|Statesmanship in government
Costs of emerging from war and entering the future
by Rafic Al- Hariri
Today, Lebanon is witnessing a growing debate regarding the acceleration of debt and the difficulties in containing the large budget deficits. Some argue that our current challenges stem directly from the growth-oriented policies of the past six years that led to a significant rise in public debt. Others, however, believe that the existing financial difficulties are a direct consequence of the success in overcoming the far more difficult and serious problems of the immediate post-war era. The demands at that time necessitated movement along multiple fronts, including the need to reconstruct, to redress social dislocations, and to improve living standards, while rebuilding the military and security capabilities of the state. Improvement along these multiple fronts required dynamic action that was continuously hindered by Israeli aggression.
The years of war and turmoil between 1975 and 1990 had a devastating effect on the Lebanese
economy, on society and on national institutions, including the political, administrative, educational, military, and security establishments.
Perhaps the largest loss to Lebanon during the years of turmoil was the cost in opportunities of wasting almost two decades of potential development, with all the implications on human capital, technological progress and national advancement.Consequently, total direct and indirect losses suffered by Lebanon exceeded US $100 billion.
Looking back at the situation on the eve of forming the first government towards the end of 1992, one recalls that the value of the Lebanese Lira reached LL2,800 for each dollar, inflation exceeded 120%, average interest rates on Treasury Bills reached 34%, and commercial bank lending rates exceeded 51%. At the same time, the capabilities of the Lebanese military and security services had declined dramatically and threatened to adversely affect the country's security. In addition, most public social provisions, including health, education, and social services, had declined to a level that gravely jeopardized social stability.
On assuming office, the government was confronted with the daunting challenge of converting a devastated, demoralized, economically contracting and hyperinflationary situation into one of growth macro-economic stability, and reconstruction.
The situation at the time required rapid progress on all aspects of life in Lebanon: security needed to be maintained and enhanced; the damaged physical infrastructure needed to be rebuilt and expanded; public services and the provision of basic needs in health and education needed to be re-initiated; the problem of the displaced needed to be resolved; support for the south needed to be expanded and accelerated; the civil service required revitalization and modernization; the legislative and regulatory framework needed upgrading and updating; and, most significantly, social harmony and national reconciliation needed to be buttressed and enhanced.
In light of the above and on the eve of assuming office, the Lebanese government in 1992 wasconfronted with three distinct options:
Option 1: Wait
The government could have decided to wait for foreign aid to become available before embarking on a massive programme of reconstruction and economic revival.
Pursuing this option would have automatically led to an aggravation of the deficit, a major expansion in public debt, a contraction in the size of the national economy, and a steep rise in interest rates.
Option 2: Reduce expenditure and raise taxes massively.
We could have decided to embark on a major contractionary fiscal strategy by seeking to dramatically reduce expenditures while simultaneously attempting to significantly raise revenues.
Such a strategy was totally unrealistic. Clearly, it would have, as in the case of some East European countries, completely damaged the Lebanese economy and pushed it into a severe recession, excessively delaying if not permanently eliminating any economic revival. The Lebanese economy could not afford several years of hibernation and economic regression. Such a strategy would have severely strained social harmony and national reconciliation.
Option 3: Growth, development and reconstruction.
This option is based on a growth-oriented strategy that emphasizes the importance of rapidly restoring domestic and international confidence in the Lebanese economy, and creating an environment conducive to capital inflows and investment. It is also based on achieving reconstruction and economic revival with a view to improving the living conditions of Lebanese people and to reclaim a role for Lebanon in the Arab and global economies. This was the only strategy that would have led to an appreciation of the assets in Lebanon, thereby raising markedly the wealth of the Lebanese.
Our strategy was based on re-establishing and strengthening one of the fundamental pillars of the Lebanese economy, namely the free, open, liberal, and democratic nature of our system. It is a system strongly committed to the principles of free market economics and to the tradition of adopting policies friendly to the private sector. Lebanon's strength and raison d'etre is based entirely on its protection of individual civil liberties (including the freedom of political belief and social behaviour, as well as freedom of speech), rights of private ownership, freedom of exchange, banking secrecy and the complete independence of the judiciary. We must be unyielding in our efforts to safeguard these sacrosanct Lebanese traditions, which represent the major foundation for the country's future growth and development.
In our efforts to achieve economic growth, we embarked on an emergency infrastructure development program that primarily targeted improving the provision of public services. In addition, we initiated significant social service programs, including the expansion of services for health, education, vocational training, the return of the displaced, support for the South and improvement in real income levels, along with re-establishing security throughout the country by significantly increasing spending on all our military services. Indeed, the political leadership has continuously supported and nurtured the Lebanese Army, to enable it to preserve public order internally, and to confront the challenges of continued Israeli occupation and aggression.
In this regard, it is noteworthy that total spending on the military and security services between the end of 1992 and the end of 1998, including their share of retirement benefits and end-of-service indemnities, amounted to US $5 billion and constituted about 92% of all spending on basic infrastructure and on agriculture, industry and tourism, which during the same period amounted to US $5.4 billion.
It is crucial to emphasize that the reconstruction and economic revival strategy was comprehensive, broad-based and spanned every region of the country. Indeed, previously under-developed and under-privileged areas experienced for the first time the benefits of electricity, telephones, roads, schools, hospitals and running water. Also, given the prevailing state of affairs, all these investments were of immediate priority and commanded a significant consensus.
Over the past several years - and more recently - a lot has been said regarding public expenditure on basic infrastructure and its actual cost and magnitude. At the outset, it is imperative to recall that the majority of public works undertaken were either fully or partially financed by multilateral organizations or bilateral lenders, including the World Bank, the European Investment Bank and the various Arab funds. These institutions closely monitored the procurement process and insisted on having their guidelines adopted when any of their resources were used. At the same time, the national implementing agencies are also subjected to pre- or post-audit procedures from the Court of Accounts, independent auditors, and government representatives. Of the greatest significance, however, is the fact that the major procurements were awarded at prices well below prevailing international prices. Finally, it is important to recall that US $1.5 billion of the total spending on basic infrastructure was financed through borrowing in foreign currencies at interest rates well below those prevailing on the Lebanese Lira.
Given the magnitude of the needs for reconstruction, military and security spending and social spending, funding of the initial phase of post-war reconstruction and recovery was to a large extent based on a domestic effort.
In addition, and soon after we assumed office, we embarked on a major campaign to revitalize Lebanon's relations with the international financial community, including major multilateral organizations in this context, it is crucial to underscore that our success in placing Lebanon once again on the international financial map and in re-establishing domestic and international confidence in the Lebanese economy was mainly due to our success in attracting top quality expertise from the large Lebanese diaspora, and placing these internationally recognized and consummate professionals in the main economic institutions, such as the Central Bank, the Ministry of Finance, the Ministry of Economy, the Council for Development and Reconstruction and IDAL.
In light of the above, we needed to concentrate the public sector's attention on those areas that would induce other parties to share and assume a larger role in the overall economic recovery effort. Hence, the government started to create the necessary conditions to encourage greater private sector participation. A glowing example of the enhanced role of the Lebanese private sector in the reconstruction process is the establishment of SOLIDERE, the private company entrusted with reconstructing and rehabilitating the devastated private and public properties in the Old Beirut City Center.
To revitalize the Lebanese private sector, we took upon ourselves the creation of a regulatory and tax environment conducive to promoting private sector activity, thereby rendering the private sector as the main engine for growth. In essence, our strategy was primarily based on an outward-looking approach, with a view to benefiting from global economic trends while attempting to contain any transitional costs resulting from these trends.
During the past six years. The Lebanese pound stabilized, interest rates significantly declined, inflation was practically eliminated, and GDP almost tripled from US $5.5 billion at the end of 1992 to US $16.3 billion at the end of 1998. In other words, per capita income increased to US $4,500, transferring Lebanon into the group of advanced developing countries and significantly improving living standards.
Clearly, public expenditure had to markedly increase to finance the reconstruction, security and social requirements. Given the limited availability of resources, and despite a significant improvement in revenue collection, large budget deficits emerged, which in turn led to a continuous build up of public debt. This was a natural consequence of spending on reconstruction and on social needs, as well as military and security spending in a post-war economy. However, this should not present insurmountable obstacles as long as the economy continues to grow and the capacity to finance these deficits remains strong. Indeed, it is the absence of growth and the drying-up of capital inflows that constitute the main obstacles to addressing the budget deficit problem.
Looking at total expenditure over the past six years we find that the government spent approximately US $16 billion (56% of total expenditure) on three major requirements:
1- Military and security services US $5,005 billion
2- Social spending US $5,428 billion
3- Basic infrastructure, agriculture, industry and tourism US $5,430 billion
The remaining public expenditure is divided into debt service on old and new debts (32%), and expenditure on the Presidencies of the Republic, Parliament and the Council of Ministries, and on the Ministers of Justice, Foreign Affairs, Finance (including civilian retirement compensation and end-of-service indemnity) Labor, Petroleum, Emigrant Affairs, Environment, Municipal and Rural Affairs and the Constitutional Council (12%)
In contrast, a quadrupling of treasury revenues took place between the end of 1992 and the end of 1998. Treasury revenues from 1993 until end 1998 amounted to LL18,845 billion or US $12.5 billion. Whereas total spending during the same period amounted to LL42,232 billion (including LL1,242 billion of accumulated arrears) or US $28 billion, total new debt accumulation amounted to LL23,386 billion or US $15.5 billion .
Nevertheless, had we been able to foresee a more solid consensus on the reform effort including the removal of the obstacles created by a weak civil service, we would certainly have achieved more rapid economic growth and development, as well as a speedier and more efficient reconstruction pace. Nevertheless, it would not have been possible to ubstantially lower the overall level of public expenditure.
In conclusion, it is important to place the current deficit and debt challenges in the context of other post-war economies. The historical experience of other countries emerging from turmoil highlights the daunting challenges of reconstruction and economic ormalization.