EXECUTIVE SUMMARY
i. Lebanon’s political development since independence has been influenced primarily by its evolving confessional system. However, this system, originally established to balance the competing interests of local religious communities, is increasingly seen as an impediment to more effective governance as it has resulted in a paralysis in decision-making and a general hollowing out of the state. Lebanon’s confessional system has also proven extremely vulnerable to external influence, which has bred and exacerbated local conflict and violence.
ii. The Lebanese economy has grown at a moderate pace over the past decades, but growth has been uneven due to large, frequent and mostly “political” shocks, to which the economy has been resilient. Real GDP grew on average by an estimated 4.4 percent from 1992 to 2014 but this performance masks the impact of many shocks (domestic, international, political and/or confessional) that Lebanon faced over this period. The latest such shock is the ongoing conflict in neighboring Syria, which, given the strong linkages between the two countries, is generating large and negative spillover effects in Lebanon. The country’s macroeconomic framework has, nonetheless, proven resilient to all the large shocks it has so far faced.
iii. With low growth quality, Lebanon has struggled to reduce widespread poverty and to generate inclusive growth as job creation has been weak and of low quality. Poverty incidence has been elevated and broadly unchanged for the past 25 years. Since the end of the civil war, extreme poverty has hovered at between 7.5 to 10 percent, while using the upper poverty line about 28 percent of the population was poor. The distribution of poverty has also been unequal with poverty levels being highest in the north and south of the country, and in small, dense pockets in the suburbs of large towns which reflect the unevenness of economic growth and development. A key factor underlying the lack of inclusive economic growth is low employment-growth elasticity. In Lebanon, job creation has trailed the high growth in the labor force, and jobs have typically been of low quality. More recently, both poverty and jobs have likely been negatively impacted by the Syrian conflict and, in particular, by the large influx of refugees. Lack of quality jobs at home continues to push a large share of Lebanese abroad, especially the educated youth.
iv. In this context, the World Bank Group (WBG) has undertaken a Systematic Country Diagnostic (SCD) to identify the main constraints Lebanon faces to generate jobs (both in quantity and quality) which is recognized in the country as the pathway to reducing extreme poverty and promoting shared prosperity (i.e., WBG’s Twin Goals). The SCD is based on a comprehensive analysis of available evidence (noting data deficiencies described herein) and has benefited from extensive consultations with Lebanese experts, private sector representatives, members of the NGO community, and the Government of Lebanon, among other stakeholders.
v. The SCD posits that, at the root of Lebanon’s failure to generate inclusive growth and jobs, are the presence of two mutually reinforcing and pervasive (overarching) constraints. These are (1)
Elite capture hidden behind the veil of confessionalism / confessional governance, and (2) Conflict and violence (stemming, in part, from the broader dynamics of conflict in the Middle East). The two overarching constraints impose a heavy burden on the economy, with the cost of confessional governance estimated at 9 percent of GDP annually. Illegal activities are not sanctioned by the state when involving politically/confessionally connected and/or wealthy actors, exacerbating elite capture and the pervasive patronage system. Influence of economic stakeholders and personal connections (known as “wasta”) is more likely to influence policy execution and enforcement of the rule of law. Thus, elite capture and corruption is endemic and undermines the achievement of the Twin Goals in Lebanon. Similarly, the cost of the conflict and violence is large and recurrent. These include the 1975-1990 civil war that halved the country’s economy, the 2006 conflict with Israel which resulted estimated direct damages of USD2.8 billion, and USD700 million in indirect damages, or more recently the Syrian conflict which is estimated to have cost the Lebanese economy USD7.5 billion in foregone output and widened the fiscal deficit by USD2.6 billion through 2014.
vi. The SCD posits that other (more traditional) constraints are nested within the two overarching constraints of elite capture institutionalized by the confessional system and fragility of the country and conflict-affected region at large. Nested constraints affecting Lebanon’s potential to deliver sustained and high economic growth to its people include macroeconomic instability, weak business environment, insufficient investment in infrastructure (especially in lagging regions), skills mismatch with labor market needs, and weak institutions and regulatory framework. The SCD posits that, absent the destabilizing impact of confessional governance and domestic and regional conflicts, these nested constraints would be significantly less binding than they currently are. Thus, constraints specific to the electricity sector or the educational system, for example, are “nested” within these overarching constraints which both makes reform at the sector level especially challenging and compounds sector constraints.
vii. To prioritize Lebanon’s development constraints, the SCD team designed a voting methodology that captured the complexity of Lebanon’s constraints, is transparent, and verifiably robust. The prioritization process included the following steps: (1) Establishing a comprehensive list of specific constraints, based on the analytical work done in the SCD; (2) Requesting each World Bank Group expert that worked on the Lebanon SCD to score each of previous constraints from least to most binding based on five criteria (impact on goals; time horizon of impacts; preconditions; complementarities; and evidence strength); (3) Ranking of the above expert scores based on the average score of each individual constraint so that the resulting prioritization is conducted at the intensive margin—which enables reformers to directly tackle the country’s specific bottlenecks. As common themes and sectors emerged from the resulting list of constraints, a list of 11 ranked priority areas was established. This list includes the twin overarching constraints of confessional governance and conflict and violence, eight nested sectors, and one foundational constraint of data availability and quality. Finally (4) sensitivity analysis/robustness checks were performed. They found that, reassuringly, priorities identified were robust to all reasonable alternatives used.
viii. While Lebanon’s twin overarching constraints are deep-rooted potential ways to mitigate them do exist. These can be classified in two types of strategies: (1) directly aim to lessen the overarching constraints themselves; and (2) work on lessening the nested constraints by designing a reform program that is incentive-compatible with the existing overarching constraints. The first strategy carries the potential of a large development payoff but, given the deep-rooted and symbiotic nature of the two overarching constraints, this strategy will take time to bear fruits. The second strategy is more suited to deliver gains in the short-term, but given the weight of the overarching constraints, these gains are likely to be more limited in scope. Examples of the first strategy include implementing key outstanding elements of the Taef Accord such as the adoption of a decentralization law, the creation of a lower chamber of parliament that would be elected on a non-confessional basis, improving access to (statistical) information, promoting political stability, and institutional reform and development. Examples of the second strategy include: a political economy and conflict exposure analysis of nested sectors, a grand bargain package of reforms, an opportunistic approach (i.e., being ready to seize windows of opportunity when they arise), working around elite capture, ‘horizontal’ social engagement, and managing the Syrian refugee influx and turning it into an opportunity.
ix. Subject to the design of reforms that are incentive compatible with the twin overarching constraints the following opportunities could materially improve Lebanon’s development prospects: a) reduce macro-fiscal vulnerabilities; (b) improve governance and effectiveness of public institutions; c) address energy gaps to increase productivity of the private sector and reduce the macrofiscal burden; d) strengthen ICT so Lebanon is fully connected to the global economy and can develop jobs needed in the 21st century; e) modernize the education sector to ensure youth have skills relevant to employers; f) improve the business climate to ease the burden on firm creation and operation; g) increase investments in transportation so people and products can move efficiently; and h) address environmental issues to protect Lebanon’s natural resources, including water. Reforms in these areas must be tackled with a sense of urgency if Lebanon is to generate the number and quality of jobs it needs for its citizens and achieve progress towards the Twin Goals, to avoid further deterioration in the well-being of citizens and, importantly, to manage the added pressures stemming from regional conflicts.