Continuity in economic policy in postware Lebanon: the record of the Hariri and Hoss governments examined, 1992-2000.

• Author: Baroudi, Sami E.

INTRODUCTION

FOR SIX YEARS (DECEMBER 1992-NOVEMBER 1998), Rafiq Hariri and his economic team were in charge of managing the Lebanese economy. While some of Hariri's economic polices had popular support, most were controversial ones that triggered mixed and sometimes overtly hostile reactions. But despite official criticisms that Hariri's policies received between late 1998 and the summer of 2000, his detractors failed to articulate an alternative set of economic policies. The Hoss government continued most of the policies initiated by Hariri and in certain instances, as with privatization and foreign borrowing, pursued them with much greater vigor. Undoubtedly, the Hoss government introduced certain changes in specific economic policies. (1) Nevertheless, what was preserved from the Hariri years was far more fundamental than what was changed. In light of this basic continuity in economic policy from the Hariri to the Hoss years, Hariri's return to the premiership in November 2000 seemed quite logical.

THE LEGACY (OR HEAVY BURDEN (2)) OF RAFIQ HARIRI: 1992-1998

Hariri's record in office, particularly in the economic policy domain, generated both praise (3) and sharp criticism (4) Hariri's admirers credited him with at least five major achievements: 1) raising the Dollar value of the Lebanese currency (LL) after years of steady (and in some months very steep) deterioration (5); 2) bringing annual inflation rates down to single digit figures (6); 3) launching (and partially completing) a highly ambitious investment project for the reconstruction for the commercial district in downtown Beirut and the modernization of Lebanon's basic infrastructure; 4) simplifying the tax code, providing tax holidays for new investors, and lowering the maximum tax rate to 10 percent (all these measures were designed to increase incentives for local and foreign investors) (7) and 5) (perhaps most importantly) restoring regional and international confidence in the Lebanese economy.

Hariri's critics, on the other hand, brought forward a long list of charges against him. They accused him inter alia of: 1) betting on the quick success of the Middle East process, and subsequently spending billions of US Dollars (of largely borrowed money) to develop Lebanon's infrastructure, in the hope that borrowed finds can be easily repaid once peace arrived; (8) 2) allowing Lebanon's public debt rapidly to mount until it reached dangerous levels towards the end of his term (in 1998); 3) causing real interest rates on deposits in LL to raise owing to excessive government borrowing and the insistence on protecting the value of the LL; 4) overspending on infrastructure development, while under spending on productive projects in agriculture and industry and on social projects (i.e., health care and education; 5) lowering direct taxes which helped the rich, while raising indirect taxes (such as the gasoline tax) whose impacts were mostly felt by the poor and middle classes; (9) and 6) (perhaps most seriousl y) turning a blind eye to rampant corruption among ministers, bureaucrats, local and foreign businessmen bidding on state contracts, as well as among his closest aides. Critics alleged that widespread corruption during the Harm years cost the treasury vast sums of money, estimated by some sources at billions of U.S. Dollars. (10)

Reality is far more complicated than the claims of-either group. At the outset of his term, Hariri was able to generate wide support for his currency stabilization and reconstruction programs. As the costs of these programs mounted, and successive Hariri governments failed to tackle other economic and social problems (such as unemployment, low wages, poverty particularly in the outlying regions in the Biqa' valley and 'Akkar, administrative red-tape, rampant corruption in official circles and poor quality of social services) criticism of Hariri intensified. It must also be pointed out that Hariri's heavy-handed style of governing and his tendency to bypass parliament, the state bureaucracy, and even some of his ministers on important decisions earned him the enmity of many powerful politicians and opinion leaders. Finally, Hariri's troubled relationship with property owners in downtown Beirut, (11) organized labor (particularly after the election of Ilyas Abu Rizk to the presidency of the Confederation Genera le de Traveilles libanais -- CGTL -- in July 1993), (12) and, on particular occasions, with business associations such as the Association of Lebanese industrialists -- ALI- and the Beirut Traders Association -- BTA -- subjected some of his economic policies to sustained criticism from organized economic interests. (13)

While Hariri continued to give priority to currency stabilization and channeling investments to reconstruction and infrastructure development projects, he showed enough pragmatism to reverse course on several occasions (14) and to make concessions to vested economic interests, particularly those of labor, public school teachers and Lebanese University professors, industrialists and merchants. Three or four years into office, Hariri also started showing alarm at the problems of recurrent budgetary deficits and mounting public debt.

In an effort to bring down the budget deficit; the 1998 budget included higher taxes and lower spending on infrastructure development than previous budgets. Subsequently, the budget deficit as a percentage of public expenditures was about 10 percent lower in 1998 than the previous year.

Hariri's problems started in 1996 when his government faced a storm of opposition in parliament over the 1996 budget. Although at the end of the day parliament passed the budget in almost the same form as submitted by the government, Baaklini, Denoeux and Springborg wrote:

During the 1996 budget debate, for instance, attacks by deputies against the government's financial priorities led to a long and frustrating debate. At the end of the day, however, parliamentarians had little to offer by way of alternative suggestions, and the Chamber as a whole ended up ratifying the final document presented by the government. This episode did great damage to the Chamber's credibility. (15)

The recorded budget deficit for 1996 (51.19 percent) was much larger than the projected 37 percent, and the net public debt (domestic and foreign) mounted to LL16,544 billion. (16) Economic and political uncertainties -- triggered by the rising public debt, concerns about the exchange rate, and the consequences of the Israeli military operation in April 1996 (the so-called Grapes of Wrath operation) -- all contributed to the slowdown in the rate of economic growth to four percent (from 6.4 percent in 1997) (17). The trend of the economic slowdown was to accelerate in 1997 and 1998, culminating in the recession of 1999 and 2000. Table 2, below, shows nominal GDP in US$ and growth in real GDP for the 1992-2000 period.

Throughout 1997 and 1998, Hariri struggled to improvise solutions for mounting economic problems and to ward of challenges to his authority from parliamentarians, some of his ministers, and organized labor. Following the 1996 parliamentary election, the government resigned and Hariri was nominated to head a new government. During the negotiations leading up to the formation of the new government, Harm had to make several concessions, and include ministers loyal to either President Hrawi or Speaker Bern in his government. (18) A few months later it became evident that the Premier could no longer count on the automatic support of a majority of his ministers for his policy choices; circles close to Hariri began to lament the absence of ministerial harmony (ghiyab al-insijam al-wizari), hinting at the desirability of a cabinet reshuffle. In the summer of 1997, Hariri faced a mini-rebellion from within his cabinet. At the 24 September meeting of the Council of Ministers, Hariri presented an ambitious plan that inc luded two main components: 1) borrowing up to US$1 billion on international markets to cover overdue payments to private hospitals and autonomous state bodies (particularly The Council for the South and the Fund for the return of the Displaced) and continue spending (albeit on a reduced scale) on necessary infrastructure, economic and social programs; and 2) raising indirect taxes and customs, particularly on gasoline and car registration and inspection feeds. (19) While there was little opposition to the borrowing part of the plan, the cabinet split (12 to 12) when it came to the LL5,000 additional tax on every twenty-liter tank of petrol. Hariri then suggested lowering the petrol tax to LL3000; a second vote was taken and Hariri lost 13 to 11 causing him to walk out of the Council of Ministers' meeting. (20) On the eve of Hariri's unprecedented defeat before his ministers, some commentators expected him to resign; but the Premier bit the bullet, insisting that he had no intention of resigning. (21) A few da ys later, he resumed his dual quest for fresh sources of finance (22) and a cabinet reshuffle that would enable him to drop at least some of the ministers who had openly defied him.

In the autumn of 1997, Hariri and Berri came close to collision over Hariri's perseverance in seeking a cabinet reshuffle, and the 1998 proposed budget that included more austerity measures, more indirect taxes and more foreign borrowing than previous budgets. Competition for Syrian backing (each coveted the position of Hafez Assad's strong man in Lebanon) and the ambition of each leader to play the role of local kingmaker in the upcoming presidential election complicated relations between Berri and Hariri. (23) In the conflict between Bern and Hariri, Hrawi assumed a neutral stance, refusing to back his embattled premier. It was only after Syria intervention that the crisis was dissolved in early December with an agreement among Hrawi, Hariri and Berri on a so-called "reform paper" (al-warquah...