The challenge for the national unity government in Lebanon is how to pull the country out of poverty and address its many problems. For Lebanon to grow at self-sustaining rates of seven to ten percent for one or two decades, it must significantly increase its economic freedom. This can be achieved by implementing three top-priority reforms: pension privatization, tax reform and radical deregulation. The guiding concept, applied rigorously in New Zealand during that country’s reform period, is to eliminate the system of state-sanctioned privileges, which prevails throughout the Lebanese economy.
Pension schemes in Lebanon are largely linked to the labor market and generally non-universal. Only state employees (civil servants and military personnel), who account for around 10% of the labor force, have the opportunity to choose between receiving a monthly retirement income or a lump sum amount as end-of-service compensation after retirement. Those employed in the private sector, public utilities and municipalities representing 25% of the labor force do not enjoy the option of a continued retirement income. When they retire, they are entitled to an end-of-service lump sum payment only.
Much lower down on the ladder of protection are the wage earners employed in agriculture, construction, small business and domestic services. Workers in this group do not benefit from a retirement scheme unless they enter into one on their own initiative. The unemployed are definitely the most vulnerable, as they are theoretically and practically outside any protection mechanism. Lebanon does not have an unemployment compensation system to protect them while they are out of work, and when they reach retirement age, if they have not been employed, they will not be provided with the benefits of any retirement scheme.
Clearly the retirement system does not provide adequate coverage and excludes the most vulnerable and poor. The Lebanese government should follow the principles applied in New Zealand: workers should be allowed to place their retirement savings in their own accounts to be privately managed by competing firms, which would invest that money in capital markets over the working lifetimes of their clients. Giving ordinary Lebanese the choice of remaining in the state-run system or moving into the private system makes it more difficult for politicians to obstruct reform. New entrants to the labor force, however, should go directly into the private pension system. That will permit Lebanon eventually to close the door on the state-run system that politicians as has been the case in all countries have abused for political purposes, and it will protect the private system from being undermined by a publicly managed, unfunded system. Finally, the benefits of current retirees and of those people remaining in the old system should not be altered. Such a measure is both fair and politically prudent since it, too, removes potential opposition to privatization. A reform that allows Lebanese to invest their pension savings abroad sends a powerful signal about the Lebanese government’s view that capital will be permitted to flow both ways, something that would itself encourage greater foreign investment in Lebanon.
Lebanon needs a radical overhaul of its tax policy. The payroll tax could be cut in half without affecting revenues significantly. They are complex, high, full of exceptions and uncollectible. The personal income tax, which provides only 3.9 percent of the state’s revenues, should be eliminated entirely. In place of those taxes, Lebanon should maintain only its value-added tax and apply it at a flat rate with no exceptions whatsoever. Those measures will encourage job creation, investment and a more transparent business sector as firms find compliance more reasonable than cheating. With more firms operating in the open as a result of the reduced tax burden, foreign and domestic banks will be better able to extend credit based on reliable assessments of firms’ financial conditions. Those reforms should be accompanied by focusing government spending strictly and more efficiently on the poor and vulnerable, thus creating an effective safety net.
Widespread deregulation, including free entry by Lebanese and foreign firms into all segments of the economy, would help create the competitive conditions that Lebanon lacks. Greater competition among firms would change not only the “hard” infrastructure of the economy but also its “soft” infrastructure accounting standards, legal practices, and even cultural attitudes. Were those changes to come about, of course, the financial system could operate properly by channeling savings to productive investments. Allowing firms to go bankrupt and generating incentives for competition through, for one thing, more-transparent and less-costly transactions is necessary to achieve a more efficient allocation of resources.
Lebanon’s task is awesome and daunting, but it is possible. The main obstacle to reform that Lebanon will face is the opposition from special interests whose privileges would end under the proposed new policies. Overcoming these obstacles will require a coherent economic program and direct appeals to the people. By clearly communicating the purposes, costs, and benefits of the reforms and by emphasizing that the reforms aim to eliminate state-sanctioned privileges not for one group but for all equally the government will rest its credibility on achieving those goals in a fair and independent way. This, in turn, makes it more difficult for special interests to impose their preferences.
The future will weigh more heavily than the past. The government can begin creating that future by removing artificial obstacles to high growth and thereby drawing on the energies of all Lebanese. If they move in that direction, they will do nothing less than spark a revolution. If they don’t, Lebanon will have to wait for the next generation to take over.
The writer is professor of interdisciplinary studies at the University of Toledo in Ohio.