not sanctioned ulation is poor. The distribution of poverty has by the state when they involve politically or con- also been unequal, with poverty levels highest fessionally connected or wealthy actors, exacer- in the north and south of the country and in bating elite capture and the patronage system. small, dense pockets in the suburbs of large Economic stakeholders and personal connec- towns, reflecting the unevenness of economic tions (known as wasta) are more likely to influ- growth and development. A key factor underly- ence the execution of policy and enforcement of ing the lack of inclusive economic growth is low the rule of law. Thus elite capture and corruption employment-growth elasticity. In Lebanon, job ­ are endemic and undermine the achievement of Executive Summary 1 the Bank Group’s twin goals in Lebanon. Similarly, intensive margin, enabling reformers to tackle the the costs of the conflict and violence are large and country’s specific bottlenecks directly. As com- recurrent. These include the 1975–90 civil war, mon themes and sectors emerged from the result- which halved the country’s economy, the 2006 ing list of constraints, a list of 11 ranked priority conflict with Israel, which caused direct damages areas was established. This list includes the twin estimated at US$2.8 ­ billion and indirect damages overarching constraints of confessional gover- estimated at US$700 ­ million, and the Syrian con- nance, and conflict and violence, eight nested flict, which has cost the Lebanese economy an constraints, and one foundational constraint estimated US$7.5 billion in forgone output and related to the availability and quality of data. widened the fiscal deficit by US$2.6 billion The final step was to perform sensitivity analysis through 2014. and robustness checks, which found that, reassur- The SCD posits that other (more traditional) ingly, the priorities identified are robust to all constraints are nested within the two overarch- reasonable alternatives used. ­ ing constraints. Nested constraints affecting While Lebanon’s twin overarching constraints Lebanon’s potential to deliver sustained, high are deep-rooted, potential ways to mitigate them economic growth to its people include macro- do exist. These can be classified in two types of economic instability, weak business environ- strategies: (1) those that aim to lessen the over- ment, insufficient investment in infrastructure arching constraints directly and (2) those that (especially in lagging regions), mismatch of aim to lessen the nested constraints by designing skills with labor market needs, and weak insti- a reform program that is incentive-compatible tutions and regulatory framework. The SCD with the overarching constraints. posits that, absent the destabilizing impact of The first strategy carries the potential of a confessional governance and domestic and large development payoff, but, given the deep-​ regional conflicts, these nested constraints rooted and symbiotic nature of the overarching would be significantly less binding than they constraints, it will take time to bear fruit. currently are. Thus constraints specific to the Examples include implementing key outstand- electricity sector or the education system, for ing  elements of the Taef Accord, such as example, are “nested” within these overarching adopting a decentralization law and creating a ­ constraints, which makes reform at the sector lower ­ chamber of parliament to be elected on a level especially challenging and compounds non-confessional basis, improving access to sector constraints. (statistical) information, and promoting politi- To prioritize Lebanon’s development con- cal stability and institutional reform and straints, the SCD team designed a voting method- development. ology that captures the complexity of Lebanon’s The second strategy is more suited to deliver- constraints, is transparent, and is verifiably ing gains in the short term, but given the weight robust. The prioritization process included the of the overarching constraints, these gains are following steps: (1) establish a comprehensive list likely to be more limited in scope. Examples of specific constraints, based on the analytical include conducting a political economy and con- work done in the SCD; (2) request each World flict exposure analysis of nested sectors, devising Bank Group expert who worked on the Lebanon a grand-bargain package of reforms, adopting an SCD to score each of these constraints from least opportunistic approach (that is, readiness to to most binding based on five criteria (impact on seize windows of opportunity when they arise), goals, time horizon of impacts, preconditions, working around elite capture, showing a willing- complementarities, and strength of the evidence); ness for “horizontal” social engagement, and (3) rank the expert scores based on the average managing the influx of Syrian refugees. score of each individual constraint so that the Subject to the design of reforms that are resulting prioritization was conducted at the incentive-compatible with the overarching 2 Executive Summary constraints, the following opportunities could • Improve the business climate to ease the bur- materially improve Lebanon’s development den on the creation and operation of firms prospects: • Increase investments in transportation so that people and products can move efficiently • Reduce macro-fiscal vulnerabilities • Address environmental issues to protect • Improve governance and effectiveness of Lebanon’s natural resources, including water. ­public institutions • Address energy gaps to increase productivity Reforms in these areas must be tackled of the private sector and reduce the macro-­ with a sense of urgency if Lebanon is to gener- fiscal burden ate the number and quality of jobs needed for • Strengthen information and communication its citizens and to achieve progress toward technology so that Lebanon is fully connected reducing extreme poverty and promoting to the global economy and can develop jobs shared prosperity, to avoid further deteriora- needed in the twenty-first century tion in the well-being of citizens, and to man- • Modernize the education sector to ensure that age the added pressures stemming from youth have skills relevant to employers regional conflicts. Executive Summary 3 Résumé Analytique i. Depuis l’Indépendance, le développement oscillé dans une fourchette allant de 7,5 à politique du Liban a été influencé princi- 10 pour cent tandis que le seuil supérieur palement par l’évolution de son système de pauvreté a oscillé autour de 28 pour cent confessionnel. Initialement établi pour de la population. La répartition de la pau- maintenir l’équilibre entre les intérêts des vreté a également été inégale avec des communautés religieuses locales, ce système niveaux qui sont plus élevés dans le nord et est toutefois perçu de plus en plus comme le sud du pays, ainsi que dans certaines un obstacle à une gouvernance efficace, dans banlieues de grandes villes, reflétant ainsi la mesure où il a entraîné une paralysie au le caractère inégal de la croissance écono- niveau de la prise de décision et un blocage mique et du développement. La faible élas- général de l’Etat. Le système confessionnel ticité de la croissance de l’emploi est un des du Liban s’est avéré également extrêmement principaux facteurs contribuant à l’absence perméable aux influences externes, ce qui a d’une croissance économique inclusive. Au nourri et exacerbé les conflits et la violence Liban, la création d’emplois a été inférieure internes. à la croissance de la population active, et ii. L’économie libanaise s’est développée à un les emplois ont généralement été de faible rythme modéré au cours des dernières qualité. Plus récemment, la pauvreté et décennies, mais la croissance a été inégale l’emploi ont probablement été affectés par en raison de chocs importants et fré- le conflit syrien et, en particulier, par l’af- quents, notamment “politiques”, aux- flux massif de réfugiés. Le manque d’em- quels l’économie a été résiliente. Le PIB plois de qualité dans le pays contribue à réel a augmenté en moyenne d’environ 4,4 l’expatriation de nombreux Libanais, en pour cent de 1992 à 2014, mais ce rende- particulier les jeunes diplômés. ment masque l’impact de nombreux chocs iv. Dans ce contexte, le Groupe de la Banque (nationaux, internationaux, politiques et/ Mondiale a mis en place un Diagnostic ou confessionnels) auxquels le Liban a fait Systématique du Pays (DSP) afin d’identi- face au cours de cette même période. Le fier les contraintes auxquelles le Liban est dernier choc est le conflit en cours en Syrie, confronté dans ses efforts de création qui, compte tenu des liens étroits entre les d’emplois. L’emploi est reconnu dans le deux pays voisins, génère d’importantes pays comme la voie primordiale à la réduc- retombées négatives sur le Liban. Il n’en tion de l’extrême pauvreté et à l’accès à une demeure pas moins que le cadre macroéco- prospérité partagée (ce sont les deux objec- nomique du pays a pu résister à tous les tifs du Groupe de la Banque Mondiale). Le chocs importants auxquels il a été jusqu’à DSP est basé sur une analyse complète des présent confronté. données disponibles (en tenant compte des iii. Avec une croissance de faible qualité, le carences des données existantes) et a béné- Liban a peiné à réduire son large taux de ficié, entre autres, de consultations appro- pauvreté et à générer une croissance par- fondies avec des experts Libanais, des tagée (trop peu d’emplois créés et peu représentants du secteur privé, des membres productifs). L’incidence de la pauvreté a d’ONG, ainsi qu’avec le gouvernement été élevée et globalement inchangée au Libanais. cours des 25 dernières années. Depuis la v. Le DSP fait état de deux contraintes fin de la guerre civile, l’extrême pauvreté a dominantes générales se renforçant 4 Résumé Analytique mutuellement, et qui sont à l’origine de Ces contraintes nichées affectent le poten- l’incapacité du Liban à générer une crois- tiel du Liban à assurer une croissance sance inclusive et forte en emplois. économique forte et durable; elles com- ­ Première contrainte  : l’accaparement des prennent l’instabilité macroéconomique, ressources par une élite qui se cache der- un environnement des affaires difficile, une rière le voile du confessionnalisme / gou- insuffisance des investissements au niveau vernance confessionnelle. Deuxième des infrastructures (notamment dans les contrainte : les conflits et la violence (attri- régions qui accusent un retard au niveau du buables en partie à la dynamique générale développement), un déséquilibre des com- de conflit au Moyen-Orient). Ces deux pétences par rapport aux besoins du mar- contraintes dominantes générales sont un ché du travail, des institutions et un cadre lourd fardeau pour l’économie. Par exemple, réglementaire faibles. Le DSP part du prin- le coût annuel de la gouvernance confes- cipe qu’en l’absence de l’impact déstabilisa- sionnelle est estimé à 9 pour cent du PIB. teur de la gouvernance confessionnelle et Les activités illégales ne sont pas sanction- des conflits nationaux et régionaux, ces nées par l’Etat lorsqu’elles impliquent des sous-contraintes imbriquées auraient net- personnalités ayant des connections confes- tement moins de conséquences qu’elles ne sionnelles/politiques et/ou étant riches, ce le sont actuellement. Ainsi, ces deux qui exacerbe l’accaparement des ressources contraintes dominantes ont des consé- par une élite et renforce le favoritisme quences négatives au niveau des secteurs omniprésent. Ce sont l’influence des parte- (par exemple, l’électricité, l’éducation) et naires économiques et les liens personnels rendent toute réforme au niveau sectoriel (appelés “Wasta”) qui sont le plus suscep- particulièrement difficile. tibles d’influer sur l’exécution des politiques vii. Pour établir un classement des obstacles et l’application des lois. L’accaparement des au développement du Liban, l’équipe ressources par une élite et la corruption DSP a conçu une méthodologie de vote sont ainsi endémiques et compromettent la permettant de saisir de manière transpa- réalisation des objectifs doubles  de réduc- rente et robuste la complexité des tion de l’extrême pauvreté et l’accès à une contraintes libanaises. Ce processus de prospérité partagée au Liban. Parallèlement, priorisation comprend les étapes suivantes: le coût du conflit et de la violence est impor- (1) établir une liste exhaustive des obs- tant et récurrent ; ceux-ci incluent la guerre tacles spécifiques, sur la base du travail civile de 1975-1990, qui a réduit de moitié d’analyse effectué dans le DSP; (2) deman- la taille de l’économie, le conflit de 2006 der à chaque expert du Groupe de la avec Israël qui provoqué des dégâts directs Banque Mondiale qui a travaillé sur le DSP estimés à 2,8 milliards de dollars et indi- Liban de classer chacun des obstacles pré- rects évalués à 700 millions de dollars, et, cédents sur la base de cinq critères (impact plus récemment le conflit syrien qui aurait sur l’objectif; durée de l’impact; conditions coûté à l’économie libanaise 7,5 milliards de préalables; complémentarités; force de la dollars en perte de production et creusé le preuve); (3)  ­ classement des notes des déficit budgétaire de 2,6 milliards de dollars experts en fonction de la moyenne des de 2012 à 2014. notes obtenues pour chaque contrainte vi. Le DSP fait état d’autres (mais plus tradi- individuelle de sorte que l’ordre de priorité tionnelles) contraintes imbriquées dans résultant de ce processus est effectué sur les deux principales dominantes que sont une marge intensive, ce qui permet aux l’accaparement des ressources par une réformateurs de s’attaquer directement aux élite, et la fragilité et les conflits. goulots d’étranglement spécifiques du pays. Résumé Analytique 5 Comme des thèmes et des secteurs com- l’accès à  l’information, la promotion d’une muns sont apparus dans la liste des stabilité politique, d’une réforme institu- contraintes, une autre liste de 11 domaines tionnelle et du développement. Des jugés prioritaires a été établie. Celle-ci exemples de la deuxième stratégie incluent : comprend les deux contraintes principales une analyse de la politique économique et que sont la gouvernance confessionnelle et de la vulnérabilité des secteurs concernés les conflits et la violence, huit autres sec- face aux conflits, un ensemble de réformes, teurs sous-jacents, et une contrainte fon- une approche opportuniste, une action damentale qui est la disponibilité des autour de l’accaparement des ressources par données et leur qualité. Finalement (4) une une élite, un engagement social ‘horizontal’, analyse de sensibilité/vérification de la et la transformation de la présence impor- solidité des données a été effectuée et a tante de réfugiés syriens en opportunité. permis de constater, de manière rassu- ix. Sous réserve de concevoir des réformes qui rante, que les priorités identifiées étaient tiennent compte des deux contraintes robustes a différentes méthodes d’agréga- dominantes du Liban, les actions suivantes tion des votes individuels. pourraient sensiblement améliorer le viii. Même si les deux contraintes fondamen- développement du pays: (1) réduire les vul- tales du Liban sont profondément nérabilités macro-budgétaires; (2) ­ améliorer ancrées, il existe des moyens susceptibles la gouvernance et l’efficacité des institutions de les atténuer. Ceux-ci peuvent être ­classés publiques; (3) combler les carences énergé- dans deux types de stratégies: (1) ­s’attaquer tiques afin d’améliorer la productivité du directement aux contraintes dominantes secteur privé et de réduire le fardeau macro- pour les réduire; (2) travailler sur la réduc- budgétaire; (4) renforcer le secteur des tion des contraintes sous-jacentes à travers ­ télécommunications ce qui connecterait la conception d’un programme de réformes pleinement le Liban à l’économie mon- qui tient compte des contraintes domi- diale  et pourrait développer des emplois; nantes existantes. La première stratégie (5) moderniser le secteur de l’éducation pour véhicule un potentiel de réussite important former des jeunes ayant les qualifications au niveau du développement, mais, étant requises par les employeurs; (6) améliorer le donné la nature profonde et symbiotique climat des affaires afin d’alléger le fardeau des deux contraintes dominantes, cette stra- administratif entravant la création d’entre- tégie prendra du temps avant de porter ses prises; (7) accroitre les investissements dans fruits. La deuxième stratégie est plus adap- le secteur du transport pour faciliter la tée pour donner des résultats à court terme, mobilité des personnes et les échanges com- mais étant donné le poids des deux merciaux; et (8) régler les problèmes écolo- contraintes dominantes, ces résultats sont giques afin de protéger les ressources susceptibles d’être de portée plus limitée. naturelles du Liban, y compris l’eau. Les Des exemples de la première stratégie réformes dans ces domaines doivent être incluent la mise en œuvre d’éléments clés de traitées rapidement si le Liban veut générer l’accord de Taëf jusqu’à présent suspendus : le nombre et la qualité des emplois souhaités l’adoption d’une loi sur la décentralisation par la population, stopper la détérioration administrative, la création d’une chambre du bien-être de bon nombre de ses citoyens basse du parlement qui serait élue sur une et, surtout, pouvoir gérer les pressions base non confessionnelle, l’amélioration de résultant des conflits régionaux. ­ 6 Résumé Analytique ‫الملخص التنفيذي‬ ‫الحاصل على شهادات جامعية‪ ،‬يلجأ إلى الهجرة خارج البالد‬ ‫‪ .‬لطالما تأثر لبنان‪ ،‬منذ أن نال استقالله‪ ،‬بنظام الطائفية‬ ‫‪ 1‬‬ ‫ة في مجال العمل ال يوفرها لبنان‪.‬‬ ‫ لفرص نوعي ٍ‬ ‫طلباً‬ ‫السياسية الذي رسم خارطة الدولة عبر العقود‪ .‬وكان‬ ‫ٍ‬ ‫‪ .‬في هذا السياق‪ ،‬قامت مجموعة البنك الدولي بإعداد‬ ‫‪ 4‬‬ ‫الهدف‪ ،‬في األصل‪ ،‬من إنشاء نظام سياسي بطابعه الطائفي‬ ‫تشخيص منهجي للبلد بهدف تحديد العوائق والقيود‬ ‫هو تحقيق التوازن بين المصالح المتنافسة للمجتمعات‬ ‫األساسية التي يواجهها لبنان في مجال خلق فرص العمل‬ ‫ّل هذا النظام ليصبح‬ ‫المذهبية المحلية‪ ،‬ولكن ما لبث أن تحو‬ ‫(من حيث النوعية والكمية)‪ ،‬العامل الذي يعتبر األهم في‬ ‫ّالة‪ ،‬حيث‬ ‫في نظر الكثيرين عائقاً أمام الحوكمة السليمة والفع‬ ‫عملية الحد من الفقر المدقع وتعزيز الرفاه المشترك (تلك‬ ‫واضح في عملية أخذ القرار وصناعة‬ ‫شلل‬ ‫دى إلى ٍ‬ ‫أّ‬ ‫ٍ‬ ‫هي أهداف مجموعة البنك الدولي)‪ .‬يعتمد هذا التشخيص ‬ ‫السياسات وبالتالي إلى إفراغ مؤسسات الدولة‪ .‬كما أثبت‬ ‫على تحليل شامل لألدلّة والحقائق المتوفرة (وتجدر اإلشارة‬ ‫النظام الطائفي في لبنان بأنه الوسيلة األقوى لتعريض البلد‬ ‫هنا إلى محدودية البيانات)‪ ،‬كما استفاد التشخيص من جوالت‬ ‫ّبت في تغذية‬ ‫التدخلت الخارجية التي بدورها سب‬ ‫ّ‬ ‫إلى‬ ‫استشارية مكثفة تضمنت خبراء لبنانيين‪ ،‬وممثلين عن‬ ‫الخالفات والصراعات بين الفئات المحلية‪.‬‬ ‫القطاع الخاص‪ ،‬وأعضاء المجتمع األهلي والمنظمات غير‬ ‫ شهد االقتصاد اللبناني نمواً معتدالً عبر العقود الماضية‪،‬‬ ‫‪.2‬‬ ‫الحكومية‪ ،‬إضافة إلى ممثلين عن الحكومة اللبناينة وآخرين‬ ‫لكن تفاوتت نسبة النمو من عام إلى آخر بسبب الصدمات‬ ‫من المعنيين وأصحاب الشأن‪.‬‬ ‫الكبيرة والمتكررة والتي كان معظمها من الطابع السياسي‪،‬‬ ‫ يفترض التشخيص بأن جذور الفشل في توليد النمو‬ ‫‪.5‬‬ ‫بحيث أبدى االقتصاد صموداً ملحوظا ً في وجه تلك‬ ‫المتكامل وفرص العمل تكمن في عائقين أساسيين‬ ‫الصدمات‪ .‬سجل الناتج المحلي اإلجمالي الحقيقي نمواً بمعدل‬ ‫أوال‪ :‬الحكم الطائفي‪ ،‬أي تولّي الحكم من قبل‬ ‫مترابطين‪ً ،‬‬ ‫‪ 4.4‬بالمئة بين العام ‪ 1992‬والعام ‪ ،2014‬وقد عمل هذا‬ ‫طبقة نخبوية تستخدم ذريعة الطائفية قناعاً لها‪ .‬ثانياً‪:‬‬ ‫األداء على إخفاء آثار العديد من الصراعات (المحلية‪،‬‬ ‫الصراع والعنف الناجمين‪ ،‬جزئياً‪ ،‬عن صراعات واسعة‬ ‫واالعالمية‪ ،‬والسياسية‪ ،‬و‪/‬أو الطائفية) التي واجهها لبنان‬ ‫النطاق في منطقة الشرق األوسط‪ .‬ويفرض هذان العائقان‬ ‫خالل الفترة المذكورة‪ .‬ومن أحدث تلك الصدمات هي‬ ‫ُقدر‬ ‫ء ثقيلة تنهك االقتصاد اللبناني‪ ،‬حيث ت‬ ‫المترابطان أعبا ً‬ ‫الحرب القائمة في سوريا‪ ،‬والتي نظراً للروابط الوثيقة بين‬ ‫الكلفة السنوية للخل الناجم عن الحكم الطائفي بـِ ‪ 9‬بالمئة من‬ ‫البلدين‪ ،‬تتسبب في تداعيات سلبية هائلة ترهق لبنان‪ .‬لكن‬ ‫ُحاسب‬ ‫الناتج المحلي اإلجمالي‪ .‬وبحسب الهيكلية القائمة‪ ،‬ال ت‬ ‫استمر االقتصاد الكلي اللبناني في صموده النسبي أمام‬ ‫الدولة المواطنين الذين يخالفون القانون إذا ما كانوا من‬ ‫الصدمات الكبيرة التي يواجهها البلد حتى يومنا هذا‪.‬‬ ‫المقربين من النخبة المسيطرة طائفياً‪ ،‬أو من هم على صلة‬ ‫ لقد عمل لبنان على الحد من انتشار الفقر وتحقيق نمو‬ ‫‪.3‬‬ ‫ّا يعزز من سلطة النخبة‬ ‫بأصحاب النفوذ األثرياء‪ ،‬مم‬ ‫اقتصادي شامل‪ ،‬وذلك في ظل ضعف فرص العمل وتدني‬ ‫المسيطرة ويغذي نظام المحسوبية‪ .‬كما أن منهجية‬ ‫نوعية النمو‪ .‬ولم تتغير مؤشرات الفقر التي سجلت ارتفاعاً‬ ‫“الواسطة” والعالقات الشخصية مع أصحاب النفوذ غالباً ما‬ ‫ّنت الدراسات بأن نسبة الفقر المدقع‬ ‫منذ حوالي ‪ 25‬سنة‪ .‬وبي‬ ‫تؤثر سلباً على تنفيذ السياسات وتطبيق القانون‪ .‬وهكذا‬ ‫ما بعد الحرب األهلية تراوحت بين ‪ 7.5‬بالمئة و‪ 10‬بالمئة‪.‬‬ ‫ء‬ ‫يتفشى الفساد في أعماق الطبقة النخبوية الحاكمة ليصبح دا ً‬ ‫ومن خالل استخدام الخط األعلى للفقر‪ ،‬أظهرت البيانات أن‬ ‫مزمناً يمنع البلد من تحقيق أهدافه التنموية‪ .‬كما أن كلفة‬ ‫اعتبروا ضمن الفئات الفقيرة‪.‬‬ ‫‪ 28‬بالمئة من إجمالي السكان ُ‬ ‫الصراع والعنف باهظة ومتكررة‪ ،‬فالتاريخ يشهد على‬ ‫متساو‪ ،‬إذ بلغ‬ ‫ٍ‬ ‫كما أن التوزيع المناطقي لنسبة الفقر لم يكن‬ ‫الحرب األهلية )‪ (1990–1975‬التي استنزفت نصف‬ ‫أقصاه في شمال وجنوب البالد‪ ،‬مع تواجد بعض البؤر‬ ‫االقتصاد اللبناني‪ ،‬والصراع مع إسرائيل عام ‪ 2006‬الذي ‬ ‫ّا يدل على‬ ‫الصغيرة والمكتظة في ضواحي المدن الكبيرة‪ ،‬مم‬ ‫تسبب في خسائر مباشرة هائلة بلغت ‪ 2.8‬مليار دوالر‬ ‫عدم التوازن الحاصل في نمط النمو االقتصادي ومسار‬ ‫قدرت بـِ ‪ 700‬مليون دوالر‬ ‫أميركي‪ ،‬وخسائر غير مباشرة ُ‬ ‫ُن‬ ‫ّا العامل األهم في عدم تحقيق النمو الشامل فيكم‬ ‫التنمية‪ .‬أم‬ ‫ً‬ ‫أميركي‪ ،‬والصراع في سوريا مؤخرا الذي كلف االقتصاد‬ ‫في نقص المرونة الالزمة بين عملية التوظيف والنمو‪ .‬وقد‬ ‫جراء‬‫اللبناني حتى اآلن ‪ 7.5‬مليار دوالر أميركي من ّ‬ ‫ارتفاع ملحوظ‬ ‫ٍ‬ ‫تزامنت جهود خلق فرص العمل في لبنان مع‬ ‫الخسائر في القطاعات المنتجة وتوسيع العجز المالي بحوالي‬ ‫في القوى العاملة‪ ،‬لكن افتقدت تلك الفرص النوعية المطلوبة‪.‬‬ ‫‪ 2.6‬مليار دوالر أميركي خالل العام ‪.2014‬‬ ‫وقد تأثرت على األغلب قضايا النمو والفقر وفرص العمل‬ ‫ كما يبين التشخيص بأن هناك قيود أخرى (أكثر تقليدية)‬ ‫‪.6‬‬ ‫مؤخراً بشكل سلبي بسبب تداعيات األزمة السورية على‬ ‫متداخلة ضمن العائقين المترابطين في صميم النخبة‬ ‫ّ‬ ‫الكبير للجئين السوريين إلى البلد‪.‬‬ ‫لبنان‪ ،‬وباألخص التدفق‬ ‫المسيطرة‪ ،‬وقد تمأسست تلك القيود عبر النظام الطائفي‬ ‫وال يزال جزء كبير من اللبنانيين‪ ،‬وباألخص الشباب‬ ‫‪7‬‬ ‫يذيفنتلا صخلملا‬ ‫ ‬ ‫االستراتيجية األولى تحمل إمكانيات عديدة في مجال تحقيق‬ ‫القائم‪ ،‬والوضع الدقيق في البلد‪ ،‬وظروف المنطقة المتضررة‬ ‫ً‬ ‫طويال لحصد النتائج‬ ‫األهداف التنموية‪ ،‬لكنها تتطلب وقتاً‬ ‫جراء الصراعات المسلحة بشكل عام‪ .‬وتؤثر القيود سلباً‬ ‫من ّ‬ ‫نظراً لعمق جذور العائقين‪ .‬أما االستراتيجية الثانية فهي‬ ‫على إمكانيات لبنان في تحقيق النمو االقتصادي المستدام‬ ‫مناسبة أكثر لتحقيق النتائج على المدى القريب‪ ،‬ولكن بشكل‬ ‫الذي يضمن العيش الكريم للمواطنين‪ ،‬بما في ذلك عدم‬ ‫محدود نظراً لعمق القيود‪ .‬نذكر بعض األمثلة حول‬ ‫استقرار االقتصاد الكلي‪ ،‬والمناخ الضعيف ألنشطة األعمال‪،‬‬ ‫االستراتيجية األولى كتطبيق بنود أساسية من إتفاق الطائف‬ ‫واالستثمارات غير الكافية في مجال البنى التحتية (وباألخص ‬ ‫من خالل اعتماد قانون الالمركزية‪ ،‬وإنشاء مجلس مصغر‬ ‫في المناطق االمحرومة)‪ ،‬وعدم التوازن بين الكفاءات‬ ‫أساس غير طائفي‪ ،‬وتحسين‬ ‫ٍ‬ ‫ضمن البرلمان يتم انتخابه على‬ ‫المعروضة وحاجات سوق العمل‪ ،‬وضعف المؤسسات‬ ‫كيفية الحصول على المعلومات اإلحصائية‪ ،‬وتعزيز‬ ‫واألطر التنظيمية‪ .‬كما يفترض التشخيص هذا‪ ،‬بأن في‬ ‫االستقرار السياسي‪ ،‬وإصالح المؤسسات وتطويرها‪ .‬أما‬ ‫غياب نظام الحكم الطائفي والنزاعات الداخلية واإلقليمية‪،‬‬ ‫االستراتيجية الثانية فتتضمن األمثلة التالية‪ :‬العمل على‬ ‫تكون تداعيات القيود المذكورة محدودة أكثر‪ .‬وبالتالي‪،‬‬ ‫ّن حدة التداعيات السياسية واالقتصادية‬ ‫تحليل شامل يبي‬ ‫القيود التي تتعلق بقطاع الكهرباء وقطاع التعليم‪ ،‬على سبيل‬ ‫بالنسبة للقطاعات المتداخلة‪ ،‬وتصميم حزمة كبيرة من‬ ‫المثال ال الحصر‪ ،‬فهي متداخلة ضمن العوائق األخرى‬ ‫ُتاح‪،‬‬‫اإلصالحات‪ ،‬وفرض نهج االستفادة من الفرص حينما ت‬ ‫ّا يؤدي إلى تعطيل العمليات اإلصالحية وإلى‬ ‫المترابطة‪ ،‬مم‬ ‫والعمل على موضوع الطبقة النخبوية المسيطرة‪ ،‬والمشاركة‬ ‫تفاقم التداعيات السلبية على القطاعات األخرى‪.‬‬ ‫االجتماعية “األفقية”‪ ،‬وإدارة قضية النزوح السوري إلى‬ ‫ وبهدف وضع العوائق التي تعرقل الجهود التنموية على‬ ‫‪.7‬‬ ‫لبنان وتحويلها إلى فرصة محتملة‪.‬‬ ‫سلم األولويات‪ ،‬قام فريق البنك الدولي بتصميم نظام‬ ‫ إذا تم تصميم اإلصالحات التي تفرض حافزاً أقوى في وجه‬ ‫‪.9‬‬ ‫فاف‬ ‫تصويت للتحقق من مدى حدة تلك العوائق بشكل ش ّ‬ ‫العائقين القائمين‪ ،‬سوف تتحسن آفاق التنمية في لبنان‬ ‫وسليم‪ .‬تضمنت عملية تحديد األولويات الخطوات التالية‪:‬‬ ‫بشكل جوهري‪ ،‬وذلك عبر (أ) الحد من ضعف اإلطار‬ ‫)‪ (1‬إعداد الئحة شاملة بالعوائق والقيود وفقاً للعمل التحليلي‬ ‫ّالة في المؤسسات‬ ‫المالي الكلي‪( ،‬ب) تعزيز الحوكمة الفع‬ ‫الذي يستند عليه هذا التشخيص؛ )‪ (2‬الطلب من خبراء البنك‬ ‫العامة‪( ،‬ج) معالجة الثغرات في قطاع الطاقة بهدف زيادة‬ ‫ّمين على التشخيص بتحديد العوائق من األكثر إلى‬ ‫الدولي القي‬ ‫إنتاجية القطاع الخاص والحد من األعباء المالية‪( ،‬د) تعزيز‬ ‫ء على ‪ 5‬معايير (تداعيات تلك العوائق‬ ‫األقل وقعاً‪ ،‬وذلك بنا ً‬ ‫قطاع تكنولوجيا المعلومات واالتصاالت لربط لبنان‬ ‫دة الزمنية للتداعيات‪،‬‬ ‫والقيود على األهداف المرجوة‪ ،‬والم ّ‬ ‫باالقتصاد العالمي وخلق فرص العمل المطلوبة في القرن الـ‬ ‫ّة األدلة)؛ )‪(3‬‬ ‫ّلة‪ ،‬وقو‬ ‫ُكم‬‫ُسبقة‪ ،‬والعوامل الم‬ ‫والشروط الم‬ ‫‪( ،21‬هـ) تحديث قطاع التربية والتأكيد على ضرورة تزويد‬ ‫وتحديد األولويات الناتجة عن معدل درجات التصويت‬ ‫الشباب بالمهارات بحسب احتياجات سوق العمل‪( ،‬و)‬ ‫ّا يسمح لإلصالحيين مخاطبة‬ ‫بحسب الهامش المكثف – مم‬ ‫تحسين مناخ أنشطة األعمال وتخفيف األعباء في مجال‬ ‫التحديات التي تواجه مسار التنمية‪ .‬وقد نتجت عن عملية‬ ‫تأسيس الشركات وتشغيلها‪( ،‬ز) زيادة االستثمارات في‬ ‫التصويت هذه الئحة تحدد ‪ 11‬قطاعاً ضمن سلم األولويات‪،‬‬ ‫قطاع النقل لتسهيل حركة األشخاص والبضائع‪( ،‬ح) معالجة‬ ‫عائقي نظام الحكم الطائفي والصراعات‪/‬العنف‪،‬‬ ‫ّ‬ ‫وقد شملت‬ ‫قضايا البيئة لحماية الموارد الطبيعية في لبنان‪ ،‬بما في ذلك‬ ‫توفر البيانات‪ .‬وأخيراً‬ ‫إضافة إلى القطاعات المتداخلة وعدم ّ‬ ‫ّه إلى البعد الطارئ عند‬ ‫الموارد المائية‪ .‬كما يجب التنب‬ ‫)‪ (4‬تم التحقق من دقة التحاليل وقوة األدلة‪ ،‬وقد تم التأكد من‬ ‫ً‬ ‫تصميم البرنامج اإلصالحي للقطاعات المذكورة آنفا‪ ،‬إذا ما‬ ‫ّبعة بالنسبة إلى تحديد األولويات‪.‬‬ ‫متانة المنهجية المت‬ ‫أراد لبنان خلق الوظائف الكافية ذات النوعية‪ ،‬إلفادة‬ ‫ في حين أن جذور العائقين التوأم المترابطين عميقة في‬ ‫‪.8‬‬ ‫المواطنين وتحقيق هدفي الحد من الفقر المدقع وتعزيز الرفاه‬ ‫صميم النظام‪ ،‬هناك وسائل للحد من تأثيرهما‪ ،‬نصنفها‬ ‫المشترك‪ ،‬وذلك لتجنب تفاقم األوضاع المعيشية‪ ،‬ومعالجة‬ ‫كاآلتي‪ (1) :‬استراتيجية تهدف مباشرة إلى الحد من تفاقم‬ ‫األعباء اإلضافية التي تفرضها الصراعات اإلقليمية على‬ ‫تداعيات العائقين المذكورين؛ )‪ (2‬واستراتيجية ترمي إلى‬ ‫وجه الخصوص‪.‬‬ ‫ُبطل النظام القائم‪.‬‬ ‫كحافز أقوى ي‬ ‫ٍ‬ ‫تطوير برنامج إصالحي‬ ‫يذيفنتلا صخلملا‬ ‫‪8‬‬ ‫ ‬ Chapter 1 Country Context Background equitable development, but instead reinforced sectarian cleavages and grievances. Numerous Lebanon is a small, open economy of high-­middle- donor conferences in the 2000s were successful income status with a population of 4.5  million in mobilizing much-needed financial assistance people in 2013. Gross domestic product (GDP) for the country, but most of it went to financing per capita was about US$17,390 in purchasing the country’s burgeoning debt and stabilizing the power parity (PPP) terms and US$9,905 in cur- currency. As such, donor funding contributed rent dollars in 2013. Services and trade are the little to the efficient targeting of much-needed most important sectors, with tourism and finan- social service provision and the promotion of cial services forming the backbone of the national equitable economic growth and job creation. economy. The country has experienced civil war, Despite these challenges, the country has external conflicts, and several waves of Palestinian experienced periods of economic boom driven and, more recently, Syrian refugees. In spite of its primarily by high growth in the banking sector political instability, the country is well known for in some years of global turmoil and, more its high level of human development and open recently, a “muddle through” period of low economy as well as a large, educated, and diversi- growth due to insufficient policy reform as the fied diaspora (World Bank 2010b). regional spillovers have intensified in the last two The country is acutely fragile, with elevated years. This situation is becoming even more ten- risks of violence and conflict due to the impact of uous as Lebanon tries to cope with the deepening a confessional system of governance that has and prolonged impact of the Syrian conflict, increasingly led to paralysis of decision making which has brought a massive influx of refugees and is prone to external influence.1 This fragility and the need to manage tensions generated by has been exacerbated by the ongoing spillover opposing Lebanese confessions supporting dif- from regional conflicts, including the ongoing ferent sides of the Syrian crisis. As a result, war in the Syrian Arab Republic. Fragility and Lebanon has very little capacity to absorb or vulnerability are a product of decades of recur- manage new shocks and stresses or to achieve rent conflict and violence, political instability, long-term, sustainable growth and development. and deep social and economic inequalities. This The Lebanese economy has grown at a mod- situation has hollowed out the state in the face of erate pace over the past decades, but growth has confessional or sectarian interests and the imper- been uneven due to large, frequent, and mostly ative of preserving confessional peace at the “political” shocks, to which the economy has expense of effective governance and efficient shown remarkable resiliency. Real GDP grew, ­service provision. on average, an estimated 3.6 percent from 1965 Apart from the high social costs and destruc- to 2014 (4.4 percent from 1992 to 2014),2 but tion of the social fabric of the country, the these figures mask the impact of many domestic, Lebanese economy suffered tremendously from a international, political, and confessional during prolonged civil war that lasted from 1975 to 1990 this period. The latest is the ongoing conflict in and resulted in devastating material damage to neighboring Syria, which, given the strong link- infrastructure and loss of productivity. While ages between the two countries, is generating modest growth resumed following the end of large and negative spillover effects in Lebanon. hostilities in 1990, this growth did not result in Country Context 9 Lebanon has weathered repeated and large The prevalence of nonmonetary poverty in ­certain shocks relatively well and—at least compared to groups reflects pervasive inequities and lack of what many might have expected—the country shared prosperity in Lebanon today. has demonstrated much resilience. The country, Lebanon has failed to generate inclusive for example, is proud to be one of few nations growth, as job creation has been weak and of low never to have defaulted on its sovereign debt, quality. A key factor underlying the lack of inclu- even after experiencing 15 years of civil war and sive economic growth is low employment-growth the world’s largest ratio of debt to GDP in the elasticity, which, at 0.2, is low even by regional mid-2000s. standards. In Lebanon, job creation has trailed Lebanon has struggled to reduce widespread the high growth in the labor force,5 and the jobs poverty, which remains at high levels and exhib- that have been created have typically been of low its considerable geographic and social variation. quality and low productivity in sectors such as Based on available (but unsatisfactory) data, pov- services, which contributed to a third of jobs cre- erty incidence has been elevated and broadly ated during the 2004–09 period. More recently, unchanged for the past 25 years. This is the case both poverty and jobs have been negatively whether poverty is measured using the lower affected by the Syrian conflict and, in particular, (extreme) or upper poverty lines.3 Since the end by the large influx of refugees. Confronted with a of the civil war, extreme poverty has hovered at bleak record on poverty reduction and an inabil- between 7.5 and 10 percent, while, based on a ity to boost shared prosperity, Lebanese stake- wider measure of poverty (the upper poverty holders revealed in a World Bank (2014f) country line), about 28 percent of the population is poor.4 survey that social protection and job creation The distribution of poverty has also been unequal, were their second and third development priori- with poverty levels highest in the north and south ties, respectively (after public sector governance). of the country and in small, dense pockets in the In fact, they ranked job creation as the most suburbs of large towns, reflecting the unevenness important factor for reducing poverty and the of economic growth and development. Poverty third most important for boosting shared pros- has been widespread and persistent since 1990, perity (after a growing middle class and consis- contrasting sharply with progress made between tent economic growth). 1961 and 1974, when poverty dropped from 50 to Lack of quality jobs at home continues to 22 percent (although data comparability is an push a large share of Lebanese abroad, especially issue, as detailed in chapter 2). educated youth, and this exerts a negative impact In addition to monetary poverty, a broader on the economy’s longer-term potential and the segment of the population suffers from nonmon- Lebanese polity. This outmigration of qualified etary dimensions of poverty (for example, inade- youth is a significant loss to the economy, as the quate levels of education, health care, and access country is losing a productive resource and hav- to basic infrastructure). Although Lebanon is an ing to compensate by hiring expatriate workers. upper-middle-income country, weak and deteri- The uneven distribution of social and physical orating public institutions mean that the state is infrastructure in Lebanon is an important factor unable to deliver satisfactory public services limiting economic opportunities and improve- widely to the population. While more affluent ments in quality of life. Geographic disparities are citizens are able to compensate by purchasing exacerbated by spatial variation in infrastructure private goods and services (for example, private and service delivery. Areas where services and schooling, bottled water, and electricity infrastructure are especially inadequate are more ­ generators), the poor and lower-middle classes likely to have population groups who are excluded are unable to compensate fully for their limited and have limited access to o ­ pportunities. access to basic services. This inability adversely However, beyond and above the stark spatial affects their living conditions and quality of life. inequality, the country suffers from relatively 10 Country Context weak basic infrastructure, which lowers people’s impedes economic analysis at the macroeconomic job opportunities and quality of life and stifles the and sectoral levels. These deficiencies include (a) country’s long-term economic growth. Lebanon’s the lack of regular information on the develop- underdeveloped infrastructure is one of the most ment of labor markets and living conditions of important factors explaining the poor quality of households; (b) weak balance of payments growth and stagnant levels of poverty. statistics; (c) weak inflation statistics; and (d) long ­ The nature of Lebanon’s post–civil war delays (up to three years) in the release of annual reconstruction has resulted in a macroeconomic ­ national accounts. Although the weaknesses of environment characterized by structurally weak the statistical system are gradually being public finances that create large vulnerabilities for addressed, the current state of the system signifi- the economy. Immediately after the end of the cantly limits the ability to analyze Lebanon’s civil war and in the absence of donor financing, growth dynamics (Berthelemy, Dessus, and Lebanon financed its large reconstruction effort Nahas 2007).8 Most important for this Systematic through borrowing.6 The interest rates at which Country Diagnostic (SCD), the weaknesses of the the debt was contracted were initially very high data on both poverty and income distribution due to a period of triple-digit inflation and a constrain the analysis of progress toward the twin sharp devaluation of the currency at the end of goals. It  is with these important limitations and the civil war. By the time inflation and the cur- caveats in mind that this SCD was undertaken. rency had stabilized, the debt stock had risen markedly, especially when compared to the recovery in economic growth. This generated Overarching Constraints concerns about the sustainability of debt and Limiting Lebanon’s elevated Lebanon’s risk premium, which, in turn, ­ worsened debt dynamics and stymied the econo- Development my’s growth potential. At the root of Lebanon’s failure to generate inclu- While Lebanon faces stark and pressing devel- sive growth and jobs are two mutually reinforc- opment challenges, efforts to improve the quality ing and pervasive (overarching) constraints. of institutions and promote growth have been These are (1) elite capture hidden behind the veil limited. Due to the difficulty in reaching consen- of confessionalism or confessional governance sus, pressing and large constraints on Lebanon’s and (2) conflict and violence stemming, in part, economic development remain unaddressed, from the broader dynamics of conflict in the although in many (maybe most) cases the solu- Middle East. While the SCD stresses the impact tions are well known and well ­documented. These of these overarching constraints on the country’s missed opportunities for reform are evident in the development, many other factors have also con- deteriorating infrastructure sector (especially the tributed to Lebanon’s failure to reduce poverty electricity sector), inability of public institutions and to achieve high, sustained, and inclusive to provide a satisfactory level of services, anti- growth. This chapter provides an overview of the quated business environment, and unsustainable origin and evolution of these overarching and macroeconomic environment, among others. mutually reinforcing/symbiotic constraints, and Major deficiencies exist in the data about chapter 3 describes and analyzes them in detail. Lebanon’s poverty and income distribution as well The two constraints impose a heavy burden as its economic and governance measurements. on the economy, with the cost of confessional Beyond the weak quality, poor reliability, and lim- governance—the first overarching constraint—­ ited availability of data needed to assess progress estimated at 9 percent of GDP annually (Chaaban toward the World Bank Group’s twin goals of pov- 2014). Illegal activities are not sanctioned by the erty reduction and shared prosperity,7 the weak- state when they involve politically or confession- ness of the statistical system is widespread and ally connected or wealthy actors, exacerbating Country Context 11 Figure 1.1  Perceptions of Corruption and Elite Capture in Lebanon and Comparator Countries, 2013 100 90 % of respondents agreeing 80 with the statement 70 60 50 40 30 20 10 0 Over the past two Corruption is a The government is The government is years, the level of serious problem or entirely or to a large very ineffective or corruption in the a problem in the public extent being run by a ineffective in the country has increased sector of your country few big entities fight against a lot or a little serving their own corruption interests Lebanon Serbia Tunisia Colombia Turkey Source: Transparency International 2013. elite capture and the pervasive patronage system Figure 1.2  Perceptions of Corruption in figure  1.1). Economic stakeholders and per- (­ Policy Execution in Lebanon and sonal connections (known as wasta) are more Comparator Regions, 2010 likely to influence the execution of policy and 7.0 enforcement of the rule of law (­ figure 1.2). For 6.0 Scale (1 = hardly ever; example, funds from the Lebanese public sector 7 = almost always) 5.0 5.0 5.0 5.0 4.7 4.7 are equally as likely to flow to kin and family as 4.4 4.0 to the needy and poor. Public servants or superi- 3.0 3.0 3.0 3.0 ors directly pocket 25 percent of funds, com- 2.0 pared to about 10  percent in the Organisation 1.0 for Economic Co-operation and Development 0 (OECD) countries (Figure 1.3). Elite capture and Firms kickbacks = Officials treat Personal corruption are endemic. procurement contracts some groups unfairly contacts = licenses The cost of the conflict and fragility—the Lebanon Middle East and North Africa OECD second overarching constraint—is large and ­ Source: Quality of Government Institute 2010. ­ recurrent. Throughout its history as a state, Lebanon has frequently been affected directly or indirectly by domestic and regional conflicts million and US$800 million (World Bank whose economic and social costs have been 2010b), and, more recently, the Syrian conflict, high and had a long-lasting impact on the which cost the Lebanese economy US$7.5 bil- ­ country. These conflicts include the 1975–90 lion in forgone output and US$2.6 ­billion in lost civil war, which halved the country’s economy, revenue and additional public spending between the 2006 conflict with Israel, which caused 2012 and 2014 (World Bank 2013c). direct damages estimated at US$2.8 billion and Other (more traditional) constraints are indirect damages estimated at between US$700 nested  within the two overarching constraints. 12 Country Context Figure 1.3  Flow of Funds from the Public Sector OECD 69% 7% 13% MENA 49% 17% 12% Lebanon 28% 30% 18% Bosnia & 28% 28% 11% Herzegovina Serbia 38% 20% 13% Colombia 45% 13% 22% 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 Needy poor Kin/family Middlemen/consultants Public employee’s Superiors of the Other own pocket public employee Source: Quality of Government Expert Survey, 2010. These include macroeconomic instability, weak quotas and electoral geography rather than actual business environment, insufficient investment in needs. With regard to the dynamics of regional infrastructure (especially in lagging regions), conflict, the infrastructure sector has been sig- mismatch between skills and labor market needs, nificantly affected by both the physical damage and weak institutions and regulatory framework. caused by the 2006 Israeli military operation and Chapter 3 provides a detailed analysis of these the pressure exerted by the large number of key nested constraints. The SCD posits that, Syrian refugees currently in Lebanon. The influx absent the destabilizing impact of confessional of refugees has severely strained the capacity of governance and domestic and regional conflicts, water, sanitation, electricity, and solid waste these nested constraints would be significantly management and municipal services, including less binding than they currently are. This magni- in terms of access, distribution and quality fying impact is best illustrated by two examples (World Bank 2013c). related to infrastructure and governance. The second example is the gradual push into a The first example is the deleterious impact on governance trap. This push has occurred through the infrastructure sector. The strong influence of several mutually reinforcing channels. First, the private sector and sectarian interests in govern- confessional system of government, with its focus ment, which is facilitated by the confessional sys- on balancing and seeking consensus among all tem of governance, has both impeded the ethnic and religious communities (based on the equitable and efficient distribution of invest- exercise of veto rights), gives rise to an unstable ments in infrastructure (both construction and equilibrium in practice. Conflict is omnipresent, maintenance) and precluded the development of but contained by formal and informal mecha- a national strategy addressing infrastructure nisms for bargaining and consensus making. development as part of a broader vision for the When confessional interests are not satisfied, country (UNDP 2009). As a result, budget spend- either decision making is imposed by an outside ing and investments in infrastructure have tended party (historically often Syria) or violence is used to be guided by considerations of confessional as a last, but relatively frequent, resort. When Syria Country Context 13 Figure 1.4  Governance Indicators in Lebanon, 1996–2012 0 0 Governance indicators for political stability and –0.20 Governance indicators for control of –0.50 absence of violence or terrorism corruption and rule of law –0.40 –1.00 –0.60 –1.50 –0.80 –2.00 –1.00 –1.20 –2.50 96 98 00 02 03 04 05 06 07 08 09 10 11 12 19 19 20 20 20 20 20 20 20 20 20 20 20 20 Rule of law Political stability and absence Control of corruption of violence/terrorism (rhs) Source: World Bank 2013. left the country in 2005, veto rights became more capture. In order to situate and frame the analysis powerful, sharply increasing paralysis in decision of Lebanon’s current development challenges, making (for example, the last voted budget law this section provides a brief historical overview was for 2005, and it was voted in 2006).9 As a of the genesis of Lebanon’s system of confessional result, Lebanon’s governance indicators have sus- governance and context of conflict and fragility. tained a marked decline (figure 1.4). In 2008, with increasing political polarization due to the Immediate Post-independence Syrian conflict, the risk of political conflict turn- Period (1943–75) ing violent rose. Second, and linked to the first, Although recognized as a state in 1920, Lebanon Lebanon’s government is acutely vulnerable to only obtained formal independence in 1943 with regional conflicts, due to the alliances that exist the end of the French mandate. Given the sectar- between regional actors and confessional organi- ian structure of its society, the Lebanese state was zations, some of which constitute “states within constituted, through its constitution and its the state” and often possess capabilities stronger unwritten National Pact, as a consociational than those of the Lebanese government. democracy based on equality among confessional groupings.10 This system was intended to avoid hegemonic power of one group over others. The Evolution of Confessional 1932 census, which showed that Christians were 54 percent of the population, was used as the basis Governance and Conflict for distributing seats in parliament on a ratio of Lebanon’s confessional system of governance has six Christians to five Muslims. This ratio was later evolved, in part through conflict, from its origi- extended to other public offices. As a result, at the nal goal of protecting minority rights to one that beginning of the republic, power was dominated features significant, and dysfunctional, elite by the Christian Maronites, who occupied the 14 Country Context presidency, controlled key civil service jobs, and Liberation Organization (PLO) from Jordan to held most of the country’s wealth. Lebanon at that Lebanon in 1971 and its continued struggle (sub- time operated as a presidential democracy, mir- sequently led from Lebanese territory) against roring the French model. This allowed a func- Israel12 gave rise to increasing tensions between tioning executive to lead state affairs and ensure Palestinians and their supporters13 and Lebanese that decisions were made. The system was rela- Christians led by the Maronites. By 1975, the tively stable, which facilitated the development of confessional system was no longer able to con- institutions, such as the civil service bureau and tain the growing tensions and civil war broke out. the central bank, and the country enjoyed a rela- The consequences were devastating. Over the tively high degree of economic growth. Lebanon 15 years of its duration, the conflict mutated sev- was, nonetheless, not impervious to external eral times, fragmenting the country into compet- shocks during this period—notably the Arab- ing sectarian and militia fiefdoms. Shifting Israeli war in 1948 and 1967 (Makdisi 2007). alliances, changing motivations of belligerents, The governance model promoted political lib- and emerging powerful new domestic groups eralism, ensured regular presidential and parlia- (notably Hezbollah) exacerbated by external mentary elections, and temporarily strengthened intrusions (including the Israeli invasion of 1982, the state through economic and administrative its occupation of the south until 2000, and the reforms (Makdisi 2007). The presidency of Fouad Syrian intervention from 1976 until 2005) sig- Chehab (1958–64) marked a period of state nificantly shaped power and conflict dynamics in and  public administration building. During the postwar period. his  ­ presidency—called the Chehabist period— Given its duration and reach into the Lebanese Lebanon embarked on a program of reforms to state and society, the Syrian intervention had a strengthen the state and expand its role in the pro- particularly significant impact on Lebanon, espe- vision of social services to reduce some of the cially with regard to governance, elite capture, country’s social and economic imbalances. State- capacity to build effective and independent state run agencies such as the Litani River Authority, institutions, and quality of life. According to the public education system including the Picard and Ramsbotham (2012, 72), “The status Lebanese University, and the National Social of Lebanese political leaders from all factions Security Fund were established during this period. was dependent on good relations with Syrian However, the state, through the ruling elite, military officers and with Damascus.” practiced patron-client relationship and increas- The civil war caused major human suffering ingly intervened and distorted markets11 in an and significant physical destruction and signifi- attempt to generate and divide rents among its cantly weakened the central authority and legiti- constituencies (Lebanese Transparency Association macy of the state. At the end of the conflict, the 2007). The central authority of the state and politi- country’s infrastructure was in ruins, with more cal institutions weakened over time, yielding to than 150,000 people killed (5 percent of the pop- growing elite capture of state prerogatives. What ulation), an estimated 17,000 persons missing, was initially a confessional system meant to pro- and an estimated US$30 billion in forgone out- vide checks and balances to protect confessional put (at 1974 prices; Makdisi 2004). The war gen- minorities evolved into the system of clientelism erated a new crop of leaders, weakened the that prevails today. executive, and created mini-states. Over the course of the war, militias developed their own economies, operated ports, imposed taxes, and Civil War and External Intervention set up their own institutions (Traboulsi 2007). (1975–90) The public administration in 1990 lacked both By 1975, the confessional formula had reached staff—with half of civil service posts vacant its limits. The displacement of the Palestinian (World Bank 2011a)—and infrastructure and Country Context 15 was unable to deliver basic services (El-Zein and The representation and powers of Christians were Sims 2004). To  avoid a civil service implosion, diminished, while those of the Sunni, the Shi’a, the government resorted to recruiting contrac- and others like the Druze and Allawites made tual labor. This measure, however, brought in gains as parliament moved from a six to five ratio both the qualified and unqualified; in the end it between Christians and Muslims to an equal created a parallel structure without injecting a share. This ratio remains in place today. new and skilled workforce into the public admin- Critical parts of the Taef Accord were never istration. As a result, most public services and implemented, such as creation of a lower house utilities lacked capacity and lost their true func- that would not be confessionally based, coupled tion, becoming instead simply sources of rent with an upper house that would be confession- seeking, employment, bribery, and transfers for ally based, and decentralization that would move the benefit of warlord constituencies. decision making on public service delivery closer As the state progressively withered during to the user. Implementation of these parts would (and after) the civil war, nongovernmental orga- likely have significantly reduced the power of nizations (NGOs) and the private sector stepped confessionalism in policy making and supported in to provide electricity, water, and social services. institution building and a functional political This situation persists today.14 Although this system. strong engagement enabled the continuation of With the war ended, Lebanon enjoyed relative basic services in the absence of functioning gov- stability between 1990 and 2005. This period was ernments, it also meant that the state was unable characterized by a postwar investment boom in to gain an adequate footing in the provision of some infrastructure sectors,16 a revamped politi- basic services for the poor after the war ended. cal system that preserved stability (at the expense There is still little pressure from the population of effectiveness and efficiency), and a climate of for the state to widen the scope and improve the relative security underwritten by the presence of quality of public service delivery. Nonetheless, Syrian forces. Economic growth was moderate, while private provision has filled some of the gap concentrated primarily in infrastructure and left by the state, these nonstate actors operate on tourism, but ultimately unsustainable as the a confessional basis that fails to serve many of the largely public sector–financed reconstruction, poor and exacerbates inequality in the quality underwritten at high real interest rates in an envi- and quantity of services available. ronment of moderate real GDP growth, led to a ballooning budget deficit and, ultimately, sky- rocketing public debt. Economic growth during Postwar Reconstruction this period was unequal, disproportionately ben- (1990–2005) efiting some areas and population groups, which The conflict formally ended with the 1989–90 fueled the perception of discrimination and mar- Taef Accord, which aimed to make the confes- ginalization and kept sectarian tension alive. sional system more equitable; however, its partial The Taef-derived political system, despite implementation enabled the (wartime) elite to resulting in confessionaly-based elite capture, was ­ onfessionalism. solidify its power behind a veil of c manageable and functioning (though not effi- While ending the war, the parts of the Taef Accord cient) as long as a power broker was able to that were implemented did not succeed in build- impose decisions. The political governance for- ing institutions and a functional political system. mula introduced by Taef resulted in a government Instead, it weakened the president, failed to intro- and state that operated at the lowest level of effi- duce a functioning alternative, and embedded ciency and quality of services. The system made confessionalism, which evolved into a gover- decision making almost impossible, given the nance structure, commonly referred to as “the ability of key religious groups to veto decisions. Troika,” outside the constitutional i ­nstitutions.15 Extra-institutional solutions or the intervention 16 Country Context of an external power broker (at that time, Syria) political gridlock that has paralyzed the country. was needed to force key confessional groups to The presidential post has been vacant twice, with come to an agreement. the current vacancy exceeding 1.5 years and ongo- In the face of weak government and public several months to form ing; each time it has taken ­ institutions, sectarian institutions consolidated a government, with major decisions or measures into de facto “states within the state” as militia necessitating months of discussion and extra-­ members entered into public administration and institutional bargaining. warlords became politicians, ministers, and even Violence and conflict returned to Lebanon heads of the executive and legislative branches of due to both domestic and regional events. In 2006 government.17 They were ultimately integrated a 34-day assault as well as an air and sea blockade into the system and became representatives of by Israel resulted in huge damage and setbacks to their confessions, a system that continues today. the country’s economic recovery. The 2006 attack The new political class developed subsidies and generated substantial economic losses through- transfers and used the public sector to obtain out the country, damaging key transport and ser- political rent and secure the allegiance of their vices infrastructure and housing and reversing various constituencies. Patronage and cliental- some of Lebanon’s reconstruction gains since ism became the dominant forms of economic 1990 (World Bank 2007b). Meanwhile, in 2008 and social organization. Reforms were intro- political tensions between the March 8 and March duced only if the welfare of the Troika was unaf- 14 groups reached a zenith, spilling into a brief fected and the power broker was in agreement, armed conflict that resulted in March 8 taking thus restricting the set of feasible reforms to a over Beirut. This domestic conflict was resolved very small number.18 Over time, the quality and through the Doha Accord brokered by Qatar. efficiency of public sector delivery of goods and The Syrian conflict that started in 2011 is services deteriorated even further. ­ destabilizing the political/confessional, security, economic, and social conditions in Lebanon. The Syrian crisis has led to both an escalation of Political Economy Deadlock tension between the March 8 and March 14 coa- (2006–Present) litions as well as more broadly between Sunni and The assassination of former prime minister Rafiq Shi’a groups within Lebanon, who support bellig- Harriri in 2005 created a new political dynamic. erents on either side of the Syrian conflict. The Cedar Revolution that followed the assassina- Tensions have been exacerbated by the increasing tion culminated in the withdrawal of Syrian forces pressure on already stretched and weak public (until then the de facto power broker) and the and, especially, social services and local commu- polarization of political forces into opposing nities, as about 1.1 million Syrian refugees have coalitions. In their present form, the first coalition ­ crossed the border and are officially registered (March 8) is led by the pro-Syrian Hezbollah with the United Nations High Commissioner movement, the Amal movement, and a key for Refugees (UNHCR), constituting more than Maronite Christian representative, and the other 25 percent of the Lebanese population. In addi- (March 14) is predominantly led by an alliance of tion, several violent incidents have led to a deteri- Sunni and other Maronite Christian groups orating security environment. Local communities (March 14). Created following the Harriri assassi- are increasingly seeing refugees as a threat to nation and without a current power broker, the social stability, and several municipalities have political polarization of March 8 and March 14 has instituted curfews specifically targeting Syrians. widened rapidly and remains the principal source A  detailed estimate of the economic and social of political tension today. The two camps domi- costs of the Syrian conflict for Lebanon can be nate the political landscape and, given their sharp found in World Bank (2013c); the annex to this differences and mutual mistrust, has resulted in chapter summarizes those findings. Country Context 17 Without an external power broker, the elite capture (hiding behind a confessional veil). post-2006 period exposed Taef ’s weaknesses: ­ Lebanon fits well the paradigm of conflict, vio- severe polarization, consolidation of the sectar- lence, and fragility described in the 2011 World ian “states within the state” phenomenon, and Development Report: Conflict, Security, and political ­ deadlock. Without a power broker, the Development (World Bank 2011d). The absence of political divide between March 8 and March 14 resilient institutions and a turbulent regional and widened, with each religious sect (even within international environment perpetuate recurring coalitions) regularly exercising its veto power to and mutually reinforcing dynamics of conflict and block any decision—be it administrative, eco- fragility. The two overarching constraints—the nomic, or political—that either did not further confessional system of governance and the coun- its direct interests or risked advancing the inter- try’s vulnerability to conflicts in the Middle East— ests of other groups. create internal and external stresses that foster In the political sphere, between 2005 and instability and constrain Lebanon’s development early 2015, caretaker governments ruled for prospects. In such a context, it is difficult to ­discern about two years, an international accord in Doha clear patterns of causality. was required to elect a president in 2008 after a One consequence of the stress is the creation six-month vacancy, and the presidency has now of a fragile and dysfunctional political system been vacant since May 2014. Meanwhile, parlia- and state unable to regulate conflict and exercise ment was unable to function regularly due to sovereign authority. At the heart of Lebanon’s lack of a quorum. As a result, not a single law was confessional political system is the tension passed in 2007, only 5 were passed in 2008, and between the conflict-mitigating goals of the con- 14 were passed in 2009. In 2013, 2 were passed, sociational approach and a social contract in but they related to extending the mandate of par- which the relationship between the state and its liament and delaying parliamentary elections. citizens is mediated through confessional and In the administrative and economic sphere, sectarian affiliations and interests. basic functions of the executive and parliament, In order to prevent future sectarian conflicts, such as passing a national budget, stopped the Taef Accord strengthened the confessional (the  2005 budget was the last one approved). system by spreading political power and institu- Important decisions related to restructuring the tional responsibilities more broadly. However, labor force in the state electric utility, Electricité du this broadening of power and responsibility par- Liban (EdL), establishing a regulatory authority for alyzed decision making (given the need for reach- the oil sector, or removing illegal structures dating ing broad consensus for every decision), mostly from the civil war all provoked ­ turmoil, sit- entrenched sectarian interests at the heart of state ins, and tension. Such events or failed attempts at institutions, and reduced the autonomy and reform multiplied and, in most cases, had a sectar- effectiveness of the state. The state was in effect ian element. In short, a rules-based system ceased ‘hollowed out’: sovereign authority was trans- to exist, and a system based on compromise and ferred to sectarian actors and organizations, and political horse trading now prevails. institutions were rendered incapable of effectively carrying out basic state functions across sectors. At the same time, the system remained deeply The Symbiotic Relationship conflictual through the establishment of a between Confessional permanent” competition over political power, “­ resources, and state privileges. After the civil war, Governance and Conflict the Syrian occupation ensured a degree of stability The progressive hollowing out of state institutions and decision making through 2005. However, the and a turbulent environment perpetuate recurring weakness of the state was highlighted following and mutually reinforcing dynamics of conflict and the Syrian withdrawal, when competition between 18 Country Context political forces, long buffered by the Syrian pres- the OECD, and Middle East and North African ence, led to immediate political deadlock and a countries on a range of policy making and ser- brief resumption of violent conflict in 2008. vice delivery indicators. Lebanon’s extremely Another consequence is the entrenchment of poor scores reflect obstacles to public action, sectarianism as an alternative and parallel system quality of services delivered, and needs-based for organizing social, economic, and political life. and territorial coverage of public services. This During the civil war, religious groups and mili- inequality, ­ combined with the inability to tias governed, administered, and defended popu- implement a national development plan, has ­ lations. Following the civil war, territorial and led to perceptions of sectarian-based economic administrative borders between groups were ­ discrimination—perceptions that political institutionalized. A key role of sectarian organi- groups have exploited to mobilize support and zations has been to provide key social services action—and further reinforced political compe- such as education, health, and welfare support to tition and conflict over control of the economic the most vulnerable groups. While this has been levers of power (Kraft et al. 2008). beneficial in the absence of effective state institu- The effects of external (that is, regional and tions, it has deepened both societal cleavages and international) dynamics in Lebanon include institutionalized a discriminatory and inequita- (1) the conversion of Lebanon into a theater for ble system for regulating social and economic regional conflicts and the pursuit of external life, given that the provision and targeting of ser- objectives (political and military), including the vices have often been linked to electoral cam- Israeli-Palestinian conflict and Syrian interven- paigning. When combined with the privatization tionism; (2) the use of regional political alliances of public service delivery and direct financing by by Lebanese actors to strengthen their political the state, this situation has created steep inequal- power domestically; and (3) the spillover of ities in access to services, as private sector actors regional conflict and its destabilizing impacts have set exorbitant prices for service delivery.19 (political, security, and economic)—notably the The sectarian politics and social relationships current conflict in Syria. that evolved during the civil war have resulted in Over the years, some of these external factors uneven growth, opaque management of public have become an integral part of the domestic resources, and widespread corruption that have political landscape, both regarding the identity exacerbated elite capture and sectarian cleavages. and political agenda of some groups (which are Lebanon’s government and economy became both national and transnational in nature) and dominated by a small number of individuals, regarding the role played by Lebanese groups in who controlled access to individual sectors and conflicts elsewhere in the region. The current exerted strong influence, through clientalist prac- regional conflict between Shi’a and Sunni groups tices, on the distribution of resources. Lebanon’s in Iraq and Syria, for instance, is polarizing com- reconstruction drive and resulting economic munities and transforming sectarian tensions boom in the 1990s benefited a small segment of and cleavages in Lebanon from a Muslim- the population, with most investments concen- Christian conflict to a Sunni-Shi’a conflict. This trated in Beirut and profits accruing primarily to has had a strong negative impact on Lebanon’s an affluent elite. During this period, social spend- growth, ­poverty, and equality. ing was not prioritized, as the benefits of recon- struction investments were expected to trickle down, which did not occur (UNDP 2009). Regional disparities are stark in Lebanon, Organization of the Report with the bulk of the poor living in peripheral The remainder of this report is structured as areas (particularly the north and the south). ­ follows. Chapter 2 provides an overview of Lebanon scores below the average for the world, Lebanon’s growth, poverty, and jobs performance. Country Context 19 When possible—given data limitations—it takes Economic Impact a long-term approach to the performance of those Lebanese growth is estimated to drop 2.9 percent- sectors, highlighting trends and structural factors age points each conflict year. This is generating rather than short-term or cyclical phenomena. The cumulative losses in economic activity of US$7.5 chapter offers a diagnostic of Lebanon’s perfor- billion through 2014. The largest impact arises mance in creating sustainable and good-­ quality from the insecurity and uncertainty spillovers, jobs, which are necessary to reach the twin goals of which profoundly shake investor and consumer the World Bank. Chapter 3 details Lebanon’s chal- confidence. The resulting lower economic activity lenges and opportunities for reaching the twin is putting downward pressure on government goals, presenting the two overarching challenges revenues, which, combined with rising demand and discussing nested challenges and constraints. for public services stemming from the large refu- The chapter concludes  with factors of strength, gee influx, is generating large costs for the budget sources of resiliency, and opportunities for and damaging Lebanon’s structurally weak public Lebanon. Chapter 4 delves into key risks and finances. These costs are largely driven by the vulnerabilities surrounding Lebanon’s develop- ­ influx of refugees into Lebanon. ment model. Finally, based on the analysis of the After an initial negative impact on the trade previous chapters, chapter 5 prioritizes a list of sector, firms have gradually adapted to the shock challenges facing Lebanon and highlights some and have found ways to cope with or benefit from opportunities for the future. it. Lebanon’s large trade sector is significantly exposed to Syria because of its role as a trading partner, the sizable share of Lebanese trade that Annex 1A The Economic and transits through Syria, and the risk that a destabi- Social Impact of the Syrian lized Syria creates for Lebanon’s large services exports, especially tourism. The first half of 2013 Conflict on Lebanon witnessed sharp reductions in trade flows, par- Syria is closely linked to Lebanon through his- ticularly for food products and consumer goods. torical, social, and economic ties, and the con- However, data through 2014 reveal that, while flict in Syria is having a large and negative Lebanese exporters to Syria have suffered from a impact on Lebanon’s economy, its social fabric, drop in demand in the Syrian market (but less so and its public services.20 The cumulative losses than Jordanian exporters), other Lebanese in economic activity reached an estimated exporters have started to export to Syria to fill the US$7.5  billion by end-2014. Social cohesion gap in Syrian production. Data also suggest that is  deteriorating partly due to a combination Syrian refugees in Lebanon provide important of  rising poverty, worsening labor market, impetus to export Lebanese services. rising insecurity, and deteriorating core public ­ The Syrian conflict and the influx of refugees services. At the same time, demand for public ­ have cost the central government an estimated services is rising as a result of the influx of US$2.6 billion through end-2014. This is putting Syrian refugees. Across all core public services, Lebanon’s public finances under severe and the surge in demand is being met partly through unsustainable strains, given Lebanon’s initial a decline in access to and quality of public ser- weak public finances. On the revenue side, spill- vices. The fiscal cost of the Syrian conflict is overs from the conflict have cost an estimated estimated at US$2.6 billion through end-2014. US$1.5 billion in revenue collection through end- Additional spending of US$2.5 billion would 2014, due to a combination of direct impacts on be required to return the level of access to and key sectors (such as tourism) and indirect impacts quality of public services to their pre–Syrian on economic activity. On the expenditure side, conflict level. total budgetary spending by the government 20 Country Context alone grew an estimated US$1.1 billion over the infrastructure, and other poor environmental same period, mostly because of the sharp increase conditions also pose significant risks, as out- in demand for public services by Syrian refugees. breaks of lice and scabies among refugees have The wider fiscal deficits, lower economic growth, shown. Thus demand for health services has and rising interest risk premium due to the Syrian risen sharply. conflict have halted Lebanon’s remarkable prog- In addition, strong demand for hospital care ress in reducing its debt-to-GDP ratio; for the is crowding hospitals and compromising access first time since 2006, Lebanon’s debt ratio rose in to health care, exerting financial pressure on hos- 2012 and has continued growing since then. pitals, increasing costs, and giving rise to medi- cation shortages. In the medium to long term, Human Development and the impact of delayed health care could result in Social Impact higher overall levels of morbidity, particularly for the vulnerable. The Syrian conflict is estimated to have a fiscal The increase in demand for education services cost US$308 million in spending on health, arising from child refugees is leading to mount- education, and social safety nets through 2014, ing fiscal costs, lowering the quality of public while US$1.4 billion (3 percent of GDP) would education, and creating a significant need for be needed for stabilization—that is, to restore nonformal education. Prior to the Syrian conflict, access to and quality of services to pre-conflict basic education enrollment in Lebanon was sta- levels—including US$166 million for short- ble at more than 90 percent for a decade. Although term job creation. The conflict is estimated to public schools only accommodated 30 percent of have negatively and materially affected the pov- total students, they catered predominantly to erty, livelihoods, health, and human capital poor children. Since the onset of the Syrian con- conditions of the Lebanese people. By end- flict, the Ministry of Education and Higher 2014, some 170,000 additional Lebanese had Education has provided open access to refugees been pushed into poverty (over and above the in its public schools. In 2012, 40,000 refugee chil- 1  million previously below the poverty line). dren were accommodated in public schools for a The Lebanese regions with a high poverty inci- budgetary cost of US$29 million. An additional dence are also the ones that are hosting large US$24 million in costs were financed by donors numbers of refugees. An additional 220,000 through United Nations agencies, which the min- Lebanese, primarily unskilled youth, are istry would otherwise have had to bear. These expected to become unemployed. The influx of costs continue to escalate. These figures do not refugees has challenged the already weak public reflect the 65 percent of refugees who are not social services sector, and social tensions, enrolled in formal schooling, thus creating a sig- including gender issues, among refugees and nificant need for nonformal, out-of-school edu- Lebanese communities, are on the rise. cation to control the onset of child labor and The conflict in Syria is affecting Lebanon’s other negative social consequences. health system through (1) increased demand for health care services; (2) increased unpaid commitments of the Ministry of Public Health Infrastructure Impact to contracted hospitals; (3) shortages of health The fiscal costs of the Syrian conflict on workers, including specialists and nurses; (4) a infrastructure—water and sanitation, municipal ­ sharp rise in communicable diseases and the services, electricity, and transport—are estimated emergence of new diseases, such as leishmania- at US$589 million through 2014. An additional sis; and (5) increased risk of epidemics such as US$1.1 billion would be required for stabilization, water-borne diseases, measles, and tuberculo- including US$258 million for current ­ spending. sis. Overcrowding, lack of water and sanitation The country’s infrastructure was severely Country Context 21 constrained and ill-prepared to cope with the closing and rehabilitating open and uncon- (1)  ­ increased demand from refugees. Cash-strapped, trolled municipal solid waste dumps; understaffed local and municipal governments (2)  ­establishing composting, separating, and are being severely affected by the crisis, as they landfilling facilities; and (3)  extending financial now provide basic services to and tend to the support to host municipalities to cover the addi- immediate needs of both refugees and host tional operational and capital expenditures. communities. Increased demand for electricity is estimated Water supply and sanitation systems, already at 251 mega-watts by end-2014. The Syrian crisis, facing acute pre-crisis challenges, have had to through the sharp increase in electricity demand, meet additional demand for water equal to has added to the sector’s structural deficiencies, 7  percent of the pre-crisis demand. This higher including insufficient installed capacity, low effi- demand resulted in severe water shortages in ciency, high losses, and inadequate infrastruc- 2014, a dry winter year in which limited water ture, resulting in poor reliability, inadequate was accumulated in the country’s reservoir. levels of supply, and extensive load shedding. Stabilization interventions to reinstate pre-­ The interventions required to reinstate pre-­ crisis levels of service to host and refugee com- crisis levels of electricity service to the Lebanese munities include (1) humanitarian relief population and meet the needs of refugee com- interventions such as distribution of bottled and munities include (1) capital investment in gener- tanked water, chlorination kits, and storage ation capacity and associated transmission and tanks  to the most vulnerable populations; distribution networks and (2) institutional (2) additional capital for operation and mainte- capacity and technical assistance for project nance, provision of urgent equipment, and addi- preparation and implementation. tional short-term infrastructure for restoring Regions with high influx of refugees wit- water supply infrastructure; and (3) acceleration nessed sharp traffic increases on some roads, of infrastructure investments and institutional resulting in accidents and the rapid deteriora- reforms such as storage and transfer infrastruc- tion of the transport network. The Syrian crisis ture, distribution network rehabilitation and has affected Lebanon’s transport sector in the replacement, water and wastewater treatment, form of (1) increased wear and tear of the road and irrigation expansion and improvement. and transport network; (2) substantial increase The level and quality of solid waste manage- in the volume of traffic and congestion; and (3) a ment and municipal services have declined visi- near halt of Lebanon’s thriving transit business, bly as a result of the sudden and sharp increase in particularly for freight. demand by Syrian refugees. Solid waste genera- In order to restore transport sector perfor- tion has doubled in several areas of the country, mance to precrisis levels, investments are needed which is contributing to groundwater contami- in the following areas: (1) asset preservation, nation, pollution of water resources, and spread primarily including enhanced road maintenance, ­ of water-borne disease. (2) capacity increases, including network recon- Efforts to reinstate pre-crisis levels of ser- struction, widening, and expansion, and (3) ­public vice  to host and refugee communities include transport solutions, such as mass transit. Notes 1. Throughout this report, the term confessional often used interchangeably with sectarianism, is used to refer a  consociational system of gov- although the latter is commonly used to denote ernment  based on an equitable distribution of forms of political and social identity, organization, political and institutional power among religious and action based on religious difference and often communities. In Lebanon, confessionalism is exclusive interests. We use the term confessional 22 Country Context to denote the political system and its functioning 10. Consociationalism is a form of government that and the terms sect and sectarianism to denote the guarantees group representation and is often sug- specific interests, actions, and organization of reli- gested for managing conflict in deeply divided gious and identity-based groups. societies. It is often viewed as synonymous with 2. GDP figures between 2004 and 2011 are based on power sharing, although it is technically only one the Lebanese national accounts published by the form of power sharing. When consociationalism Central Administration of Statistics in July 2013, is organized along religious lines, it is known as while data for 2012, 2013, and 2014 are based on confessionalism, as is the case in Lebanon. projections pending final GDP estimates. 11. Such as awarding public contracts to and securing 3. Poverty lines are defined in chapter 2. employment for their constituencies. 4. Extreme poverty was 7.5, 10, 8, and 8.7 percent in 12. The Cairo Agreement of 1969 brokered by the 1993, 1997, 2005, and 2007, respectively. Using the Arab Republic of Egypt legalized the military pres- upper poverty line, poverty was 28 percent in 1993 ence of the PLO in Lebanon with the underlying and 28.5 percent in 2005. As detailed in chapter 2, objective of fighting the Israeli army. PLO fight- progress in reducing poverty has been unlikely ers soon set up check points across the country, since the 2005 surveys. raising tensions with various communities, chief 5. The labor force has been growing robustly due to an among them the Christians. increase in the working-age population, in addition 13. Behind them was Syria, a major supplier of arms, to a modest increase in labor force ­ participation, which in June 1976 dispatched Palestinian units particularly among women (see chapter 2). under its control. 6. Donor financing arrived, starting with the Paris I 14. Religiously affiliated NGOs provide services such conference of 2001, after Lebanon’s public debt as education grants, food stamps, or services for level became a concern. battered women and orphans. 7. Lack of microdata affects the quality of other statis- 15. The Troika included the president of the repub- tics as well—for example, the national accounts are lic and the heads of government and parliament, estimated without adequate underlying surveys, in respectively, representing the three largest reli- contrast to standard practice in most countries. gious groups: the Maronites, the Sunnis, and the 8. Growth diagnostics is a methodology developed Shi’as. by Ricardo Hausmann, Dani Rodrik, and Andrés 16. The majority of the investment was in the road Velasco to determine the underlying reasons why network, the airport, the telecommunication sec- some developing economies are not growing as tor, and the sewage network. fast as expected. The growth diagnostic approach 17. Leenders (2003) finds that 39 cabinet posts were is based on the idea that there may be many rea- held by former militia leaders between 1989 and sons why an economy does not grow, but each rea- 2003. son generates a distinctive set of symptoms. These 18. An example of such reform is the introduction symptoms can become the basis for a differential of a value added tax in 2002, at a time of severe diagnostic in which the analyst tries to distinguish fiscal stress when a failure to act would have had among potential explanations for the observed negative consequences for all groups and their growth rate of the economy (Hausmann, Rodrik, leadership. and Velasco 2008). 19. For an analysis of the impact of service privatiza- 9. No postwar budget has been voted within the con- tion and confessionalism in the health sector, see stitutionally mandated time period. The last offi- Kasturi and Mehio-Sibai (2004). cially closed fiscal accounts are for 2003, and those 20. This annex derives largely from World Bank for 1993 to 2003 need major adjustments. (2013c). Country Context 23 Chapter 2 Growth, Poverty, and Jobs Economic Growth • Recovery and safe-haven economic boom (2007–10). Buoyed by the January 2007 Paris Since the end of the civil war, the Lebanese III international donor conference, the econ- ­ economy has expanded at a moderate pace, but omy grew 9.2 percent, on average, a record growth has been volatile due to frequent shocks average despite repeated security incidents (figure 2.1).1 While real gross domestic product and the global financial crisis.4 Part of the (GDP) grew an estimated 4.4 percent, on aver- economic recovery stemmed from a “base age, from 1993 to 2014,2 the volatility around that effect” following two years of weak economic average was large, at 3.2 percent (1 standard performance (2005 and 2006). Seen as a rela- deviation). tive safe haven by the Lebanese diaspora and Six periods of growth are evident for the given excess liquidity by the Gulf countries post–civil war period: (driven by record high oil prices), deposits • Postwar recovery and reconstruction boom flowed into Lebanese banks and fueled a surge (1991–95). Growth averaged 12.9 percent due in real estate investment. While the global to large public investment aimed at recon- financial crisis spread to most countries, structing the country’s infrastructure and Lebanon’s banking system attracted deposi- Beirut’s center as well as large public tors concerned with the viability of banking consumption. institutions in other countries and attracted • Public debt concerns (1996–2000). Growth by Lebanon’s tightly regulated banking sys- decelerated significantly to average 2.4 percent, tem, high liquidity, focus on traditional com- due to shocks (conflict with Israel in April mercial banking, and little exposure to the 1996) and mounting concerns regarding the toxic assets, such as mortgage-backed securi- rapid growth of public debt, which exceeded ties, at the heart of the financial crisis. 100 percent of GDP. Private consumption and Lebanon’s strict bank secrecy and relatively investment slumped, leaving net exports as high rate structure were additional factors for the only driver of growth. some depositors. Surging private consump- • Resumption of growth (2001–04). While pub- tion also contributed to growth during this lic deficits expanded briskly and pushed the period. country toward the highest debt-to-GDP ratio • An overstretched economy hit by domestic and in the world, confidence nonetheless improved external political shocks (2011–14). As the real thanks to the Paris I and II international estate boom ran its course (with prices overex- donor conferences of 2001 and 2002. As con- tended), investment decelerated. Meanwhile, fidence improved, private consumption drove private consumption was sharply and nega- growth, with real GDP growth averaging tively affected by the political vacuum in early 4.1 percent. 2011 following the fall of Saad Hariri’s unity • Domestic and external political shocks government and the onset of conflict in the (2005–06). The assassination of Prime Minister Syrian Arab Republic, which brought numer- Rafic Hariri in February 2005 and the conflict ous security issues and an influx of refugees. with Israel in 2006 severely affected the econ- With confidence falling, average real omy, with real GDP growth averaging only GDP  growth slumped to 1.7  percent in this 2.2 percent.3 period. Growth, Poverty, and Jobs 25 Figure 2.1  Drivers of Growth on the Expenditure Side in Lebanon, 1994–2014 Source: Central Administration of Statistics. a. Estimated. b. Forecast. The services sector—historically a key driver unskilled labor, which in Lebanon is provided by of growth—has been severely affected by events cheaper foreign workers. For this reason, eco- since 2011 and has contributed significantly to nomic growth from the sector has not resulted in Lebanon’s low growth in recent years (figure 2.2). significant employment gains for Lebanese Between 1997 and 2011, the services sector nationals. Since 2004, the real estate and con- accounted for an average of 74 percent of real struction sectors have accounted for a large share GDP compared to 49 percent in a group of com- of GDP (17.1 percent, on average, between 2004 parator countries.5 In contrast, the agriculture and 2011), but employed only a small share of the sector accounted for, on average, 5.6 percent of Lebanese workforce (7.8 percent, on average, real GDP. The services sector has a dominant between 2004 and 2009). The same is true across share of the Lebanese economy, and its decelerat- the Middle East and North Africa region, where ing growth, led primarily by domestic trade and the real estate sector accounts for around tourism, was a significant drag on the Lebanese 46 percent of foreign direct investment, but con- economy. tributed only 19 percent of jobs created between The high dependence on the real estate and 2003 and 2011 (World Bank 2012b).6 In the tour- tourism sectors—which are sensitive to security ism sector, hotels, restaurants, and wholesale and shocks—imparts strong and relatively frequent retail trade accounted for 16.8 percent of GDP volatility to the Lebanese economy. The real between 2004 and 2011, but are highly suscepti- estate sector has accounted for 50–70 percent of ble to political and security shocks. Consequently, total gross fixed capital formation since 1997. the deteriorating security and political situation However, the sector tends to attract mainly since 2011 has negatively and severely affected 26 Growth, Poverty, and Jobs Figure 2.2  Drivers of Growth on the Production Side in Lebanon, 1994–2014 Source: Central Administration of Statistics. these sectors. The negative impact of the Syrian fiscal space and lack of an approved budget since conflict on the real estate sector has, to some 2006, public investment dwindled from 6.3 to 1.4 extent, been mitigated by repeated stimulus percent of GDP between 1997 and 2011, far below packages from the Banque du Liban (BdL) in the the average of 3.6 percent in the group of com- form of subsidized loans offered by commercial parator countries. Available indicators suggest banks. These stimulus packages aimed to improve that sluggish economic activity since 2011 has access to affordable mortgages, which enabled been the result of a severe drop in private con- the real estate sector to stabilize somewhat in sumption as the deteriorating security and politi- 2012–14. cal situation has negatively affected consumer On the demand side, private consumption has confidence.7 Demand from the large influx of been Lebanon’s dominant driver of growth during Syrian refugees, however, has partially offset the the twenty-first century, but it is highly sensitive decline in private consumption. to confidence and security shocks. Private con- sumption accounted for 75 percent of real GDP growth between 1998 and 2010. This contribu- tion, however, shrank to 17 percent in 2011 and Poverty and Jobs has been subdued ever since. Low levels of exports In a World Bank (2014f) survey, Lebanese citi- and an overreliance on imports to meet domestic zens ranked public sector governance reforms as demand resulted in a persistent trade balance def- the top development priority for the country. Key icit that hovered between 22 and 33  percent of aspects of this governance challenge include elite GDP during 1997–2011 (based on the July 2013 capture of business, discretionary implementa- national accounts release). Squeezed by a lack of tion of regulations, and rampant corruption, Growth, Poverty, and Jobs 27 which all affect achievement of the World Bank’s said that the country is headed in the wrong twin goals. In fact, international evidence shows direction (with only 8 percent saying it is headed that an increase in the quality of governance can in the right direction), which reveals a profound help to reduce absolute poverty up to 20 percent dissatisfaction with current policies. These views (figure 2.3). Transparency also matters for effec- are consistent with growth not having been tive government (figure 2.4). inclusive, as employment growth elasticity is Lebanese ranked social protection and job weak, even compared to that of other countries creation or employment as their second and in the region. third development priorities, respectively, behind Although data are lacking, inadequate cre- public sector governance.8 Moreover, 66 percent ation of productive jobs has likely stymied ­ poverty reduction and shared prosperity in Lebanon. As discussed below, we know little Figure 2.3  Impact of Good Governance on Absolute Poverty about medium- to long-term poverty trends in Lebanon. However, global evidence suggests that wages and employment are the primary drivers of poverty reduction (Inchauste et al. 2014). In Lebanon, job creation has trailed labor force growth. Data analysis also suggests that develop- ments in labor markets have not been conducive to creating more domestic employment opportu- nities, especially formal private sector jobs. Most job creation has been in low-productivity sec- tors, especially in trade. Only about one in three labor force participants have a formal sector job. Without more and better earning opportunities, households in Lebanon will continue to have Source: Knack 2002. difficulty improving their welfare. ­ Moreover, ineffective government and inade- quate fiscal space have limited the reach of the Figure 2.4  Correlation between public safety net, which could have augmented Transparency and Government the income of the poor. In Lebanon, social pro- Effectiveness Worldwide, 2014 tection interventions include social insurance and labor market interventions (including con- tributory schemes such as pensions), social ser- vices (access to services such as health and education), and narrowly targeted social assis- tance programs. However, these programs reach only a small share of the population and are not considered adequate to address the needs of the poor. Thus the population remains heavily reliant on earnings and possibly on private safety nets (such as remittances), although little is known about the role of this source of income in poverty reduction. In recent years, the supply of low-skilled workers has grown rapidly due to the Syrian Source: World Justice Project. ­ crisis, lowering incomes for low-income and 28 Growth, Poverty, and Jobs poor Lebanese. The jobs that have been created on how welfare aggregates and poverty lines were have typically been of low quality (for example, constructed across time. The trends presented in low skills, often informal) and gone to foreign this section are subject to this strong caveat. workers, not Lebanese (for example, laborers in The pre–civil war Lebanese economy was the construction sector). Both poverty and jobs characterized by high income inequality and fall- have been severely and negatively affected by the ing, but still elevated, poverty. Notwithstanding Syrian conflict and, in particular, the large influx the comparability issues among early studies, of refugees into Lebanon. Thus the prospects for high levels of income inequality and poverty in poverty reduction in the near term are grim, the 1960s were followed by rapid declines in pov- although government reforms in the medium erty in the 1970s. The first poverty study, pub- term could have a significant impact on raising lished by Mission IRFED (1961), showed that the welfare of the poor. 50  percent of the population in Lebanon had income below the poverty line and documented wide regional disparities in living standards and Measurement of Monetary high inequality among the population. Schemeil Poverty and Inequality (1976) showed that 22 percent of the population was poor in 1973–75 before the civil war. (1961–2012) According to Gaspard (2004), income inequality Despite the lack of microdata, sporadic attempts was relatively high, with Gini coefficients of have been made to measure living conditions in 0.51 and 0.55 in 1960 and 1974, respectively.9 Lebanon since the 1960s. Table 2.1 summarizes After the civil war, poverty and inequality the main findings from different reports between remained high. The United Nations Economic 1961 and 1997. However, there is little basis to and Social Commission for Western Asia compare these estimates over time, since the sur- (UNESCWA 1995) estimated consumption-­ veys used different methodologies and sample based poverty to be at 28 percent and extreme sizes. Further, there is very little documentation poverty at 7.5 percent in 1993 and 10  percent Table 2.1  Measurement of Poverty and Inequality in Lebanon, 1961–2014 Author Survey year Main findings Mission IFRED 1961 1960 50% of population below poverty line Schemeil 1976 1973–75 22% of population below poverty line UNESCWA 1995 1993 28% of population below poverty line and 7.5% in extreme poverty; poverty concentrated in Bekaa and North Lebanon regions; higher poverty rates among agricultural workers UNDP 2008b Summary Share of low-income population declined from 50% in 1959–60 to 22% in 1973–74 and increased again to 52% in 1994–95 Gaspard 2004 Summary Income-based Gini declined from 0.5 in 1960 to 0.47 in 1997 UNDP 2008a 2004–05 28.5% of population living in poverty and 8% living in extreme poverty in 2004–05. The Gini coefficient was about 0.361. Large regional disparities in headcount poverty rates, with the North, South, and Bekaa being the poorest; highest, deepest, and most severe poverty among illiterate and unemployed individuals; agricultural, self-employed, and nonsalaried workers more likely to be poor. Based on backward and forward simulations, extreme poverty declined from 10% in 1997 to 8% in 2004–05, but increased to 8.4% in 2007 Central Administration of Statistics 2011–12 Data to be analyzed once the large nonresponse bias has been addressed World Values Survey, Arab Barometer 2010–13 About 30–32% of population estimated to be poor using questions about Survey, and the Survey on Financial subjective well-being and information about income (measured in different ways Literacy and Capabilities in different surveys) World Bank 2013b 2012–14 Syrian crisis is estimated to increase poverty among Lebanese population by 170,000 people by 2014, with existing poor being pushed deeper into poverty Growth, Poverty, and Jobs 29 in 1997. As the Mission IRFED study was based extremely poor population was located in the on income, poverty estimates in 1960 and 1993 North. are not comparable. Nevertheless, according to • Inequality within regions accounts for most of the United Nations Development Programme the inequality in Lebanon. Lebanon’s Gini (UNDP 2008b), poverty, measured as percent- coefficient was estimated at 0.361 in 2004–05 age of population with low income, has been using spatially adjusted consumption per U-shaped: falling from 50 percent in 1959–60 capita. This is on par with the average of coun- to 22 percent in 1973–74 and rising again to tries in the Middle East and North Africa and 52  percent in 1994–95. In terms of inequality, much lower than inequality in countries in income-based Gini coefficients declined Latin America. Inequality was the highest in modestly from 0.5 in 1960 to 0.44 in 1997. the North, which also had the lowest con- Similarly, Gini coefficients based on expendi- sumption per capita. North and Mount tures also declined modestly, from 0.51 in 1951 Lebanon had the lowest consumption growth to 0.47 in 1997 (Gaspard 2004). between 1997 and 2004–05. The North region In Lebanon, the majority of the poor are was also distinct because it had the lowest located in urban areas (World Bank 2011c). An elasticity of poverty to consumption growth, estimated 88 percent of the population lives in which may be related to highly unequal distri- urban areas. In a poverty-mapping exercise com- bution in this region. pleted in 2004, Lebanon’s Economic and Social • Poverty is particularly acute in rural areas Fund for Development found more poor people and agricultural households. Compared to in small pockets of dense poverty in the suburbs Lebanon’s overall poverty rate of 8 percent, of large towns than in all of rural Lebanon. The more than 20 percent of households engaged entire rural population of Lebanon represents a in agriculture fall below the poverty line. fraction of the population living in slums in the The  sector’s high productivity12 and high country (30 percent in 2004). poverty rates are the result of very small ­ No significant progress on poverty reduction landholdings—with 90 percent of all farms ­ has likely been made so far in the twenty-first between 0.1 and 4 hectares and an average century.10 The main findings of the 2004–05 farm size of less than 1.5 hectares, limit­ Multipurpose Household Survey are as follows ing  the scope for full-time employment. (UNDP 2008a): Moreover, Lebanon’s agriculture sector is currently experiencing downward pressure • Extreme poverty affected 8 and 8.4 percent of on wages as a result of the arrival of more the Lebanese population in 2004–05 and 2007, than 1 million Syrian r ­ efugees seeking jobs in respectively. This includes the percentage of rural areas. Unlike other sectors, there is no households living below the extreme poverty legal restriction concerning agricultural line or unable to meet their most basic food labor and no minimum wage requirements and nonfood needs.11 for Syrian refugees. • 28.5 percent of the population was poor using the upper poverty line in 2004–05. A 2011–12 Household Budget Survey was • Striking regional differences in consumption conducted, but several problems were encoun- per capita and headcount poverty rates were tered, questioning the reliability and representa- evident across regions, with the North, South, tiveness of the data (figure 2.5). The World Bank and Bekaa being the poorest. Of the poor pop- team has worked with the Central Administration ulation overall, 27.3 percent was concen- of Statistics to explore ways to adjust for such trated in relatively affluent Mount Lebanon, high nonresponse rates. The survey results are and 38  percent was concentrated in the forthcoming but were not available for this North; more striking, 46 percent of the report. 30 Growth, Poverty, and Jobs Figure 2.5  Household Budget Survey respondents to the Arab Barometer Survey Response Rates in Lebanon, by Regions, in  2010 considered their household to be in 2011–12 the  low-income group and said that they had ­ significant difficulty meeting their needs; and finally, 31.7 percent of households from a national Survey on Financial Literacy and Capabilities had income per capita lower than the poverty line, which was taken from the 2004 Multipurpose Household Survey and inflated to 2012 prices.14 Using individual demographic and socioeco- nomic characteristics in conjunction with wel- fare status provides a general picture of poverty correlates. In particular, according to the World Values Survey, being in the middle class (accord- ing to subjective perception data) in Lebanon is associated with having a tertiary education and Source: Central Administration of Statistics. having a full-time job or being self-employed. The lowest likelihood of being in the middle class is associated with being unemployed, being Insights on Poverty Based a housewife, and having no formal education. on Nontraditional Surveys Similarly, having more education and a job has a significant negative association with being in the (2010–14) bottom 40 percent of population. According to While the lack of reliable recent microdata the Arab Barometer Survey, the highest share of prevents carrying out traditional poverty anal- ­ middle-income households (self-reported) was ysis, valuable information on poverty can be among respondents working as employers of obtained from other surveys.13 For example, firms and professionals such as lawyers, teach- surveys that capture subjective well-being ers, and doctors. The respondents who dispro- provide an understanding of people’s own ­ portionately reported being in low-income assessment of their welfare. Further analysis of households were individuals employed as agri- the respondents’ education or employment cultural workers or as housewives or not characteristics also provides useful informa- employed. tion on what Lebanese consider to be charac- The Survey on Literacy and Financial teristics of households that are poor and those Capabilities found that income poverty is closely that are not. associated with demographic variables, as well as A striking and consistent result across all the head of household’s education and labor force surveys is that, despite record GDP growth in status. Thus poverty is more pronounced among 2007–10, poverty remained elevated in households with many children. In particular, Lebanon in the 2010s. All three surveys yielded the poverty rate increases from 24 percent in poverty estimates that are very close (mea- households without children to 88 percent in sured in different ways in different surveys), households with more than four children. Being namely, about 30 percent of the population. In employed in the formal sector or being an particular, about 30 percent of respondents to employer decreases the likelihood of poverty. the World Values Survey considered them- Finally, households with well-educated heads selves as belonging to the working or lower (tertiary education) have much lower chances of class in 2013 (­f igure 2.6); about 29 percent of falling into poverty. Growth, Poverty, and Jobs 31 Figure 2.6  Self-Assessed Economic Classes in Lebanon and Comparator Countries, 2013 Source: Calculations based on World Values Survey, wave 6. Note: Surveys were conducted in different years in different countries. “Do not know” and “no answer” were excluded from calculations. Middle class includes lower-middle class, middle class, and upper class. No definition of classes was provided to respondents. The first comparator group includes countries at similar levels of economic development—having 2010 GDP per capita in purchasing power parity terms within 10 percent of Lebanon’s (Azerbaijan, Belarus, Romania, Turkey, Mexico, and Uruguay). The second includes countries in the Middle East and North Africa (Arab Republic of Egypt, Jordan, Libya, Morocco, and Tunisia). Estimated Poverty Impact of push the existing poor deeper into ­ poverty. The Syrian crisis has brought higher poverty as a the Syrian Crisis (2012–14) result of higher inflation (increase in domestic Part of the lack of progress in reducing poverty income and demand), fewer employment oppor- during the 2010s is the result of the Syrian con- tunities due to lower economic activity, and lower flict, which pushed thousands of Lebanese into wages (excluding the labor income of immi- poverty from 2012 to 2014. In the absence of reli- grants), mostly reflecting slower economic activ- able and recent data with which to assess the ity and a sharp increase in the labor force due to impact of the Syrian conflict on poverty, a global the influx of refugees. computable general equilibrium model named GTAP (Global Trade Analysis Project)15 was used to simulate the impact of the Syrian conflict on Job Creation and the Twin Goals poverty in Lebanon (World Bank 2013b). These models have important shortcomings for esti- Growth, Jobs, and Productivity mating poverty,16 so the specific point estimates Lebanese see job creation as a critical factor for obtained should be understood as only indica- reducing poverty and the third most important tive. Shock variables included the headcount of factor—especially for young people—for achieving refugees, the headcount of labor force, disposable shared prosperity. Moving out of poverty and income, and real GDP. The Syrian crisis was pro- improving the well-being of workers and their jected to increase poverty among the Lebanese families in a sustainable way entails enhancing population by 170,000 people by 2014  and to labor market opportunities. Lebanese stakeholders 32 Growth, Poverty, and Jobs ranked job creation as the factor that would con- sector job creation has been weak due to factors tribute most to reducing poverty (World Bank such as poor governance and weak infrastructure. 2014f).17 Jobs drive development and are “not a Between 1997 and 2009, real GDP expanded at by-product of economic growth” (World Bank an average rate of 4.4 percent per year, yet 2012g). They can be transformational along the employment grew only 1.1 percent (World Bank following dimensions: (a) living standards: individ- 2012d). This indicates an employment growth uals around the world work their way out of elasticity of only 0.2, which is considerably ­ poverty by improving their livelihoods through lower  than that observed in other countries in their ability to earn a decent and reliable income the region. Insufficient job creation is one of the stream; (b) productivity: as workers improve the main causes of persistently high unemployment way they work and become more efficient, more rates. productive jobs are created and less productive The majority of jobs created in Lebanon are jobs are destroyed; and (c) social cohesion: jobs in low-productivity sectors demanding low- gather ­people from different social and ethnic skilled workers (figure 2.7). Between 2004 and backgrounds and thus improve social cohesion. 2009, the main contributors to net job creation The 2013 World Development Report: Jobs has also were trade (61 percent) and low-productivity shown that the challenges and structural problems services  (33  percent), followed by construction that impede the creation of decent jobs vary across (10 percent). Agriculture and industry shed jobs, countries (World Bank 2012g). and higher-productivity services such as infor- In Lebanon, unemployment, informality, and mation and communication technologies (ICTs) poverty are strongly correlated, pointing to a key or finance registered very little growth (only role that jobs can play in reducing extreme pov- 5 percent of total net job creation). erty and promoting shared prosperity. As detailed Two-thirds of the employed are in trade and above, being poor in Lebanon is associated with services, and half are in the informal sector ­ being unemployed or engaging in low-­productivity figure  2.8). One-third of wage employees and (­ or informal employment. It is no surprise that almost ­two-thirds of the self-employed are engaged poverty rates are much higher among unemployed in low-productivity services (for example, whole- persons. However, the incidence, depth, and sale and retail trade, repair of motor vehicles, severity of poverty are the highest among non-­ transportation, and storage). High-productivity salaried employees (El-Laithy, Abu-Ismail, and services (for example, ICT, financial, and insur- Hamdan 2008).18 Such employees constitute more ance activities) employ only 14  percent of wage than one-third of the working poor, while the employees and 3 percent of the self-employed. self-employed make up another third. In contrast, salaried employees and employers have the lowest Demographics, Labor Force, and poverty incidence. This suggests that poverty is high among unskilled Lebanese in informal and Migration low-productivity employment and that gaps in The labor force has been growing robustly, driven earnings are large between formal-skilled and in part by an increase in the working-age popula- informal-unskilled jobs. Expanding access to bet- tion and in part by slowly increasing labor force ter jobs and improving productivity and earnings participation, particularly among women.19 of the bottom 40 percent of the population could Lebanon continues to have low participation contribute significantly to poverty reduction and rates, with less than half of the working-age pop- inclusive growth in Lebanon. ulation participating in the labor market. The Lebanon faces a considerable employment male labor force participation rate (70 percent) challenge, as economic growth has not translated continues to be lower than that of other countries into sufficient job creation. Even during periods in the region, but largely comparable with that of of relatively rapid economic growth, private countries outside the region at similar levels of Growth, Poverty, and Jobs 33 Figure 2.7  Net Job Creation in Lebanon, by Sector, 2004–09 Source: Central Administration of Statistics. Figure 2.8  Characteristics of the Labor development (figure 2.9, panel a). Female labor Force in Lebanon, 2010 force participation, in contrast, is more in line with regional averages, but lags significantly behind comparators in other regions, with the exception of Turkey (figure 2.9, panel b). Although current participation rates are low, particularly for women, they are on an upward trend.20 Not taking into account the recent influx of refugees, 23,000 individuals, on average, enter the Lebanese labor market each year. To absorb them, the economy would need to create more than six times the number of jobs it creates (on average, only 3,400 net jobs per year between 2004 and 2007). The influx of Syrian refugees is having a pro- found impact on the socioeconomic situation in Lebanon (World Bank 2013c). Official refugees now constitute one-quarter of the population, exacerbating unemployment and poverty. As a Source: 2010 Employee-Employer Survey. result of that influx, the labor force is expected to expand by as much as 35 percent, with major changes taking place among women and youth. Because of their low level of education, most Syrian refugees will join the supply of low-skilled 34 Growth, Poverty, and Jobs Figure 2.9  Labor Force Participation Rates in Lebanon and Comparator Countries, by Gender, 2010 Source: World Bank 2014l; 2010 Employee-Employer Survey. Note: Latest available year in 2000s. workers, and informality is likely to increase as a of age who emigrated between 1992 and 2007, result. Almost half of the Syrian refugee workers Kasparian (2009) finds that, while 61 percent of are involved in agriculture or domestic services, migrant men were employed in Lebanon prior to followed by 12 percent in construction. Therefore, emigrating, 91 percent were employed after emi- competition between Lebanese and Syrian work- grating. For women, however, employment only ers for low-quality, low-skilled jobs will increase, increased from 32 to 36 percent, while inactivity likely leading to higher unemployment and rose 9 points to 59 percent. Lebanese migrants depressed wages in this segment of the labor also appear to be well integrated into the labor market. market of recipient countries, even compared to Emigration is a major source of access to migrants from other countries with historically employment and better economic opportunities high emigration rates and a large diaspora. for Lebanese. About 15 percent of the Lebanese The high emigration rate of persons with a population has emigrated (as of 2010), driven tertiary education could, in addition to the influx mainly by political instability and the search for of Syrian unskilled labor, accentuate the scarcity better economic opportunities. Comprehensive of skilled labor. Presented with the lack of high-­ studies on the situation of Lebanese migrants are productivity wage jobs at home and given lucra- scarce; existing evidence suggests that their tive opportunities for work abroad, as many as employment opportunities improve markedly on 44  percent of the tertiary-educated Lebanese migration, but that some gender disparities ­persist. have emigrated (figure 2.10, panel a). While no Analyzing the situation of Lebanese 18 to 35 years quantitative impact assessment of these labor Growth, Poverty, and Jobs 35 Figure 2.10  Emigration Rate in Lebanon and Comparator Countries, by Educational Attainment and Gender, Various Years Sources: World Bank 2014 (left panel); adapted from Kasparian 2009 (right panel). outflows on the Lebanese economy exists, such and  higher unemployment, which could be due large emigration shocks are likely to have sizable to  spatial disparities in infrastructure and service effects on labor supply and wages. Evidence from delivery, identified earlier (figures 2.11 and 2.12). Mexico shows that a 10 percent increase in emi- Participation rates are lowest in the North (38 gration of a given skill group raises the wages of percent) and somewhat lower in the South and workers in that skill group by about 4 percent Nabatieh. Unemployment is highest in South and (Mishra 2007). Given the differences in emigra- Nabatieh. In the North the majority are self-­ tion rates across education level and gender employed, while in Beirut and Mount Lebanon, figure 2.10, panel b), emigration could increase (­ more than half of the labor force consists of wage the wage gap across gender and skill groups and employees. exacerbate overall wage inequality in Lebanon. Unemployment is high, especially among These high levels of emigration of tertiary-­ women and youth, and is often of long duration educated Lebanese could accentuate the scarcity (figure 2.13). Before the Syrian crisis unfolded, of key skills and ultimately constitute a heavy around 11 percent of the labor force was unem- drag on productivity and growth.21 Studies point ployed. Such high rates reflected, in part, long to a significant “brain drain” due to emigration average durations of unemployment (close to 13 (see box 2.1). months for men and 10 months for women). Unemployment is twice as high among women as among men. Youth unemployment (34 percent) Access to Jobs is alarmingly high even by regional standards Labor force participation rates, unemployment, and and especially compared to other countries out- type of employment (wage or self-­ employment, for- side the region. Current unemployment rates are mal or informal) vary markedly across population likely to be significantly higher given slower eco- groups (youth, women) and regions. Disadvantaged nomic growth and the impact of the Syrian regions tend to have lower participation rates conflict. 36 Growth, Poverty, and Jobs BOX 2.1  Educational and Occupational Profile of Lebanese Emigrants Kasparian (2014) finds that among Lebanese emigrants who undertook university studies (25 percent of emigrants in the sample study), about 26.6 percent studied engineering and technology and 9.8 percent studied science, mathematics, and computer science. About 26.5 percent of university-educated ­ emigrants specialized in management and business services, 13 percent in literature and social sciences, and more than 11 percent in medicine (figure B2.1.1, panel a). Many occupy middle and senior manage- ment positions critical for operational efficiency and productivity (figure B2.1.1, panel b). A quarter of emigrants hold senior management positions, 20 percent are in scientific and other white-collar profes- sions, and 18 percent are in services, mostly trade. Figure B2.1.1  Specialization and Occupation of Lebanese Emigrants with Tertiary Education a. University educated b. Occupation Technology and engineering 27 Senior management 25 Management and business 27 Scientific and white collar 20 Services and trade 18 Literature and social sciences 13 Qualified worker 10 Medicine 12 Intermediate profession 9 Sciences, math, computer 10 Administrative position 6 Other 7 Machine operator 3 Law and political science 4 Nonqualified worker 2 0 5 10 15 20 25 30 0 5 10 15 20 25 % of emigrants with % of emigrants with tertiary education tertiary education Source: Kasparian 2014. Informality remains a salient feature of the running a formal business.23 Hence the quality of Lebanese economy and labor markets, particu- jobs in Lebanon overwhelmingly continues to be larly for the poor. Half of the labor force is in the poor, especially for the more disadvantaged informal sector: 20 percent are in the informal workers, and the business environment remains wage employment, while another 30 percent are challenging in light of high informality. Most self-employed and lack access to social security informal workers are involved in small retail (World Bank 2012d). The informality rate is sig- trade, personal services, and vehicle repair nificantly lower for the wealthier segment of the services. About 66 percent of informal firms are ­ Lebanese population, as 15 percent of individu- engaged in selling food, clothes, household items, als in the highest quartile are informal wage electronics, and other goods. employees, compared with 74 percent of individ- Earnings inequality is high, and labor mobil- uals in the poorest quartile (Gatti et al. 2014; ity is low. Given differences in access to job ­figure 2.14). Informality is associated with poorer opportunities and significant education and working conditions22 and presents a constraint to skill  premiums, earnings inequality is high.24 Growth, Poverty, and Jobs 37 Figure 2.11  Labor Force Participation are the most varied (with a ratio of mean earn- Rates in Lebanon, by Region, 2010 ings in the top to the bottom quintile of 4.5), given the diverse nature of self-employment. In the bottom quintiles, persons who are self-­ employed generally earn less than formal employees, while the situation is reversed for the top two quintiles. Labor mobility is low, with transition rates from one status to another (for example, informal to formal or self-employed to wage employee) at less than 10 percent.25 Education levels are strongly correlated with having better private sector jobs, but job search constraints and connections (wasta) may inhibit labor mobility and access (figure 2.16). Overall education levels in the labor force are low (42 percent have primary or less education), with Source: Central Administration of Statistics. great variation by employment status and sector of work. More than half of the self-­ employed Figure 2.12  Employment Status in have primary education or less compared to just Lebanon, by Region, 2010 27 percent of wage employees. This is not surpris- ing given that the overwhelming majority of self-employed work in low-­ productivity, low-­ paying jobs. In contrast, more than 40  percent of  wage employees have tertiary education, and this share reaches almost 75  percent among wage employees working in high-­ productivity services in the private sector. 26 While there appears to be a strong correlation between educational attain- ment and access to high-­ productivity, high-wage private sector jobs, additional barriers and con- straints related to job search and connections may inhibit labor mobility. For instance, in Lebanon personal contacts are the most preva- lent mechanism for finding a job. Furthermore, connections also appear to play an important role Source: 2010 Employee-Employer Survey. in hiring, especially in the public sector.27 Wage  disparity is significant both across and within employment status (figure 2.15). Informal Jobs Dynamics at the Firm Level employees have the lowest earnings, and their Younger firms and more productive firms are the earnings are more compressed. Those in the top main engines of formal job creation in Lebanon. quintile earn, on average, about 3.3 times more Recent evidence on the firm-level determinants than those in the bottom quintile. Formal of job creation shows that in Lebanon—as in employees earn significantly more than informal most countries in the region as well as in high- employees, and those in the top quintile have growth economies—younger, more productive wages 3.6 times higher, on average, than those in firms create more jobs than older, less productive the bottom quintile. Self-employment earnings firms (World Bank 2014e). As shown in 38 Growth, Poverty, and Jobs Figure 2.13  Unemployment Rates in Lebanon, 2010 Sources: World Bank 2014l; 2010 Employee-Employer Survey. Note: Latest available year in 2000s. Figure 2.14  Informality Rate in Lebanon, Figure 2.15  Mean Monthly Earnings in by Wage Quartile, 2010 Lebanon, by Wage Quintile and Employment Status, 2010 Source: 2010 Employee-Employer Survey. Source: 2010 Employee-Employer Survey. fi ­ gure 2.17, while older firms tend to shed work- generated about 66,000 jobs in Lebanon between ers in both Lebanon and Tunisia, net job creation 2005 and 2010, accounting for 177 percent of is positive for firms in their start-up period (first aggregate net job creation. Young large firms four years). Firms with between zero and four with 200–999 employees created the second years of activity and fewer than four workers ­ largest number of jobs (12,000). Growth, Poverty, and Jobs 39 Figure 2.16  Main Sector of Employment in the Private Sector in Lebanon, by Education Level and Employment Status, 2010 Source: 2010 Employee-Employer Survey. a. Information and communication, financial and insurance activities, and professional, scientific, and technical activities. b. Wholesale and retail trade, repair of motor vehicles, transportation and storage, accommodation and food service activities, and real estate activities. Figure 2.17  Job Creation in Lebanon and Tunisia, by Size and Age of Firm, Various Years Source: World Bank 2014e. Note: Size-age categories that created jobs are in dark blue, while categories that shed jobs are in light blue. Start-ups grow faster during their first years operation, while firms 25 years and older of operation, but they tend to underperform rel- expanded their employment 12 percent ative to their regional peers, pointing to the pres- figure  2.18). Yet employment growth among (­ ence of substantial constraints to firm growth in young firms in Lebanon is below that of other Lebanon. Young firms grow and expand employ- countries in the region. In Morocco, for instance, ment faster than older firms. In Lebanon, firms firms 2–4 years old increase their employment 2–4 years old expanded their employment 25 percent during their first two years of opera- 19 percent per year during their first two years of tion, while firms 25 years and older expand at a 40 Growth, Poverty, and Jobs rate virtually similar to that of firms in Lebanon. the region (table 2.2). Consistent with these find- The loss in employment is substantial; assuming ings, fast-growing firms—so-called “gazelle” that 1,000 firms 0–2 years old start with an aver- firms—are more productive and younger than age of four workers and operate for two years, other firms. However, firm entry and productiv- they would create 293 fewer jobs per year in ity growth are too weak—partly due to barriers to Lebanon than in Morocco.28 entry—to unleash faster job creation in Lebanon. However, weak firm entry and productivity The firm entry rate in the manufacturing and ser- growth still constrain job creation. In addition to vices sectors in Lebanon is low relative to that in firm age, firm productivity is a key determinant other countries in the region (figure  2.19). For of job creation (World Bank 2014f). In Lebanon instance, the entry rate of new services firms is a 1 percent increase in firm productivity raises only 9 percent in Lebanon compared to job creation 3.9 percent, which is one of the high- 9.6 percent in Tunisia and up to 12 percent in a est elasticities of job creation to productivity in fast-growth economy such as Turkey. Figure 2.18  Growth of Firms in Figure 2.19  Firm Entry in Lebanon and Lebanon and Morocco, by Age of Firm, Comparator Countries in the Middle East Various Years and North Africa, by Sector, Various Years Source: Enterprise Survey data from the 2013 survey for Lebanon Source: Adapted from World Bank 2014e. and 2007 survey for Morocco. Note: Entry rate is the share of new firms in a given year over the Note: Annual employment growth rates were calculated using firm number of firms in the previous year. The data cover 2005–10 in employment level during the survey year and two years prior to the Lebanon and Turkey, 2003-06 in Morocco, and 1996–2010 in survey. Tunisia. Table 2.2  Job Creation in Lebanon and Comparator Countries in the Middle East and North Africa, by Firm Productivity Lebanon Tunisia Turkey Egypt, Arab Rep. Indicator (all sectors) (all sectors) (all sectors, 20+ workers) (manufacturing, 10+ workers) Labor productivity 0.039*** 0.029*** 0.007*** 0.007 Controlling for firm size and age Yes Yes Yes Yes Number of observations 141,061 129,516 176,665 7,925 R 2 0.40 0.34 0.03 0.10 Source: World Bank 2014f. Note: The dependent variable is firm employment growth defined using the Davis-Haltiwanger-Schuh growth rate. Regressions are weighted by the average size of firms over the growth period. Job growth is measured annually, and productivity is measured in the beginning of the period. In Egypt, data include manufacturing and mining establishments with at least 10 employees; in Turkey, firms with at least 20 employees are considered. The estimation periods are 2005–10 in Lebanon and Turkey, and 2007–11 in Egypt. Labor productivity in Egypt is significant at the 1 percent level when the job creation rate measured over the four-year period is regressed on initial labor productivity in 2007. *** Significant at the 1 percent level. Growth, Poverty, and Jobs 41 Constraints to Firm Entry, Growth, permits, or import licenses. Firms in Lebanon face and Formalization demands for bribes or feel that a payment is needed when they engage in most operational Businesses identify political instability, the invest- activities, such as construction (42 percent of firms ment climate, lack of reliable electricity services, report expecting to give a bribe), obtaining an and corruption as the chief obstacles to their electrical connection (17 percent), or operating a operation and growth. Political instability ranks license (12 percent). This stifles competition and as by far the most severe constraint on the ability the entry and expansion of firms. The high inci- of firms to run their operations and grow, with 58 dence of bribe payments and corruption is closely percent of firms reporting it as such (figure 2.20). linked to the multitude of licenses and authoriza- The second leading obstacle is the weak “invest- tions required as well as to unclear laws and ment climate,”29 with 15 percent of firms identify- regulations, which often lead to discretionary ­ ing it as a major or severe constraint, followed by implementation of policy. This ultimately accentu- electricity (11 percent), corruption (7 percent), ates the barriers to business creation and growth. and access to finance (7 percent). This ranking of Entrepreneurs in Lebanon find uncertain major constraints remains the same across the dif- regulatory and policy implementation to be a ­ ferent cuts of data (firm age, size, sector, and loca- significant impediment to business operations. tion), although the percentages vary, with larger Medium-age and medium-size firms are particu- shares of the youngest firms and medium-size larly negatively affected, as are firms located in businesses and those operating in North Lebanon Mount Lebanon and in retail and wholesale busi- and in the services sector of Greater Beirut and ness activities (figure 2.21). However, this uncer- South Lebanon listing political insecurity as the tainty appears to affect smaller firms and those predominant constraint. Some of these con- outside the capital city to a larger degree. As a straints are not mutually exclusive. For instance, consequence, managers spend, on average, more political instability weakens institutions and could than 12 percent of their time dealing with vari- undermine transparency and accountability, fuel- ous government entities. The lack of clarity in ing corruption and poor service delivery. laws and regulations opens the doors to discre- Many firms have to pay bribes to obtain docu- tionary implementation, fosters red tape and ments such as operating licenses, construction Figure 2.20  Obstacles to Firm Operations Figure 2.21  Consistency and and Growth in Lebanon, 2013–14 Predictability of Policy Implementation as Obstacles to Firm Performance in Lebanon, by Age, Size, Sector, and Region of Firm, 2013–14 Source: 2013–14 Lebanon Enterprise Survey. Note: Figures are survey-weighted. The top five national-level obstacles shown. The investment climate indicator pools seven relevant indicators (tax rates and administration, customs and trade regulations, labor regulations, licenses and permits, courts, access Source: 2013–14 Lebanon Enterprise Survey. to land, and informal practices). Note: Figures are survey-weighted. 42 Growth, Poverty, and Jobs Figure 2.22  Delivery of Electricity Services and Firm Performance in Lebanon and Comparator Countries, Various Years Source: 2013–14 Lebanon Enterprise Survey. corruption, and limits the potential for firm Figure 2.23  Delivery of Electricity growth and investments. Services in Lebanon, by Region, 2013–14 Firms have an unreliable supply of electricity, with significant regional variation, and incur large losses as a result. Firms in Lebanon have to wait 56 days after submitting an application to obtain an electricity connection, compared with 13 days in Jordan and 19 days in Morocco figure 2.22). Once connected, firms receive very (­ poor service. They experience more than 50 power outages per month for an average dura- tion of 5.2 hours, which is about 8.7 hours per day. The impact on businesses is large; the aver- age firm loses 6 percent of its sales because of power outages. Poor service delivery masks large differences in service quality across regions. Firms in Beirut and South Lebanon experience, Source: 2013–14 Lebanon Enterprise Survey. on average, 2 to 4 hours of power outages per day compared to 11 hours per day in Mount Lebanon (34  percent) and the Republic of Yemen and up to 17 hours in Bekaa Valley (figure 2.23).30 (20 percent) have higher shares of SME lending Although Lebanon performs well regionally figure 2.24). Lebanese firms depend signifi- (­ in lending to small and medium enterprises cantly on the banking sector for their financing, (SMEs), the country’s conservative lending cul- as 53  percent of all firms, 50  percent of small ture limits access to credit, although this is par- firms, and 63 percent of medium-size firms tially mitigated by incentive programs of the report having received a bank loan. government and the BdL. The share of SME Overall, domestic commercial banks provide loans as a percentage of total bank loans is 24 percent of firms’ working capital finance around 16 percent. In the region, only Morocco and  39 percent of their investment finance. Growth, Poverty, and Jobs 43 Figure 2.24  Access to Finance of Firms in Lebanon and Comparator Economies, 2010 Source: World Bank and Union of Arab Banks 2010. Since  2000, the government and the BdL have large firms, they tend to use fewer bank lines of been subsidizing interest payments of SME bor- credit and loans, less bank financing of invest- rowers, extending special guarantees to SMEs, ment and working capital, and more internal and granting exemptions on compulsory reserves sources of financing (figure 2.25). Insofar as the of creditors.31 It is unclear how much of this busi- smaller companies also tend to be younger, to ness would appeal to commercial banks in the have weaker collateral, and to have a short finan- absence of incentive programs. In many markets cial track record, their access to bank financing internationally, despite the absence of extensive can be particularly challenging. As detailed in incentive programs SME finance has proved a World Bank (2014e), younger firms are the main profitable business for banks that have developed engines of job growth in Lebanon, so relieving expertise to address the specific risks associated their financing constraints is particularly impor- with the sector. Notwithstanding the consider- tant for achieving the twin goals of poverty able support of government and BdL programs, reduction and shared prosperity. In that regard, access to credit remains among the top con- particularly welcome are two recent initiatives: straints to business and growth as identified by the launch of the BdL Circular 331 initiative Lebanese firms. In addition, accessing credit designed to provide up to US$400 million for remains a challenge because the value of required start-up equity, and a complementary initiative collateral is significantly high—at 166 percent of by Kafalat to provide even earlier high-risk seed loan value, on average—and around two-thirds capital. of enterprises report that their most recent loan The majority of informal firms are small, required collateral (World Bank 2010c). Lebanese owned, and managed by persons with Notwithstanding relatively favorable access to relatively low educational attainment. The aver- finance, important gaps remain. Smaller firms, in age informal firm has US$2,455 of sales per particular, have difficulty obtaining business month. Median monthly sales are US$995, indi- loans from banks. As a result, compared with cating large differences across firms.32 Firms with 44 Growth, Poverty, and Jobs Figure 2.25  Financial Constraints for Firms in Lebanon, by Size of Firm, 2013 Source: 2013–14 Lebanon Enterprise Survey. Figure 2.26  Size of Informal Figure 2.27  Biggest Obstacles to the Establishments in Lebanon, by Monthly Operations of Informal Enterprises in Sales and Share of Firms, 2013–14 Lebanon, 2013 Source: 2013–14 Lebanon Enterprise Survey on the Informal Sector. Source: 2013–14 Lebanon Enterprise Survey on the Informal Sector. fewer than four employees dominate the infor- Informal firms identify lower-priced com- mal sector, representing more than 91 percent of petition and corruption as the most severe all firms (figure 2.26). The majority of informal constraints to their operation and growth. Of firms are managed by Lebanese (about the informal firms surveyed, 53 percent report 87 percent), followed by Syrians (8 percent) and that lower-priced competitors are the biggest Palestinians (4 percent). Educational attainment obstacle to their ability to run their operations among owners of informal firms is relatively and grow (figure 2.27). The second leading low:  46 percent have only a primary education obstacle is corruption, with 22 percent of firms and 9  percent have no education, while only identifying it as a major or severe constraint. 16 percent have tertiary training. This is ­followed by access to finance (8 percent). Growth, Poverty, and Jobs 45 The  poor supply of electricity is particularly and fees involved (32 percent), and more inspec- problematic for ­ informal firms engaged in tions and meetings  with government officials small manufacturing activities. For instance, (26  percent). Thus  informal firms in Lebanon about 76  percent of bakeries cite lack of elec- choose to opt out of the formal economy in tricity as a major or severe constraint. Other order to fall below the radar screen of enforcing constraints appear to affect sectors equally. authorities given the low opportunity cost of Small firms are reluctant to register and for- informality. malize their activities, largely because they see Programs to increase formalization would registration as having few benefits (figure 2.28, have more impact if they were combined with panel a). Among larger informal firms, the time, policies to improve access to finance, reduce fees, taxes, and inspections that registering taxes, and simplify tax procedures for small firms involves also matter for their decision to remain (figure 2.29). Informal entrepreneurs see the informal, indicating a propensity to opt out of main benefits to formalizing as being to the formal sector as a mechanism to escape pol- improve access to finance (39 percent of firms), icy enforcement. About 72 percent of informal to be able to issue receipts and attract customers owners report that they do not register their (13.8 percent), and to have better access to raw firm because they see no real benefits to regis- materials and government services (12.8 percent). tration (figure 2.28, panel b). The other main Few entrepreneurs expect formalization to reasons given are the time and fees involved reduce bribe payments. Smaller firms see larger with the process (21.6 percent) and higher taxes benefits in improving access to finance. Among (27.7  percent). Impediments to formalization larger firms, formalization brings the ability to related to time and fees, taxes, inspections, and expand the client base by issuing receipts. These meetings with government officials appear to be findings suggest that policies to increase formal- more important for larger than for smaller ization would have more impact if they were firms. Among firms with six workers and more, combined with programs to improve access to owners who do  not want to register the firm ­ finance among newly formalized businesses as cited lack of ­ benefits to registration (59.5 well as with measures to reduce taxes and percent), higher taxes (39.5  percent), the time simplify tax procedures for small firms. ­ Figure 2.28  Willingness to Formalize and Main Constraints to Formalization of Firms in Lebanon, by Firm Size, 2013 Source: 2013–14 Lebanon Enterprise Survey on the Informal Sector. 46 Growth, Poverty, and Jobs Figure 2.29  Perceived Benefits of Formalization in Lebanon, by Firm Size, 2013–14 Source: 2013–14 Lebanon Enterprise Survey on the Informal Sector. Figure 2.30  Creation of Informal Firms in Lebanon, by Owner’s Nationality, 1984–2014 Source: 2013–14 Lebanon Enterprise Survey on the Informal Sector. The inflow of Syrian refugees has led to an but Lebanese businesses still account for more increase in Syrian-owned informal firms, but than 84 percent of the new businesses near these there is little evidence that they have displaced figure 2.30, panel b). Syrian settlements (­ Lebanese firms. Among informal businesses opened after 2011, about 66 percent are managed Diaspora and Remittances by Syrians and 29 percent by Lebanese (­ figure Thanks to their strong economic standing abroad 2.30, panel a). However, the share of Lebanese- and deep ties at home, emigrants support rela- managed informal businesses created in 2004–10 tives through large, relatively frequent, and stable and in 2011–14 is virtually equal. In locations remittances. Lebanon has a larger inflow of close to Syrian refugee settlements, Syrians man- remittances than any other country of similar age 13 percent of informal businesses opened size (figure 2.31, panel a).33 Remittances from between 2011 and 2014 compared to 4.7 percent emigrants residing in Arab countries play a of businesses opened between 2004 and 2010, ­ significant role, followed by remittances from Growth, Poverty, and Jobs 47 emigrants in North America, Western Europe, regularly. Less frequent remittances are more and Africa (figure 2.31, panel b).34 Remittances common among emigrants with only brothers or are frequent and stable, especially for emigrants sisters in Lebanon or lesser blood relations who have children or parents in Lebanon. About figure 2.32, panel a). While the frequency of (­ one in every four emigrants remits regularly; remittances is  lower for the diaspora who left about 96 percent of emigrants who are house- Lebanon decades ago and is well established hold heads and have a spouse and children in abroad, it remains substantial (Kasparian 2014). Lebanon remit regularly. About 44 percent of About a third of  emigrants who left less than migrants who have parents in Lebanon remit 10 years ago remit regularly compared to about Figure 2.31  Remittances to Lebanon and Comparator Countries, by Size and Origin (various years) Sources: Adapted from Kasparian 2014 (panel a); World Bank 2014l (panel b). Figure 2.32  Frequency of Remittances in Lebanon, by Role in Family and Length of Stay Abroad (various years) Source: Kasparian 2014. 48 Growth, Poverty, and Jobs 17 percent of those who left more than 25 years While the diaspora has maintained strong ties ago (figure 2.32, panel b). with Lebanon, its participation in the country’s Remittances contribute largely to investments in political and economic life is limited. Lebanese the education and health of Lebanese households, migrants send remittances, visit the country, con- thereby supporting human development and tribute to business creation and trade, support the skills of the next generation. Remittances sup- philanthropic activities, and help communities in port household investments in education, and times of conflict and natural disasters (Hourani their impact is significant at all levels, from pri- 2007). For instance, at the macroeconomic level, mary school to university. About 39  percent of the diaspora has contributed to meeting the gov- ­ remittance-receiving households partially or fully ernment’s financing needs by buying treasury rely on these transfers to finance primary school bills targeted to emigrants. The Lebanese ­ education, while 46 percent use them to finance Children’s Fund, first created in Cyprus in 1995, tertiary education (figure 2.33, panel a). The ­ later opened several country offices to collect contribution of remittances to health care is also ­ philanthropic donations and supported more significant. Among remittance-receiving house- than 24 organizations in Lebanon (Rahme 2007). holds, 24 percent rely on remittances from abroad Successive governments have attempted to link to pay for medications, while 4 percent rely on the diaspora with Lebanon to varying degrees by remittances from within Lebanon (figure 2.33, creating and expanding Lebanon’s diplomatic and panel b). consular missions and permitting the creation on Figure 2.33  Investments in Education and Health of Lebanese Households, by Source of Funds (various years) Source: Kasparian 2014. Growth, Poverty, and Jobs 49 Lebanese soil of organizations related to emi- after-tax real average effective interest rate on grants’ interests.35 The large potential for invest- public debt). As shown in figure 2.34, this rate of ment in business by the diaspora is not fully return (r) on capital was significantly higher than realized because Lebanese entrepreneurs abroad the real GDP growth rate (g) over the postwar find that the policy environment in Lebanon is period (that is, over 1993–2013: r = 7.1 percent > too uncertain and corruption too rampant. g = 4.6 percent). As Piketty (2013) notes, such a The large number of Lebanese abroad rep- high gap (2.5 percent) between r and g generates resents an important opportunity to tap into a persistent and large income inequality, as g prox- rather well-educated, prosperous, and con- ies for the upper bound on real wage growth over nected pool of people. High levels of remit- the long term. tances from the diaspora have kept the Lebanese economy afloat, along with the strong banking system.36 Diasporas and diaspora networks abroad are especially important reservoirs of Poverty and Inequality in knowledge about trade and investment opportu- Access to and Quality of Public nities as well as technical and scientific expertise. Services About 3.4 percent of the Lebanese diaspora Nonmonetary dimensions of poverty are high in residing in the Organisation for Economic Lebanon due to the limited availability of Co-operation and Development (OECD) coun- good-quality social and infrastructure services. tries is highly skilled. A recent World Bank Shared prosperity is difficult to achieve without a consultation with the Lebanese diaspora points favorable environment for equitable and sustain- to a strong desire to give back and stay con- able growth. The government plays a critical role nected with Lebanon and abroad. Many of the in creating this environment by maximizing the interviewees referred to their background and human and productive potential of a society, experience growing up in a time of war and regardless of exogenous circumstances such as having the natural ability to adapt and take risk. gender, place of birth, parental wealth, religion, They expressed willingness to give more if or ethnicity. Governments can maximize human proper and more transparent venues were insti- and productive capacity by the effective provi- tuted. Despite the gloomy business environ- sion of public goods such as education, water, ment in Lebanon, diaspora members tend to roads, and electricity. This section briefly dis- believe that they have an important role to play. cusses inequality in access to and quality of two Individual efforts, such as connecting, invest- basic public ­services—water and education—in ing, and mentoring, can be crucial in particular Lebanon. sectors (high technology, ICT, solar energy) and in development projects in remote and rural areas. Diaspora members are often Water attached to their city of origin and are willing A recent survey of the relatively affluent to improve the local infrastructure there. ­mohafaza37 of Greater Beirut and Mount Lebanon The government’s strategy of financing the region indicates high variability in access and reconstruction and recovery through borrowing quality.38 The survey found that public access to rather than taxation (at least over the medium water is not uniform in the area and varies across term) clearly benefited wealthier Lebanese citi- residence and households by wealth status zens: not only did they not face a high tax burden (­figure 2.35). In particular, 70 percent of the pop- (taxes in Lebanon are relatively low compared to ulation from the top 60 percent of the distribu- comparator countries), but they also benefited tion has access to the public water network from a relatively high real (after-tax) return on compared to 58 percent from the bottom capital (proxied, for lack of better data, by the 40  percent. There is substantial variation in 50 Growth, Poverty, and Jobs Figure 2.34  Gap between Return on Capital and Economic Growth in Lebanon, 1993–2013 Source: Central Administration of Statistics. Note: The 1993–2013 average of the after-tax real average effective interest rate on public debt is 7.1 percent, while the average real GDP growth rate for the period is 4.6 percent. The income from interest in Lebanon is taxed at 5 percent (withheld at source). The 2.5 percentage point gap between r and g is large. access to public water across municipalities as the wet season (December through May) com- well. For example, access to the public network is pared to 90  percent of households using water almost universal in Metn and less than 10 percent from other sources. An estimated 82 percent of in Aley. Furthermore, the quality of public water subscribers are not satisfied with the public is worse for households from the bottom ­network service.39 40  percent than for wealthier households. For example, service water is saline for 46 percent of Educational Outcomes households from the bottom 40 percent com- pared to 32 percent of households from the top A significant gap exists in educational attain- 60 percent (figure 2.36). ment between public and private education, The delivery of public water is also unreli- which is reducing equality of opportunity able, with the majority of subscribers experienc- among children (figure 2.37). Children from ing frequent interruptions in supply. Average wealthier and middle-class households are con- water supply in the public network is much centrated in high-performing private schools, shorter than is experienced in nonpublic while disadvantaged children are concentrated sources: 6 and 13 hours per day, respectively. in low-performing public and private schools Only 20 percent of households connected to the (figure 2.38). Household characteristics, area of public network have water available every day in residence, and access to services have a large Growth, Poverty, and Jobs 51 Figure 2.35  Public and Private Access to Water in Mount Lebanon, by Income Classes (various years) Source: World Bank 2014c. Note: Precise income data are not available from the survey, so the upper income threshold was imputed for each household from a particular income group to calculate income per capita. As a result, income per capita reflects the upper-bound approximation. ***Average access to public network is lower among the bottom 40 percent of the population than among the top 60 at 1 percent significance level. Figure 2.36  Salinity of Public Water in Lebanon, by Income Class (various years) Source: World Bank 2014c. Note: Precise income data are not available from the survey, therefore the upper income threshold was imputed for each household from a particular income group to calculate income per capita. As a result income per capita reflects the upper-bound approximation. ***Average access to the public network is lower among the bottom 40 percent of the population than among top 60 at 1 percent significance level. 52 Growth, Poverty, and Jobs Figure 2.37  Test Scores on Math and Figure 2.39  Circumstances Contributing Science in Lebanon, by Type of School, 2011 to Inequality of Opportunity in Math Test Scores in Lebanon, 2011 Source: 2011 Trends in International Mathematics and Science Study (TIMSS). Note: Students’ weights were used. Figure 2.38  Economic Background of Students in Lebanon, by Type of School Source: 2011 Trends in International Mathematics and Science Study (TIMSS). impact on math and science achievement. Simple cross-­ tabulations show a substantial variation in test scores in math and science across regions, area of residence, parents’ edu- cation, access to ICT, and durables. Residing in a remote rural area is also associated with low test scores. Parents’ education is a strong predic- tor of children’s test scores as well. Living in a ­family where parents do not have any secondary education is associated with the lowest test score. Father’s education and residence (region and location of school) are the two largest con- tributors to inequality of opportunity, account- Source: 2011 Trends in International Mathematics and Science Study (TIMSS). ing for 44 and 23 percent of total inequality, Note: Students’ weights were used. respectively (figure 2.39). Notes 1. Appendix B provides an overview of the econ- 2. GDP figures for 2004 to 2011 are based on the omy’s performance prior to and during the civil Lebanese national accounts published by the war. This long-term perspective illustrates the last- Central Administration of Statistics in July 2013, ing impact that the conflict had on Lebanon’s core while data for 2012, 2013, and 2014 are projections drivers of growth (human, physical, and social pending final GDP estimates from the Central capital). Administration of Statistics. These projections Growth, Poverty, and Jobs 53 are based, in part on the Lebanon coincident and to US$3.84 (World Bank 2014m). Average annual leading economic indicators developed by Matta per capita poverty lines in Lebanese pounds were (2014). as follows: LL 844,000 (food poverty line), LL 3. The conflict with Israel resulted in large human 1,332,000 (lower poverty line), and LL 2,172,000 losses, infrastructure damage, and economic (upper poverty line). Any household that spent losses, with US$2.8 billion in direct damages and less than the upper poverty line was considered to US$700 million to US$800 million in indirect be poor. damages (World Bank 2010b). 11. The poverty estimates for 1997 and 2007 were 4. Major security incidents included the Nahr-el obtained using backward and forward simulations Bared conflict in the summer of 2007 and armed (UNDP 2008a). clashes between opposing political factions in May 12. High productivity among small farms is relatively 2008. common in developing and emerging markets. 5. This group has the same GDP per capita (pur- While small farms are more productive than large chasing power parity terms) as Lebanon in 2013. farms, they still cannot leave subsistence agri- It includes Azerbaijan, Belarus, Cuba, Gabon, culture given their small amount of land, lack of Mauritius, Mexico, Romania, Suriname, Turkey, rural advisory services, and market imperfections Uruguay, and the República Bolivariana de (among others). Venezuela. 13. Detailed results of the analysis along with a 6. National accounts data in this paragraph refer description of the data are provided in Vishwanath to data consistent with the July 2013 national and Atamanov (2014). In the absence of recent accounts release. microdata, having information from other sur- 7. The American University of Beirut/Byblos Bank veys that have self-reported information on consumer confidence index dropped 33.9 percent household income or people’s perceptions about in 2012 and 9.9 percent in 2013, respectively. their well-being can be useful. In particular, three These are the latest available annual numbers. sources roughly covering the period between 8. Social protection consists of policies and programs 2010 and 2014 have been used: the World Values designed to reduce poverty and vulnerability by Survey, the Arab Barometer Survey, and the promoting efficient labor markets, diminishing Survey on Financial Literacy and Capabilities. All people’s exposure to risks, and enhancing their three surveys contain rich information on subjec- capacity to manage economic and social risks, tive well-being and individual or household char- such as unemployment, exclusion, sickness, dis- acteristics of respondents. Some of the surveys ability, and old age (World Bank 2001). collected self-reported income. Combining mon- 9. The Gini index measures the extent to which the etary information with subjective well-being helps distribution of income or consumption expen- to triangulate results using imperfect proxies for diture among individuals or households within poverty in recent years. an economy deviates from a perfectly equal 14. The average poverty line in 2004–05 was LL distribution. A Gini index of 0 represents per- 2,172,000. Cumulative inflation between 2004–05 fect equality, while an index of 1 implies perfect and 2012 was 51.1 percent. inequality. 15. For the initial documentation of the GTAP model, 10. After 2000, the Ministry of Social Affairs, sup- see Hertel (1997); for more recent literature and ported by the UNDP, and in partnership with the latest version of the model, see https://www.gtap​ Central Administration of Statistics, undertook .agecon.purdue.edu/models/current.asp. the first Multipurpose Household Survey (Living 16. For example, a global GTAP does not have the Conditions and Household Budget Survey), which detailed modeling of the economy needed for a was conducted from February 2004 to April 2005 precise estimation. Moreover, the World Bank in about 13,000 households nationwide (CAS study was undertaken in August 2013, and the 2005). The sample covered the entire population, data available at that time covered only a few except the Palestinian population living in refugee months in which a large number of refugees were camps. Household-specific extreme, lower, and in Lebanon. It probably did not capture some of upper poverty lines were constructed based on the the channels through which the Syrian conflict costs of basic needs. Since the lower poverty line is would affect poverty. used as eligibility criteria in the National Targeting 17. Other key factors, in decreasing order, were Program, it was updated in 2013 using the con- economic growth, social protection, rural devel- ­ sumer price index from US$2.40 per capita per day opment, public sector governance, equality of 54 Growth, Poverty, and Jobs opportunity, education, anticorruption, and bal- 28. In this scenario, firms 2–4 years old would create anced regional development. 760 jobs in Lebanon and 1,000 jobs in Morocco 18. Employee paid weekly, hourly, or piece-rate basis. during the first year (difference of 240 jobs). 19. During 2004–10, the labor force grew at an aver- During the second year, they would create an age annual rate of 2.2 percent, half of which was additional 904.4 jobs in Lebanon and 1,250 in explained by a growing working-age population. Morocco (difference of 345.6 jobs). The average 20. Over the past decade, the total participation rate difference in the number jobs created in the first increased moderately, driven largely by increases two years is 292.8. in the participation of women, especially young 29. “Investment climate” comprises tax rates and educated women (that is, female participation administration, customs and trade regulations, rates increased from 22 in 2004 to 26 percent in labor regulations, licenses and permits, access to 2013). land, courts, and informal practices. 21. While labor inflows into Lebanon (immigrant 30. Firms adopt various costly coping strategies such workers, refugees) could compensate for the high as producing electricity with power generators, emigration of skilled workers, there is little rea- with more than 91 percent of firms owning or son to believe that this is the case. First, the pro- sharing a power generator. Outside Beirut, power file of immigrant workers and refugees is similar generators provide more than 50 percent of firms’ to the profile of the Lebanese resident population electricity consumption. In the Bekaa Valley and (World Bank 2013c), indicating that such inflows Nabatieh, firms draw 62 and 69 percent, respec- cannot close the skilled labor-supply gap opened tively, of their electricity from generators. by emigration. Second, labor laws, in particular 31. One of the region’s most successful credit guar- those geared toward managing the political and antee programs is Kafalat, a government- (and social impact of refugees from certain countries, donor-) subsidized loan guarantee scheme aiming limit the integration of refugees into the Lebanese to improve access to finance for SMEs. Firms with labor market, such as in high-skill professional a Kafalat guarantee are still required to have sub- fields. stantial collateral, which is an important obstacle 22. Evidence suggests that formal workers have access for small and start-up firms. The main benefit of to better benefits (annual, maternity, and sick the Kafalat guarantee is to make longer-term lend- leave) and better-quality jobs (higher earnings, a ing more available. Small firms, in addition, pay written contract, longer tenure). lower interest rates, reducing their cost of financ- 23. Among business owners and top managers, ing (World Bank 2012f). 53  percent identified competition with unregis- 32. One- or two-person firms—which account for tered or informal firms as a major constraint in 56  percent of informal firms—have average Lebanon, as opposed to 28 percent in the Middle monthly sales equal to about US$1,500. Average East and North Africa region. Disaggregated fur- monthly sales reach over US$9,000 for informal ther, this appears to be the biggest constraint in firms with six or more workers, but such firms rural areas (specifically in North Lebanon, where account for less than 4 percent of informal firms. informality rates are especially high (2013–14 33. Remittances were US$1,600 per capita or Enterprise Survey data). 16  percent of GDP in 2012, followed by Egypt 24. Other things being equal, having higher tertiary (US$238 per capita, 7.5 percent of GDP) and education increases hourly wages by 32 percent Morocco (US$200 per capita, 6.8 percent of GDP) for men and 52 percent for women relative to hav- in the Middle East and North Africa. ing only primary education. Cognitive skills have 34. Kasparian (2014) finds that emigrants in Arab a positive effect in addition to the effect of educa- countries are the leading source of remittances, tion (World Bank 2012d). followed by emigrants in North America, Western 25. On a month-to-month basis over December Europe, and Africa. 2007–10 (World Bank 2012d). 35. The diaspora has voiced its desire to have the right 26. Beyond formal education, cognitive skills appear to citizenship for the descendants of Lebanese to have positive effects on earnings for wage migrants and the right to vote in absentia for employees, while noncognitive skills affect the Lebanese residing abroad. likelihood of working in the informal sector 36. In 2013 (latest available data), remittances consti- (World Bank 2012d). tuted 6.8 percent of GDP. 27. See Rizk Azour (2013) for details on personnel 37. A mohafaza is an administrative unit equivalent to cost in the central government of Lebanon. a governorate. Lebanon has six mohafazas. Growth, Poverty, and Jobs 55 38. This section discusses the results of a survey to safe water has been conducted recently in conducted by the Consultation and Research Lebanon. Institute to assess the impact of the Bisri Dam 39. As a result, 43 percent of connected households Project. The number of observations was 1,200 are willing to choose a hypothetical plan with the households located in Greater Beirut and Mount best water service and the highest water fee (con- Lebanon. No national survey regarding access tinuous connect time and high water quality). 56 Growth, Poverty, and Jobs Chapter 3 Lebanon’s Challenges and Opportunities Overarching Challenges political actors, often manifested in confessional terms, have repeatedly created deadlock within The confessional system of governance—in its the legislative and executive branches of current incarnation—and the dynamics of government. As a result, key development plans ­ national and regional conflicts constitute overar- and policies have not been ratified or imple- ching constraints that have engendered deep mented. This constraint is rooted in the nature structural inequalities and deficiencies, and of the confessional system itself (specifically in have  inhibited economic growth and inclusive the partial implementation of the Taef Accord). development. These constraints are at the core of Second, the confessionally-driven staffing of Lebanon’s current fragility and vulnerability to public institutions at the expense of merit-based destabilizing national and regional shocks. They criteria impedes the state’s ability to deliver qual- affect growth and development across all sectors ity public services efficiently and to generate and must be taken into account when analyzing inclusive and sustainable growth (figure 3.1). The sector-specific challenges and priorities. This need to maintain a sectarian balance of power chapter describes the main manifestations of within institutions, reflected in both staffing and these twin constraints. responsibilities for resource allocation, means that sectarian interests are prioritized over the Lebanon’s Confessional equitable and adequate provision of services, Governance and Elite Capture transparency, and accountability. This problem Lebanon’s economic growth and development has worsened markedly in Lebanon in the past pathway since independence cannot be consid- decade (figure 3.2) to the extent that the country ered apart from the country’s (evolving) confes- is now the worst performer among countries sional system of governance. This is due to the in the Middle East and North Africa with regard role of confessionalism not only in providing to political interference in hiring decisions the basis for Lebanon’s political system, but also (figure 3.3). in determining economic and relationships and Third, the confessional system has become forms of organization. In this respect, the confes- the dominant system for structuring socioeco- sional system has exerted a constitutive—and nomic relations. As described in chapter 1, the not  exogenous—influence on economic growth Lebanese state emerged from the civil war in and development trajectories. Confessionalism, weakened form, with its sovereign role and capa- as an overarching constraint, manifests itself in bilities displaced by sectarian organizations and several ways. interests, which in certain cases assumed de facto First, the inability of political actors to reach responsibilities for territorial administration and a consensus on national priorities severely con- governance. In this context, individual social strains the ability of government to develop and and  economic rights and opportunities came implement long-term, visionary development to  be defined through sectarian affiliations policies. Continuing tensions between domestic and patronage or clientalistic relationships with Lebanon’s Challenges and Opportunities 57 Figure 3.1  Policy Making and Delivery of Services in Lebanon and Comparator Regions, 2012 Source: 2012 Institutional Profiles Database. Figure 3.2  Perception of Political financial allocations, perpetuating regional Interference in Public Employment in income disparities and uneven access to and Lebanon, 2007 and 2010–11 quality of public services. Fourth, electoral accountability is weak. The 1960 parliamentary elections law and the role it  gave to confessions result in elections where political party platforms have limited economic and social content, and are focused, instead, on  defending the confession’s access to public resources. When faced with limited prospects for  improving the quality of public services and  institutions, and the impact these have on growth, many Lebanese opt to emigrate. Fragility, Conflict, and Violence For most of its history, Lebanon’s internal stabil- ity and political, social, and economic dynamics have been directly affected by regional conflicts. Two dimensions are particularly salient for the purposes of this Systematic Country Diagnostic Source: Arab Barometer Surveys (2007, 2010–11). (SCD) because of the constraints they impose Note: Responses to the question, How important is the applicant’s political orientation to obtaining government employment? on  governance and on economic and social stability. sectarian leadership. This gave sectarian actors First are regional alliances and the weakening and organizations considerable authority and, of state authority, governance, and institutional in some cases, political autonomy. It also meant capacity. A key feature of politics in Lebanon is that sectarian affiliations became key organizing the establishment of alliances between domestic principles in the provision of public services and political actors (confessional groupings or sects) 58 Lebanon’s Challenges and Opportunities Figure 3.3  Perception of Political Interference in Public Employment in Lebanon and Comparator Economies, 2010–11 Source: 2010–11 Arab Barometer Survey. Note: Responses to the question, How important is the applicant’s political orientation to obtaining government employment? and regional actors, usually in some form of breakdown in relations between host and refugee clientalistic relationship (Hourani 2013). At ­ communities and upset the delicate confessional present, Lebanese groups have aligned with balance within society, further polarizing sectar- opposing sides of the conflict in the Syrian Arab ian tensions at the political level. Republic—March 8 is aligned with the Syrian regime, and March 14 is aligned with the Syrian opposition. This alignment is threatening to Nested Challenges and undermine the delicate confessional balance, with growing potential for destabilization and Constraints conflict. This is directly affecting governance These overarching constraints have been the and  state institutional capacity, paralyzing an root cause and also exacerbated Lebanon’s long- already problematic decision-making apparatus, standing and well-identified development and and undermining the ability of state institutions private sector challenges. Two studies have ana- to contain increasing insecurity and violence lyzed Lebanon’s growth constraints and drivers. (Barnes-Dacey 2014). The first study, by Berthelemy, Dessus, and Nahas Second is the influx of refugees and the conse- (2007), using the growth diagnostic methodol- quent economic and social destabilization. As ogy of Hausmann, Rodrik, and Velasco (2008), of  January 2015, more than 1.1 million Syrian identifies binding (nested) constraints to growth refugees have officially sought refuge in Lebanon, in Lebanon. Key among these are the country’s creating severe pressures and competition over fiscal imbalances and the resulting macroeco- social services and jobs. In addition to the fiscal nomic risks. The risk of crisis affects the nature burden and limited absorptive capacities of gov- and of quality private sector investment. The ernment services and communities (World Bank inefficiency of public spending and services also 2013c), there is growing concern that deepening has a major impact on economic activity, as it vulnerability and rising tensions could lead to a poorly complements private investment (weak Lebanon’s Challenges and Opportunities 59 infrastructure, especially electricity) and widens institutions and the challenges this poses to effec- the inequality gap and regional disparities. tive decision making have prevented the estab- The second study, by the World Bank (2012e), lishment of appropriate checks and balances, focuses on Lebanon’s drivers of long-term sus- and  sound coordination of economic and fiscal tainable growth. It identifies the key constraints policies (Makdisi 2007). as (a) macroeconomic volatility, in particular the Moreover, Lebanon’s location at the intersec- risk of continued fiscal imbalances and severe tion of several conflicts in the region has been macroeconomic shocks that these imbalances a  source of constant macroeconomic shocks, may create; (b) infrastructure gaps, especially in including the significant fiscal impact of the electricity, water, transport, sanitation, and tele- influx of Syrian refugees (World Bank 2013c), as communications; and (c) deficiency in banking well as security-related shocks, which have led to sector intermediation due to fiscal dominance in major declines in key sectors, especially tourism which highly productive industries and innova- and trade (Bertelsmann Stiftung BTI 2014). tive activities do not seem to benefit from finan- Until a few years ago, Lebanon had the high- cial inflows, which are used mainly for short-term est ratio of debt to GDP in the world. A period deposits in banks or real estate acquisitions. of  strong growth from 2007 to 2010 reduced Furthermore, despite Lebanon’s strong banking this  ratio markedly, due mostly to a cyclical sector, access to finance for micro, small, and improvement but also to some rationalization of medium enterprises remains a constraint.1 expenditures. The underlying structural fiscal The rest of this section reviews in some detail deficit has, however, not been fundamentally the key nested constraints that Lebanon is facing. addressed; on the contrary, it has widened in part These are the overall macroeconomic environ- due to the  introduction of permanent revenue-­ ment, infrastructure gaps, weak institutions and eroding measures (for example, the value added governance, uneven human capital, the business tax exemption on diesel). With growth tumbling climate, access to finance, and environmental since 2011 and a large fiscal burden associated degradation. with the Syrian crisis (a combination of lower revenue and higher expenditures related primar- ily to the cost of providing public services to Macroeconomic Vulnerability refugees), the debt-to-GDP ratio is rising again, ­ The macroeconomic environment is vulnerable resulting in a marked deterioration of the coun- as a result of precarious public finances and try’s macroeconomic environment. Based on Lebanon’s exposure to regional instability and current policies and projections, Lebanon’s debt conflict. According to the Word Economic dynamics are not sustainable (IMF 2014). Forum’s global competitiveness index, the weak- Determined under a confessionally-oriented ness of the macroeconomic environment is regime, fiscal policy is not transparent, lacks Lebanon’s biggest constraint both in absolute basic accountability, is prone to being captured terms and also compared to countries in the by vested interests, and therefore is inefficient Middle East and North Africa region, compara- and unproductive. The budget process is in tor countries in terms of purchasing power par- disarray. There have been no approved budgets ­ ity, or comparator countries in terms of stage of since 2005 due to political polarization in parlia- development. Lebanon’s macroeconomic envi- ment and a dispute regarding extra-budgetary ronment is ranked as the second worst in the expenditures.2 The last officially closed fiscal world according to the global competitiveness accounts are for 2003. Spending has been con- index ranking of 144 countries. This weakness ducted largely through enabling legislation, trea- arises, to a large extent, because of the country’s sury advances, and ad hoc measures. Even prior structurally weak public finances. The predomi- to 2005, fiscal policy was not transparent due to nance of confessional interests in government basic impediments such as having different 60 Lebanon’s Challenges and Opportunities budget classifications for the approved budget service reform, coupled with deficiencies in law and the executed budget. Lack of proper human resource management and training, hin- oversight, including over extra-budgetary enti- ders the formation of human capital, mobility of ties that receive significant government funding the workforce, and management of diversity. and are only answerable to certain confessions Such challenges further strain the state’s “capac- or  politicians, entrenches a culture of non-­ ity to govern” at a time when the threat of rising transparency and capture of fiscal policy for con- violence and conflict in neighboring countries fessional purposes. This lack of transparency and is  exacerbating an already weak environment accountability creates room for fiscal leakages, regarding the implementation of rules and guide- inefficiencies, and corruption. Furthermore, lines. Trust in government has been eroding, key  documents on the government’s national with increasing corruption, vested interests, budget and financial activities are either not pub- and  confusing policy choices (Arab Barometer lished or not produced at all. This limited access Surveys). Finally, accountability is hindered by to information inhibits potential third-party the scant availability of data and information, accountability mechanisms (for example, vot- which reduces transparency and participation. ing  power of informed citizens, civil society Lebanon’s expenditures are characterized by organizations, media), making the management large budget rigidities that limit fiscal space of public resources an ad hoc, discretionary and flexibility to react to shocks. These expendi- endeavor. The constraints have been exacerbated tures are concentrated on personnel costs, by increasing polarization linked to the con- debt  servicing, and transfers to the state-run flicts  in Syria and Iraq, leading to paralysis in electricity company, Electricité du Liban (EdL), both policy development and implementation which together accounted for 81.6 percent (Bertelsmann Stiftung BTI 2014). of  total spending, on average, during 2006–13 The public financial management system suf- (figure 3.4). The wage bill (as a share of GDP) for fers from several constraints that hinder its public sector employees is not excessive when proper functioning, weaken its transparency, and compared to the bill in a group of comparator result in the inefficient use of public resources. countries, although benefits are generous, espe- Despite the implementation of some reforms,3 cially pensions (which is, however, ­heterogeneous Lebanon’s public financial management system is among public sector employees with some, such outdated, imposing considerable inefficiencies as the army and judges, having a very generous within the budget cycle and reflecting a fragmen- scheme compared to others)—(figure 3.5). The tation in the budget and treasury functions. issue is more about the quality of public services The wage bill and an unsustainable pension for that these public sector employees are able to civil  servants4 are sources of public spending deliver. Reflecting the large public debt, interest inefficiency. The wages and salaries scale for the ­ payments have been sizable, accounting for one- civil service are not transparent, revealing large third of total expenditures and about 60 percent gaps and distortions within the public service of total revenue and grants. itself, and large benefit packages distort the gen- Unproductive spending and fiscal leakages are eral equilibrium of the labor market. significant and widespread; they crowd out effec- On the human resources level, the implemen- tive social safety net programs and hinder the tation of competency-based meritocratic recruit- provision of better services for the population. ment could be enhanced. Moreover, a significant The energy sector is a major drag on public gap in capacity exists in the civil service, with finances. Between 2006 and 2014, the govern- vacancies reaching 41 percent for leading ment transferred an average of 4.3 percent of positions and 70 percent across the civil ser- ­ GDP to EdL each year. EdL’s production is both vice  (Moubayed Bissat 2013). Additionally, the inefficient and insufficient, with a generating absence of policy orientation concerning civil capacity of 2,019 mega-watts, compared to a Lebanon’s Challenges and Opportunities 61 Figure 3.4  Central Government Spending in Lebanon, 2002–13 Source: Ministry of Finance data. Figure 3.5  Cost of Public Sector since 1996, when the price of oil was US$23 per Employees as a Share of GDP in Lebanon barrel (World Bank 2008a). and Select Countries, 2010–12 EdL is not the only source of leakage. Leakages also occur on both the expenditure and revenue sides, such as spending on civil service and mili- tary pensions or tax exemptions (World Bank 2005c). Corruption is perceived as endemic. Given these large, inefficient, and in the short term nondiscretionary items, the budget in Lebanon has limited resources left to pursue meaningful antipoverty programs, social safety nets, and investment in basic infrastructure. Low capital expenditures have reduced poten- tial economic growth (Berthelemy, Dessus, and Nahas 2007). The lack of fiscal space combined with the failure to approve a budget since 2005 Source: Ministry of Finance data. have resulted in a sharp fall in public spending on capital projects, which have averaged around 1.5  percent of GDP since the beginning of the peak  demand of 3,195 mega-watts. Systematic millennium. This is significantly below the spend- and long blackouts are a daily occurrence, caus- ing in comparator countries. As a result, the ing the extensive use of backup private generators country’s infrastructure network has deterio- at a cost that is three times the level of EdL tariffs rated, particularly transportation, water supply, (IMF 2014). Moreover, whereas only about  half and electricity—services important for the popu- of total electricity production costs are recover- lation’s well-being. Further, low public investment able, electricity tariffs have remained unchanged in these sectors has caused capacity to lag behind 62 Lebanon’s Challenges and Opportunities demand, leading to a reduction in potential The underlying structural fiscal balance, how- ­ economic growth and an overall deterioration in ever, did not improve. As a result, once growth living conditions. tapered off, debt dynamics stopped improving. The debt-financed postwar reconstruction, With the added fiscal impact from the Syrian coupled with inefficient and unproductive spend- crisis—estimated at an additional spending of ­ ing, has resulted in over-indebtedness. In con- US$1.1 billion for the period 2012–14 (World trast to the pre–civil war period, when the public Bank 2013b)—the debt ratio started rising in sector was a net saver, Lebanon’s public finances 2013 and is projected to continue rising over the in the postwar period have been structurally and medium term given current policy and regional persistently weak—during 1993–2013, the over- turmoil and factoring in the expected rise in all fiscal deficits averaged 12.4 percent of GDP global interest rates. (figure 3.6). These deficits have been driven The domestic banking system, relying on by low growth, high borrowing costs (compared funds from the diaspora and the Gulf, has been to the economy’s growth rate), and weak effi- willing to finance the large buildup in public ciency of public spending, partly due to an inabil- debt, but at the expense of the private sector and ity to rein in waste and corruption (World Bank a large exposure to the sovereign. At the end of 2005c). the civil war, the lack of foreign aid necessitated As a result of these high and persistent d ­ eficits, the mobilization of private funds to finance the Lebanon’s public debt peaked at 185.2 percent of country’s large reconstruction needs. This resur- GDP in 2006, the world’s highest d ­ ebt-to-GDP rected the country’s prewar banking culture, ratio at the time (figure 3.7). Between 2006 and which successfully reconnected with the large 2010, high and sustained GDP growth signifi- expatriate community, enlarged by the war. The cantly improved Lebanon’s fiscal balances and low- successful introduction of a fixed exchange ered the debt ratio by about 40 percentage points. rate  regime (fixed to the U.S. dollar) to anchor Figure 3.6  Fiscal and Primary Balance as a Share of GDP in Lebanon, 1991–2013 Source: Ministry of Finance data. Lebanon’s Challenges and Opportunities 63 Figure 3.7  Gross Public Debt in Lebanon, 1991–2013 Source: Ministry of Finance data. expectations and stop a currency crisis that Stackelberg follower role5 vis-à-vis the fiscal erupted in 1992 has resulted in a very stable authority; it is the residual buyer of sovereign nominal exchange rate, with the pound-dollar debt, while ensuring that banks offer attractive peg unchanged since 1997. Both peg and high dollar spreads to finance the current account. interest rates on government debt have enabled Under severe fiscal dominance and a banking the banking system to attract foreign deposits sector balance sheet that is more than three times profitably by offering high interest rates on GDP, the BdL ensures that banks keep attracting pound and dollar deposits and then use them to foreign deposits and that the public sector’s gross finance the government. financing needs are met. For the former, the BdL Given the scale of the public debt, the bank- has introduced certificates of deposit or various ing sector has reached a size seen in only a few subsidized refinancing schemes. For the latter, it countries in the world. At the same time, if finan- is the residual buyer of government debt in the cial inclusion is to be improved, returns from primary or secondary markets. The resulting lending to the private sector have to be better banking-sovereign feedback loop undermines than the low risk, low cost, and high margins that the BdL’s independence, which could ultimately banks are realizing by lending to the sovereign. prevent it from achieving its monetary policy Although this is less an issue for connected firms, objectives. However, the BdL will not be able it is an important concern for the rest of the pri- to stop being a Stakelberg follower vis-à-vis the vate sector and especially for small and medium fiscal authority until the size of the public debt enterprises (as discussed later in this chapter, and the public sector’s gross financing needs access to finance is the sixth most problematic shrink sufficiently that they do not endanger factor to doing business). macro stability. To maintain the peg, the central bank, While commercial banking has flourished, this the  Banque du Liban (BdL), is trapped in a sector has limited capacity to address a range of 64 Lebanon’s Challenges and Opportunities outstanding financing needs. Gaps persist in the Furthermore,  better infrastructure can have a financing needs of micro and small and medium positive impact on income inequality because it enterprises (SMEs) as well as in the availability allows low-­ income groups to access better and of  longer-term financing for infrastructure and more productive opportunities, increasing the public-private partnership projects (World Bank returns on their assets. It also enhances health and 2013j). Some of these gaps could be  addressed education outcomes, improving human capital. by the further development of non-bank financial Lebanon’s infrastructure is deficient com- institutions (NBFIs), such as those offering leas- pared to that of similar countries and acts as an ing, factoring, microfinance, and capital market impediment to private sector expansion and job solutions. While NBFIs could play a larger role in growth. According to the WEF’s competitiveness the provision of more inclusive financial services, index, infrastructure is Lebanon’s second weakest they are constrained, in part, by the lack of an comparative constraint, and is materially below adequate legal and regulatory environment. For ­ various sets of comparator countries (figure 3.8). instance, in the microfinance sector, some prog- Among the nine sub-indicators for infrastruc- ress has been made, but a significant amount of ture in the World Economic Forum’s global com- demand has not been met, which is attributable, petitiveness index, two of Lebanon’s are in the in part, to the burden of a regulatory framework bottom 10 percent of world ranking (out of 144 not tailored to this specific sector. countries) and four are in the bottom 25 percent Helping to address a critical gap, the BdL (table 3.1). Specifically, Lebanon ranks 143 for recently launched an innovative incentive pro- quality of electricity supply (second worst in gram (Circular 331) that encourages banks the world), 120 for quality of roads, and 114 for to invest in early-stage equities. This effort should mobile phone subscriptions per 100 population. boost the supply of capital, particularly for start-up companies and potentially higher-​ growth businesses that offer the greatest short- to Figure 3.8  Global Competitiveness Index medium-term potential for job creation. in Lebanon and Comparator Countries, by Likewise, longer-term financing mechanisms Component, 2014–15 also need work to build institutional capacity and establish appropriate regulatory environments before they can play a role in funding large-scale infrastructure and public-private partnership projects. Strengthening financial infrastructure related to collateral registries, settlement and custody systems, and credit information, among others, would improve risk management and promote inclusiveness. Infrastructure Gaps Lebanon’s weak infrastructure base has cur- tailed  economic development and lowered the population’s well-being. The weakest sectors are telecommunications, electricity, water, sani- tation, and transportation, sectors that are ­ essential not only for achieving growth in pro- ductivity and aggregate income, but also for ensuring a basic standard of living for people. Source: World Economic Forum. Lebanon’s Challenges and Opportunities 65 Table 3.1  Global Competitiveness Index skilled and unskilled. Direct jobs relate predomi- in Lebanon, 2011–15 nantly to civil works and broadband infrastruc- Rank (out of 144) Score (1–7) ture, which employ mainly unskilled workers. GCI 2014-2015 113 3.7 Indirect and induced jobs can be both unskilled GCI 2013–2014 (out of 148) 103 3.9 and skilled, but most are high skill. The potential GCI 2012–2013 (out of 144) 91 3.9 to develop new services in intermediary sectors, GCI 2011–2012 (out of 142) 89 3.9 such as e-banking or e-health, and new indus- tries, such as export-oriented information Basic Requirements (37.7%) 127 3.5 ­ technology–enabled services, opens the door to Institutions 139 2.7 multiple private sector–led job opportunities. Infrastructure 122 2.6 The rise of mobile applications businesses and Macroeconomic environment 143 2.6 the fragmentation and delocalization of global Health and primary education 30 6.3 employment through crowdsourcing are opening Efficiency Enhancers (50.0%) 85 3.9 multiple opportunities for persons connected Higher education and training 67 4.4 through broadband to these new platforms. If Goods market efficiency 71 4.3 Lebanese workers and the economy are not con- Labor market efficiency 123 3.7 nected to these new opportunities, Lebanon will Financial market development 102 3.7 likely face severe constraints in the future, espe- Technological readiness 86 3.5 cially as it aspires to move to high-income status. Market size 76 3.6 Box 3.1 provides more details on recent reforms Innovation and sophistication 101 3.3 in the sector and its outstanding constraints. factors (12.3%) Business sophistication 75 3.9 Electricity.  The electricity sector is a striking Innovation 119 2.8 example of an underperforming sector that nega- Source: World Economic Forum. tively affects Lebanon’s macroeconomic situation, economic growth, and households. First, fiscal Investments in infrastructure can lead to sig- transfers to the vertically integrated public utility, nificant job creation. According to the World Electricité du Liban, account for a large part of Bank, every US$1 billion invested in infrastruc- the country’s public debt. Second, electricity is a ture has the potential to generate, on average, binding constraint on Lebanon’s competitiveness around 110,000 infrastructure-related jobs in and ease of doing business. And third, many con- oil-importing countries in the Middle East sumers are willing to pay significantly more for and  North Africa (Freund and Ianchovichina good-quality electricity service and own private 2012). According to data from the World Bank generators to ensure that they do. Enterprise Survey, electricity is the second big- The burden on consumers is inequitable: gest obstacle to private sector firms in Lebanon, poor  regions go without public electricity for after political instability. 12–13 hours every day, while richer ones, such as Beirut, are subject to 3 hours of daily blackouts. Broadband Networks.  Lebanon’s weak broad- Political and confessional cleavages have blocked band networks and services also constrain growth reforms that have been on the table for more and private sector activity. Recent studies esti- than 30 years. This has allowed EdL to keep mate that a 10 percent increase in broadband underperforming, with high noncommercial penetration increases economic growth between losses, and low billing and collection rates. This is 0.24 to 1.50 percentage points and employment partly due to its inability to recover costs given a around 10 percent (Beardsley et al. 2010; Czernich freeze on tariffs, which has been in place for more et al. 2009; Katz 2010; Qiang, Rossotto, and than 20 years. Box 3.2 presents more details on Kimura 2009). The jobs created would be both the situation of the electricity sector. 66 Lebanon’s Challenges and Opportunities Box 3.1  Performance of the Information and Communication Technology Sector in Lebanon Since 2011, the government has taken a more active role in strengthening the supportive infrastructure of the information and communication technology (ICT) sector, but has not tackled the main issues in the sector, including lack of competition, and insufficient private participation. The insufficient focus on pol- icy and regulatory reform has been only partially compensated by government investments in telecom- munications infrastructure. These investmetns have extended the coverage of mobile and broadband services and lowered prices. In 2014 mobile penetration reached almost 100 percent of the population, and mobile broadband reached almost 50 percent (mostly through 3G service). Prices for fixed broad- band have fallen significantly, and today they are in line with the regional average of US$22 per month (price data from December 2012; see Gelvanovska, Rogy, and Rossotto 2014). However, fixed broadband has limited coverage, and mobile broadband costs US$55 per month, on average, which is above the regional monthly average of US$44, making mobile broadband unaffordable for many (figure B3.1.1). The quality of connections and access to high speeds are problematic, particularly for businesses. Ultra- Fast Broadband (for example connections above 20 Mbps) is not common in Lebanon. Coupled with uncertain electricity, access to quality broadband remains a key infrastructure concern for entrepreneurs. Government actions have extended coverage and lowered prices. However, the sector relies on govern- ment action and investment to improve coverage and services to meet the growing demand. Without the introduction of private sector–led investment and competition, the sector will not be able to continue upgrading infrastructure, extending coverage, and reducing prices. In the long term, this inability is likely to stifle the productivity of firms and the economy. High broadband costs and low quality will also have an impact on technology entrepreneurship, an area that has the potential to create new business opportu- nities and jobs for youth. Figure B3.1.1  Fixed and Mobile Broadband Prices in Lebanon and Countries in the Middle East and North Africa Region, 2012 10 9 national income per capita per month Broadband price as % of gross 8 7 6 5 4 3 2 1 0 . . . Ar isia co ep ep ep lic s n a a an n Em n ria q ar t en ti ai te by ai bi no a Ira u ub oc at R R ,R rd m ge w Ye ibo ira hr ra n Li ba Q yp Tu O Ku Jo or ep ab ic Ba iA Al j m Le D M R ud m la ab ab Is t, Sa Ar Ar n, Eg Ira n d ria te ni Sy U Fixed broadband Mobile broadband 3% threshold 5% threshold Source: Gelvanovska, Rogy, and Rossotto 2014. Note: For West Bank and Gaza, data are not available; values for Djibouti, fixed broadband: 22.1 percent; for Libya, mobile: 32.4 percent and fixed broadband: 77.2 percent; for the Republic of Yemen: 10.0 percent; for Syria, mobile broadband: 13.8 percent. Lebanon’s Challenges and Opportunities 67 Box 3.2  EdL: The Poster Child of Confessionally Induced Waste in Public Spending That Plagues Public Finances, Businesses, and Households since 1981 The staggering recurrent transfers to Electricité du Liban, the national electricity company, illustrate the perennial structural issues that escalate over time as political consensus for reform is lacking. EdL domi- nates electricity supply in Lebanon. The company is a vertically integrated utility. By itself the company is a major source of macroeconomic vulnerability for the country given the large drain on public finances it has generated over time, and that it continues to impose. However, given the sector’s highly politicized/ confessionalized nature, reforms have not materialized.a The EdL’s drag on public finances is staggering. The company accounts for about 40 percent of Lebanon’s public debt and is escalating rapidly (figure B3.2.1). Transfers to the EdL averaged 2.3 percent of GDP from 1992 to 2013 and 4.4 percent from 2006 to 2003, or 55 percent of the country’s fiscal deficit (figure B3.2.1). Since 2012, transfers to the EdL have exceeded US$2 billion per year. As the overall fiscal balance has been in deficit since 1992, transfers to the EdL have been effectively paid through borrowing. Using the rolling average effective interest rate on public debt since 1992 to price that borrowing cost, one finds that the cumulative cost of EdL transfers from 1992 to 2013 is a staggering 55.4 percent of 2013 GDP. With Lebanon’s public debt-to-GDP ratio at 143.1 percent, almost 40 percent of Lebanon’s total public debt can be attributed to EdL. Alternatively, Lebanon’s debt-to-GDP ratio would have been 87.8 percent instead of 143.1 percent if EdL had not been loss making. EdL’s financial losses, their sources, and their solutions have long been known (for example World Bank 1983), but have not been addressed. They became substantial in 1981, as the number of illegal connec- tions and unbilled consumers rose. With normal power line losses at about 12 percent, only about 54 percent of the energy generated and purchased by EdL was billed to consumers. These losses arose Figure B3.2.1  Cumulative Cost of Transfers to EdL, 1992–2013 60 80 70 50 60 40 % of fiscal deficit 50 % of GDP 30 40 30 20 20 10 10 0 0 01 11 10 00 09 99 92 93 98 02 03 08 12 96 06 13 94 04 95 05 97 07 20 20 20 20 20 19 19 19 19 20 20 20 20 19 20 20 19 20 19 20 19 20 Cummulative cost of EdL transfers (including government borrowing costs) EdL transfer as a share of the overall fiscal deficit Source: Ministry of Finance data. 68 Lebanon’s Challenges and Opportunities Box 3.2  EdL: The Poster Child of Confessionally Induced Waste in Public Spending That Plagues Public Finances, Businesses, and Households since 1981 (continued) despite a government subsidy on the ex-refinery price paid by EdL that, in 1982, was equivalent to 29 and 20 percent of fuel oil and gas oil refinery prices, respectively. At that time, the World Bank (1983) recommended that the government (a) urgently discuss the problem of illegal connections and excessively overdue accounts with EdL, (b) set up practical measures to help EdL to restore normal conditions in the sale of electricity, and (c) discuss with EdL its operating costs and financial requirements, and the extent of tariff increase necessary to enable EdL to pay for its current oil purchases, meet its debt service, and break even on its operating account. Despite EdL’s large and subsidized budget, the power supply remains inconsistent for 92 percent of households, who need to be linked to private generators. The revenues of private generators are estimated at US$1.7 billion or 4 percent of GDP (Roberts 2013). The poor quality of service delivered can be attrib- uted to corruption, mismanagement, and the confessional system, in which sectarian leaders protect segments of the supporting infrastructure (workers, service providers). ­ Aside from significant but longstanding operational inefficiencies, the government’s tariff policy has further compounded EdL’s losses and its reliance on budgetary transfers. A large portion of budgetary ­ transfers to EdL can be attributed to a nominal freeze in place since 1996 which caps EdL’s tariffs at a level derived from an average oil price of US$23 per barrel—far below cost recovery levels. Also contributing to low revenue are very high production costs, including the cost to operate and maintain power plants due to insufficient regular maintenance, aging assets, and high technical losses. The failures of the electricity sector also widen inequality in the country (World Bank 2009c): (a) consumers who are not billed are cross-subsidized by taxpayers and EdL customers who pay their bills; (b) consumers who suffer from electricity blackouts must use higher-cost alternatives (private generators for the rich, can- dles for the poor); and (c) electricity rationing favors the rich at the expense of the poor. Poor regions go without public electricity for 12–13 hours every day, while richer ones such as Beirut are subject to 3 hours of daily blackouts. Despite this major constraint on daily life and livelihood. Government is more apt to equalize the benefits that each confessional group receives than to encourage needs-based service delivery that favors the poor.a For example, in the early 1990s, seven sites were identified as suitable for a thermal power plant because each community insisted “on having its own power plant, … and subsequently the gov- ernment launched the construction of two hardly justifiable plants in Tyre and Baalbeck” (Nahas 2008). Consumers are willing to pay significantly more to have high-quality electricity supply. More than half of respondents to a Social and Impact Assessment Survey said that they would be willing to pay double their current budget in return for 24-hour service (World Bank 2009c). According to this same study, the share of electricity expenditures (EdL and private sector) in household budgets is relatively low, even for the lowest income quintiles. Even relatively high tariff increases across the board would not lead household expenditures to exceed international norms for any quintile. The impact on the poor and less well-off consumers would, however, need to be assessed carefully and compensated if needed. The poor quality of electricity supply hurts economic activity. Development and cost-efficient investment in energy systems is correlated with GDP growth. When electricity supply is frequently interrupted or prohibitively expensive, economic growth slows down or even contracts. Electricity ranks as a key bind- ing constraint to doing business in Lebanon. Lebanon has the second worst quality of electricity supply in the world (2014–15 World Economic Forum’s Global Competitiveness Index). Similarly, according to the World Bank’s 2013/14 Enterprise Survey, 55.1 percent of Lebanese firms identify electricity as a major constraint to their business operations and competitiveness. a. For example, in 2012, attempts by EdL to outsource its distribution retail services to private service providers met with strong and sometimes violent resistance from a highly factionalized workforce. The divisions within EdL’s workforce are a direct result of Lebanon’s confessional approach to governance and public employment, and highlight the constraints on rational management decision making within a confessional system. Lebanon’s Challenges and Opportunities 69 Transportation. Lebanon’s poor transport reliable public transportation is the relatively infrastructure and cumbersome procedures hin- high cost of vehicle ownership: import dues on der trade and competitiveness. The Work Bank’s vehicles can exceed 50 percent of a vehicle’s value, logistics performance index, which benchmarks higher than in most countries, while gasoline is countries’ performance on trade logistics, reveals (correctly) not subsidized, as it is in most other that import and export costs in Lebanon are rel- countries in the region. All of these result in atively high. While Lebanon’s cost of domestic lower well-being and less connectivity, while exports via its ports and airport is relatively low they push up accident rates and economic and compared to the regional average and that of financial costs, with detrimental impacts on eco- upper-middle-income countries, mostly due to nomic growth and inclusion. short distances within Lebanon, the cost is sig- Spending on transportation represents about nificantly higher for both land-based exports and 15 percent of household expenditure, which is exports via its ports and airport to the region. disproportionately high compared with shares in This places Lebanon at a large disadvantage as a other countries, while waste and inefficiencies trade hub for the region, a role it played success- related to urban congestion cost the economy fully in the past. no less than 4–5 percent of national GDP a year The major impediments to logistics in (Ministry of Environment 2011). These high Lebanon are weak infrastructure and cumber- costs are significant: as a trade and service-­ some procedures. This is in contrast to the oriented economy, Lebanon depends heavily important role that transportation plays in the on its transport system for moving people (tour- economy: the transport and telecommunica- ism and airlines) and goods (trade and transit tion  service sector employs about 7 percent of business). Lebanon’s working population (mostly in trans- High transport costs disproportionately port). From the perspective of job creation, the affect the poor. The inefficient and costly trans- sector is particularly important to the poor both port sector is creating increased disparities because service providers and employees tend to between Beirut and the regions. Economic activ- come from less well-off households (for example, ity is centered in Beirut, and poor transportation truck drivers, taxi drivers, and microbus owners is contributing to that, as industries and services and drivers) and because the labor-intensive are induced to relocate to Beirut to be closer construction of transport infrastructure employs to  demand and population. Poor road quality primarily poor and unskilled labor. is  a  trademark of underdeveloped regions in Poor transportation impedes private sector Lebanon, due to their relatively weak political development and access to markets in lagging leverage. The rural poor cannot afford housing regions. This results in high monetary and non- in  Beirut, and the commute to Beirut is both monetary costs for both households and expensive and time-consuming, despite the short ­ businesses. Lebanon ranks 120 out of 144 coun- distances. The lack of a reliable public transport tries on road quality. Lebanon’s road network, system requires the urban poor to travel on out- while substantial at 22,000 square kilometers, is dated, overcrowded, and unsafe buses and micro- in poor overall condition.6 Traffic congestion is vans. While it is difficult to quantify the cost of rife in the  Greater Beirut area, as the transport deteriorating roads, particularly rural roads, on system is  underdeveloped compared to that in the economy and lower-income groups due to most cities in the region. Further, the road net- the lack of data, there is widespread evidence work has not expanded significantly since the in other countries that rural road rehabilitation 1960s, all north-south traffic has to pass through programs dramatically improve rural incomes.8 Beirut’s central streets, there is no mass transit Lebanon’s very poor record of road safety system in Beirut, and there are no reliable public ­ represents another major drain on the economy. transport systems.7 Compounding the lack of Weak road safety management, including 70 Lebanon’s Challenges and Opportunities poor-quality road infrastructure, together with Housing affordability is an issue of particular bad behavior and lack of enforcement, has had a concern for low- and middle-income groups detrimental effect on road safety in Lebanon. In in Lebanon. The ratio of house price to income 2012, traffic police reported 595 fatalities, while is  9, almost double the typical ratio in an the Red Cross registered 6,700 injuries. These fig- Organisation for Economic Co-operation and ures are widely considered to be underreported, Development (OECD) country, which is less and the World Health Organization estimates than 5 (UN-Habitat 2011; World Bank 2011c). the  number of fatalities at 950 (WHO 2013). The average cost per square meter for an apart- According to the World Bank (2013i), the eco- ment in Beirut was about US$4,200–US$6,800 nomic cost of traffic fatalities and injuries in in 2011, approximately two to four times the cost Lebanon is equivalent to 5.5 percent of national of an apartment in the capital cities of other GDP, higher than in most other countries in the Mashreq and Maghreb countries. Socioeconomic region. segregation is substantial, and mixed-income housing is minimal. Water and Wastewater.  Water supply services Dysfunctional land markets and land policies are below the levels expected in a middle-income affect the poor directly and through the con- country, with significant ramifications for the straints they impose on firms. Key challenges poor in particular.9 Despite relatively high water include ineffective means for servicing land, and endowment per capita, Lebanon uses more than insufficient and ineffective land taxation. The 66 percent of its water resources in a largely new (and controversial) rent law passed in April unsustainable manner. Agriculture consumes 2014 to remove old rents is likely to affect about more than 60 percent of available water and 200,000 apartments, mainly in Beirut. Such legis- employs 20 percent of the labor force, many of lation runs the risks of (a) displacing low- and whom are poor, but only contributes an aver- middle-income groups, who will find it difficult age of 6 percent per year to GDP. Seasonal mis- to obtain affordable housing, a problem that is match between water supply (peaking in the compounded by the presence of 1.1 million rainy winters) and water demand (peaking in the ­ displaced Syrians; (b) inducing major demo- hot, dry summers) is exacerbated by the very graphic  changes in different parts of Lebanon low  water storage capacity,10 deficient water and in the socioeconomic profile of Beirut, lead- ­ supply networks, and fast-rising demand from ing to increased gentrification; and (c) destroy- municipal and industrial sectors. A poorly ing Lebanon’s cultural heritage, as lucrative sequenced investment program and absence of a high-density buildings are constructed in the viable business model for wastewater mean that core of historic districts. 92 percent of Lebanon’s sewage runs untreated into watercourses and the sea. Responsibility for Weak and Deteriorating Institutions irrigation has not been transferred to regional water establishments as planned, and proposals and Governance to decentralize management to water user associ- Poor governance and weak institutions exacer- ations and increase cost recovery have not been bate the challenges posed by Lebanon’s confes- implemented. More than half of the irrigation sional system.11 Institutions in Lebanon are schemes lack adequate operation and mainte- characterized both by inefficiency and corrup- nance. Returns to water are low, and the country tion and by a governance trap in which political is missing opportunities to increase production stability is maintained through subordination of and trade in high-value crops. national prerogatives to consensus among sec- tarian interests at the cost of strong institutions Land and Housing.  Dysfunctional land and focused on the public good. In this configura- housing sectors disproportionally affect the poor. tion, Banque du Liban stands out as an effective Lebanon’s Challenges and Opportunities 71 and respected institution, because it’s consider- independence (138), transparency of govern- able powers are legally ring-fenced, keeping it ment policy making (138), and diversion of financially independent of the government. public funds (137). These weaknesses are also ­ reflected in polls of Lebanese citizens. In a 2013 Governance.  Lebanon scores poorly on many Gallup World Poll, Lebanese reported low aggregate indicators of governance, and its per- confidence in (a) their national government ­ formance is not only below the regional average, (37  percent) and the judiciary, (b) the honesty but also has declined significantly over the past of  elections (15 percent), and (c) the honesty decade, as figure 3.9 shows. According to the of  government—that is, lack of corruption global competitiveness index, institutions are (4 percent). the third weakest comparative constraint of the Aggregate indicators of governance, however, country, and although the gap between Lebanon hide significant heterogeneity in institutional and comparator countries is not as large as with performance. Public services do not reach all infrastructure and the macroeconomic environ- ­ citizens in the same way and with the same ment, it is nonetheless substantial. Lebanon’s ­ quality, as both the Enterprise Survey of the institutions rank 139 out of 144 countries. In 15 Informal Sector and the Institutional Profile of 21 institutional subindicators, Lebanon ranks Database report. These differences are significant among the 10 percent worst countries in the across cities and between urban and rural areas world (71 percent). Of 144 countries, Lebanon’s (figure  3.10). The quality of public policy mak- worst rankings are for public trust in politicians ing  and of service delivery, which was weak to (144), wastefulness of government spending start with, has deteriorated markedly since 2006 (143), favoritism in decisions of government offi- (figure 3.11). cials (142), irregular payment of bribes (142), business cost of terrorism (140), efficiency of Judicial System.  The judicial system is slow, legal framework in challenging regulations (139), costly, and corrupt, which increases transaction intellectual property protection (139), judicial costs for enterprises. Contract enforcement is slow and costly, with high costs associated with legal fees. Lebanon has the slowest contract enforcement in the Middle East and North Africa Figure 3.9  Quality of Lebanese Public Finance Institutions, 2008–13 region, taking more than 700 days, on average, to enforce a standard contract. Predictability of rules and regulations is generally deficient, partly as judges lack access to legal information and training, so that dispute resolution tends to be inconsistent (World Bank 2005b). Despite some reforms, corruption remains a serious problem in the judicial sector, particularly with court administration staff. The fairness and indepen- dence of the judiciary have been called into ques- tion as a result of the extension of the confessional system to judicial appointments. Predictability also suffers from the poor quality of legislative drafting and review, which is at least partly due to the lack of resources available to the legislative drafting unit of the Ministry of Justice. Judges, lawyers, and government officials have noted Source: 2008–13 World Bank country policy and institutional assessment. that improperly drafted legislation too often 72 Lebanon’s Challenges and Opportunities Figure 3.10  Quality and Spatial Inequality in Delivery of Public Services in Lebanon and Comparator Regions, 2012 Source: 2012 Institutional Profiles Database. Figure 3.11  Quality of Public Policy Making and Service Delivery in Lebanon, 2006–2012 Source: 2012 Institutional Profiles Database. results in uncertainty as to whether new laws Long and repeated periods of caretaker govern- supplement, amend, or replace existing laws, ments have eroded accountability. A large and prompting the need for frequent amendments growing number of senior positions in the and obscuring the meaning of the law for the administration remain vacant due to deadlock public. This increases the transaction costs of on hiring based on confession, exacerbating businesses. Enforcement of judicial decisions can unclear lines of accountability. Regulations also be problematic (figures 3.12 and 3.13). governing income and asset disclosure are ­ A significant gap exists between the de jure weak,  as  are conflict of interest regulations. dimensions of governance and the de facto Lebanon has no proper freedom of information implementation of laws and regulations, leading framework, including relevant legislation and to a culture of weak accountability and impunity. ­regulations.12 Information on public affairs, Lebanon’s Challenges and Opportunities 73 Figure 3.12  Perception of Civil Justice in Lebanon and Comparator Regions, 2014 Source: World Justice Project. Figure 3.13  Trust in Key Public Institutions in Lebanon and the Middle East and North Africa Region, 2010–11 Source: 2010–11 Arab Barometer Surveys. 74 Lebanon’s Challenges and Opportunities including budgetary information, is difficult to in 2014 (figures 3.14 and 3.15). Improved public obtain. Boundaries between the public and governance implies improved public account- private sector persona of policy makers are ill-­ ­ ability and quality of administration as well defined. Most high-ranking politicians and pol- as  efforts to address bribery and corruption. icy makers are connected to major financial and A  major area for improvement is the need to real estate interests, either directly or through establish government procurement policies that their close relatives. Monopolies linked to politi- are transparent and open to a wide range of bid- cians hinder competition and create obstacles for ders, including SMEs. For example, a modern the entry of new firms. public procurement law, including the possibility of e-procurement, would reduce the cost of deliv- Civil Service.  The management of civil ser- ering goods and services and combat corruption vants is profoundly tainted by favoritism and and bribery that are rampant in the private and nepotism. Political orientation rather than expe- public sectors. Systematic corruption has added rience and skills appear to be the key factor influ- materially to the cost of public procurement. encing decisions regarding the hiring of civil Control of corruption in public procurement servants. These factors play a more significant is weak. At 22 percent in 2010 according to role in Lebanon than in any other country in Transparency International, Lebanon ranks 15 the  region, and their importance has increased out of 18 countries in the Middle East and North markedly over the past few years. These public Africa region (ahead of Iraq, Libya, the Republic sector jobs are sought after because they offer of Yemen, and Syria). Further the quality of income security and benefits for those who are goods and services fails to meet the required able to obtain them. standards. Major public procurement impedi- Local governments have historically been dis- ments include (a) lack of a comprehensive empowered, and there has been limited upward public procurement law; (b) a weak control envi- ­ and downward accountability of them. Lebanese ronment that does not enforce the implementa- local governments have limited mandate and tion of rules and guidelines; (c) lack of private financing. This is reflected in the low share of pub- sector international competition; (d) weak lic expenditure executed by local governments— human resource capacity and training, coupled for example, 6 percent in 2007 relative to an with the perception that procurement is not a average of 20 percent in countries with unitary profession; (e) lack of a mechanism for lodging governments around the world (World Bank complaints regarding institutional procurement; 2007a). Furthermore, central government trans- and (f) lack of procurement performance infor- fers to local governments are irregular and often mation or data. delayed, constraining the ability of local govern- ments to invest in and sustain good-quality ser- Uneven Human Capital and Skills vices and infrastructure. Mechanisms for upward and downward accountability are limited. There is Mismatch limited measurement and transparency regarding As revealed by the World Bank’s inequality-­ the performance of local governments. adjusted 2013 human development index, Lebanon performs relatively well in terms of Public Procurement System.  The public pro- human capital, but faces large inequality of curement system is weak, resulting in poor opportunities and outcomes among its citizens.13 accountability and widespread rent-seeking Opportunities are more a function of confes- (World Bank 2005a). Lebanon has systemati- sional polity and wasta (influence, often accom- cally  been ranked on the lower spectrum of panied by economic payment) than meritocracy. Transparency International’s surveys regarding Nearly 80 percent of the respondents to the 2013 governance, ranking 136 out of 175 countries Arab Barometer Survey agreed that obtaining Lebanon’s Challenges and Opportunities 75 Figure 3.14  Ranking on Quality of Institutions in Lebanon and Comparator Countries, Various Years Source: World Bank and World Economic Forum. Figure 3.15  Ranking on Corruption in Lebanon and Comparative Countries, 2003–04 and 2012–13 Source: Transparency International. 76 Lebanon’s Challenges and Opportunities employment through connections is extremely difficulty that is compounded in poorer regions widespread, compared to the regional average of of the country (figures 3.16 and 3.17). With low 60 percent. More than 70 percent of respondents rates of return on skilled human capital at home, cited the applicant’s tribe or political orientation Lebanon is facing severe difficulties in attracting as more important than personal qualifications and retaining talent (according to the World in obtaining employment in the public sector, Economic Forum’s human capital index, Lebanon compared with 40 percent across the region. scored 99 and 97, respectively, out of 122 coun- Both figures are the highest percentages in the tries, and 43.9 percent of tertiary-educated region. persons emigrate from Lebanon). These factors ­ The structural inequalities created by the con- are affecting the country’s development pros- fessional system of government are also evident pects, as skilled labor is difficult to find, and in the social services. Although social spending many Lebanese do not reach their full human in Lebanon has been historically high (with more potential. than 70 percent coming from the private sector), A particular challenge is to reduce the skills investment expenditure has not matched the mismatch with private sector needs as postsec- geographic distribution of poverty (table 3.2), ondary schools need to address skills for ICT, and the privatization of service delivery has tourism, health care, and construction. This mis- resulted in exorbitant costs, which have dispro- match is also undermining Lebanon’s poverty portionately affected the poor (Sen and Mehio- reduction and social and economic inclusion Sibai 2004). The substitution of welfare support efforts, as social-economic mobility is difficult and direct delivery of social services by confes- for individuals born to low-skilled parents. sional organizations, while largely beneficial for The Syrian crisis and the associated influx the most vulnerable populations,14 have further of  refugees has severely stressed access to and weakened the ability of the state to deliver, regu- quality of public services in Lebanon, especially late, and improve the quality of social services. related to human capital (World Bank 2013c). Inequality in Lebanon is particularly stark The government’s cost to meet additional in  income and in education, but is less pro- demands for health, education, and social safety nounced in health (with losses of 30.0, 24.1, and nets in 2012–14 is estimated at US$308 million 6.7 percent, respectively, compared to the non­ - to US$340 million (excluding demand that is inequality-adjusted human development index). being met through international humanitarian In part this arises from the weakness of the state assistance). In the health sector, the influx of in delivering high-quality public services—a refugees has significantly increased demand for ­ Table 3.2  Public Expenditure, Poverty, and Basic Needs in Lebanon, by Region, Various Years % unless otherwise noted Total public investment Allocation of public Distribution of low Poverty incidence, Distribution of Mohafaza expenditure, 1995–2005 investment satisfaction of basic 2004 poverty, 2004 (US$, millions) expenditure needs, 1995 Beirut 734 5.85 16 8 2 Mount Lebanon 1,111 19.56 25 30 27 North Lebanon 1,415 52.57 32 26 38 Bekaa 247 29.36 6 15 13 South Lebanon 918 42.21 21 10 16 Nabatieh 42 52.57 1 11 4 Total 4,467 28.55 100 100 100 Source: UNDP 2009. Lebanon’s Challenges and Opportunities 77 Figure 3.16  Geographic Coverage of Public Services in Lebanon, 2012 Source: 2012 Institutional Profiles Database. Figure 3.17  Equal Access to Public Services in Lebanon, 2012 Source: 2012 Institutional Profiles Database. health care services, creating shortages of health communities, who are less able to afford quality workers and placing financial pressure on hospi- health care services. In the education sector, the tals, which the government has been unable influx of refugees has also resulted in mount- to  meet. Health care costs have risen sharply, ing  fiscal costs, diminished quality of public resulting in significant welfare impacts on host education, and greater need for informal, out of ­ 78 Lebanon’s Challenges and Opportunities school education. If not managed, the extra bur- Health.  Lebanon has relatively good health sta- den on the education system could lower the tus, but, as with education, inequality regarding performance of Lebanese students. In both the ­ access to and quality of health services is high health and education sectors, the crowding out in  terms of geography, income, and gender. of  Lebanese host communities due to the large For  example, some regions (Bekaa and North number of refugees is increasingly becoming a Lebanon) have pockets of low socioeconomic source of tension and undermining social and associated health status. Health inputs cohesion and stability. ­ exhibit similarly stark geographic inequality.17 Service delivery is complex, with both public and Education.  Education in Lebanon is character- private institutions as providers. The system is ized by multiple adjacent systems, including also inefficient and expensive, as public resources public and private systems, functioning indepen- are allocated predominantly to curative care and dently from each other. Public schools educate pharmaceuticals, while primary care and gener- only about 31 percent of students, even though ics receive limited resources (IGSPS 2012). they are free and alternative options are expen- With only 50.1 percent of the population hav- sive for the most part.15 The remaining students ing health insurance, out-of-pocket expenditures are in private schools (53 percent), in free private are the largest source of health financing and are (and state-subsidized) schools, which are often shared inequitably across households (World confessionally-based (13 percent), or in schools Bank 2013g).18 The obligation to pay directly for for Palestinian students (3 percent). This revealed services is subjecting a large proportion of the preference for nonpublic schools reflects the population to financial hardship and even impov- poor quality of public education16 and has large erishment. Data also suggest that catastrophic negative implications for the poor and their health expenditures vary significantly across struggle to escape from poverty. Indeed, based regions. In the Nabatieh region, about 35 percent on the 2004 Household Survey, poverty and edu- of households incur catastrophic health expendi- cation are highly correlated in Lebanon: the poor tures, while the national average is 7 percent. often attend lower-quality public schools, while The health system reflects the broader eco- the wealthy attend higher-quality private schools nomic and political situation of the country in that (UNDP 2008). The higher quality associated different health payers and providers (Ministry of with private schools means that public school Public Health, the social security fund, and the students are likely to learn less and face more various specialty fund holders) fall under different ­ difficult job prospects on graduation. This sets ministries or management responsibilities, up intergenerational transmission of both lower making any attempts at national, comprehensive ­ learning levels and lower income. The education health sector reform very ­challenging. To improve system in Lebanon, because of its strong strati- Lebanon’s health system, increased accountability fied nature—along income and confessional in the quality and delivery of public services and lines—does not perform its civic mission of further strengthening of the regulatory system are being the “glue” that binds citizens to the state. critical. Among the main obstacles facing the sec- Relative to other countries in the region, tor and its ability to expand coverage are inade- Lebanon’s adjusted primary net enrollment rates quate public spending on health and skewed are slightly above average at 96 percent. However, spending on curative care compared to prevention secondary net enrollment lags behind at 67 and primary health care. percent, compared with the regional average of 72 percent. When compared with countries at Social Safety Net.  Lebanon’s social safety net similar levels of development, Lebanon’s second- system ranks among the weakest in the world ary net enrollment rate is significantly lower than (117 out of 122 according to the 2013 human the average of 81 percent. capital index). Similar to the Middle East and Lebanon’s Challenges and Opportunities 79 North Africa region, Lebanon suffers from key subsidy is perceived as a social safety net for the factors that hamper the effectiveness of social poor, with a progressive tariff fixed in 1996. As safety nets. First, it offers a multitude of small, electricity subsidies suffer from high leakage and fragmented, and poorly targeted programs that offer small benefits to the poor, the program’s effi- do not have a signifi­ cant impact on poverty or ciency as a social safety net is weak and should be address inequality because of their low coverage, replaced with better-targeted and more efficient high leakage, and limited benefit levels. Weak programs (World Bank 2009c). The government’s capacity of public institutions, coupled with lack inability to provide adequate social safety nets of reliable and consistent data, also hampers diminishes citizen trust in the state (figure 3.18), program effectiveness. Second, the system ­ while the absence of feedback mechanisms cre- relies  primarily on inefficient and pro-rich ates a disconnect between the government and ­ universal subsidies, which crowd out more the needs of citizens (figure 3.19). ­ interventions. Fragmented and relying effective ­ overwhelmingly on categorical and geographic Gender Inequality. Gender inequality in targeting, Lebanon’s social safety net spending ­ Lebanon is particularly stark once political without price subsidies did not exceed 1 percent empowerment is taken into account.20 According of GDP in 2013,19 while price subsidies (diesel, to World Economic Forum (2014), Lebanon is bread, and domestic production of tobacco) the world’s eighth worse country in terms of gen- accounted for a negligible 0.03 percent of GDP der equality, ranking 134 out of 142 countries21 (World Bank 2013h). surveyed, with a gender gap score of 0.592.22 This The 1 percent of GDP spent on social safety low score is driven mostly by the country’s poor nets in 2013 did not contribute to reducing pov- performance with regard to political empower- erty or addressing inequalities and proved to be ment (the global gender gap index measures the weak in protecting vulnerable Lebanese. If elec- relative gap between women and men across tricity subsidies and, in particular, the transfers four  key areas: health and survival, educational to Electricité du Liban are included, spending on attainment, economic participation, and politi- social safety nets rises dramatically, reaching cal  empowerment). According to this index, more than 5.6 percent of GDP. The electricity Lebanon ranks third to last in the region, where Figure 3.18  Trust in Institutions in Lebanon and the Middle East and North Africa, 2013 Source: 2013 Arab Barometer Survey. 80 Lebanon’s Challenges and Opportunities Figure 3.19  Awareness of Citizens’ Needs in Lebanon and the Middle East and North Africa, 2013 Source: 2013 Arab Barometer Survey. Figure 3.20  Gender Inequality in Lebanon, 2010–14 Source: World Economic Forum 2014. only war-ridden Syria and the Republic of score in the region does not exceed 0.01 point). Yemen have a worse gender gap ranking of 139 Lebanon’s global index ranking and relative gen- and 142,  respectively (figures 3.20 and 3.21). der gap score have fallen since 2010, primarily as Notwithstanding the weak ranking, Lebanon’s a result of consistently close to zero scores in absolute scores are very similar to those of other political empowerment (Figure 3.20). countries in the region (the difference between Lebanon’s gender inequality is among the Lebanon’s score in 2013 and the fifth highest lowest in the region with regard to economic Lebanon’s Challenges and Opportunities 81 Figure 3.21  Gender Inequality in Lebanon and Comparative Countries, 2014 Source: World Economic Forum 2014. participation and political empowerment, but it In educational attainment, Lebanon has is noticeably higher in the areas of educa- closed the gender gap in secondary and tertiary tional attainment and health. Lebanon’s political education, with a ratio of female to male enroll- empowerment index is second to last in the ment exceeding 1.00; however, in primary world (last in the Middle East and North Africa education female enrollment is relatively low ­ region), with a score of 0.01. The low score is due at  90 percent, while male enrollment exceeds to the historically small number of women 97 percent. Consequently, Lebanon ranks 106 out elected to parliament or appointed as ministers, of 142 with regard to educational attainment. with only three women elected to parliament in Finally, Lebanon’s health and survival ranking 2008 and no woman appointed in the previous is the highest of the four key areas (62 out of 142); council of ministers in 2014. However, this par- sex rate at birth and healthy life expectancy are ticular score does not correctly portray the role almost equal between men and women. of women in political life. While countries like  Kuwait and Saudi Arabia may receive a Challenging Business Climate and higher political empowerment score for recently appointing more women as ministers in a partic- Access to Finance ular year, women in Lebanon have taken part in The Lebanese economy is constrained by signifi- political life since 1952.23 cant structural rigidities. While political uncer- With regard to economic participation, tainty dominates the investment decisions of Lebanon ranked 133 out of 142 countries, due to businesses, according to newly available investment relatively low levels of female participation in the climate assessment data from the World Bank, workforce (female to male ratio of 0.34) and low issues related to the investment climate rank as the estimated earned income for women (female to second most important constraint to business. male ratio of 0.27). The female labor participa- While Lebanon’s private sector has t ­raditionally tion rate in Lebanon is on par with that of other demonstrated considerable resilience—​ adapting countries in the region and has been rising stead- in a challenging and volatile investment c­ limate— ily, albeit from a low level. the proximity of conflict in neighboring Syria, 82 Lebanon’s Challenges and Opportunities increasing domestic political instability, and an constraint in many countries in the Middle East uncertain geopolitical environment have consid- and North Africa, and Lebanon has better Doing erably increased perceived risk exposure. This Business measures than its regional neighbors. has led entrepreneurs and companies to prefer However, Lebanon’s systems for dealing with short-term and liquid investments, to the detri- “out of court” debt restructuring, insolvency, and ment of economic growth.24 These factors, bankruptcy are outdated and suppress business together with “traditional” investment climate development (World Bank 2012a). Lebanon constraints, intervene at all stages of a firm’s life ranks 136 on the Doing Business indicator for cycle. resolving insolvency (figures 3.22 and 3.23). Establishing and Closing a Business.  Running a Business.  Running a business is Establishing and closing a business are challeng- also  challenging. Among the key constraining ing and expensive tasks. Lebanon ranks 104 out factors are of 189 economies on the ease of starting a busi- ness (World Bank 2015). The high minimum • Contestability of markets is weak, given signifi- capital required to start a business and the fixed cant barriers to entry, especially legal and mandatory cost imposed by lawyers for creating administrative measures, widespread pricing a new company, even a small one, impose signifi- policies, and restrictive practices. There is no cant barriers to entry for small entrepreneurs. competition law. As a result, half of Lebanon’s Exit (insolvency and liquidation) is costly, domestic markets are considered oligopolistic nontransparent, and slow. The cost and time ­ to monopolistic, and a third of them have a to  close  a business are significant deterrents dominant firm with a market share greater to  entrepreneurial risk taking. These are a than 40 percent (Ministry of Economy and Figure 3.22  Indicators of Doing Business in Lebanon and Comparator Countries, 2013 Source: World Bank 2014b. Note: The average is for a group of countries with GDP per capita in purchasing power parity terms within 10 percent of Lebanon’s in 2013. The comparator countries are Azerbaijan, Belarus, Cuba, Gabon, Mauritius, Mexico, Romania, Suriname, Turkey, Uruguay, and the República Bolivariana de Venezuela. Lebanon’s Challenges and Opportunities 83 Figure 3.23  Key Constraints to Doing Business in Lebanon, 2013 Source: World Economic Forum. Note: From the list of factors above, respondents were asked to select the five most problematic for doing business in their country and to rank them between 1(most problematic) and 5. The bars in the figure show the responses weighted according to their rankings. Trade 2003). In particular, import monopolies of this code has been implemented by the are captured by a limited number of exclusive ­ private sector. Banks, however, have been agents stemming from a pricing and monopo- active and responsive under the supervision of lies law of 1967, and they wield considerable the Banque du Liban, which issued circulars political influence. This concentration of in 2011 requiring all banks to adopt a code of power makes it difficult to see any reforms in corporate governance meant to improve trans- this area in the near future. The legislative parency and facilitate the monitoring of banks framework places few restrictions on conflicts by different stakeholders (World Bank 2013d). of interest for the head of state, ministers, and Improved corporate governance practices members of parliament, limiting efforts to would improve accountability, transparency, prevent and combat corruption. Business and and decision making as well as help firms to political figures are often one in the same. attract external capital. Such elite capture and widespread lack of • Tax administration and business regulations competition in the economy have a large neg- are  nontransparent, outdated, complex, and ative impact on economic efficiency (and ulti- unevenly applied. In dealing with construction mately on growth and jobs) as well as on permits, Lebanon ranks 164 out of 189 econo- consumer welfare, which is particularly detri- mies, according to the World Bank’s 2015 Doing mental to poor households and households in Business indicators, with the process taking a the bottom 40 percent. minimum of 244 days to complete. Variation • Corporate governance is inadequate. In 2006 among firms in obtaining a permit is reported the Lebanese Transparency Association spear- to be high and linked to how connected the headed the country’s first corporate gover- firm’s owner is. This is a cross-cutting challenge nance code focused mainly on Lebanese joint that affects investors operating a business in stock companies. This code could serve as a various sectors of the country. It is also an area model for other types of businesses and non- where there is high incidence of corruption profit organizations, both in Lebanon and with municipal authorities. Contract enforce- throughout the Middle East. To date, only part ment remains problematic as even though 84 Lebanon’s Challenges and Opportunities acceptable laws are in place, their enforcement • Access to skilled labor is a serious challenge, as is slow, unpredictable, and costly to businesses. detailed in chapter 2. Lebanon consistently scores lower than the • A large informal sector (estimated at 30 percent regional average for regulatory enforcement of GDP in 2011) and is even larger in rural and lower than the regional average, the areas. This suggests that the formal sector OECD, and other comparator countries such as has  been captured by vested interests in Bosnia and Herzegovina, Serbia, and Colombia urban  centers and that the informal sector on indicators of improper influence in enforce- constraining competition in rural areas is  ­ ment and expropriation (figure 3.24). The diffi- (figure  3.25). The informal sector has likely ­ culty that lenders encounter in trying to expanded significantly due to the influx of foreclose assets negatively affects private sector more than 1.4 million Syrian refugees. As evi- lending. Enterprise Survey data for 2013–14 dent in other fragile and conflict-affected situ- reveal that corruption continues to be a serious ations, the large influx of refugees could crowd obstacle to business operations, ranking fourth out both the formal economy (undermining after political instability, the investment climate, competitiveness and the capacity of the state) and power supply (access to finance ranks fifth). and the informal sector (where the majority of This finding is consistent across firm size, age, Lebanese poor earn their living) and, worse, sector, and location. Enterprise Survey data give rise to further political destabilization also  show that weaknesses in the investment through the progressive criminalization of the climate are not just de jure but also de facto. ­ informal sector through uncontrolled rent Despite positive improvements in the number seeking, exploitation, and domination of trade of days to clear exports and imports, delays in networks (Rossis 2011). obtaining electrical and water connections, operating licensing, and construction permits The informal sector has been severely affected are ­significant. Moreover, there is significant by the presence of and competition from Syrian variability in the time taken, most starkly in the refugees. According to evidence from the 2014 case of construction permits. Informal Enterprise Survey,25 in areas with a Figure 3.24  Regulatory Enforcement in Lebanon, 2014 Source: World Justice Project. Lebanon’s Challenges and Opportunities 85 Figure 3.25  Quality of Business Environment in Lebanon, by Region, 2013 Source: 2013–14 Enterprise Survey. concentration of Syrian refugees, the majority of the future of early-stage equity investments, businesses rank competition from lower-priced although the sector is still in its infancy. The competitors as the principal constraint to their supply of viable companies (the deal-flow) is ­ operations, followed by corruption. limited, and innovative high-growth-potential ­ companies at the seed and early stages of devel- Access to Finance.  Although access to finance opment need both financing and other support. is not the overriding constraint that it is in many Rebalancing the market has implications for job other countries in the region, it is still very sig- creation. Enterprise Survey data reveal that small nificant and a larger constraint for small and firms and “other services” sectors (including medium enterprises than for large and informal ICT) created the largest number of jobs during firms. It remains a significant obstacle (in excess 2010–13, and evidence from firm surveys in of 40 percent) for formal firms across the other countries shows that young companies country, with the exception of the Bekaa Valley ­ who experience high growth early on create the (figure  3.26). Ongoing efforts initiated by the bulk of SME jobs. central bank and other governmental and However, evidence from focus groups—in ­ quasi-governmental agencies (such as Kafalat) addition to survey data—suggests that entrepre- to  promote SMEs and improve their access to neurs and start-ups do not receive sufficient finance are showing potential for some success, support from commercial banks. Given the but their limited track record, large collateral lending behavior of commercial banks, sup- requirements, and lack of an established relation- port  to foster private sector–led job creation ship with the financial intermediary discourage requires a focus on reforms of the non-bank start-up firms in particular.26 financial sector and related institutions, such as The recent BdL 331 circular has had a cata- the work being done to develop the payments lytic effect on venture capital. This bodes well for systems, capital markets authority, leasing, and 86 Lebanon’s Challenges and Opportunities Figure 3.26  Access to Finance by Firm Size, Location, and Formal or Informal Status in Lebanon, 2013–14 Source: 2013–14 Enterprise Survey. Note: Indicators for formal firms are survey-weighted. Informal enterprises are unweighted. microfinance sector. It also requires efforts to poorer households are more susceptible to envi- diversify financing products and to strengthen ronmental pollution by virtue of differences in the equity, credit, insurance, and microfi- health status and access to medical care. nance systems (World Bank 2013f). In addition, reforms on secured transactions would allow Water Pollution.  Water pollution is a grow- SMEs to offer and banks to accept movable col- ing concern in Lebanon. Untreated sewage, indus- lateral, enabling higher and safer lending and trial effluent, and agricultural runoff are often thus larger job creation. discharged into valleys, rivers, and the Mediterranean Sea, creating substantial pollution of water resources. Key sources of pollu- Environmental Degradation tion  include households, as only 8 percent of Lebanon suffers from large environmental deg- wastewater is treated (Ministry of Energy and radation that disproportionately affects the poor Water 2012a),27 and industries, which discharge (World Bank 2011b). In 2005 the environmental untreated industrial waste into major water cost was estimated at 3.2 percent of GDP. Water bodies, including the Mediterranean Sea and ­ and air pollution as well as coastal erosion are the the  Litani River. Even operational, downstream costliest causes of environmental damage in municipal water treatment facilities lack Lebanon (figure 3.27). Environmental degrada- proper  technological capabilities to treat toxic tion disproportionately affects poorer communi- effluents, representing a serious threat to the water ties because they rely more directly on ecosystem quality of potable water supplies, irrigation, and services for their well-being. According to the ecosystem services (World Bank 2014h). A third World Wide Fund (2014), “Damage to the envi- source is agriculture, as the runoff and infiltration ronment, as well as a lack of clean water and of ­residues from fertilizers and pesticides are land suitable for farming or growing food, leads ­ further polluting Lebanon’s water resources. to more hunger, illness, poverty, and reduced In  drinking water and groundwater samples opportunities to make a living.”  In addition, ­ collected in  major Lebanese cities, chlorine Lebanon’s Challenges and Opportunities 87 Figure 3.27  Costs of Environmental Degradation in Lebanon, 2005 Source: World Bank 2011b. and  organophosphate pesticides were frequently Strengths, Sources of detected in large quantities (Kouzhaya et al. 2013). Resiliency, and Opportunities Solid Waste Disposal.  Municipal solid waste dis- Despite a challenging environment, Lebanon posal is a persistent and critical issue. As of 2007, possesses some important drivers of growth, only 53 percent of municipal solid waste was sources of resilience, and significant opportunities. disposed in the country’s two sanitary landfills: ­ These have enabled the economy to perform Nahmeh and Zahlé. As discussed in box 3.3, these well amid adversity. After the civil war, Lebanon figures have worsened substantially in the past two experienced the strongest post-conflict recovery years due to the influx of Syrian refugees (World of any country with a conflict lasting more than Bank 2013b). The remaining solid waste is being 10 years (see appendix B). Lebanon was also one disposed in a contained landfill and in 700 open of the fastest-growing economies in the world dumps. Open and uncontrolled dumps are pollut- during the global recession that started in 2008. ing air, watersheds, and coastal zones (World Bank Lebanon’s resilience even in times of great stress 2011b). The closure of the over-extended Nahmeh has helped to prevent a relapse of the violence landfill in July 2015 resulted in the worse environ- witnessed during the civil war and created oppor- mental crisis in Lebanon’s recent history. Piles of tunities for both stabilizing the country and garbage have accumulated on street corners, addressing fundamental structural problems. dumped under bridges, valleys and forest area, thrown in river beds or simply burnt in open space. It has also brought large protests organized by Relatively Strong Human Capital ­ citizen groups such as “You stink” “We demand Compared to countries in the region or at a accountability” and the most recent “Women ­ similar level of development, Lebanon performs Uprising” movement. Civil society is demanding an ­ relatively well: Lebanon ranks 65 out of 187 end to years of corruption in the waste sector and countries in the World Bank’s 2013 human devel- more transparency in managing public resources. opment index, which puts the country in the 88 Lebanon’s Challenges and Opportunities Box 3.3  The Impact of the Syrian Conflict on Lebanon’s Environment This box summarizes the findings of a recent assessment undertaken by the Ministry of Environment (2014). In addition to huge social and economic challenges, the Syrian conflict is putting serious pressure on Lebanon’s fragile natural resources and ecosystems in the following areas. Solid waste management. The incremental quantity of municipal solid waste attributed to refugees is esti- mated at 325,000 tons per year, representing a 15.7 percent increase in municipal solid waste generation. While part of the waste is being managed within existing facilities, more than half is disposed of in open dumps, which increases land, soil, and water contamination and creates serious health risks. Water supply and quality. The increase in domestic water supply is estimated between 43 million and 70 million cubic meters, representing an increase in national water consumption of 8–12 percent. This increase has exacerbated an already stressed water situation and resulted in decreasing groundwater tables (ranging between 1 to 20 meters in wells across the country between April 2013 and April 2014). The consumption of poor-quality water and improper sanitation and hygiene in refugee settlements have also increased the incidence of diarrheal and other communicable diseases. The resulting increase in ­ pollution load from wastewater discharge has been significant. Air quality. While it is difficult to attribute an increase in air pollution precisely, the incremental demand being placed on road transport, residential heating, open burning of solid waste, and electricity produc- tion has increased air pollutants an estimated 20 percent. Land use and ecosystems. The influx of refugees has increased Lebanon’s population density from 400 to 520 persons per square kilometer. This urban densification creates many environmental and social stresses, generating more waste, water, and sanitation problems, noise pollution, and overcrowding. Refugees who have settled in informal tented settlements outside urban areas have encroached on ­ agricultural land, engaged in excessive felling of forest trees, and weakened sensitive ecosystems. A conservative estimate of the costs to mitigate the environmental impact of the Syrian conflict is US$3.5 billion (with US$300 million in operation and maintenance per year). This estimate only accounts for measures that could be quantified during preparation of the report. category of “high human development” (second invest strongly in (private and high-quality) edu- below “very high human development”). cation, which allows them to compete favorably Based on the World Economic Forum’s 2013 at the international level and to get well-paid human capital index, Lebanon’s performance jobs  abroad, especially in countries in the Gulf is not as strong (74 out of 122 countries), largely Cooperation Council (this brain drain, however, as a result of severe underperformance in its makes it difficult to retain talent at home). “enabling environment.” Lebanon is, nonethe- Lebanon’s health outcomes also improved mark- less, particularly strong in education, where it edly and now compare favorably with those of significantly outperforms upper-middle-income Middle Eastern countries or countries at similar and Middle East and North Africa countries, levels of development.28 ranking 32 out of 122. Lebanon invests heavily in its human capital, especially in education, pri- Large Diaspora and Remittance marily through high private spending. The qual- ity of the (privately dominated) education system Flows is high, ranking 13 out of 122. While return on Given large and sustained outmigration, Lebanon human capital is low, many Lebanese continue to has one of the largest diaspora in the world as Lebanon’s Challenges and Opportunities 89 a  proportion of the resident population. diaspora is globally diversified and internation- Remittances are a large and stable source of ally competitive. When combined with new financing for the country, both for the balance opportunities for trade and investment through- of  payments and for public finances. In 2013 out the region, these sources of economic vitality Lebanon was the ninth largest country in the will constitute significant sources of resilience world with regard to personal remittances and potential growth—once the right political, received29 as a share of GDP (17.7 percent). institutional, and security conditions have been Remittances are also contributing to the buoy- created. ancy of the real estate sector and are key to the A key challenge is to delink private sector continued growth of the banking sector, among from sectarian interests by increasing account- others. The Lebanese diaspora, which is very ability, managing conflicts of interest, mitigating skilled and residing mostly in countries with opportunities for corruption, and promoting a advanced economies, has strong links to the more equitable distribution of investments home country. Beyond remittances, the dias- into lagging regions. While positive overall, the pora  can contribute to the economic develop- private sector (and to a certain degree civil ment  of Lebanon through productive and society)—through its alignment with sectarian ­ pro-development investment, mentorship, and actors and interests—reinforces inequality. business networking (ILO, 2010). Unlocking the inclusive development potential of the private sector could yield important gains, Strong Support from the especially in the absence of improvements in International Community in public social spending and policies in the near Critical Times term. Private sector engagements that are not sectarian in nature could also help to build con- Given the scope of shocks and macroeconomic fidence, trust, and collaboration between sectar- vulnerabilities that the country has experienced, ian communities. Lebanon would have been in a dire economic sit- uation had it not received international support in difficult times. The Paris I, II, and III confer- Large and Profitable Banking Sector ences (2001, 2002, and 2007, respectively30) as A resilient, large, and profitable banking sector well as the 2008 Doha Agreement are examples has been the lynchpin of the country’s develop- of international support. However, international ment model since the civil war. Lebanon’s bank- support to help Lebanon to cope with the severe ing sector is liquid, profitable, and well regulated. impact of the Syrian crisis and especially the In 2013 the ratio of tier-one capital to risk- large number of Syrian refugees has been more weighted assets was 12.2 percent, double the muted, possibly reflecting the difficult domestic, Basel III requirement. Tier-one capital consti- regional, and international geopolitics of the tutes the principal funding source for commer- situation. cial banks, with the ratio of deposits to total liabilities at 87.5 percent. By 2015, the BdL man- Dynamic Private Sector dates that banks should have an additional Lebanon’s people have a long and illustrious tra- 4  percent conversion buffer, compared to the dition as merchants and traders going back as Basel III mandate of 2.5 percent. Moreover, banks far as the Phoenicians. Situated at the crossroads are highly liquid, nonperforming loans are low, of the East and the West, Lebanon has a long- and return on equity is in the double digits. standing trading culture and recognition of the However, banks have substantial exposure role of private firms and markets. Throughout to  the sovereign, with more than 55 percent of this rich history, the private sector has always had bank assets concentrated in the public sector a strong international orientation. The Lebanese and the BdL. In an effort to diversify, banks have 90 Lebanon’s Challenges and Opportunities expanded regionally, with mixed results to date. meet the country’s financing needs.32 Other miti- For example, diversification into Syria has proved gating factors include banks’ substantial net costly because of the conflict, whereas diversifi- ­foreign assets33 and sizable gross international cation into other countries in the region has been reserves at the BdL—comfortable buffers that more positive. help to anchor investor confidence. Additionally, The sector’s strength mitigates sustainability the BdL has demonstrated its readiness to be the concerns regarding the sovereign and overall ultimate guarantor of the financial sector via macroeconomic weaknesses for several reasons. its  large foreign exchange reserves and crisis First, an estimated 80 percent of government management, especially its interventions in the debt is held by domestic financial institutions government debt market. and the BdL. Additionally, large external financ- Notwithstanding its proven resilience to large ing needs are met partly by deposits of Lebanese shocks, the size of the sector exposes the country expatriates who are familiar with the political to significant macroeconomic risks. Lebanon’s and security situation of the country and the short-term foreign liabilities surpass its reserve region and have confidence in the BdL and the of foreign assets (figure 3.28), exposing the Lebanese banking system. As a result, deposits ­country to the risk of a sudden change in investor have been growing at an average of 14 percent confidence that would require drastic policy annually since 1993, attracted by large interest measures. The short-term liabilities are largely rate spreads.31 Due to base effects, the growth of foreign liabilities of commercial banks, which nonresident inflows has been slowing, from an reached 222 percent of GDP in 2013. Lebanon’s average of 21.5 percent during 1993–2002 to total foreign assets, consisting of BdL gross 16.2 percent during 2003–11 and to an average of foreign reserves (foreign currency and gold) ­ 7.4 percent since 2011 and the onset of the Syrian and  commercial bank foreign assets, equaled crisis. This lower rate of growth is sufficient to 157 percent of GDP in 2013. Figure 3.28  Short-Term Foreign Liabilities and Total Foreign Assets in Lebanon, 1990–2012 Source: Banque du Liban and Ministry of Finance. Lebanon’s Challenges and Opportunities 91 Strong Sense of Political Future growth of the agriculture sector will Self-Preservation require continued upgrading of supply chains for  high-value products—in particular fruits, At the political level, the restraint exhibited sev- vegetables, and livestock products for regional, eral groups with respect to the Syrian conflict European, and domestic markets. Lebanese illustrates a general desire to avoid the kind of products have achieved good-quality reputations descent into conflict and warfare associated with and are particularly competitive in the Gulf the civil war. The situation remains fluid, how- Cooperation Council countries, Turkey, and the ever, and severe clashes with armed elements Arab Republic of Egypt, with some market entry in  Arsal and Tripoli have shown how quickly in Europe. However, expanding or even main- ­ tensions can escalate. taining these markets will require additional investments in quality control and certification Urbanization and Higher Income to meet increasingly stringent phytosanitary and Potential food safety standards. At the same time, expanded Lebanon is one of the most urbanized countries in production of these products will require invest- the region and the world. Its urban population is ments in high-quality irrigation systems on lands estimated at 89 percent, with almost 4 million peo- currently used for lower-value, mainly rain-fed ple living in cities and urban areas. An estimated grain, production. These investments are consis- 64 percent of the Lebanese population lives in large tent with both improving farm incomes as well as agglomerations, mostly in the city of Beirut and generating additional, sector-based employment its surrounding suburbs, along with Saida, Tripoli, throughout the value chain. Tyr, and Zahle. However, contrary to patterns observed in most of the world, the share of the Game-Changing Opportunities ­population in Lebanon’s primary city—Beirut—has Lebanon’s economy and its prospects for more declined over time (World Bank 2011c). Measures inclusive growth could also be bolstered by that increase factor mobility may help to increase potentially game-changing opportunities. the productive potential of Lebanon’s cities. Recovery and Reconstruction in the Region.  Highly Productive Agriculture Peace and stability in the region would strongly A small and stable part of Lebanon’s economy, benefit Lebanon. The World Bank (2013b) esti- agriculture is highly productive by regional stan- mates that the conflict in Syria is lowering dards. Agriculture’s share of GDP has remained Lebanon’s real GDP growth by 2.9 percentage relatively stable at around 6 percent, roughly points every year. Not only would peace in Syria equivalent to the regional average of 8 percent. be expected to lift this negative spillover, but the Lebanon’s varied altitude (sea level to 2,000 recovery and reconstruction of Syria would likely meters) and annual rainfall (200 to 1,600 milli- benefit Lebanese firms. Lebanese entrepreneurs meters) have resulted in a range of agricultural and banks were playing an important and rapidly products, including grains, orchard fruits, olives, growing role in Syria’s economy in the mid-2000s and tubers (mainly potatoes), as well as milk and as Syria moved toward greater market-based processed dairy products. However, while only mechanisms. Given their familiarity with Syria, 3 percent of the labor force is employed full time the Lebanese private sector should be well posi- in agriculture, this figure may be as high as tioned to benefit from an expanding Syrian 20 percent when part-time and seasonal labor is economy. Iraq is another market where Lebanese ­ included. This compares to a regional average of businesses have comparative advantages that 29 percent, resulting in labor productivity that is could be leveraged as the situation on the ground more than 15 times the regional average. stabilizes. 92 Lebanon’s Challenges and Opportunities Hydrocarbon Wealth.  Recent three-dimensional from stronger trade integration in the region seismologic mapping of Lebanon’s offshore area (given a resolution of the Syrian conflict and a reveals the likely presence of sizable hydrocarbon more stable Iraq). As detailed in a recent report resources, which are likely in excess of 25 trillion (World Bank 2014j), economic complementari- cubic feet, mostly gas (IMF 2014). The discovery ties between Egypt, Iraq, Jordan, Lebanon, Syria, of such a large amount of natural resources could Turkey, and the West Bank and Gaza are signifi- be a game-changer for Lebanon, as it could pro- cant, with substantial welfare gains expected vide sufficient financial resources to address the from increased trade, investments, and, ulti- country’s large public debt and large current mately, economic integration. account deficit as well as to invest in badly needed With a population of 224 million, a land area infrastructure and social services. This could of 2.4 million square kilometers, a nominal GDP result, over the medium term, in a less vulnerable of US$1.4 trillion, and proximity to major mar- balance sheet (lower public debt, smaller banking kets and transportation corridors, these “New sector), more fiscal space, and less need to pay Levant” countries have significant economic high interest rates on deposits to attract funds weight and promise. Similarities in stages of into the country. While no fiscal revenue is likely economic development, resource endowments, ­ to accrue to the sovereign before 2020, interna- or factor costs generate high potential to benefit tional evidence shows that these revenues could from competitiveness and complementarities. be substantial, especially for a relatively small The volume and structure of trade and invest- economy. Becoming a gas producer could also ment flows among these countries indicate the enable Lebanon to use some of its gas resources presence of large untapped potential for deeper to fuel its power generation sector (which is and wider integration in the sub-region. designed for gas inputs, but so far has been fueled by more expensive and less efficient oil). Decentralization of Authority.  Reforms to Potential hydrocarbon wealth, therefore, rep- decentralize authority and empower local gov- resents a sizable opportunity for the economy to ernments could help to address concerns about generate jobs and enhance the welfare of the inequities in public spending and service deliv- population, but it also entails challenges, espe- ery and serve as a means for increasing trust in cially if Lebanon continues on its current path and accountability of the state. Despite previous of  weak institutions and poor accountability. attempts to decentralize authority, these reforms In order to avoid a resource curse (or Dutch dis- have been operationalized only partially, and the ease), good governance (in the form of strong Lebanese state remains extremely centralized. institutions and accountability mechanisms, The allocation of resources to local governments which unfortunately Lebanon has yet to estab- is perceived to be inequitable. The former presi- lish) needs to be at the forefront of this new dent of Lebanon introduced a draft law on sector (Jamali and Le Borgne 2014). ­ administrative decentralization in April 2014. If  these reforms are supported and introduced, Levant Trade Integration.  As a small open they could provide an impetus for increasing the economy with a strategic location among regional capability, transparency, and accountability of trade routes, Lebanon could materially benefit local governments. Notes 1. The 2013 World Bank Enterprise Survey data significantly above the global average (29 percent). reveal that almost 42 percent of firms identify Furthermore, despite efforts initiated by the cen- access to finance as a major constraint, which is tral bank and other governmental and quasi-­ above the regional average (38.5 percent) and governmental agencies (such as Kafalat, a loan Lebanon’s Challenges and Opportunities 93 guarantee agency) to promote small and medium the region), 60, 28, and 12 percent of the road enterprises and improve their access to finance, network is in good, fair, and poor condition, ­ World Bank (2014d) finds that entrepreneurs respectively. and  small businesses cite obtaining access to 7. All cities in the region have either built such sys- credit  as a constraint due to a limited track tems (Cairo, Dubai, Rabat, and Tunis) or are in the record,  large collateral requirements, and lack of process of building them (Amman, Jeddah, and an established relationship with the financial Riyadh). intermediary. The financial sector’s incentives to 8. Morocco’s rural roads program in recent years intermediate a large share of its liabilities toward has  caused a drop of 43 percent in the cost of productive investments remain weak, and collat- transporting goods and a rise of 39 percent in eral requirements for loans are high. Product average monthly income per household among regulations have also tended to bias investment ­ the rural poor. decisions in favor of either liquid instruments or 9. For details, see World Bank 2010d and 2012c. real estate. 10. Lebanon only stores 6 percent of total resources, 2. As provided in Article 86 of the Constitution and compared to the regional average of 85 percent. public accounting law decree no. 14969/1963, in the 11. This section summarizes the analysis of existing absence of approved budgets for 2006–13, govern- governance data gathered from the AGI Data ment expenditures are incurred on the basis of Portal (www.agidata.org). the “one-twelfth rule,” by which the government is 12. Two draft laws—one on right to information and authorized to spend monthly one-twelfth of the last the second on whistleblower protection—were approved budget (that is, the 2005 budget) and other submitted to parliament in 2009 and 2010, enabling legislation. In October 2012, parliament respectively. approved an increase in the legal spending limit 13. Lebanon’s inequality-adjusted human develop- from the last approved budget. During 2006–12, ment index is 20.8 percent lower than its unad- successive governments incurred extra-budgetary justed ranking, among the largest losses in the expenditures. Controversy arose regarding the group of countries categorized as having high extra-budgetary expenditures incurred during human development. 2006–10, when certain members of the March 8 14. Despite the important role of confessional organi- coalition requested a review of these expenditures zations in the provision of social and welfare by the Audit Court. The minister of finance and services, inequalities exist even in coverage for ­ other members of parliament have proposed draft in-groups. In many cases, service provision by laws seeking to approve the extra-budgetary expen- confessional organizations is politically motivated ditures that have not yet been approved. This con- and selective, that is, it targets important electoral troversy has contributed to parliament’s failure to constituencies, implying that the most vulnerable approve the budgets for 2006–12, which has limited do not necessarily benefit. For a fuller analysis, see the government’s ability to have a budget approved Cammet and Issar (2010). for 2013 (Ministry of Finance 2014). 15. Lebanon’s private education system is also free for 3. Most recently these include budget preparation a large share of students as private schools receive reforms such as the adoption of a new budget public or private subsidies. These subsidies are classification. available to (a) children of public employees 4. This is due to a high real implicit rate of return (accounting for about 19 percent of all students on contributions, reaching 12 percent for civilian in  Lebanon), (b) households in which at least personnel and 13 percent for military person- one  member is a private sector wage earner nel  compared to a sustainable rate of 3 percent (5.7 percent of pupils have received a grant from (Boustany and Moubayed 2013). private employers, a small share as surveys find 5. For a game-theoretic analysis of monetary and fis- that many employers avoid paying grants), and cal policy coordination issues using a Stackelberg (c) students who are simply exempted from school competition model, see, for example, Lambertini fees (about 8.5 percent of students). and Rovelli (2004). 16. Public schools achieve lower scores in interna- 6. Experts estimate that only 15, 65, and 20 percent tional and national assessments. The achievement of Lebanon’s main road network is in good, fair, of public school students was 10 percent lower and poor condition, respectively. By comparison, than that of private school students in the 2011 in Jordan (whose upper-middle-income services-­ Trends in International Mathematics and Science oriented economy most resembles Lebanon’s in Study (TIMSS) results. 94 Lebanon’s Challenges and Opportunities 17. For example, Mount Lebanon has the highest den- drawn from four regions of Lebanon (Bekaa, sity of physicians and nurses (42 and 33 percent, Greater Beirut, North Lebanon, and South respectively), compared to Bekaa, with only Lebanon) and 25 urban and periurban areas. 7.8 percent of Lebanon’s physicians and 19 percent Businesses interviewed were small manufacturers, of nurses (Ammar 2009). retail providers, and other services. Almost 600 18. The poorest households spend about 14 percent enterprises from the sample were one-person of  their income on health, while the richest businesses, 186 had between three and five ­ households allocate 4.2 percent (World Bank employees, and 260 were two-person operations. 2013a). 26. These findings are confirmed by a recent study 19. These programs include (a) social services and (World Bank 2014d), which found that entrepre- programs targeted to certain categories of the pop- neurs and small businesses, especially those run ulation (disabled persons, juvenile delinquents, by women, consider obtaining access to credit as a school dropouts, orphans) provided by the constraint. Ministry of Social Affairs, with the majority of its 27. 2012 data, which do not take into account the budget distributed to nongovernmental organiza- sharp increase in wastewater generated by the tions and welfare associations, and (b) fee waivers large influx of refugees. for hospitalization in public and private hospitals, 28. Lebanon continued to invest in population-based which are for persons not covered by the National disease prevention programs that helped the Social Security Fund and lacking the means to country to improve health status, attain the purchase insurance. Finally, the National Poverty Millennium Development Goals, and even sur- Targeting Program of the Ministry of Social Affairs pass other countries in the region.  Similarly, the is the first poverty-targeted social assistance Ministry of Public Health, being aware of the program for the poorest and most vulnerable ­ inefficiencies in the system, especially in the cura- ­ families. tive sector, launched several reform efforts to 20. For detailed studies, see World Bank 2009a and improve the regulatory system. These included 2009b. establishing a hospital accreditation program and 21. Only Chad, the Côte d’Ivoire, the Islamic Republic developing fairly advanced hospital performance-​ of Iran, Mali, Pakistan, Syria, and the Republic of based ­ contracting mechanisms. Yemen score lower on the 2014 gender gap index. 29. Personal remittances are defined by the World 22. 0.00 = inequality; 1.00 = equality. Bank (2014l) as personal transfers and compensa- 23. Lebanon granted women the right to vote in 1952, tion of employees. while countries like Bahrain, Oman, Qatar, and 30. See Government of Lebanon 2002 and 2007 for the United Arab Emirates only did so more than details of the Paris II and III conferences. 50 years later. 31. The key interest rates in this arrangement are the 24. The Lebanese private sector, like the broader polit- international dollar rate, a local rate on deposits in ical, social, and economic system, has proved dollars, and a local rate on deposits in Lebanese remarkably resilient to instability and shocks pounds. The spread between the local and interna- (both domestic and regional), which it has been tional dollar rates attracts deposits in dollars, able to mitigate and manage with some degree of while the spread between the Lebanese pound and success, as a cost of doing business. However, cur- local dollar rates encourages deposits in local cur- rent threats to security and political stability (in rency. Nonetheless, like much of the economy, particular those related to the Syrian conflict) are Lebanon’s banking system is highly dollarized considered a more fundamental and far-reaching (64 percent). set of risks, potentially beyond the capacity of 32. A growth rate of 8 percent is sufficient to cover the domestic coping mechanisms to handle. country’s financing needs and keep reserves high 25. This survey is not statistically representative of (IMF 2014). the country. The sample was drawn from random 33. Lebanon’s banking sector has proven resilient walks undertaken by enumerators in targeted through several pronounced cycles, with a tier- urban and periurban areas (additionally stratified one capital to risk-weighted asset ratio of to ensure locations with and without known con- 12.2  percent in 2013, though both profitability centrations of Syrian refugees). The enumerators (still double digits) and asset quality have deterio- operated within predefined areas delineating tar- rated during the Syrian crisis. Banks’ liquidity get locations on a grid. The informal enterprise depends on the BdL’s willingness to refinance gov- survey had a sample of 1,015 informal businesses ernment debt and redeem its certificates of deposit Lebanon’s Challenges and Opportunities 95 (55 percent of banking assets concentrated with many banks are lending to the same select clients the public sector and the BdL). Bank profitability and few have significant revenues or operations also reflects an “accommodating” BdL (for exam- outside of Lebanon to diversify macro risks. The ple, incentive programs, cheap funding) and the move by Audi Bank to develop a more regional lack of diversification within the banking sector, as franchise is one approach to diversifying this risk. 96 Lebanon’s Challenges and Opportunities Chapter 4 Risks and Sustainability Macroeconomic and Fiscal vulnerabilities limit the exit options, and outside financing has, so far, arrived during shocks. Sustainability Lebanon’s high debt level, large twin deficits Lebanon’s political economy is such that key (­fiscal and current account), large banking sys- stakeholders have few incentives to change the tem, and highly dollarized pegged economy pres- economy’s suboptimal equilibrium, unless a ent significant macroeconomic vulnerabilities crisis is imminent. The confessional approach to ­ (Berthelemy, Dessus, and Nahas 2007; IMF policy making has resulted in large, unproduc- 2014). Although these vulnerabilities have been tive, and inefficient spending combined with present for nearly two decades, in times of stress, limited revenue mobilization. The sovereign Lebanon has, so far, been able to avoid a crisis finds it easy to meet its large structural financing thanks to a powerful set of stabilizing forces. needs through the banking system. For its part, First, a strong financial sector has helped to the banking sector has limited alternative in sustain Lebanon’s macroeconomic stability and terms of lending to the public rather than to the resilience to shocks. Capital, liquidity, and non- private sector, given the risk premium required performing loans are robust in Lebanon and are over the “risk free” and simple business of lend- critical to maintaining confidence during peri- ing to the sovereign. Hence, other than tourism ods of stress.1 Banks also recognize the risk of and real estate, which are externally driven, the over-lending to the sovereign, but are unable to private sector is, at some level, subject to selec- reduce it due to the perceived lack of alterna- tive crowding out (World Bank 2012b). As a tives and the inability to lend out deposits in result, the economy is dependent on its own Lebanese pounds. Many have expanded region- brain drain and on highly cyclical sectors that ally to boost growth and diversify, and are are sensitive to external shocks. This macroeco- increasingly interested in Africa, given links nomic volatility is a primary source of uncer- with the diaspora. tainty for domestic and foreign investors, Second, many see Armageddon as the alter- inhibiting private investment and reducing native to the status quo. Investors and lenders potential output. The lack of fiscal space squeezes fully understand that, given the country’s inter- investment, causing infrastructure degradation, twined balance sheet vulnerabilities, stopping to particularly with regard to transportation, water fund the country’s large gross financing needs supply, and electricity. It also lowers potential would affect the peg and result in massive and output. However, key stakeholders in the econ- sudden financial insolvency for core parts of the omy, such as policy makers and the business economy (i.e.,  the sovereign and the banking elite, have weak incentives to push for reforms, system). It also would impoverish a large part of ­ as the limited contestability of markets (eco- the population through balance sheet shocks and nomic and political) ensures good rents. Only in a surge in inflation, with likely dire social impacts. times of stress have reforms been introduced and Third, the status quo financially rewards those implemented, such as the introduction of the able to benefit from it. Given the stability of the value added tax in 2002 during the fiscal crisis. peg—unchanged in nominal terms since 1997— While Lebanon’s macroeconomic environ- using dollars to lend to the sovereign in pounds ment is highly vulnerable, the country has been has been a very profitable carry trade for deposi- able to withstand large shocks, as these same tors and investors alike. Risks and Sustainability 97 Fourth, a core group of rich countries sup- Figure 4.1  Gross Public Debt in Lebanon, ports Lebanon. For financial and geopolitical rea- 2012–19 sons, Lebanon has (until recently) always received prompt and decisive financial support from core countries. Timely support has included the trans- fer from Saudi Arabia of US$1 billion to the cen- tral bank at the onset of the 2006 Israel conflict and another US$1 billion in early 2008 during a period of domestic political gridlock to instill confidence in the peg. Gulf Cooperation Council countries, Europe, and the United States have also provided political and financial support through a series of donor conferences (Paris I, II, and III in 2001, 2002, and 2007, respectively), in which Lebanon pledged to undertake structural reforms (which remain broadly unimplemented) in return for financial aid (Government of Source: IMF 2014. Lebanon 2002, 2007). As Lebanon is a relatively small economy compared to the wealth of its supporting countries, the financial assistance ­ Figure 4.2  Gross Financing Needs in provided is large enough to boost confidence. Lebanon, 2012–19 And fifth, a supportive and wealthy diaspora maintains strong ties to Lebanon. Once rich donor countries send strong signals of support, the dias- pora’s confidence in the peg is strong enough that capital outflows, when they have occurred, have remained manageable and short term. Notwithstanding the economy’s remarkable resilience to shocks, public debt dynamics are not sustainable based on current policies and ­projections. The International Monetary Fund, in its 2014 Article IV consultation, undertook a detailed debt sustainability analysis based on three scenarios: baseline, constant primary bal- ance, and historical. The results indicate that public debt is expected to increase from more Source: IMF 2014. than 143 percent of gross domestic product (GDP) in 2013 to 155 percent in 2019 (figure 4.1). Gross financing needs will also deteriorate from Political and Social around 30 percent of GDP in 2013 to 40 percent by 2017 (figure 4.2). Such large gross financing Sustainability needs make the economy vulnerable to sudden Since 2005, all governance and institutional indi- stops, with potentially severe impacts on poverty cators have worsened markedly as the policy-­ and inclusive growth. Additionally, debt dynam- making process has come to a halt, highlighting ics and financing needs are sensitive to macro- the limits of Lebanon’s post–civil war governance economic shocks, especially to growth, interest arrangements. The political equilibrium achieved rate, and contingent liability shocks. with the Taef Accord reached its limits after 2005, 98 Risks and Sustainability as no outside actor has been capable of enforcing depletion of the country’s total wealth. To mea- decision making when domestic politics have sure sustainability, physical, financial, natural, become more divisive and resulted in a political human, and social (intangible) forms of capital standoff. As discussed in chapter 3, key gover- (wealth) are required to generate income, now nance indicators such as control of corruption and and in the future. Wealth analysis allows us to ask rule of law have worsened rapidly and significantly if GDP growth is sustainable or if Lebanon is liv- since 2005–06, while political instability and inci- ing off its capital, including natural capital. A dents of violence and conflict have risen. These country’s total wealth can be measured through trends are evident regardless of the source of data. the adjusted net savings (ANS) rate. The ANS Such a marked deterioration in quality of gov- measures the true rate of savings in an economy ernance and policy-making indicators raises strong after taking into account investments in human concerns regarding Lebanon’s (inclusive) growth capital, depletion of natural resources, and dam- potential, given the core role that institutions and age caused by pollution. In 2012 Lebanon’s ANS governance play in a country’s development (World was −2.2 percent of gross national income (GNI). Economic Forum 2013). While the current politi- This is dangerously low and compares to +17.8 cal situation does not allow for the implementation percent of GNI in middle-income countries and of much-needed countrywide governance reforms, +7 percent in low-income countries (World Bank an alternative, more gradual approach could 2014l). A negative ANS implies that Lebanon is support the implementation of reforms aimed at ­ depleting, not accumulating, wealth. improving the business environment and service The sustainability of Lebanon’s growth is even delivery at the local level, while engaging in much more concerning when expressed in per capita more complex reforms (for example, human terms, which is the measure that citizens care resource management) at a later stage. about. In economies with growing populations, The conflict in the Syrian Arab Republic is and especially in developing countries that aspire also challenging the delicate societal and com- to higher material standards of living for their cit- munal balance in Lebanon. A porous border and izens, sustainable development requires not just close links between political and militarized increasing wealth, but also increasing per capita groups in Lebanon and Syria have exacerbated wealth (World Bank 2014a, 2014i). Unfortunately, existing political divides along sectarian lines Lebanon’s per capita wealth has been depleted and prompted violence across the country. The over the past years, decreasing by US$416 in 2005 conflict spillovers, including the steady stream of and US$667 in 2010 (in 2010 U.S. dollars; World Syrian refugees, are seen as an existential threat Bank 2014l). During the same period, Middle to the country. Refugees have the largest impact East and North African countries, on average, on the relatively poor host population (via com- increased their wealth per capita by US$101, and petition for low-cost housing, basic commodi- upper-middle-income countries expanded theirs ties, and low-wage jobs), and the continuous by US$1,039. Lebanon ranks in the bottom third waves of displacement are leading to an increase of upper-middle-income countries that depleted in poverty rates among the Lebanese population. their wealth per capita in 2010. This raises the prospects of a large backlash from Lebanon’s per capita wealth depletion is driven the host population. mostly by the large depreciation of produced cap- ital (15.5 percent of GNI) and comparatively lim- ited increase in human capital formation Environmental Risks and (1.4  percent of GNI). Natural capital deprecia- tion, as currently estimated, is negligible, though Sustainability likely underestimated to a significant degree, as Lebanon’s growth model is also unsustainable on factors such as coastal erosion, water and sanita- the environmental front, as highlighted by the tion, fisheries, and marine resources are not yet Risks and Sustainability 99 included in the calculations. Several of these Infrastructure and Public omitted factors, however, are particularly weak in Service Sustainability Lebanon and have been rapidly worsening over the past years, driven in part by the surge of The financial situation of the electricity sector is Syrian refugees since 2012 (World Bank 2013b). undermining the sustainability of public finances Large and rapidly growing environmental and limiting the capacity of Electricité du Liban degradation could materially affect Lebanon’s (EdL) to improve electricity supply to households key growth drivers, such as tourism. For exam- and industry. EdL’s assets, including its power sta- ple, the country’s natural heritage is being tions, are rapidly aging. Its large financial prob- affected by uncontrolled urban sprawl, quar- lems also limit its capacity to invest in ries, and solid waste dumps, placing increasing much-needed additional production capacity. pressure on natural sites such as the karst heri- In June 2010, the government endorsed a policy tage of Lebanon in the Caza of Kesrouan and paper for the electricity sector outlining policy the natural bridge of Fakra and Nabaa el Laban and investments aimed at increasing the level and (World Bank 2011b). quality of electricity supply, managing demand, Haphazard urbanization has been affecting decreasing the average cost of electricity produc- Lebanon’s urban environment, morphology, and tion, increasing revenues, improving sector gov- ability to facilitate economic growth. Numerous ernance, and ultimately improving service illegal structures and building additions were delivery and reducing the fiscal burden that the constructed during the civil war and are still evi- sector places on public resources (Ministry of dent today. Recent years have witnessed a surge Energy and Water 2010). However, the majority in building permits, new construction, and resi- of plans laid out in the paper have not been imple- dential developments in major cities, largely in mented, and the sector continues to constitute a the absence of strict enforcement of urban plan- significant drain on the Lebanese economy. ning and building regulations. The result is urban The rapid and massive influx of Syrian refu- congestion, depletion of open spaces, a deterio- gees in Lebanon since 2011 is further straining rated urban landscape, and a threat to the archi- Lebanon’s already weak infrastructure and adding tectural heritage. stress on already vulnerable communities and Real estate and rents have multiplied in price, municipalities (World Bank 2013c). The influx of and housing prices have been associated with refugees is equivalent to a 25-year shock for segregation between affluent and poor neighbor- Lebanon: in its 2005 infrastructure master plan hoods, where services (water, sanitation, roads for the 25 years ahead, the Council for networks) are strained and quality of life suffers. Development and Reconstruction had forecast an The influx of refugees has exerted additional increase in the Lebanese population of 1.5 million pressure on natural resources. The 1.1 million over the quarter century. This number of regis- Syrian refugees registered with the United tered Syrian refugees alone may soon be reached Nations High Commissioner for Refugees (as of in Lebanon. With regard to communities and January 2015) represent an increase of more than municipalities, municipal services are not geared 25  percent of the Lebanese population prior to to such a spike in population, leading to a decline the crisis. Most refugees are concentrated in the in the quality of services (with potential long- impoverished areas of Bekaa (35 percent) and term negative impact). Social cohesion is strain- North Lebanon (35 percent) that were previously ing, and tensions are rising in communities where poorly served by public services. This surge in refugees are finding it hard to sustain themselves population strains overburdened social services and hosts are affected by overcrowding, ­saturation and scarce resources, such as solid waste man- of basic public services, rising rents, pressure on agement, clean water, and sanitation. Box 4.1 salaries, and increasing costs. The arrival of a large details the effects of climate change. number of Syrian refugees has also challenged the 100 Risks and Sustainability BOX 4.1  Impacts of Climate Change on Lebanon Lebanon’s climate change model projections suggest a more rapid warming than the global average and an annual reduction in precipitation. This would lead to less runoff, more evapotranspiration, and longer periods of drought. The average number of heatwavea days observed in cities in the region is between 0 and 7 and is expected to increase to 93 days in a 2oC world and to more than 187 days in a 4°C world (Lelieveld et al. 2013, cited in World Bank 2014k). Additionally, by 2040, maximum temperatures are ­ predicted to increase between 1oC along the coast up to 2oC in the mountainous inland; by 2090 the pre- dicted increases are from 3oC to 5oC, respectively. Significant reductions are projected for rainfall, which will be more severe from the coastal to the inland areas, ranging from −10 to −20 percent in 2040 and from −25 to −45 percent in 2090. Snow water storage and the ski winter season are also likely to become a growing concern. Mountain areas in Lebanon play an important role in water supply and in tourism during the winter months. However, mountainous areas are expected not only to experience a reduction in total precipitation, but also a reduction in the fraction of precipitation falling as snow, affecting snow cover and snow water storage. Changes in melt-water regimes are expected to bring about a shift in peak river flows toward the ­ earlier months of the year, with negative impacts on downstream riparian systems during the hot and dry summer months. Lebanon’s Second National Communication analyzed the Upper Nahr el Kalb Basin under a stylized warming of 2°C and 4°C. Snowpack volume was projected to shrink from 1,200 million cubic meters to 700 million and 350 million cubic meters, respectively (Ministry of Environment 2011). Other sectors vulnerable to climate change include agriculture, electricity, coastal zones, forestry, public health, and human settlements and infrastructure, for which adaptation measures need to be imple- mented. Agriculture is one of the most vulnerable sectors due to limited availability of water and the effects of population growth and urbanization on agricultural yields of crops, particularly fruit trees. ­ Higher electricity demand in summer will require between 87 and 438 mega-watt expansion of installed capacity, given that an increase in total consumption will be 1.8 percent for a 1°C increase in temperature and 5.8 percent for a 3°C increase. Current sea-level rises average approximately 20 millimeters a year in the Levantine Basin, and a 30–60 centimeter rise in 30 years will significantly affect coastal zones, human settlements, and infra- structure. In addition to changes in temperature and rainfall, expected changes in Lebanon’s bioclimatic levels will adversely affect Lebanon’s forests and nature reserves, frequency and periodicity of fires, and regeneration, overall area, and population of certain tree species. Direct and indirect effects of climate change will affect public health on many fronts, with 2,483–5,254 additional deaths per year expected between 2010 and 2030 due to higher temperatures, with vulnerable groups particularly at risk. Sources: Lebanon’s Second National Communication to the UNFCCC, Ministry of Environment, 2011 ; World Bank (2014) “Draft Turn Down the Heat III,” Washington DC ; and Lelieveld J., et al. (2013), “Model projected heat extremes and air pollution in the eastern Mediterranean and Middle East in the twenty-first century,” Regional Environmental Change, Springer–Verlag. ­ onsecutive a. Heatwave days are calculated by the warm spell duration index, which is defined as the longest annual spell of at least six c days with maximum temperatures exceeding the local 90th percentile relative to a reference period (in days). delicate societal and intercommunity balance in administrative decentralization in April 2014. Lebanon. Lebanese women and girls are particu- Called for in the Taef Accord, the legal reforms larly affected, as insecurity and violence rise. aim to redistribute the authority, responsibility, Decentralization has long been discussed as a and financial resources needed to provide public possible answer to the unsustainable deteriora- services across tiers of government. The bill con- tion in key public services. During his term, tains 147 items and prioritizes the powers and President Suleiman introduced a draft law on rights of municipalities, particularly with respect Risks and Sustainability 101 to financial autonomy. The aim is to create an economic gains. For example, Lin and Michaels elected council in each of the country’s 25 qadas (2014) find that, on average, giant oilfield discov- (districts) with wide-ranging financial and eries increase the risk of internal armed conflict administrative powers. However, decentraliza- by about 5–8 percentage points within four to tion reforms in Lebanon are linked to the confes- eight years of discovery compared with a baseline sional structure of government and the way probability of about 10 percentage points. This power is shared between the various groups, effect is even larger for countries that experienced making passage of the draft law challenging. at least one civil conflict in the decade before Service delivery at the municipal level is over- the  discovery (figure 4.3). Similarly, Calì and burdened by the surge in demand for services at a Mulabdic (2014) find that increases in the value time when municipal finances are erratic. of point-source commodity exports (driven by Municipal financing is a perennial issue in international prices) lead to a higher risk of Lebanon. Municipal revenues are broadly consid- ­conflict.3 They also identify several factors that ered to be insufficient and provided in a manner affect the relation between the value of hydrocar- that greatly constrains the ability of municipalities bon export revenues and the risk of conflict. to offer services and conduct local development The  most significant are the level of economic projects. Municipalities have two main sources of inequality, the level of ethnic and religious divi- revenue: transfers from central government, sions, and a history of recent conflict. The increase which are distributed through the Independent in the risk of conflict is higher in countries with Municipal Fund (about 70 percent), and local higher levels of ethnic and religious fractionaliza- taxes and fees, representing the remaining 30 tion, with greater ­ levels of economic inequality, percent. The Independent Municipal Fund alloca- and with a civil ­conflict in the last 10 years. tions are based on (a) the number of registered Lebanon fits the profile of a country exposed voters in the municipality (not the number of to conflict risk from hydrocarbon exports too actual residents) and (b) the total amount of reve- well. The country has a relatively high level of nues collected in the previous two years. This for- economic inequality and religious fractionaliza- mula is considered inequitable, as it fails to take tion, and it is experiencing a low-intensity civil into account the size of individual municipalities ­conflict.4 These characteristics increase the risk and makes it difficult for smaller ­municipalities to of conflict induced by a hydrocarbon discovery provide an acceptable level of service. In addition, in Lebanon relative to the average country. payments from the Independent Municipal Fund Table 4.1 quantifies the increased risk due to tend to be irregular, with payments sometimes each of these factors on the basis of the mar- delayed up to two years. ginal effects computed in Calì and Mulabdic (2014). For example, for a country with the average level of religious fractionalization Hydrocarbon Wealth and Risks: (0.35), a 1 standard deviation increase in hydro- Conflict, Macroeconomic, and carbons and mineral exports raises the risk of conflict by 2.5 percent. At the level of fraction- Fiscal Mismanagement alization of Lebanon (0.79), the increased risk is Large hydrocarbon discoveries pose significant more than double, at 5.7 percent. A similar story risks of social tension and conflict for Lebanon. applies to the two other main ­ factors: economic Windfall revenues from hydrocarbon discoveries inequality and recent conflict. At the same time, (or from increases in the price of hydrocarbons) other factors, such as level of democracy, level can spur violence in the attempt to appropriate of accountability, presence of conflict in neigh- these revenues.2 As supported by recent evidence, boring countries, and share of trade with neigh- this is more likely to be the case in countries bors, yield smaller differences between Lebanon where political violence can achieve political and and the average country. 102 Risks and Sustainability Figure 4.3  Effect of a Giant Oilfield Discovery on Internal Armed Conflicts, 1946–2008 Source: Lin and Michaels 2014. Note: The red lines show the estimated coefficients, and the dark blue lines show the 95 percent confidence intervals based on robust standard errors clustered by country. Table 4.1  Risks of Conflict from Hydrocarbon Exports in Lebanon Risk Mean Lebanon Average effect (%) Lebanon effect (%) Significance Inequality (Gini) 45.44 55.33 2.10 4.20 Yes Religious fractionalization 0.35 0.79 2.50 5.70 Yes Recent conflict 0.28 1 2.20 4.10 No Level of democracy −1.21 7 1.90 1.90 No Accountability 3.24 5 2.40 0.90 No Neighbors in conflict 0.52 Yes 2.00 2.30 No Share of trade with neighbors 0.12 0.03 2.00 2.10 No Source: For the computations, Calì and Mulabdic (2014). For the mean and Lebanon values, Solt (2009) for inequality data; Alesina et al. (2003) for religious fractionalization; UCDP/PRIO database for recent conflict (mean) and International Country Risk Guide (ICRG) for recent conflict (Lebanon); polity 2 data for level of democracy; ICRG for accountability; UCDP/PRIO for neighboring conflict (mean) and ICRG for neighboring conflict (Lebanon); and COMTRADE for share of trade with neighbors. Note: Mean is the mean value of the variable across the entire sample over which the marginal effect of the export price index is computed in Calì and Mulabdic (2014). Average effect is the increased probability of conflict due to a standard deviation increase in the point-source commodity export index measured for the mean value of the variable. Lebanon effect is the same increased probability measured at the value of the variable for Lebanon. Another key risk related to becoming a com- inflationary pressures and leading to real modity producer and exporter is the associated exchange rate appreciation. This would, in turn, macroeconomic and fiscal challenges. One com- diminish the export competitiveness and possi- mon economic challenge is the possible occur- bly lead to persistent trade account deficits. rence of “Dutch disease,” which refers to the risk While the resource extraction sector can gener- that sustained, large external inflows could rap- ate substantial revenues, it is not labor intensive. idly stimulate aggregate domestic demand and Hence, any loss in competitiveness from the the economy beyond its potential, creating non-resource part of the economy could ­ Risks and Sustainability 103 potentially result in large employment losses Moreover, low wages may depress the nutritional (World Bank 2014g). Another challenge is standards of the poorest quintiles of the popula- the  high volatility of revenue and spending—­ tion, especially the health of young children and typically higher than for non-commodity women. producers—and associated procyclicality (IMF ­ The Syrian crisis has shifted Lebanon’s agri- 2014). In addition, resource revenue is exhaust- culture sector from exports to domestic food ible, raising issues of sustainability and intergen- production. A significant change has been the erational equity. This calls for smoothing shift to domestic production from exports pre- government consumption over time and avoid- viously oriented toward the Syrian market. ing the need for massive fiscal adjustment once Moreover, prior to the civil war, Syria subsi- resource wealth has been depleted (IMF 2014). dized fertilizers and pesticides. Many Lebanese farmers traded or smuggled agricultural inputs from Syria. As this informal and cheap source of Agriculture Sector Risks and agricultural inputs has dried up, farmers have had to rely on inputs from the domestic market, Opportunities which is increasing production costs. The tense In general, the lack of diversification of incomes security situation of farmland alongside the of farm-based households raises significant Syrian-Lebanese border and the diversion of risks regarding the sector’s impact on the World trade routes have also increased production Bank Group’s twin goals. The primary concerns costs. While the export sector has been hurt, the regarding sustainability and risk in relation to massive number of refugees has led to increased agricultural growth and poverty reduction are demand for domestically produced food items. the need to facilitate diversification of farm This occurs largely because the international incomes through both on-farm (increased pro- community distributes food aid for Syrian refu- duction of high-value products and value addi- gees in the form of cash. At the same time, there tion) and off-farm employment opportunities. has been a sharp decline in imported agricul- In addition, some on-farm investments will tural products. This has benefited Lebanese require land ­ consolidation to ­ permit scale farmers who produce for the domestic market, economies in production. Government’s ability as they face less competition and benefit from a to influence the sector is limited largely to cap- supply of cheap labor. ital investments due to low budget allocations The change in market structure presents both for the Ministry of Agriculture and very low opportunities and challenges. It is likely that the levels of staffing, which weaken the ability of shift will have significant impact on Lebanon’s the ministry to provide standard agricultural agriculture sector over the medium term. On the services. one hand, the increase in domestic demand and If not addressed, the huge amount of surplus labor supply could be regarded as an opportunity labor from Syrian refugees will generate social to develop the agriculture sector in Lebanon tensions in rural areas. This is because the mas- further. On the other hand, the ongoing shift in ­ sive increase in labor supply and the sudden the structure of production suggests upcoming availability of relatively cheap labor have led to a challenges, as Lebanon needs to diversify its decline in real wages and in opportunities for exports into alternative markets. One option is “decent” jobs. For example, the influx of Syrian for the export sector to reorient production workers may have reduced the daily agricultural toward new regional or perhaps European wage rate as much as 60 percent (FAO 2013). ­markets. As the sector is dominated by a dynamic According to a survey by the International Labour private sector, this reorientation could be sup- Organization in 2013, three out of four Syrian ported by ­providing entrepreneurs with a­ dequate refugees were paid less than US$400 per month. market information. 104 Risks and Sustainability Notes 1. The balance sheet mismatch on short-term ­foreign 4. This categorization of conflict follows from the assets exposes the country to sudden stops. International Country Risk Guide (ICGR) data Lebanon’s short-term foreign liabilities s­ urpass its and the UCDP/PRIO Armed Conflict Database. reserve of foreign assets, which exposes the coun- In the first seven months of 2014 ICRG assigns try to a sudden stop. Short-term foreign liabili- an average value of 2 to Lebanon in the civil ties are largely those of commercial banks, which war category (on a scale to 1–4), placing the reached 222 percent of GDP in 2013. On the other country in the top decile of that category. The hand, Lebanon’s total foreign assets reached 157 ­ current low-intensity conflict in Lebanon is also percent of GDP that the same year. in line with the UCDP/PRIO definition of “a 2. Various theoretical models can account for this contested incompatibility that concerns govern- effect, usually called the “state prize” or “rapacity ment and/or territory where the use of armed effect” (for example, Besley and Persson 2009; Dal force between two parties, of which at least one Bó and Dal Bó 2011). is the government of a state, results in at least 3. Point-source commodities include hydrocarbons 25 ­battle-related deaths.” and mineral products (Calì and Mulabdic 2014). Risks and Sustainability 105 Chapter 5 Prioritizing Challenges and Highlighting Opportunities Introduction sought to be analytical, transparent, and partici- patory. The constraints on job creation and This chapter presents a prioritized list of the most achievement of the twin goals were prioritized critical constraints facing Lebanon in accelerat- through the process described in this section. ing progress toward the twin goals of reducing First, a comprehensive list of constraints was poverty and promoting shared prosperity and established. These were obtained from the analyt- suggests opportunities to address them. As diag- ical work done for chapters 1–4. The robustness nosed in chapter 3, Lebanon faces substantial of the analytical work in identifying a compre- overarching and nested constraints that have hensive set of constraints was validated through challenged progress toward ending extreme pov- extensive stakeholder consultations.1 Whenever erty and promoting shared prosperity in a sus- stakeholders identified constraints that were not tainable manner. Should the status quo persist, adequately reflected in the initial draft of the Lebanon risks exacerbating an already fragile sit- SCD, World Bank Group sector experts were uation, as presented in chapter 4. While tackling asked to consider this new information, along these constraints simultaneously may seem with available supporting evidence, in revising daunting, this Systematic Country Diagnosis the SCD. highlights critical constraints that, if addressed, Second, experts were asked to score each of the could help Lebanon to make meaningful prog- long list of constraints. World Bank Group experts ress toward achieving growth, inclusion, and who worked on the Lebanon SCD scored each of sustainability. the constraints on the comprehensive list. These The SCD’s prioritization of constraints aims to experts consisted of two broad types of World assist in the identification of reforms to support Bank Group staff. The first type included sector the growth and poverty reduction efforts of the experts who are assigned to Lebanon as part of government and donors, and to inform the World their country coverage (for example, a water sec- Bank Group’s Country Partnership Framework, tor expert assigned to work on Lebanon and a which will be defined and agreed with the gov- few other countries); these experts are very ernment of Lebanon. The agreed framework will knowledgeable on the relative strengths and outline the World Bank Group’s work in Lebanon weaknesses of Lebanon in their specific sector of over the next four- to five-year period. As the expertise. The second type included country SCD is a public document, it is also intended to experts who work on a broad range of sector be a resource for the general public. issues in Lebanon (for example, a country econo- mist or a program leader); these experts are very knowledgeable about the comparative strengths Methodology and weaknesses of sectors within the economy. While any prioritization of development chal- The World Bank Group experts also included a lenges contains large subjective and normative good representation of staff based inside and components, the methodology used in this SCD outside of Lebanon. This diversity in sector and Prioritizing Challenges and Highlighting Opportunities 107 country background as well as a desirable mix of decided that Lebanon’s priorities consisted of the bird’s-eye view and deep local knowledge were top third of the ranked constraints. This top third meant to provide strong assurances that the of constraints yielded common themes and sec- ranking of priorities captures the complexity of tors, generating a list of 11 ranked priority areas. the country’s development challenges. The diver- While priority areas were identified, the pri- sity of experts also was useful for checking the oritization exercise was undertaken at the inten- robustness of the final ranking. sive margin (that is, while the education sector When scoring each constraint, experts were was one of the areas identified, the top priority instructed to base their assessment on the follow- was not the sector itself, but specific issues such ing five criteria: as the “stark inequality in education between the public and private education systems” or the • Impact on goals. Assess the size of the poten- “influx of refugees from the Syrian Arab Republic tial impact on eliminating poverty and ensur- that exacerbates problems related to access and ing a sustainable increase in the welfare of the quality of education in public schools”). The less well-off; relative to the other criteria, give value added of a ranking based at the intensive the highest weighting to the overall impact on margin is that is provides clear directions on spe- achieving the twin goals cific issues that are bottlenecks to developing and • Time horizon of impacts. Calculate the balance creating numerous quality jobs. of short-term and longer-term impacts when Fourth, sensitivity analysis and robustness looking at the timeframe within which the checks were conducted. To check the sensitivity impact could be realized so as to include inter- or robustness of the ranking of priorities that ventions that will deliver quick (visible) wins emerged from the scoring process, the impact • Preconditions. Identify the constraints that that alternative criteria would have on the prior- need to be addressed first in order to unlock ities identified was analyzed.2 The fact that the wider potential World Bank Group experts were from very • Complementarities. Weigh the degree to which diverse professional and personal backgrounds addressing these constraints would have influ- enabled us to analyze the robustness of the rank- ence across different domains (for example, ing by splitting the voting results along these growth, inequality, sustainability) or would various factors. Reassuringly, the priorities magnify the positive impact of addressing identified were robust to all reasonable alterna- ­ other constraints tives used. • Evidence base. Evaluate the degree of confi- dence in the evidence base (for the problem and the solution). Political feasibility, which has been used in Results of Prioritization other World Bank Group SCDs, was not incor- Eleven priority areas for reform were identified porated as a separate criterion, as it was already and ranked.3 Of these, two consist of the over- captured in the overarching constraint of elite arching areas of (a) elite capture behind a veil of capture. confessionalism and confessional governance and Third, the expert scores were ranked. The (b) conflict and fragility. The nine nested areas— results from the World Bank Group experts were in prioritized order of binding constraints—​ tabulated, and constraints were ranked based on are  related to governance, information and the average score of each individual constraint. communication technology (ICT), energy, mac- To provide a reasonable trade-off between hav- roeconomics and the fiscal environment, ing a narrowly focused set of priorities and hav- the  business climate, education, transport, the ing an excessively long list of priorities, which environment, and water. Data availability also would dilute the prioritization exercise, it was arose as a foundational constraint. The heat map 108 Prioritizing Challenges and Highlighting Opportunities presented in table 5.1 reflects these 11 areas distribution of power and lack of accountability. across the ranking framework’s five criteria. Of This system allows political interference in public the top 10 constraints, the top 4 were related to institutions and concentrates political influence governance, ICT, and energy, followed by elite and wealth among a privileged few at the expense capture, conflict, and macroeconomic and fiscal of broader economic development and robust constraints. job creation. It fails to manage conflicts of inter- Jobs emerged strongly as the outcome or goal est between the business community and the that stakeholders perceive is needed for Lebanon political elite, which creates economic rents. and its citizens to achieve their development Ultimately, this system is fueled by corruption, potential. “Jobs” are not a separate cluster in the including payment of bribes in both the public top constraints, as they are the outcome, not the and private sectors. determinant, of existing challenges. Weak job Conflict, security, and fragility, including the creation, especially for the increasing number of recent Syrian crisis, is another overarching women in the job market and in locations beyond constraint. Lebanon suffers from a fragile and ­ Beirut (for example, Tripoli), limits the develop- dysfunctional political system resulting in a ment of economic and human capital, and high state  that is severely constrained and, at times, ­ unemployment is often of long duration. The unable to regulate conflict and exercise sovereign stakeholder consultations highlighted that insuf- authority, due to both internal and external ficient job creation is a cross-cutting theme, par- factors. Security shocks have historically ren- ­ ticularly for the poor, with the caveat that social dered growth volatile. For example, the recent protection also has a strong role to play for the Syrian crisis and ensuing influx of refugees are more vulnerable members of society. The consul- affecting Lebanon’s economy and exacerbating tations also emphasized that the lack of quality, problems of access to and quality of education, well-remunerated jobs pushes youth and others health care, public and social services, as well as who are disillusioned with the status quo to emi- environmental degradation. Conflict also aggra- grate. The country’s low-jobs-producing econ- vates corruption, which directly links to the omy is also exacerbated by the influx of Syrian overarching constraint of elite capture. refugees, who are increasingly competing for jobs and putting downward pressure on wages, especially affecting the unskilled, women, and Nested Constraints youth. Unlocking the prioritized constraints Governance emerges as the top nested constraint would stimulate the creation of jobs, with benefi- for Lebanon, with the lack of political will and cial effects on living standards, productivity, and vision and the lack of capacity of government social cohesion. institutions (including the judiciary) as particu- The following paragraphs synthesize the top larly binding. Governance and institution-related third of constraints grouped by cluster. The two challenges are the most binding nested constraints overarching areas are presented first, followed by for Lebanon’s achievement of the twin goals, with the nested constraints, listed from the highest to the top-ranking constraints being “lack of politi- the lowest ranked constraints in the cluster. cal will, capacity, and institutions to design and enact new laws, policies, and strategies and to implement reforms.” Stakeholder consultations Overarching Constraints highlighted a lack of vision and leadership, An overarching constraint for Lebanon is perva- whether manifested in insufficient planning, lack sive elite capture and corruption hidden behind of continuity of government policies, or absence a  confessional veil. Significant progress on job of clarity on what the vision is  for  addressing creation and achievement of the twin goals short- and long-term challenges,  including is  severely constrained by elite capture of the ­ poverty. Public institutions are perceived as Prioritizing Challenges and Highlighting Opportunities 109 110 Table 5.1  Heat Map of Identified Priority Areas in Lebanon Impact on goals Time horizon of impacts Pre-condition? Complementarities Evidence Base Priority Area Summary of Constraints Small Medium Large Short Medium Long Yes No Weak Medium Strong Weak Medium Strong Overarching Elite capture Corruption and lack of accountability, conflict of under interest between business community and political confessionalism elite, concentration of political influence and wealth veil among few families, confessional system that drives distribution of power and political interference in public institutions. Conflict, security Fragile and dysfunctional political system and state, and fragility unable to regulate conflict and exercise sovereign (including recent authority, conflict as overarching constraint affecting Syrian conflict macroeconomy, jobs, environment, with recent Syria and refugees) crisis increasing competition for jobs, economic and fiscal costs, exacerbating: environmental degradation, weak public and social services access and quality of education in public schools Nested Prioritizing Challenges and Highlighting Opportunities Governance and Lack of political will to implement reforms, weak and Institutions inefficient public institutions, absence of political consensus on national priorities,lack of vision and planning to address challenges such as poverty, weak accountability, slow, costly and corrupt judicial system, low capacity of public sector to deliver quality public services, lack of continuity of government policies, favoritism in government officials’ decisions, state that is absent/hollowed out for many parts of society. ICT Infrastructure deficiencies including need for improved telecommunications infrastructure, mobile phone subscriptions, broadband and internet services. Energy Energy sector and EdL specifically as source of macroeconomic vulnerability and lack of political will and vested interests prevent effective reforms. Macroeconomic Unequal economic development across Lebanon, and fiscal fiscal policy that lacks basic accountability, environment captured, inefficient and unproductive; public financial management system suffers from table continues next page Prioritizing Challenges and Highlighting Opportunities 111 Table 5.1  Heat Map of Identified Priority Areas in Lebanon (Continued) Impact on goals Time horizon of impacts Pre-condition? Complementarities Evidence Base Priority Area Summary of Constraints Small Medium Large Short Medium Long Yes No Weak Medium Strong Weak Medium Strong constraints that hinder its proper functioning, frequent shocks rendering growth volatile, lack of approved budgets (since 2005), Syrian crisis impact on economy and public finances, unproductive spending/fiscal leakages, diversion of public funds, macro-fiscal framework with large vulnerabilities. Business Weak business environment for private sector limits Climate firm creation, reduces efficiencies and competitiveness of operations, monopolies linked to politicians hinder competition, lack of diversity in economy mainly focused on real estate and tourism, relatively high import and export costs, bad infrastructure and cumbersome procedures. Education Stark inequality in education between public and private education systems, influx of Syrian refugees that exacerbates problems related to access and quality of education in public schools. Environment and Large and rapidly growing environmental Water degradation particularly water pollution, a deteriorated water supply network, lack of universal access to potable water, and Syrian refugee crisis exacerbating environmental degradation incl. solid waste and access to clean water and sanitation. Transport Lack of reliable public transportation combined with high traffice congestion in Greater Beirut. Foundation Data availability Lack of strong statistical base and capacity to and access to collect data to measure poverty and other issues, information as well as lack of access to information by civil society which is exploited by politicians. Note: The color coding is as follows: red = very binding; orange = moderately binding; yellow = slightly binding. extremely weak, inefficient, and corrupt, possess- The macroeconomic and fiscal environment ing low capacity to provide high-quality services, exhibits large vulnerabilities and has led to which is particularly damaging to vulnerable and unequal economic development across Lebanon. less well-off citizens. The judicial system is singled Numerous macroeconomic and fiscal constraints out as being slow, costly, and corrupt, suffering entered the top third, constituting the second from a lack of capacity, and being saddled with an highest number of nested constraints after inefficient and outdated legal framework. governance. The highest ranking of these relates ­ Other predominant governance constraints to unequal economic development across the include: (a) an absence of political consensus on country, which has disproportionately benefited national priorities among political actors due some areas and population groups, while largely to  the severe political prioritization that, since ignoring others, including border areas. 2006, has paralyzed decision making; (b) weak Constraints related to fiscal policy and public accountability of the executive; (c) favoritism in finance management dominate this cluster, led decisions of government officials; and (d) a state by fiscal policy that lacks basic accountability, is that is totally absent or hollowed out for many captured, inefficient, and unproductive, and is in parts of society. need of oversight and is suffering from a stalled Infrastructure deficiencies significantly ham- budget process. The lack of approved budgets per the achievement of the twin goals, especially since 2005 is itself perceived as an impediment to telecommunications infrastructure, broadband, the twin goals, as it undermines the efficiency, and Internet services. Given its complementari- accountability, and contestability of public policy ties with all sectors, the weak ICT sector is decisions. Unproductive and wasteful govern- severely limiting job creation, growth, and ulti- ment spending, the diversion of public funds, mately the development of human capital and and fiscal leakages are significant and wide- was the second highest ranked constraint and the spread, crowding out effective poverty reduction highest infrastructure-related constraint. More and social safety net programs. The inefficient reliable and lower-cost telecommunication and use of public resources is attributed to a public Internet services would positively affect citizens finance management system that suffers from and the private sector alike. challenges that hinder its proper functioning and The energy sector is in unequivocal need of weaken its transparency. Frequent shocks, espe- reform. This sector captured the third and fourth cially those related to the security environment, top-scoring constraints. Lack of political will, render growth volatile and contribute to a largely vested interests, and corruption all prevent effec- vulnerable macro-fiscal framework, including tive reforms in infrastructure, especially energy. high fiscal deficits and an over-indebted sover- Electricité du Liban is a major source of macro- eign. The recent Syrian crisis has exacerbated economic vulnerability given its drain on public these weaknesses by further straining the econ- finances and its impact on the balance of pay- omy and public finances. ments, with the sector suffering from operational The weak business climate limits firm cre- inefficiencies, an outdated tariff policy, and seri- ation by the private sector, which directly affects ous deficiencies across the entire chain from gen- achievement of the twin goals. Four constraints eration to distribution. Reforms in this sector related to finance, markets, trade, and competi- require special attention given its impact on pub- tiveness enter the top third. New firms face lic finances, the business climate (where electric- obstacles to entry due to a weak business envi- ity is the second biggest obstacle to private sector ronment that reduces efficiencies and competi- firms), and poverty reduction, where the poor tiveness of operations and monopolies linked to have limited access to both government-supplied politicians cum businessmen that hinder electricity and private generators (the latter competition. The lack of diversity in the econ- ­ mostly due to the high cost). omy, which focuses mainly on real estate and 112 Prioritizing Challenges and Highlighting Opportunities tourism, also impedes firm creation. From a nonmonetary costs. The impact of an unreliable competitiveness perspective, particularly for public transport system lowers countrywide con- trade, relatively high import and export costs, nectivity, weighing heavily on economic growth bad infrastructure, and cumbersome procedures and inclusion. all contribute to an uninviting business climate. Data availability and access to information Stark inequality in the access to and quality of are foundational constraints that affect evidence-​ education between public and private education based policy making and impede an informed systems is a challenge to human capital accumu- population. Major deficiencies exist in the time- lation for a large share of the population. liness of data, the reliability of available data due Education is key to the accumulation of human to weak statistical capacity, and limited data capital and critical to obtaining high-quality coverage, especially regarding poverty, income ­ jobs, economic growth, and shared prosperity. distribution, and economic measurements such ­ While Lebanon exhibits relatively strong average as balance of payments. While some ministries human capital, particularly in education, the have enhanced the disclosure of data and reports poor quality of public school education generates published, the general public has limited or large inequality of opportunities among citizens, no  access to information that is typically pub- depending on the wealth and income status of licly available in other countries, given that a their parents. This, in turn, widens inequality in freedom to information act has yet to be the country, both spatially and over time. The enacted.  Such  gaps in knowledge and facts can recent influx of Syrian refugees has heightened be  used by  the elite to sustain a confessional this problem in public schools, with some schools discourse. overcrowded and teachers managing different curricula to accommodate the different needs of Lebanese and Syrian children. This situation is Opportunities for Unlocking affecting the quality of learning of all students. Large and rapidly growing environmental the Overarching Constraints degradation and lack of universal access to pota- Internal challenges and pressures from the Syrian ble water are important binding constraints given crisis have placed Lebanon at a crossroads. The that environmental risk affects poverty. The envi- country must urgently capitalize on opportuni- ronment, with a focus on water issues, was ties to unlock its development constraints. While reflected in four constraints, with the highest Lebanon has proven resilient to myriad internal concern being a deteriorated water supply net- and external crises, it has often (re)acted only in work due to low public capital expenditures. the face of crisis. Today Lebanon is confronting Environmental degradation is a key constraint, a  “perfect storm” of protracted shocks. These particularly water pollution from untreated sew- include significant internal and external security age, industrial effluent, and agricultural runoff threats, a presidential vacuum, widening macro- discharged into water bodies. The Syrian refugee economic vulnerabilities, and the arrival of an crisis is rapidly exacerbating environmental deg- unprecedented number of refugees. These have radation given the limited quality and capacity of the potential to alter Lebanon in significant ways public water supply, solid waste challenges, and over the medium term. The protracted nature of access to sanitation. these shocks is of particular concern, as it is test- A lack of reliable public transportation, com- ing the limits of the country’s resilience. bined with high traffic congestion in the Greater Political leaders, decision makers, the private Beirut area, impedes the twin goals. The last sector, and civil society need to be engaged to infrastructure constraint to break into the top realize the extent of Lebanon’s challenges, agree third, this issue has repercussions for both house- on a vision for the future, and implement ambi- holds and businesses, resulting in monetary and tious reforms. Quick wins for job creation need Prioritizing Challenges and Highlighting Opportunities 113 to be urgently considered, particularly for vul- progressive downward spiral of the economic nerable groups. With dysfunctional policy mak- and fiscal situation due to both government ing at new highs, there is no room for complacency inaction and unmanaged pressures created by at this uncertain time of internal and regional the refugee situation. instability and heightened risks. • Escalation of the conflict in Syria. A significant At the same time, the Syrian conflict contin- escalation of the conflict in Syria, including ues to undermine the stability of Lebanon, its increased large-scale military confrontations development, as well as the overarching con- and violence, could lead to further displace- straints of elite capture and fragility. At this junc- ment of populations as well as renewed drives ture, considerable uncertainty surrounds future by  belligerents to mobilize further support trajectories in the Syrian crisis. For the purposes through regional networks and alliances. In of this document, three medium-term scenar- such a scenario, the risk of a significant spill- ios  are identified and possible implications over  of the conflict could severely destabilize for  Lebanon’s overarching constraints are Lebanon, with possible implications including highlighted: the wholesale collapse of the political equilib- rium, the degeneration of political and sectar- • Resolution of the conflict in Syria (best-case sce- ian tensions into violent confrontations, and nario). A ceasefire or a negotiated resolution the collapse of government and state ­institutions. of the conflict in Syria would lead to the cessa- Potential political destabilization and the possi- tion of large-scale violence and conflict, which bility of a renewed large-scale influx of Syrian would improve security conditions through- refugees into Lebanon could significantly desta- out the region. The implications for Lebanon bilize the social and economic situation, leading could include a decrease in domestic political to popular unrest and tensions between tensions and polarization, and an increase in communities throughout the country. ­ the space for dialogue and reform. Improving security conditions in Syria could also lead to  the beginning of the return of refugees, although a prolonged presence in Lebanon for Mitigating the Impact of the the majority is still a possibility due to poor Overarching Constraints on social and economic conditions in Syria over the short term. Finally, the start of economic Development recovery and reconstruction in Syria would While Lebanon’s overarching constraints are provide the Lebanese private sector with sig- deep-rooted—being the result of decades of nificant opportunities for investment, trade, institutional, social, and political evolution— and services. potential ways to mitigate them do exist. • Continuation of the current situation (status Regardless of how the situation evolves in Syria, quo scenario). The continuation of the conflict important opportunities exist for addressing in Syria, characterized by periodic positional Lebanon’s twin overarching constraints, bolster- warfare (that is, no major or decisive military ing the country’s resilience, and reducing its operations) and insurgent activity and by lim- vulnerability to external shocks.4 These sources ­ ited will or prospects for peace negotiations, of resilience and options for reform can be classi- would continue to destabilize Lebanon, deep- fied broadly in two types of mitigation strategies: ening its fragility. In this scenario, aggravation (1) those that directly aim to lessen the overarch- of both overarching constraints could be pos- ing constraints themselves and (2) those that take sible, including the deepening of elite and the overarching constraints as a given and work confessional divides, resulting in higher risks on lessening the nested constraints by designing of political and social destabilization and a a reform program that is incentive-compatible 114 Prioritizing Challenges and Highlighting Opportunities with the overarching constraints. By aiming to The creation of a second chamber that, by lessen the overarching constraints, the first strat- design, would be non-confessional and tasked to egy carries the potential of a large payoff for the legislate based on a non-confessional basis likely country’s development, but, given the deep-­ would significantly lessen the power that a few rooted and symbiotic nature of the overarching elites have been able to amass over the years by constraints, it will take time to bear fruit. The using the veil of confessionalism. Minorities’ second strategy is more suited to delivering confessional rights would still be protected gains in the short term, but, given the weight of through an upper chamber of parliament, but the overarching constraints, these gains are the  upper chamber would not have the key likely to be more limited in scope and might be agenda-setting role that it currently has. contingent on the emergence of “windows of opportunity.” Improving Access to (Statistical) Information.  The following options illustrate ways of Access to information is a core tenet of an open approaching reform in a country, like Lebanon, and inclusive society, and constitutes an integral with deep-rooted overarching constraints. part of creating a level playing field. It would Lebanon’s overarching constraints are fluid, and allow more fair competition within the private these options should be seen as indicative of the sector and help civil society and citizens to hold overall approach to reform that should be under- government accountable. It would also help to taken. They do not claim to be comprehensive. show the real costs—both economic and social— of the current system of governance. Increased Strategy 1: Lessening the transparency by the Lebanese public sector Overarching Constraints (Benefits: would offer access to government information Medium-Term but Large) and socioeconomic data and statistics. This could facilitate the participation of citizens, media, and Implementing Key Elements of the Taef civil society organizations in informed policy Accord.  Implementing key outstanding ele- dialogue and increase accountability, as these ments of the Taef Accord would likely yield sig- groups would be able to scrutinize information. nificant results by lessening elite capture. These Adopting proactive disclosure measures, before elements include a decentralization law and cre- passing legislation (as legislation does not neces- ation of a lower chamber of parliament that sarily translate into implementation; implemen- would be elected on a non-confessional basis tation is often a function of political will in (while having the upper chamber maintaining a individual ministries, departments, and agen- confessional basis in order to protect minorities’ cies), could mitigate elite capture by moving rights). toward equal access to information, limited Decentralization, if properly designed, could discretionary opportunities, and increased ­ be a means to restore the link between elected accountability. policy makers and voters or consumers of public services. Empowering local governments ­ Improving Services in High Demand.  through decentralization may mitigate opportu- Strategically improving services in high demand nities for elite capture. Divesting power (finan- from the public and the private sectors may cre- cial, political) to the local government, or at least ate appropriate demand and provide an incentive power over a few priority services, could create a for public officials to put the public interest ahead clear line of accountability from the local officials of elite capture. In Lebanon, actual responsibility to the citizens they represent and facilitate for local service delivery falls under the remit of ­ government responsiveness to citizens’ needs. the central administration, which is captured by Working to implement the draft decentralization the elite. As such, public sector spending, human law could leverage the viability of this option. capital, and, ultimately, delivery of services are Prioritizing Challenges and Highlighting Opportunities 115 governed not necessarily by need, but by a pressures created by the Syrian refugee crisis, patronage system based on religious and political efforts have been made to strengthen national alliances. In addition, many local officials are institutions, including through international appointed by the central government, as opposed assistance. While these efforts have not always to being elected locally. translated into more equitable or efficient public Improving the services most used or consid- services, they provide an important foundation ered most important by the general public could for future capacity development to increase increase the demand for reforms from across transparency and provide equitable services and confessions, which could create incentives for constitute a starting point for future economic public sector entities to engage in further reforms. and development reform programs. Such sectors may include health, education, land Key pathways for action could include administration, and access to personal docu- (1)  reforming key institutions, including trans- ments. The same can be said for reforms that parency in targeting and allocative decision- would benefit the private sector more broadly. making processes, and improving the quality and Reforms could include automation of common equity of service provision (an additional focus documents, e-services, simpler administrative could include risk-based targeting); (2) strength- procedures, and efforts to address low-level ening public-private partnerships regarding corruption, such as bribery of administrative ­ social spending, based on common policy or officials. Improved service delivery may ulti- planning frameworks and transparent or equita- mately lead to a shift in attitudes toward serving ble rules governing allocation; and (3) develop- the public interest rather than protecting elite ing institutional capacity development programs capture. in key sectors, with a focus on addressing demo- graphic and regional inequalities and promoting Promoting Political Stability.  At the political citizen-based policy development (as opposed level, the restraint exhibited by local confessional to  more narrow sectarian or confessional coalitions with respect to the Syrian conflict approaches). illustrates a general desire to avoid the kind of descent into conflict and warfare associated with Strategy 2: Tackling the Nested the civil war. The gains achieved through national Constraints by Designing Reforms dialogue since 2006 and through instruments That Incorporate Existing such as the Doha Accord—though interrupted— are important steps that could form the basis for Overarching Constraints a new political consensus on the nature of the In the absence of the two overarching con- political system and definition of national straints, designing reforms at a sector level priorities. would focus on the technical issues that need to Key pathways for action could include be reformed within the sector. In Lebanon, (1) promoting national dialogue and reconcilia- undertaking a technical analysis of sector tion, building on post-2006 precedents and reforms is a necessary, but not a sufficient condi- (2) creating space for participatory dialogue and tion for reforms to take place and be successful. engagement on critical political and governance For that to happen, a prior analysis of (1) key reforms, with a focus on increasing equitable stakeholders’ incentives and powers and (2) the and inclusive decision making and governance at sensitivity of the sector to conflict and fragility is all levels. required. If, for example, the stakeholder analy- sis reveals that one powerful confessional party Engaging in Institutional Reform and derives strong personal rents from the sector Development.  Despite the destruction of the and is in a position to veto any reform attempts 2006 conflict with Israel and the current in it, then even the most solid technical solution 116 Prioritizing Challenges and Highlighting Opportunities will not produce the desired results. Once Stakeholders could support and use these reformers have a solid understanding of the interventions to create spillover effects that impact that confessional governance, conflict, benefit governance in other sectors as well—for ­ and fragility have on the sector, they can design example, by improving general accountability a reform package that is incentive-compatible mechanisms involving the public sector or pro- with these two overarching constraints. This sec- moting access to information and transparency tion provides examples of how such a package that touch on many different sectors. could be designed. Working around Elite Capture. Working Making a Grand Bargain.  Grand bargaining around elite capture entails working with actors can help to mitigate competition over power outside the public sector that could advocate for (political and economic) between the confes- necessary reforms or bring key services to c ­ itizens. sional parties and elites that have captured the Many actors—private sector, civil society, politi- Lebanese economy. Currently, the status quo cal parties, and religious groups—currently com- among the elite is to respect the sphere of influ- pensate for the lack of services offered by the ence of others by assigning religious confessions public sector; as a result, services are delivered on to lead, for example, specific ministries and the an ad hoc basis, with poor accountability. services delivered to their own constituents. Grand bargains would encourage different stake- Engaging Horizontally.  Lebanon’s civil society holders to share the pains of reform in return for and private sector are often considered through sharing the benefits. sectarian filters—that is, as part of the broader In order for grand bargaining to be successful, sectarian system and the institutions to which an understanding of common strategic interests, they are affiliated. But the history of Lebanon incentives, access to information, power condi- since the civil war highlights the potentially pos- tions, extent of mutual trust, and enforcement of itive role that civil society can play in fostering accountability are needed. The alternative to not integrative and horizontal dynamics with respect cooperating (i.e., conflict) is dire and imminent. to both political and economic issues. Grand bargaining would most likely go beyond A key strategic pathway is to strengthen the political parties in Lebanon to involve or incor- integrative and nonsectarian organization and porate international actors who influence sector— engagement of civil society and the private ­ Lebanese politics. in particular, the Arab Spring ­generation—in the development of inclusive national agendas on Seizing Opportunities.  Being ready to seize reform and institutional development. At the local windows of opportunity when they arise, such as level, engaging these actors in efforts to mitigate when the overarching constraints become tempo- social tensions (including those associated with rarily less binding (for example, because a regional the influx of refugees) could strengthen social peace accord significantly lessens both confes- cohesion and resilience and facilitate the develop- sional governance, and conflict and f ­ragility). ment of mechanisms for managing associated Such an opportunity might be opening up in the social and economic pressures. governance sector, where several reform initia- tives have recently been launched or are about to Managing the Influx of Syrian Refugees and be launched. For example, the Ministry of Finance Turning It into an Opportunity.  It is likely that is considering wide-ranging reforms to the land Lebanon will need to address a protracted pres- administration process and has taken steps to ence of Syrian refugees over the medium term, address the widespread corruption in it. The regardless of how the Syrian crisis develops. Ministry of Health has taken steps to address While humanitarian assistance has been essen- unsafe food and drug practices. tial in sustaining the refugees and in partially Prioritizing Challenges and Highlighting Opportunities 117 mitigating associated fiscal requirements, there is transport sector, which would itself unleash an opportunity to consolidate and sustain these improved connectivity and stimulate growth. gains over the medium term, while also strength- Such reforms would help to attract foreign direct ening and improving public and private capaci- investment and stimulate investments in real ties as a development outcome in their own right. estate and government bonds, which would This bridging of the humanitarian-­development enhance Lebanon’s competitiveness. Factoring continuum could include three strategic pathways: renewable energy into Lebanon’s energy mix is (1) improving safe asylum space by strengthening an opportunity to create green jobs, particularly the capacity of host communities to manage eco- as Lebanon has set a target of 20 percent of the nomic and social tensions associated with the ref- country’s energy mix to be met by renewable ugee presence; (2) providing support to the energy by 2020. government to address fiscal requirements, while Upgrading ICT infrastructure would generate also developing the basis for medium-term jobs, as would creating new services in interme- improvements in infrastructure and public service diary sectors pertaining to broadband, such as delivery; and (3) promoting greater self-reliance those in e-banking, e-health, and new industries and economic autonomy among the refugee pop- such as export-oriented information technology–​ ulation through targeted livelihoods assistance enabled services. Such ICT advances would also and policies for their medium-term inclusion in support Lebanon’s burgeoning technology eco- the national economy. The second point is critical system and stimulate the creation of more for a country like Lebanon, which is providing the high-quality jobs. international community with the global public good of hosting refugees while also preventing or Targeted Investments in Agriculture mitigating the proliferation of a global public bad, and Water such as international terrorism (should prevention Some of the challenges of the Lebanese labor interventions such as tackling poverty be left market could be addressed through targeted largely unfunded). investments in agriculture and water. The agricul- ture sector is experiencing shifts in its production structure and declining wage income. Yet the Opportunities for Unlocking Syrian crisis presents a sizable opportunity for the Nested Constraints domestic producers. Concrete investments could include support for the rehabilitation of irrigation Subject to the design of reforms that are incen- schemes through both soft and hard infrastruc- tive-compatible with the twin overarching con- ture investments, consistent with the govern- straints, taking advantage of opportunities in ment’s 2015–19 agricultural strategy, which aims four areas could materially improve Lebanon’s to revitalize the sector (water scarcity and effi- development prospects. ciency are identified as a main constraint for the expansion of agricultural production). Moreover, Infrastructure Reforms the export sector will need to reorient itself away Infrastructure reforms in electricity, ICT, water from traditional markets in Syria and continue to supply, and transport would improve the quality diversify. It will need to upgrade the supply chains of life for all, in addition to stimulating job for high-value products, in particular, fruits and ­ creation. Electricity sector reform is paramount vegetables. and would result in higher cost recovery for EdL, Likely areas of support could be analysis and improved fiscal and external balances, and lower market information systems, targeted export pro- carbon dioxide emissions. Reliable electricity motion programs, and institutional support to would satisfy a prerequisite to support the enhance the sector’s efficiency and organization. 118 Prioritizing Challenges and Highlighting Opportunities Human Capital Investments In addition to focusing on job creation, another option is to propose and implement a Investments in human capital are crucial at youth engagement policy, launch campaigns on all  levels of education. Quality early child- good governance, organize competitions to pro- hood  education has been documented as a mote Lebanese identity, and publish inspirational ­ barrier to escaping poverty and could be a and economically empowering content on jobs, medium-term win. At the secondary and ter- scholarships, and grants. Behavioral change tiary levels, educational programs that are bet- could be inspired through positive stories by rec- ter suited to meet the demands of Lebanon’s ognizing administrations, agencies, and leaders labor market are critical. Related, the presence that are delivering on their mandate by serving of career counselors to guide youth in their citizens well. selection of a major and a career offers another Lebanon could transform negative pressure opportunity. points into positive ones. Confessionalism, when Youth need to be given hope that they can be not exploited as a veil for corruption and elite a catalyst for change in Lebanon and be given capture, can serve to foster and respect Lebanon’s the skills to succeed. For the most part, they are diversity. Entry points in the confessional system disengaged from the political process and could be identified in order to drive change, such demotivated to affect any real change in as engaging the confessional structure in plan- Lebanon. Hence their strong propensity to ning and discussions on public goods, job cre- ­emigrate. Curricula need to be revised to ensure ation, and economic growth. Lebanon could also that graduates have skills that employers need, redefine itself amid demographic changes. For and entrepreneurship skills need to be inte- example, the country could capitalize on its grated in the education system at the secondary changing comparative advantage in the agrifood and tertiary levels to motivate youth to initiate business. Opportunities also exist for Lebanon’s start-ups and create their own jobs. Establishing private sector given its experience in recovery common spaces for youth from different back- and reconstruction, as troubled countries in the grounds such as community centers and sports region stabilize. clubs could mitigate confessionally-designated The Lebanese diaspora has an important role spaces. to play in supporting reform. The strong support of the diaspora in providing a large base of remit- Soft Opportunities tances has been a source of strength for Lebanon. While technical solutions are known for achiev- The diaspora could be mobilized to influence key ing reform and progress in each of the prioritized decision makers in Lebanon to support reforms constraints, additional soft opportunities could and could play a role in supplying talent, funding be considered. There is scope for the state to investment in productive assets, and mediating regain the trust of its citizens, with state rebuild- domestic political tensions by helping to focus ing as key and rule of law at its heart. Horizontal private sector and civil society efforts away from social engagement is one option. confessional interests. Notes 1. The multidisciplinary SCD team of experts across identify constraints. Between June and December 16 global practices and cross-cutting solution 2014, the World Bank also held eight stakeholder areas from the World Bank, the International consultations with representatives from civil soci- Finance Corporation, and the Multilateral ety, academic institutions, think tanks, the private Investment Guarantee Agency analyzed the sector, and the public sector in Beirut and Tripoli existing literature and conducted new analysis to and held additional sessions with government Prioritizing Challenges and Highlighting Opportunities 119 representatives, United Nations and donor rep- 3. The average score of the final list of 122 con- resentatives, youth, and a sample of the Lebanese straints stood at 3.3 with a standard deviation of diaspora in Washington, DC. These consultations 0.5. The highest-ranking one-third of constraints provided additional insights and validated or was captured at a cutoff of the highest-scoring 41 informed new constraints. constraints corresponding to 11 key priority areas 2. These included using the results of the scores when clustered thematically. from (1) the core SCD team because they 4. Despite the internal and external factors that con- would  have a comprehensive knowledge of tribute to Lebanon’s fragility, there are also some Lebanon’s constraints and from (2) all of the important sources of resilience, including gains voters who answered at least 120 out of the 122 achieved over the past decade, which have pre- constraints because voters who only answered a vented a relapse of the violence witnessed during small subset of questions would not have a com- the civil war. These sources of resilience constitute prehensive assessment of Lebanon’s develop- opportunities for both stabilizing the country and ment challenges. addressing fundamental structural problems. 120 Prioritizing Challenges and Highlighting Opportunities Appendix A Statistical System and the SCD Overall statistical capacity in Lebanon is weak, in civil status registers within the Ministry of the part due to the lack of resources and autonomy Interior (European Union 2009). of  the Central Administration for Statistics Lebanon is lagging behind other middle-­ (Berthelemy, Dessus, and Nahas 2007; IMF 2014; income countries in collecting and making avail- World Bank 2010b). This is reflected in the indi- able microdata, which are the data needed to cator of low statistical capacity constructed by monitor the twin goals. Figure A.1 shows the the World Bank. In 2010 Lebanon had the s ­ econd number of microdata surveys available in the lowest indicator after Gabon among ­ countries at Central Microdata Library of the World Bank. similar levels of economic development, as mea- The catalogue only has 16 surveys for Lebanon, sured by gross domestic product (GDP) per compared to 63 surveys for Turkey and 71 capita in purchasing power parity (PPP) terms. for  Mexico. A particularly severe problem in Weak data impede both decision making and Lebanon is the lack of household surveys and economic and social analysis. For instance, the data. Among the 16 surveys deposited in the span and frequency of the national accounts ­ catalogue, only two are household budget sur- data  limit the scope of the analytical work that veys. These household surveys collect the type of can be  undertaken in the Systematic Country data from which poverty and distribution of Diagnostic. Neither cross-country regressions income growth are estimated. Lebanon also nor estimates of potential output, which require does not have regular labor force surveys, which the use of advanced econometric techniques limits the analysis of the labor market and job (such as filtering), can be performed with the developments. currently available data. In addition to low resources and capacity, key Figure A.1  Number of Microdata Surveys reasons underlying the weak statistical system Deposited in the World Bank’s Central in  Lebanon are the political and sectarian Microdata Library, as of April 21, 2014 ­ sensitivities associated with data. The delicate political-confessional equilibrium described in ­ the main body of the SCD gives rise to particular issues regarding the collection of household data in Lebanon. Given the sectarian nature of the political system, population demographics—the foundation on which much of a country’s statisti- cal system is built—have always been a sensitive and highly politicized issue. There is a fear that some groups may claim more power if statistics show a shift in population demographics (Lebanese Information Center 2013). The last official census in Lebanon was conducted in 1932. The Lebanese administration updated the 1932 census results in 1942. The latest update of Source: Central Microdata Library. Note: Countries selected had GDP per capita in U.S. dollars PPP the population figures was in 1964, drawing on 10 percent higher or lower than Lebanon in 2010. Statistical System and the SCD 121 Lack of microdata in the World Bank is not highlighted in the government’s policy catalogue can be driven by lack of availability or ­ strategy documents. For example, data issues lack of access. For example, the Islamic Republic are not mentioned in Lebanon’s national social of Iran collects a plethora of household budget development strategy (Ministry of Social Affairs surveys, but does not share them with the World 2011), even though the latest poverty estimates Bank. In contrast, Lebanon has conducted only are for 2005. This imposes an important con- two household budget surveys since 2000, and straint on the government’s ability to assess only one has been used to measure poverty and accurately and define core social development inequality. The national absolute poverty rate and poverty reduction goals, which perpetuates for  Lebanon is only available for 2005, while important social and economic inequalities. many other countries measure national absolute These inequalities reinforce political and social poverty rates regularly (figure A.2). ­ cleavages and exacerbate tensions, perpetuat- Partly driven by political and sectarian issues, ing  and deepening Lebanon’s vulnerability to the importance of data collection and statistics conflict. Figure A.2  National Absolute Poverty Rates in Lebanon and Selected Comparators, 2000–12 Source: Based on Azevedo 2011. World Development Indicators data as of June, 19, 2014. 122 Statistical System and the SCD Beyond the lack of data for analyzing the twin nonbank private sector, and corporate bor- goals, some important issues also exist with the rowing abroad. statistical information available for economic • Prices and inflation. Prior to December 2013, monitoring and analysis: consumer price inflation data did not provide ­ (a)  a comprehensive breakdown of prices • National accounts. In addition to being com- (rental data are now collected on a monthly piled only on an annual basis, Lebanese basis), (b) an updated weighting scheme for the national ­ accounts cover only the 1997–2013 inflation basket, or (c) a geographic breakdown period (as of October 2015). The compilation of the consumer price index (CPI). The CPI of national a­ ccounts has improved recently, as also did not accurately reflect the dynamics of the Central Administration of Statistics pub- aggregate prices, as rental surveys, which lished, in October 2013, new national accounts accounted for 16 percent of the old CPI basket, for the 2004–11 ­ period based on (a) a new were only undertaken once every three years. framework that is consistent with the interna- The Central Administration of Statistics also tional standards (UNSC 2008) and (b) new did not collect CPI data between January and data (for example, value added tax returns, May 2013, resulting in a break in the CPI series. imports of services). • Labor market and productivity. The latest official • Balance of payments. Despite some modest unemployment data are from 2009.1 No labor improvements (such as the compilation of force survey is periodically undertaken. Data on an international investment position state- total factor productivity are not available. The ment), the International Monetary Fund absence of these data prevents analytical work (IMF 2014) notes that current account data on the role of different factors of production and have uncertainties related to estimates of technological changes in driving growth. private sector services, worker remittances, • Access to capital and returns to private invest- and investment income. The quality of the ments. Data on sectoral access to capital are capital and financial account data is  also limited. While data on the cost of finance can weak, as uncertainties plague the data on be obtained, private returns to investment foreign direct investment, equity investment, data are not available. Note 1. The one-off MILES project (World Bank 2012d) somewhat attenuates the lack of labor market data, but these data date from 2010. Statistical System and the SCD 123 Appendix B Economic Performance and the Civil War As Lebanon’s economic performance is materi- US$25  ­ billion), and emigration of an estimated ally affected by fragility and conflict, a long-term 200,000 skilled Lebanese, or 7.3 percent of the ­perspective on the country’s growth is i­ nstructive. population (Eken et al. 1995; World Bank 1993). For example, Lebanon’s economic performance The economy only returned to its pre-conflict has been profoundly affected by the 1975–90 level (1974) level in 1998. In per capita terms, civil war and has had lasting impacts on all core given rapid population growth (and notwith- determinants of economic growth, from human standing the casualties of the civil war and the and physical capital to institutional and social large and sustained outward migration), per capital. ­ capita real GDP only returned to its 1974 level in Led by services and private consumption, eco- 2002. Thus in economic terms, it took one gener- nomic growth and growth per capita were robust ation to return to the country’s (average) welfare between 1950 and 1974. The Lebanese economy prior to the war. As described in chapters 1 and 2, grew, on average, an estimated 7 percent during the war also took a toll on institutions, gover- 1950–74 (Makdisi and Sadaka 2003). Real GDP nance, and the role of the state. per capita growth exceeded 3 percent in 1950–74 The civil war set back Lebanon’s development (Gaspard 2004) and 3.3 percent during 1964–74 for at least one generation (figure B.1). In the early (Eken et al. 1995). While robust, this per capita 1970s Lebanon ranked in the top 31 percent of growth was nonetheless lower than the average countries in the world in GDP per capita (PPP growth of seven neighboring countries.1 In terms terms). That ranking dropped markedly because of sectoral contributions to GDP, the large ser- of  the civil war and has not yet fully recovered vices sector (69.5 percent of GDP) was the main (Lebanon was in the top 35 percent of countries in driver of growth in the immediate pre–civil war 2011).3 A slightly more positive assessment arises period (1966–71). On the expenditure side, pri- when looking at Lebanon’s performance against vate consumption accounted for 78.5 percent of countries that had the same PPP-adjusted GDP per GDP, constituting the main driver of growth, by capita in 1974 as Lebanon. As shown in figure B.2, far, during that period (World Bank 1973). At the Lebanon trailed its comparators (12 countries) onset of the civil war, the structure of the econ- until the 2000s. Since then, it has rapidly caught up, omy resembled that of a developed economy with and by 2011, Lebanon ranked toward the middle of relatively small agriculture and industry. its 1974 peer group and is now again at par with Lebanon suffered large and persistent eco- Chile and Turkey, but still far behind the group’s nomic and human (among other) losses during top performers (for example, Cyprus, with a PPP- the civil war. Human losses are estimated at adjusted per capita GDP that is 114 percent higher 144,000 fatalities (or 5 percent of the resident than Lebanon’s). Similarly, the size of the Lebanese population at the time) and more than 184,000 economy recovered only in 2009 the gap it had injuries (Makdisi and Sadaka 2003). Lebanon’s compared to the U.S. economy in 1974—that is, economy halved during the civil war2 due to a 41 percent in PPP terms (figure B.3). large decline in investment, the dislocation of The country’s recovery from the civil war was goods and labor markets, widespread destruc- comparatively strong (figure B.4). Compared to tion  of physical capital stock (estimated at 12 countries that had experienced a conflict Economic Performance and the Civil War 125 Figure B.1  Real GDP at Chained PPP in Lebanon, 1970–2010 Source: Penn World Tables 8.0 data. Figure B.2  GDP per Capita at Chained PPP in Lebanon and Comparator Countries, 1970–2010 Source: World Bank 2014l. Note: The comparator countries are Antigua and Barbuda, Chile, Colombia, Costa Rica, Cyprus, Hungary, Jamaica, Poland, South Africa, Turkey, and Uruguay. 126 Economic Performance and the Civil War Figure B.3  Real GDP at Chained PPP in Lebanon and the United States, 1970–2010 Source: Penn World Tables 8.0. Figure B.4  Postwar Economic Performance in Lebanon Source: Penn World Tables 8.0 data. Economic Performance and the Civil War 127 lasting at least 10 years,4 Lebanon’s real GDP of capital early in the recovery and r ­ econstruction rebounded rapidly and later became the process, which has been maintained since, in best-performing one. This strong performance large part due to remittances of the Lebanese might be attributed to (a)  Lebanon’s highly diaspora, and (c)  large-scale reconstruction skilled human capital, (b) the rapid, large inflow efforts. Notes 1. These are Cyprus, the Arab Republic of Egypt, 4. Real GDP (at chained PPP) is normalized at 100 Israel, Jordan, the Syrian Arab Republic, Tunisia, at the last year of each conflict. The comparator and Turkey. countries were selected from the list of coun- 2. By 1990, real GDP stood at 48 percent of its 1974 tries that experienced conflicts lasting at least level, according to data from the Penn World 10 years during 1960–2011 (World Bank 2011d). Tables 8.0. Eken et al. (1995) find the same The resulting countries are Angola, the Republic number by putting together various information ­ of Congo, El  Salvador, Guatemala, Indonesia, sources. Lebanon, Liberia, Mozambique, Nepal, Peru, 3. Penn World Tables 8.0. Rwanda, Sierra Leone, and South Africa. 128 Economic Performance and the Civil War Appendix C Supplemental Tables and Figures on Poverty and Access to Public Services Figure C.1  Respondents to the World Values Survey in Lebanon and Comparator Countries, by Class and Education Level, circa 2013 Source: World Values Survey, wave 6. Note: Surveys were conducted in different years in different countries. “Do not know” and “no answer” were excluded from calculations. Figure C.2  Respondents to World Values Survey in Lebanon and Comparator Countries, by Class and Employment Status, circa 2013 Source: World Values Survey, wave 6. Note: Surveys were conducted in different years in different countries. “Do not know” and “no answer” were excluded from calculations. Supplemental Tables and Figures on Poverty and Access to Public Services 129 Table C.1  Marginal Effects from Probit Model Explaining Being in Bottom 40 Percent of Respondents Based on Self-Assessed Ranking of Income Scale in Lebanon, 2013 Explanatory variable Coefficient t-statistic Age −0.001 [−0.133] Age squared 0.000 [0.445] Male 0.014 [0.493] Education No education Omitted Incomplete primary school −0.118* [−1.899] Complete primary school −0.165*** [−3.636] Incomplete secondary school: technical −0.228*** [−5.946] Complete secondary school: technical −0.186*** [−4.241] Incomplete secondary school: university −0.207*** [−4.970] Complete secondary school: university −0.220*** [−5.228] Some university-level education −0.221*** [−5.050] University-level education, with degree −0.292*** [−7.658] Employment status Full-time worker −0.0953** [−2.053] Part-time worker −0.041 [−0.727] Self employed −0.181*** [−4.139] Retired −0.061 [−0.981] Housewife −0.108** [−2.180] Student −0.084 [−1.608] Unemployed Omitted N 1,159 Source: World Values Survey, wave 6. Note: “Do not know” and “no answer” were excluded from estimation. * Significant at the 10 percent level ** Significant at the 5 percent level *** Significant at the 1 percent level. Figure C.3  Labor Force Status in Lebanon, by Household Income, 2010 Source: Arab Barometer Survey. Note: Individuals without answers about household income status were excluded from calculation. 130 Supplemental Tables and Figures on Poverty and Access to Public Services Figure C.4  Poverty Rates in Lebanon, by Table C.2  OLS Regression Explaining Number of Household Members, 2012 Math TIMSS Score in Lebanon Dependent variable: Math score Teachers’ experience Experience 10–20 1.4 [3.956] Experience 5–10 −20.44*** [4.182] Experience <5 −21.68*** [4.577] More than 20 years Omitted Access to internet and computer No internet −13.43*** [2.451] No computer −29.41*** [3.771] Migrant Was not born in the country −9.343*** [2.971] Source: 2012 Financial Literacy and Capabilities Survey. Attitude to math Like a little math, science −18.97*** [2.612] Do not like math, science −35.08*** [3.615] Completely dislike math and science −52.14*** [3.390] Figure C.5  Poverty Rates in Lebanon, by Like math and science a lot Omitted Number of Children, 2012 Region Bekaa 7.997 [5.312] Mount Lebnanon 20.68*** [5.178] Banlieue 3.5 [4.418] Nabatieh −21.63*** [6.345] North −14.48*** [4.949] South −17.83*** [5.172] Beirut Omitted Area of residence Suburban 14.55*** [4.269] Medium size city 14.92*** [3.163] Small town 1.943 [3.740] Source: 2012 Financial Literacy and Capabilities Survey. Remote rural −13.58 [8.671] Urban Omitted Boy 5.819*** [2.243] English −2.75 [2.832] Constant 481.9*** [5.353] Observations 3,438 R-squared 0.198 Source: 2011 Trends in International Mathematics and Science Study (TIMSS). Note: Observations with missing values were removed from estimations: 536 from 3,974 observations. t-statistics are shown in parentheses. Students’ weights were used. * Significant at 10 percent ** Significant at 5 percent *** Significant at 1 percent Supplemental Tables and Figures on Poverty and Access to Public Services 131 Figure C.6  Coverage, Human Opportunity Index, and Dissimilarity Index for a Select Set of Countries Based on Math TIMSS Score Source: 2011 Trends in International Mathematics and Science Study (TIMSS). Note: Students’ weights were used. Dissimilarity index measures inequality of opportunity and ranges from 0 to 1, with higher values meaning higher inequality. An eighth-grade child has opportunity if his math test score is higher than the average for the Islamic Republic of Iran, Lebanon, and Turkey: 439. 132 Supplemental Tables and Figures on Poverty and Access to Public Services Figure C.7  Poverty Rates in Lebanon, by Labor Force Status and Educational Attainment of Head of Household, 2012 Source: 2012 Financial Literacy and Capabilities Survey. Supplemental Tables and Figures on Poverty and Access to Public Services 133 The human opportunity index (HOI) is a mea- equality of opportunity. It can be estimated sure that combines into a single indicator both econometrically and decomposed into the con- the coverage of or access to a particular opportu- tribution of characteristics selected to define nity and how equitably that access is distributed groups of population. (Barros et al. 2009; Cuesta and Abras 2013). More The following simple numerical example formally: illustrates how HOI is calculated (Cuesta and Narayan 2011): HOI = C*(1 − D), (C.1) Number of children of age where C is the average coverage rate for opportu- 6–10 enrolled in school nity and D is the dissimilarity index or inequality Country A (100 Country B (100 of opportunity. children) children) The HOI index runs from 0 to 1. A society Urban (50 percent of population) 40 30 with universal coverage will have an HOI equal Rural (50 percent of population) 20 30 to 1, or 100 percent. A society with coverage of Total enrollment 60 60 90 percent that is distributed unequally in favor of one group (say, urban population) will have an The average enrollment or coverage rate for HOI lower than 90 percent, with the exact value both countries is the same: 60 children or 0.6 depending on how unequal access is across the (60/100). However, in country A, access in rural rural and urban populations. Intuitively, the HOI areas is lower than equal allocation: 20 versus 30, takes access to opportunity and discounts it if meaning that 10 children need to be reallocated opportunity is not allocated equitably. to achieve equality. The dissimilarity index measures the dissimi- larity of access to an opportunity across different HOIA = C(1 − D) = 0.6*(1 − 10/60) = 0.5 groups of people (in our case, urban and rural) HOIB = C(1 − D) = 0.6*(1 − 0/60) = 0.6. compared with the average rate of access to this opportunity for the whole population. It ranges As a result, the HOI for country A (0.5) and is from 0 to 1 and equals 0 in a situation of perfect lower than the coverage rate for country B (0.6). 134 Supplemental Tables and Figures on Poverty and Access to Public Services Appendix D 2013–14 Enterprise Survey: Additional Results Figure D.1  Largest Obstacles to Business Operations in Lebanon, by Firm Age, Size, Region, and Sector, 2013 Source: 2013–14 Enterprise Surveys. Note: Figures are survey-weighted. Top five national-level obstacles are shown. 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