Prior to its civil war - and much before it became fashionable to speak of "the challenge of globalization" - Lebanon was the most "globalized" country in the Arab world. It served as the principal commercial entrepot and banking center for the Levant and the Arab states of the Gulf. It possessed the region's most developed physical infrastructure and human resources. And it was able to draw upon the skills and resources of its migrant communities across the globe. Consciously striving to emulate its putative mercantilist Phoenician heritage, Lebanon was the only truly cosmopolitan Arab country. The curious, rickety, confessional political system inherited (in spirit if not exact form) from the Ottoman period may have been precarious, as Michael Hudson warned, but it seemed adequate to enable Lebanon to play its economic role in the region.1 Lebanon's weak state par excellence presided over a laissez-faire economic system unique to the region and was very much appreciated by international business in those days of Arab socialism. Most Lebanese felt comfortable with a state that actually did very little. Indeed a weak state and laissez-faire system were closely associated with the image they had of their own country.
It is not surprising, therefore, that reconstruction in Lebanon has been inspired by the desire to turn the clock back to the pre-civil-war period and restore the country to its previous role as the financial and commercial center for the region. This goal is what Prime Minister Rafiq Hariri seems to have in mind when he expresses his wish to turn Lebanon into "the Singapore of the Middle East."2 Both inside and outside Lebanon, this vision for the future of the country has been widely accepted. This is in part because it is consonant with Lebanon's previous economic role, in part because it seems consistent with the country's resource endowment and comparative advantage, and in part because no other compelling model has been put forward - be it by the Lebanese themselves or by those in the World Bank, IMF and bilateral aid agencies who are involved in translating into its Lebanese variant the "Washington consensus" on neoclassical economic reform.3
By default, therefore, it has been more or less agreed that those in charge of Lebanon's reconstruction, and especially its hard-driving prime minister, have the right model in mind, even if its implementation is viewed as inadequate or flawed. The slowdown in economic growth since 1994, the spectacular increase in the indebtedness of the state, persistent unemployment, spreading poverty, rampant corruption, rising sectarian tensions and various signs of deepening political malaise have all been dismissed by Lebanese politicians and more neutral observers alike as stemming primarily from factors beyond Lebanon's control. Most frequently blamed are Syria's pervasive influence and the various negative effects of the continuing conflict with Israel, including regional instability, actual fighting and ongoing destruction of infrastructure in southern Lebanon.
Even those Lebanese who acknowledge the domestic roots of their country's political and economic woes have yet to put forward a vision of Lebanon's future that would provide a real alternative to the economic strategy that has been implemented by Rafiq Hariri, under the auspices and with the blessing of Syria, since October 1992. Most of the critics of the current political and economic situation argue that the Taif accord spelled out what should be done, and that Lebanon's problems stem from the non-implementation of several of this agreement's key provisions. Revealingly, however, the compromise reached at Taif was very detailed as far as the polity is concerned, but it said virtually nothing about the economy - suggesting that the nature of the economy was not seen as a contentious matter and that most of the key actors agreed that it should and would more or less naturally be reestablished in its prewar form.
This article argues instead that many of Lebanon's current political and economic problems can be traced back to the adoption of a particular model of reconstruction. That model, we contend, does not provide a blueprint for an effective political economy. Because it has further attenuated accountability and transparency, to say nothing of its role in undermining the rule of law, it will not allow Lebanon to seize the opportunities offered by globalization. In any event, that model is now increasingly contested within Lebanon, precisely at a time when the government needs political support to ensure the success of the austerity measures it is implementing to overcome a looming financial crisis. To understand how Lebanon reached this point, the nature of the model itself, as well as why and how it came into being, must first be explained.
ASCENT OF A MERCHANT PRINCE
By the summer of 1992, the Lebanese economy was in crisis. For several years, the government had been financing the growing, war-induced deficit by printing money, which had led to an inflation rate of 120 percent. Then, in a few days during September 1992, the Lebanese pound suddenly dropped from 1,150 to the dollar to 2,830. The financial crisis chased the incumbent prime minister, Omar Karameh, from office as the Lebanese looked to Rafiq Hariri to save their personal savings and their country from disaster.
That Hariri was seen as the one and only savior was due to in large measure to the perception of him as a Lebanese "merchant prince," who had both the personal resources and the international (especially Gulf) connections that could be mobilized to shore up the pound and the country more generally. At the age of twenty-two, Hariri had left his native Sidon in southern Lebanon in search of success in Saudi Arabia. There he succeeded beyond his wildest dreams, becoming a construction magnate. In the early 1980s, he began literally to "pave the way" for his return to his native country.
While the war was still raging, he dispatched a fleet of brightly colored heavy equipment, conspicuously bearing the logo of his company, Oger Liban, to repair the shell-pocked roads, clean the rubble out of the way, and even pick up the garbage - all gratis. His Hariri Foundation also granted thousands of scholarships to Lebanese students and financed a host of charitable activities. Hariri thus seemed to offer the desperate Lebanese of 1992 the ideal combination of pride in his country, selfless commitment to its rehabilitation, and the deep pockets necessary to bring it about.
THE "HARIRI MODEL"
After he became prime minister, Hariri focused on rebuilding the two pillars that had supported Lebanon's economic success prior to 1975: a stable currency and the infrastructural capacity to provide services more competitively than any other Arab country. He quickly implemented IMF-type stabilization measures which, in combination with the general optimism his presence instilled, resulted within two months in a revaluation of the currency by some 1,000 pounds to the dollar and a sharp decline in inflation to 29 percent in 1993. Coupled with macroeconomic stabilization measures was the unveiling and immediate launching of a reconstruction plan, Horizon 2000. Its centerpiece was the building of an entirely new central business district for Beirut. According to the scheme's backers, this new district would serve as the symbol of the country's revitalization and would house its financial sector, which was to be the engine of Lebanon's economic reconstruction.
It was clear from the beginning that Hariri's reconstruction project would emphasize development of Beirut rather than of the country as a whole; that it would concentrate on the financial sector at the expense of agriculture and industry; that it would stress physical infrastructure as opposed to human capital; that, in the short run at least, it would be more preoccupied with the stability of the currency than with the overall rate of growth of the economy; and that it would devote far more resources to the construction of ultramodern, high-rise commercial and residential buildings than to the rehabilitation of existing structures.
One project in which Hariri never showed any real interest was modernizing the Lebanese state. This might seem surprising at first, especially in light of his expressed desire to turn Lebanon into "the Singapore of the Middle East." After all, Singapore's government is anything but laissez faire. Furthermore, the emerging consensus among donors is that countries need more than free markets if they wish to succeed in the global economy. They also need healthy, effective state institutions that promote good governance.4 How then may one account for Hariri's disinclination to rebuild, strengthen and upgrade the Lebanese state?
Two explanations may be offered. The first has to do with Hariri's professional background, that of a building contractor who had made his way in the world of the Saudi political economy. That world is not known for its emphasis on transparency, accountability and the rule-of-law. It is therefore not surprising that Hariri would almost instinctively have seen the state more as an obstacle than an asset in the process of reconstruction. The second explanation goes back to the state that Hariri inherited in October 1992. That state was, as it has always been in Lebanon, an uneasy assemblage of conflicting interests and leaders with widely different and often irreconcilable objectives and priorities. Like the country as a whole, it consisted largely of fiefdoms controlled by particular interest groups and their leaders. In this system, the bureaucracy operates primarily as a dispenser of patronage to sectoral interests, while public offices and funds are used to promote the objectives of sectarian institutions and leaders.
Hariri knew that such a state could not be committed to development objectives. He probably reasoned that he could not reform that state, both in light of the vested interests embedded in it and because Syria would not let him do so. So, instead of modernizing the state and then relying on it to implement his reconstruction model, he simply decided to leave the existing state more or less in place, and proceeded to carry out his reconstruction strategy by mobilizing his own team, recruited from his business empire.
More specifically, as he assumed his new responsibilities as prime minister, Rafiq Hariri struck an implicit bargain with Lebanon's politicians and its people. He would be given carte blanche to implement his ambitious reconstruction strategy aimed at enabling Lebanon to reconquer its place as the leading financial center in the Middle East. In return, those politicians who had risen to prominence since 1975 or whose influence had remained intact since before the civil war were allowed to retain their subordinate but still important roles within the political system and the state. For their part, civil society and the Lebanese public agreed to trade a measure of their political autonomy and freedoms for the implied promise of rapid economic development, and for the prospect of seeing their capital reborn. Presiding over this bargain were the Syrians, who endorsed it because it served their interests in Lebanon and the region.
Parts of Hariri's team were immediately superimposed on the state's administrative structure, while others were established alongside it. The result was the emergence of a new, partly private and partly governmental administrative structure directly controlled by the prime minister. This structure overlaps with the state but is distinct from it. It consists of Hariri's business empire and of those components of the state apparatus that are controlled by the prime minister and his key associates. Thus, Hariri employees were put in charge of such critical institutions as the Central Bank (responsibility for which was given to Riyad Salameh, who had handled the Hariri account at Merrill Lynch), the Ministry of Finance (presided over by Fuad Siniora, chief financial officer for Hariri's enterprises), and the Governorship of Mount Lebanon (in the hands of Suhail Yamut, former director of Hariri business interests in Brazil). These and numerous other individuals, whose official salaries amount to less than $1,000 per month, have been kept on Hariri's payroll, from which they derive several times their governmental earnings. Simultaneously, numerous private and quasi-public agencies have been formed or taken over by Hariri and his team and charged with implementing various aspects of his reconstruction plan.
The mixing of private and public interests in Hariri's Lebanon is exemplified by the relationship between Solidere and the Council for the Development and Reconstruction of Lebanon (CDR). Solidere, a privately owned joint stock company in which Hariri maintains the major interest, was awarded the government contract for rebuilding Beirut's central district. The CDR, nominally a governmental agency with a virtual monopoly over publicly financed reconstruction efforts, is in the process of providing Solidere with roads, water pipes, telephone lines and all other necessary services. In short, a multi millionaire businessman turned prime minister maintains a dominant interest in a private company (Solidere) to which his government awarded the single most important and potentially lucrative reconstruction project, while a public agency (the CDR) provides that private company with vital services. Not surprisingly, the transfer of authority and resources from the state to numerous quasi-public bodies created and controlled by the prime minister is viewed by many Lebanese as the manifestation of a "Saudization" of Lebanon that is intended to bring political control and financial profit to those implementing the reconstruction plan and those abroad supporting them.
The relationship between the CDR and Solidere is certainly not the only example of a few individuals' increasing use of political power to accumulate enormous wealth, and vice-versa. For instance, one of the two licenses for cellular phones has been awarded by the state to the son of the minister of defense, Mohsen Dalloul, who is married to Mrs. Hariri's daughter from a prior marriage. Similarly, much of the media has been brought under the direct or indirect control of the prime minister or other key players in government. In September 1996, for instance, the government decided to reduce the number of authorized television stations from approximately fifty to four. The four stations allowed are owned mostly by, respectively, Prime Minister Hariri; the brother of Interior Minister Michel al-Murr, a close Hariri ally; Speaker of Parliament Nabih Berri; and a group of Christian figures associated with the Lebanese Forces. This last station, LBC, could not be eliminated because it was the most successful broadcaster in the country. Even observers who had acknowledged the need to put some order back into Lebanese airwaves were quick to interpret the government's licensing process as an effort to muzzle freedom of expression. It was also easy to detect in the new system features characteristic of Lebanon today: the mixing of private and public interests; the division of a major source of wealth (through commercial advertisements) among the key players in the country's political economy; and the stifling of dissenting voices in the name of "reconstruction" (or, more specifically in this case, in the name of rationalizing broadcasting). Recently the prime minister also bought around 40 percent of the shares of al-Nahar, the largestcirculation newspaper in Lebanon.
Manifest conflicts of interest have been accentuated by the public borrowings needed to raise the capital for showcase reconstruction projects, including a huge new airport terminal. The growing public debt has been financed primarily by treasury bills (T-bills). Some three quarters of these T-bills have been sold to banks, the lending portfolios of which have therefore come to be dominated by T-bills holdings. Because these T-bills bear interest rates that in early 1998 averaged almost 18 percent, they have driven the profitability of Lebanese banks to an all-time high.5
The single largest owner of Lebanese bank stocks is the prime minister. Rafiq Hariri, the investor, consequently has been a primary beneficiary of the economic program engineered by Rafiq Hariri, the prime minister. Whether intentionally or not, the country's increased indebtedness has translated into rising earnings for a banking sector in which the prime minister is the dominant player. In sum, the division between the private purse of the prime minister and the public treasury has been erased, so funds can flow from one to the other without hindrance.
But Hariri's Lebanon is not the France of Louis XIV ("L'Etat, c'est moi!"), where the state was claimed to be indistinguishable from its ruler. Syria, after all, would never allow a single Lebanese actor to gain total control of the state. Besides, prominent families and wartime leaders have maintained a strong presence. They continue to exercise leverage over government policies and the allocation of public resources. Consequently, what might be called "the residual state," that huge entity not controlled by the prime minister and his clients, serves as a counterbalance to Hariri. And because Hariri is unable to fully dominate the state, he continues to avoid it as much as he can, permitting it to dole out public resources through the confession-based networks that wind through the bureaucracy, while he seeks to exercise his influence through the partially private, partially public structure described above.
SHORTCOMINGS OF THE RECONSTRUCTION MODEL
If there were infinite resources, the two-sided Lebanese state, one portion of which is dominated by Hariri and another controlled by traditional and war-time political elites, might be sustainable. Alas, resources have begun to dry up, for the demands of physical reconstruction, profits for the prime minister, and patronage for the politicians cannot all be accommodated. Therefore, the state has confronted the choice of printing or borrowing money and whether to borrow at home or abroad. It has chosen to borrow money on the domestic market, probably for two main reasons. First, that route has certain economic advantages, such as being anti-inflationary, at least over the short term. Second, it results in a massive net transfer of funds from the public treasury to private lenders, the largest of which is the prime minister.
But high interest rates on T-bills have deprived the private sector of the capital it needs, since banks have understandably preferred to invest in safe, high-yield T-bills rather than lend to private companies. This phenomenon has contributed to the consistent decline in the economy's growth rate: from a high of 8 percent in 1994 down to 6.5 percent in 1995, 4 percent in 1996, 3 percent in 1997, and an anticipated 4 percent in 1998 (barring any political crisis).6 Even after one takes into account such external shocks as Israel's 1996 "Operation Grapes of Wrath," which is estimated to have reduced Lebanon's annual growth by 1 percent, average growth rates since 1994 have been very low indeed, especially in a country supposedly in the throes of an active reconstruction program. Lebanon's average growth rate of 5 percent per year since 1992 is not significantly different from the rates recorded in Jordan or Syria.
Perhaps most disturbing is the mushrooming of the public debt from approximately $2 billion in 1992 to approximately $15 billion - more than 100 percent of the GDP - in early 1998.7 The consensus in Lebanon appears to be that the scope of physical reconstruction has not kept pace with this spectacular rise in the debt. Moreover, the cost of servicing the debt is eating up an ever-larger share of government revenues, even as those revenues increase; debt service in 1998 is expected to consume about half of total expenditures. Salaries and debt servicing combined devour more than 90 percent of the annual budget, leaving a mere 6 percent for capital expenditures, thereby causing the reconstruction effort to slowly but steadily grind down.8
It is hard to see Lebanon making much progress toward becoming "the Singapore of the Middle East" when only 6 percent of the government's annual budget is left for capital expenditures. Much of the physical infrastructure required to be competitive in today's global economy either has not been rebuilt or is very much in need of upgrading. These figures also leave little room for investments in education and health, two sectors that have been identified as critical to a country's ability to be an effective player in the global economy.
The state thus has a desperate need for new revenues, especially considering the low tax rate, which is below 20 percent of GNP (in 1994, consistent with the model of Lebanon as a capital haven, the top rates of personal and corporate income tax were reduced from 32 percent and 50 percent respectively to 10 percent). 9 Since 1996, the government has managed to raise some new revenues through the imposition of miscellaneous regressive taxes and fees. The annual vehicle tax alone rose by 400 percent in 1997.10 In addition, trade barriers - such as customs duties on imported cars and food imports - were increased significantly in 1997 and now represent as much as 40 percent of government revenue.11
The problem with these stopgap measures, however, is that they cannot be sustained politically and are not consistent with the official goal of enabling Lebanon to carve its niche in the global economy. Thus, political resistance to revenue raising measures has been stiffening since 1997, in part because of increasing poverty and income inequalities. The 1996 Report on Poverty in Lebanon by the U.N. Economic and Social Commission for Western Asia suggests that around one million Lebanese, about 28 percent of the population, live below the poverty line.12 Of these, 250,000 are described as living in conditions of extreme poverty (a family of five living on less than $306 a month). Increasing taxation in a country where poverty is growing is not only a fruitless and self-defeating exercise, but it is also a politically difficult and risky one, especially when income inequalities are widening as well.
Increasing taxation on the rich would also be politically difficult, and would run counter to a fundamental tenet of the reconstruction strategy, which is that Lebanon should be a tax haven, especially for the financial sector. More generally, the government's ability to raise new revenues is circumscribed by its declining level of legitimacy, widespread discontent with the lack of accountability and transparency, and the universal expectation that there can be "no taxation without representation."
As for tariffs, which already represent the largest single source of the state's income, they cannot be further raised for at least three reasons. First, almost three quarters of goods consumed in Lebanon are imported, so that further increases in tariffs would contradict the low-inflation policy that is key to the government's macroeconomic strategy. Second, the reconstruction plan is based on Lebanon's being an entrepot, which in turn requires low tariffs. Third, Lebanon is seeking to sign a partnership deal with the European Union and to join the World Trade Organization (WTO), both of which require dramatic reductions in Lebanon's currently very high rate of trade protection. Tariffs, however, are unlikely to be cut in the near future because of the government's desperate need for revenue, so it is hard to be optimistic regarding Lebanon's forthcoming negotiations with the EU and the WTO.
In the meantime, the budget deficit may continue to increase, in which case the government will be forced to turn to foreign borrowing to cover it. Already in March 1998, the government floated a Eurobond loan of $800 million, bringing its foreign debt to some $2.4 billion. These funds will be used to pay for current expenditures, not to help reimburse the public debt. Therefore, they will add to the interest burden while further exposing the economy to volatility in world markets. It is not surprising that international investors and governments are showing increasing caution toward the Lebanese economy. This is reflected in the high interest rates that the Lebanese government has had to pay for its foreign borrowings and by the large-scale liquidation of Lebanese T-bills by Gulf investors in 1997. In this context, Lebanon's most recent turn to foreign bankers for assistance will likely give its government only a short reprieve.
Instead of acting as a catalyst for economic growth, the state is more than ever a burden on the economy. Government expenditure, which was a modest 15 percent of GDP before the outbreak of the civil war (a very low figure by both OECD and developing country standards), has exploded under Hariri, more than doubling as a percentage of GDP within two years of his assuming the premiership. While the critics of laissez faire in its Lebanese version had historically urged the building of a modern state in order to pursue developmental objectives and dilute confessionalism and inegalitarianism, the dramatic rise in the cost of the state under Hariri has not been driven by a commitment to establishing a strong state capable of guiding the economy and reshaping society. Instead, the prime minister's reconstruction strategy has preserved a weak state while increasing its costs several fold.
Lebanon, which once boasted the least "socialized" economy of the Arab republics, has also been unable to sustain its privatization campaign. As a result, the state continues to subsidize the bloated public sector. Government employment has mushroomed, as thousands of bureaucrats have been put on the payroll through various means used to circumvent civil-service regulations in order to service patronage networks. The military, which for both economic and political reasons had always been kept small, has grown from some 26,000 at the time of the outbreak of the civil war to more than 40,000. Conscription, which has been reduced in scope in almost all Middle Eastern countries, has become almost universal in Lebanon.
Lebanon's once laissez-faire state now supervises a maze of regulations that require enough permits to generate substantial private incomes for those civil servants who dispense and sign permits. Given the number of signatures required for virtually any activity and considering the very low remuneration of public officials, it is hardly surprising that those requesting services from government typically must pay bribes to obtain them. This in turn contributes to the alienation from, and contempt for, government while at the same time making large-scale corruption and evasion of laws commonplace.
Such a system discourages private domestic and foreign investment and is certainly not conducive to Lebanon's regaining its prewar eminence as a financial and commercial center. Take the case of a Lebanese entrepreneur (we will call him Samir) recently returned to his country of birth after a successful career in the printing business in Dubai.13 In 1997, Samir established a printing press north of Beirut. A Swiss manufacturer had wanted to send him a free sample of varnish to test his press. From past experiences, however, Samir knew that a 15-pound package described as "free sample" would create administrative complications, as, in his words, "[customs] treats free samples as if they are uranium and overestimate their value." Instead, he requested that the Swiss manufacturer send with his sample a bill indicating its value. Even then, by the time the varnish bucket cleared customs, the various "landing charges," "stamps," and "formalities" (i.e., bribes) added to the customs duty had brought the price of what had initially been intended as a "free" sample to $285.
This certainly was not the first time that Samir had felt cheated by a bureaucracy that seems to do everything possible to deter foreign investment and the return to Lebanon of the capital that left the country during the war. A year after setting up his factory, Samir is still waiting for his official permit to operate, even though he has long since submitted all required documents. Therefore, despite the fact that he is employing 14 people and paying taxes for them, his enterprise it technically illegal. "My file containing a year's correspondence with the government weighs 5 kgs [more than 10 pounds]," he says. Samir had also faced multiple hurdles in securing the necessary utilities. To be sure, he had obtained electricity quickly, but only because he was able to activate a personal contact at the electricity authority. The telephone was a different matter, and in the end he felt forced to buy his telephone lines "from unofficial suppliers." As for collecting factory garbage, he had no choice but to use a private company. Samir notes that even after the government offered him such financial incentives as a low 3-percent tariff on machinery to entice him to establish a branch of his printing business in Lebanon, the bureaucracy negated such advantages by multiplying paperwork and delays. It is not surprising that Samir and the many other Lebanese entrepreneurs who have gone through the same agonizing experiences should express exasperation at a system that so systematically deters private initiative and at a government that is incapable of rooting out corruption and delivering even minimal services.
The central problem that Lebanon faces in its effort to sell itself to the world is unaccountable governance. Governmental procedures remain essentially opaque. The bureaucratic labyrinth, with its multitudinous and overlapping authorities, provides the perfect camouflage for illicit activities. It also creates the means by which honest citizens can be cheated by corrupt officials. Those within that system and those outside who have benefitted from it, such as many property developers, have entrenched interests in maintaining it. Those who have suffered from it have no power to change it. As for those presiding over it, they in most cases use it as a source of patronage and prefer that it remain intact. For his part, the prime minister has clearly decided to circumvent that system as much as possible by constructing an administrative structure answerable to himself, but the functioning of that structure is known only to him and his closest associates. It is also significant that Lebanese banking laws are modeled on Swiss counterparts, the rationale being that banking secrecy is essential to Lebanon's serving as a regional financial center.
Outside checks and controls on the government, which would be needed to ensure good governance, are largely ineffective. The curbs that the government has imposed on the media, combined with the absence of a tradition of investigative journalism, have largely prevented journalists from lifting the thick veil behind which government operates. The administrative courts, through which cases against government officials might be brought, are essentially moribund and are themselves subject to corrupt practices. As for the central control agencies created to hold the executive branch accountable, they, too, have been largely marginalized. These agencies - the Civil Service Board (CSB), which is supposed to be in charge of personnel recruitment, training, promotion and transfer, and the Central Inspection Commission (CIC), the main function of which is to uncover and punish corruption, mismanagement and failure to comply with existing rules within the bureaucracy - were created in the wake of the 1958 civil war. When they were finally beginning to be revitalized in 1993, interventions from the prime minister and other cabinet members stopped and even reversed the process. When during that same year the CSB dismissed several thousand employees for corruption, all but a handful were reinstated shortly thereafter. The unmistakable message of this reinstatement was that crime pays, and the level of corruption within the government increased noticeably, according to informed observers. The civil service, in short, cannot police itself.
Given the inadequacies of governmental decision making and implementation, and in light of the general lack of transparency and accountability, Lebanese seek to avoid government as much as possible. The primary institution upon which they rely for a host of economic and political services is the family, with confession-based organizations being of secondary importance. While the family and confessional social organizations do provide a range of services, they are severely constrained by a government which is jealous of its prerogatives and hostile to autonomous political organization. NGOs with a political objective are severely hampered in their activities by the Ministry of Interior.14 The plethora of government licenses and permits required to do just about anything hinders even service-oriented NGOs. In sum, there are no social institutions that make major contributions to governance and, given the governmental framework, it is unlikely any will emerge.
Because of the lack of governmental accountability, Lebanon is less like Singapore than it is like the radical Arab republics of the 1960s, with a weak but overly large state that serves primarily the interests of those who have captured parts of it or are simply in its employ. That state is not only incapable of directing an effort at global integration, it is the primary obstacle to such an endeavor. Moreover, the fact that Lebanon is regressing in its ability to face the challenge of globalization is the inevitable product of the nature of the particular strategy of economic and political "reconstruction" that has been followed. Rhetoric to the contrary, that strategy is less likely to place Lebanon on the cutting edge of the region's economy than to make it a backwater.
Indeed, there is no single, coherent model - as distinct from a sentimentalized, vague memory - guiding Lebanon's reconstruction. In Lebanon as elsewhere, public policy is the product of political pressures, compromises and bargains. The special problem of Lebanon, however, is that the rules by which policy decisions are reached and implemented have not been fully agreed upon. In part due to mounting criticism of the nature of Hariri's reconstruction plan, the manner in which it has been carried out, and the fact that it has not delivered on some of its basic promises, the move toward greater consensus that had characterized the 1991-96 period has come to a halt and may even be receding. In this context, decisions on public policy are both difficult to reach and not automatically accepted as legitimate. Consequently, side-payments have to be made to all important actors in order both to arrive at decisions and then to implement them.
This was precisely the situation in the Republic of Yemen from the time of unification of the north and south in May 1990 until the civil war of April-June 1994. During that time, majority rule was impossible, as there was insufficient consensus on the rules of the political game. Consequently, decisions could only be reached through consensus, which in turn resulted in either immobility or the dispensing of vast amounts of patronage that drained the state's treasury. Just as tribal, sectarian and regional differences underlay Yemen's inability to fashion a democratic system based on majority rule, so in Lebanon have similar differences impeded the legitimation of processes and structures to make and implement public policy. Lebanon is turning in on itself economically as a consequence of its failure to establish a viable political system. Unless it confronts that problem, Lebanon will further de-link from the world economy and come to resemble Sanaa more than Singapore.
In 1993-94, the pound appreciated, inflation fell, the economy expanded and reconstruction appeared to proceed at a reasonable pace. During that period, the Lebanese were not much concerned about the relationship between the prime minister's private purse and the state's coffers. Indeed, they tended to believe that Hariri was himself financing the reconstruction effort. But as the economy has slowed down, the average purchasing power of salary earners has fallen, poverty has increased, and the public debt has skyrocketed, the prime minister's purse and its confusion with the state treasury have become a matter of major public concern. The consensus today appears to be that the flow of funds has not been from the prime minister's purse to the treasury, but from the treasury to his private purse, and to those of his associates, clients and political rivals.
The sea change in the public mood has begun to alter the balance of power between the prime minister and other actors within the political elite. As long as economic performance improved, his standing rose in relation to theirs. But now that economic performance has declined for two consecutive years, a reverse trend has set in. Riding a wave of public criticism from almost all quarters, these political actors have become emboldened in their attacks on the prime minister. Increasing political tensions have, in turn, further eroded confidence in the economy and contributed to rising interest rates, thereby slowing economic growth. The result is a downward spiral of the political economy that threatens to spin out of control.
Now that his plan for reconstruction and revitalization of the economy has soured, the prime minister is making at least symbolic concessions to other political actors, appearing to consult with them and indicating that he might want to open up the political system more generally. In December 1997, for instance, Hariri allowed some demonstrations against censorship to take place without the usual heavy-handed crackdown. Similarly, in early 1998, he undertook a round of meetings with some of those actors and sat patiently while they spelled out their grievances, something which he had never done since his appointment as prime minister in October 1992.
Perhaps because they have sensed an expansion in the political space, the public and the media seem to be speaking more openly. According to several observers, criticisms of the government have become more specific and harsher. But the prime minister and the coalition of forces that support him may ultimately decide to constrict political space rather than expand it. And even in the best-case scenario, strict limits on autonomous political mobilization will remain.
MYTHS AND REALITIES OF LEBANESE RECONSTRUCTION
Since Prime Minister Hariri embarked on his mission to turn his country into an Arab Singapore, Lebanon has, if anything, departed further from the model of a globalizing city state.15 In these conditions, the persisting propensity to ascribe a disappointing economic performance to external factors or to flaws in the implementation of the strategy instead of blaming the strategy itself is beginning to appear myopic, if only because of the magnitude and consistency of the empirical evidence.
The degree to which Lebanon is actually integrated into global markets, and the extent to which it has implemented the prerequisites for being competitive in those markets, are now less than was the case for even those Arab states that trod doggedly down the path of "Arab socialism" until fairly recently. So, for instance, Lebanon now has higher barriers to foreign trade than most Arab states. Unable to reduce tariffs because they have become the dominant source of government revenues, Lebanon, formerly the shopping center of the region, now exports its shoppers even to Syria. Once the intellectual center of the region, Lebanon, by continuing to violate intellectual-property-rights conventions, is now shunned by those corporations and interests that generate globally valuable intellectual property. Having sustained a stable exchange rate from independence through the 1970s by maintaining a balanced state budget, Lebanon since 1992 has been able to ensure currency stability only at the price of increasingly large government domestic borrowings.
Lebanon's banks, once the most extroverted of those in the region, have become among the most introverted as the virtually guaranteed profitable Lebanese T-bills have soaked up from most banks more than half their total loans. So, while the recently privatized or even still publicly-owned banks of the once-socialist Arab states have diversified their portfolios to include lending to their private domestic-sector and even selected foreign borrowers, Lebanese banks have turned to their government as their principal customer. Lebanon's exports of some $1 billion are dwarfed by its imports of some $8 billion. That trade deficit is not being covered by "invisibles," such as tourism and financial services, as it typically was prior to the civil war, when the imbalance in trade was, in any case, not so severe. Instead, the deficit is now covered by borrowing. The agricultural sector, which once produced a range of high-value crops for export, has withered, while the nascent industrial sector that was virtually destroyed during the war has not been rebuilt. Unlike Morocco and Tunisia, which have already signed with the European Union agreements that will steadily reduce barriers to trade between them, and unlike Egypt, which is now negotiating a similar agreement, Lebanon has yet to commence a dialogue with the E.U. Its economy is far too inward-looking to meet requisite conditions in the foreseeable future.
It is clear that Hariri's project is now encountering mounting difficulties, as evidenced by a mushrooming public debt, declining rate of growth, slackening pace of reconstruction, increasing poverty, widespread public disenchantment, and rising political and sectarian tensions. As a result, the Lebanese have begun to question the terms of the implicit bargain they struck with Hariri in 1992, thereby reopening a range of political and economic issues that had been closed during the previous six years. The lack of consensus over fundamental issues has become more apparent as well.
The decelerating pace of physical, economic and political reconstruction is no doubt due to several factors, but the one of greatest importance is the nature of the tacit agreement that was struck when Hariri came into office. That compromise had left the state as an arena for negotiation and bargaining among the leaders of the various sects. As discussed earlier, it had been understood that these leaders would continue to use their control of a segment of the state apparatus to distribute patronage to their respective constituencies, so that they could preserve their power position. Implicit, however, was the notion that the state would not assume primary responsibility for the reconstruction effort, which instead would be left to the new prime minister, his team, his backers in the Gulf and elsewhere, and the group of banks and companies he controls. In short, the implied division of labor was the following: Hariri would rebuild the country, while the government would neither be overhauled nor modernized, but would continue to dole out patronage and thereby underpin the confessional leadership roles of the incumbent politicians.
There is growing evidence to suggest that this novel assignment of roles and responsibilities is not viable. The Lebanese state - antiquated, controlled from the outside by Syria and riddled on the inside with divisions among sectarian leaders feuding over turf and patronage - is unable to make and implement public policy in an effective manner. This state is not dedicated to the provision of public goods and services. It is not geared toward enabling Lebanon to meet the daunting developmental challenges that still lie ahead. Instead, its primary function remains the allocation of patronage along confessional lines. Yet, for all its weakness, the state - or, more specifically, the most powerful political actors within it besides Hariri himself - is also unwilling to grant the merchant prince the latitude to which he feels entitled and which he must enjoy for his plan to succeed. As a result, the conflict between Hariri and key political players entrenched in state structures has intensified. Compounding the impact of this overarching struggle are rivalries among the sectarian leaders as they constantly seek to expand the boundaries of their fiefdoms. Meanwhile, the public becomes increasingly bitter and resentful, as the economy slows and the promised trickle-down fails to materialize.
The core of the problem is the flawed assumption that the state (indeed the entire political system) can be bypassed by a reconstruction plan focused exclusively on restoring Lebanon to its pre-1975 role as entrepot and financial center. To be able to compete successfully in the global economy of the next century, Lebanon, like any other nation, must have a modern state with legitimate institutions that provide for effective government, secure property rights, and a reliable legal framework. There is no getting past the hard but necessary work of building a political system and administrative structures in which transparent and accountable governance are nurtured. For all the cheerleading of its prime minister and his foreign backers, Lebanon is not prepared for globalization because it has not established the rule of law with a fair and predictable justice system; it has failed to improve public administration; and it has not developed autonomous, accountable agencies to regulate banking and public finance.
Lebanon wasted much of the decade of the 1990s pursuing a Faustian bargain, a mistake which is now giving rise to political recrimination and general public hostility. This situation, in turn, is being met by a mixture of accommodation and repression. Lebanon is thus in danger of being caught in a downward spiral, its deteriorating economy undermining the fragile political agreements reached earlier in the decade, creating new political uncertainties and fears that drag the economy down yet further. The only way out of this spiral is for Lebanon to consciously address those political problems that have prevented the emergence of a more effective, representative and accountable form of government. These problems have festered and intensified as reconstruction has concentrated on the physical, rather than the political. If and when the political will to tackle these problems materializes, rapid, sustainable economic reconstruction could begin.
1 Michael C. Hudson, The Precarious Republic. (New York: Random House, l 968).
2 Rafiq Hariri speaking to the World Affairs Council, Los Angeles, CA, December 20, 1996, cited in Sam R. Hakim and Saad Andary, "The Lebanese Central Bank and the Treasury Bills Market," The Middle East Journal, 51, 2, Spring 1997, p. 232.
3 On the Washington consensus see Dirk Vandewalle and Karen Pfeifer, "North Africa as a Peripheral Economic Region: Development and Reform," in Dirk Vandewalle, ed., North Africa: Development and Reform in a Changing Global Economy (New York: St Martin's Press, 1996), pp. 3-24.
4 On the connection between effective government and economic prosperity, see the 1997 edition of the World Bank's World Development Report.
5 In October 1995, the yield on 12-month T-bills had even reached a peak of 37.85 percent. See The Oxford Business Group, Lebanon Finance 1998, London, 1998, p. 18.
6 The Oxford Business Group, Lebanon Finance 1998, London, 1998, p. 15.
7 Total net public debt was "only" 46 percent of GDP in 1992. See The Oxford Business Group, Lebanon Finance 1998, London, 1998, p. 21.
8 Ibid., p. 20.
9 Ibid., p. 19.
10 Ibid., p. 21.
11Ibid., pp. 10-11. In fact, the government initially went so far as to ban food imports in June 1997, but it reversed that decision shortly thereafter.
12 See Antoine Haddad, "Poverty in Lebanon" (in Arabic), Economic and Social Commission for Western Asia, Amman, 1996.
13 This story is based on an article published in The Daily Star, Beirut. Sec Khaled Yacoub Oweis, "Why a free sample cost $285 by the time it cleared Beirut airport," The Daily Star, March 18, 1998, pp. 1-9.
14 The law states that an association need only notify the Ministry of Interior of its formation. Upon receiving notification, the Ministry of Interior is to deliver a certificate to that effect. In practice, however, the Ministry has been turning this simple notification procedure into a de facto licensing process by failing to acknowledge receipt of notification. Many examples exist of NGOs that have notified the Ministry months if not years ago and still have not received from the Ministry the certificate that acknowledges notification, which in turn gives the association legal status. One is not surprised to discover that the associations that have suffered the most from this process are advocacy NGOs which the regime is trying to prevent from operating. In general, the Ministry of Interior does not authorize "political" NGOs that deal with sensitive issues - it only issues certificates attesting notification to service NGOs and religious ones.
15 For an analysis of Hariri's reconstruction strategy which reaches an assessment similar to the one offered here, see George Conn, "Derriere la facade de la reconstruction: le 'miracle libanais' en peril," Le Monde Diplomatique, Paris, April 1998, p. 4.