January 2014
A Three-Pronged Strategy for the New Government to Address Lebanon’s Socio-Economic Challenges

 
While the formation of the government seems to be only days away, the socio-economic challenges that the new government needs to tackle are almost unprecedented.  The refugee crisis along with economic slowdown compounded by political instability is putting a tremendous pressure on the country’s assets. 

For the government to address the socio-economic challenges effectively, it must realize that: First, the socio-economic ills of the country – chronic budget deficit, unemployment, oligopolistic market structure, poor infrastructure – preceded the Syrian crisis and were masked by deceivingly high growth rates between 2006 and 2010. Second, the refugee problem is a medium to a long term problem and hence must be dealt with it as such. In fact, studies on other war-torn countries have shown that it takes five to seven years from the date when the guns fall silent for refugees to return. The countdown for Lebanon has not yet even began. Ignoring these two facts will make any attempt to solve the country’s ills at best temporary if not futile. If serious, the new government must develop a three-pronged strategy to deal with the socio-economic ills of the country:  

1.      It must provide assistance to both Lebanese and Syrians: Given the unprecedented size of the crisis – more than one million Syrian refugees and another one million poor Lebanese, the government must directly target them with assistance. According to the recent World Bank study, another 170,000 Lebanese will fall under the poverty line in the next two years. Although it is obvious that Syrian refugees are in desperate need for support, the government must expand its own poverty targeting programs for the Lebanese in order to mitigate the simmering socio-economic tension between Syrians and Lebanese. Several challenges await the government: it must deal with urban refugees who, unlike those in camps, are harder to locate; and it must put in place a transparent mechanism to ensure that money goes to the right beneficiaries. This could convince more donors to provide financial assistance to Lebanon.  
 
2.      Launch regional development in the peripheries: For poverty targeting to succeed, it must be complemented by investments in infrastructure, water, waste treatment, electricity, and garbage collection to salvage the precarious situation in regions which were already vulnerable prior to the Syrian crisis. Key actors in leading and implementing these projects along with CDR and relevant ministries are municipalities, which are currently shouldering a disproportionate share of the problem. Although 80% of the almost 1,000 municipalities are administratively weak and have few resources, subsequently there are 50 to 80 strong municipalities in Lebanon that can take the lead on developmental issues.  
The government should enhance these municipalities’ fiscal capabilities in at least four ways: First, it can release their share of the Independent Municipal Fund (IMF) on time (which is the ninth month of every year) and make the disbursement in one installment as stated in decree 1917. The last decree that distributed the IMF to municipalities was six months behind schedule and payments are often made in two to four installments which prevented municipalities from planning or undertaking long term developmental projects; second, the central government can also boost the resources of the IMF by simply stopping all illegal withdrawals and deductions from the fund that do not benefit municipalities. A previous study financed by the World Bank and executed by ICMA for the Ministry of Interior and Municipalities have shown that the government has withdrawn and deducted $1.26 billion from the IMF over a ten year period to pay for solid waste collection (i.e. Sukleen and five other companies), Civil Defense, CDR, villages without municipalities, and other expenses. Such spending is considered illegal since it does not benefit all municipalities in Lebanon as stated in decree 1917. Third, the government ought to release the money currently stacked at the Ministry of Telecommunications which is probably worth between $1.5 and $ 2billion but has been withheld from municipalities. Fourth, another way to handle this is to create a framework where the private sector including banks can partner or loan the creditworthy municipalities funds to undertake developmental projects.

3.      Develop policies and coordinate initiatives to ensure effective development. The central government ought to lead the development initiative by setting a framework that brings donors on one hand, and local administrations and NGOs on the other hand to effectively coordinate their efforts in dealing with this crisis. Given the precarious situation on the ground, the government must use all the country’s resources to get a grip on the situation. First and foremost, it must bring its own ministries and institutions to coherently work together and avoid duplication and political bickering over the scant resources.

In addition to leading the coordination effort, the government must think outside the box and figure out ways to attract capital and private investment to the country to create jobs. Instead of only seeking financial aid for humanitarian assistance, it must provide generous tax incentives to set up new businesses in the Bekaa or the North. The current capital flow out of Syria could be an important source for investment and job creation for both Lebanese and Syrians. This needs to be supported by the appropriate infrastructure such as a proper road network and uninterrupted and cheap energy. The effects of these initiatives will be long-lasting and may even outlive the current crisis. The government should also seek to open up markets for Lebanese exports that would provide a further boost for economic activities. Despite the odds, Lebanese industrialists have managed to export highly sophisticated goods in the absence of an effective industrial policy.

The three pillars are complementary in the sense that they provide support to the poorest, develop Lebanon’s peripheries that have long been neglected, and implement policies that create direly needed jobs. The plan is not without risks, but it calls for a government willing to take initiatives, test policies, be experimental, and able to evaluate quickly what works and what does not.