Tuesday, April 15, 2008

Re-Connecting Lebanon

The Serail (parliament) surrounded by tents and barbwire erected following the Hizbullah-led opposition sit-in, which has gone on since Dec, 2006

By Paul Cochrane in Beirut for TRENDS magazine (Dubai)

Economically speaking, Lebanon is a basket case. The Hizbullah-led opposition has turned the center of Beirut into a ghost town, the state has no president and the government is paralyzed. All of this is leaving Lebanon's economy limping along, but the reasons lie as much in its antiquated court system, crony-laden regulatory and ministerial organization as due to sectarian strife. Indeed, the sectarian strife is, at heart, exacerbated by the lack of economic activity.
Lebanon’s political shenanigans are hindering the country’s development at a time when the rest of the region is moving ahead, implementing reforms, improving infrastructure and attracting foreign investment.
In the zero-sum game that is global capitalism, Lebanon has kept the outside world at arms length with barriers to communications and trade, and it’s paying dearly for it.

Corruption and Subsidies. Fady Abboud, president of the Association of Lebanese Industrialists, estimates some $2-$3 million is spent on bribes every day, amounting to almost a billion dollars a year. Backhanders are not only common practice for land purchases, acquiring licenses and lining the pockets of bureaucrats, but also at one of Lebanon’s life lines with the world, the port of Beirut.
“A container from my factory to aboard the vessel costs $500: $100 for the truck, $50 for port dues, $50 for forwarding and another $200-$300 worth of bribes,” says Abboud. Such unpredictable “extra charges” make shipping to Lebanon a dicey proposition.
Restrictions on foreign workers are further hindering the economy, with pricey work permits required for white-collar workers and cheap foreign labor officially disallowed. “You can import anything from the Gulf, all made by an expatriate workforce, into Lebanon without duties, but we are not allowed to import foreign workers,” says Abboud. “How can we compete?”
These barriers to trade mean Lebanon is never going to be a major industrial hub. And tourist dollars won’t make up the difference. Not when a car bomb is enough to prompt ticket cancellations by the planeload.
And, not coincidentally, the one area where Lebanon is doing well – it’s banking industry – relies on foreign markets and connections to foreign markets. They also keep afloat by relying on remittances from abroad, which accounted for 25.8 percent of the country’s GDP at $5.72 billion in 2006. The Lebanese diaspora is the one reliable link to international capital.
“The middle class has disappeared from view but not from the banks; they are working in the regional markets,” says Tarek Khalife, chairman-general manager of Credit Bank.
However, the exodus of Lebanese seeking better opportunities overseas is negatively impacting on the very sectors that Lebanon could compete in, namely the knowledge-based service and IT sectors.
Brain drain. For Lebanon, its connectivity to global labor markets goes one way: out. Indeed, emigration has become so commonplace that a recent cartoon showed Lebanese university graduates being handed their diplomas and walking straight onto an airplane, invariably destined for the booming GCC markets where an estimated 400,000 Lebanese work.
“Young people have given up on Lebanon, with probably 90 percent of American University of Beirut students leaving after graduation,” says Marcus Marktanner, assistant professor of economics at AUB.
To keep talent in country, repatriate Lebanese and attract foreign investment, the country needs to better integrate into the global economy. And for that to happen effective and transparent regulations and cheap communications is paramount.
“The legal system has to be reformed,” says Robert Jreissati, president of the Lebanese International Business Association Network. Because of low wages, judges are easily bought off. Meanwhile the lack of an independent judiciary means regulations to protect investors are nonexistent or unenforceable.
“With no independent legal system, law suits last five to 10 years,” complains Jreissati. “And you want to attract investment?”
Equally, the country’s consumer protection law has never been enforced, the small claims court has not been activated, and the privatization of the telecom sector, proposed in 2004, has yet to happen.
“One of the myths of Lebanon is that it is a free economy where the government doesn’t interfere, but there is still a trust law where you can have a monopoly,” says Khalil Gebara, co-executive director of the Lebanese Transparency Association. “And in which country does a religious leader [Maronite Patriarch Nasrallah Boutros Sfeir] speak out against an anti-trust law as it will affect the sectarianism balance? He becomes anti-globalization without even knowing it.”
Such sectarian concerns extend to Lebanon’s telecommunication sector. Hizbullah leader, Hassan Nasrallah, has spoken out against privatizing the mobile phone networks, as it would run counter to sectarian interests.

Barbwire skirts Beirut's empty downtown.

Talking taxes. These intricacies of Lebanon’s tortured confessional political system and the political-business elite allow such monopolies to flourish. One of the worst examples is Ogero, the country’s national telecom that provides – if you can call it that – lackluster Internet connectivity and overpriced telephone charges. Its chairman is – coincidentally, surely – also the telecom minister.
Such cronyism has resulted in two politicians and a judge being granted Internet service provider (ISP) licenses, but who have, as yet, done nothing with the grants.
And although a Telephone Regulatory Authority (TRA) was established following a 2004 draft law to oversee the privatization of the telecoms sector, it is being “leashed by the establishment,” says Gabriel Deek, president of the Professional Computer Association. With some 30 percent of government revenues coming from telecoms, a budget deficit of 10.4 percent of GDP, and public debt 171 percent of GDP, “every penny counts,” says Joe Faddoul, chairman of IT software development company BML Istisharat.
“There is a huge Lebanese diaspora that make incoming international calls,” he says. With voice-over-IP services officially banned (but which are widely available), “the government is dragging its feet as it could lose that revenue” if it sold off its telephone and Internet interests, he adds. As a former telecom minister joked a few years ago, the ministry should be called “the Ministry of Taxcom.”
So Lebanon is caught on the horns of a dilemma. The government is strapped for cash, so it can’t afford to let go of a lucrative revenue stream. But high communication costs are choking off economic growth, because connectivity is not a luxury. It is an economic necessity.
Under the current system, companies are paying roughly 70 percent more for communications than in the Gulf, with phone costs among the highest in the world. Such costs discourage international firms from basing themselves in Beirut, and industries that could thrive from utilizing Lebanese bi- and tri-lingual skills – such as call centers – paying more for phone bills than for salaries, eliminating profits.
“For steady Internet, an average IT company spends $1,000 a month,” says Nicolas Rouhana, director of business incubation at Berytech, a private initiative by the Universit√© Saint Joseph. “That’s the wage of an engineer, so companies either hire an engineer or get better Internet.”
When Intel chairman Craig Barrett visited Lebanon last year to promote e-government, he said that affordable and reliable Internet connectivity was “absolutely key in developing Lebanon.”
“Our message is loud and clear,” Barrett said at the time. “If you regulate and price connectivity as a revenue source, then you inhibit the economy.”

Connectivity. A glimmer of hope is in sight, however, with an Internet Exchange Point (IXP) installed at Berytech in March. The region’s second IXP after Egypt, the system allows ISPs to exchange Internet traffic between their networks, freeing up bandwidth for outside traffic.
“Whole country connectivity with the world is less than one gigabyte right now,” says Deek. “Our vision for Lebanon is very high broadband. Not just open connectivity for ADSL - of 256kb to 2MB - but we’re looking for 100 megabits per second per citizen, like in Japan.”
Deek estimates one million Lebanese are connected to the Internet, and the IT sector was valued at $570 million in 2007.
“I can’t say how much investment is needed, but future growth will be 30 percent a year, if we have stability, based on the government’s revival plan of five percent economic growth a year,” he says.
However, with Business Monitor International predicting annual trend-level real growth of just two percent between 2008 and 2012, Lebanon has a long way to go to get better connected and have an economic turnaround, especially given the current domestic and regional political situation.
“How can you talk of privatization if you feel you are on the verge of a civil war?” Gebara asks.

Photos by Paul Cochrane

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