• Politics
    May 01, 2019

    Anatomy of Corruption in Postwar Lebanon

    • Bassel F. Salloukh
    Anatomy of Corruption in Postwar Lebanon
    Trying to take stock of Lebanon’s postwar public finances is like feeling your way through the darkness. There is no light at the end of the tunnel, just darkness. Waiting for the overhyped 2019 budget has become like waiting for Godot. Decision-takers insulated themselves from a healthy dose of possible reform proposals advanced by Lebanese economists. Instead of an inclusive and genuine debate over what kind of budget Lebanon requires to make its way out of its twin fiscal and monetary storms, we were left with a barrage of leaks directed solely at gauging the reaction of the political elite’s clientelist base. Fearing a popular rebellion by this base, the political and economic elite shied away from adopting the kind of structural reforms that can reorient the economy from the current rentier paradigm to a more productive one. The exception to this otherwise stubborn rule is a proposed 2% tax on all imports except medications, environmentally friendly cars, and machinery used for production, and a 5-20 percent tax on a range of selected imports to protect local products. Consequently, cabinet debates degenerated into a sophomoric accounting exercise centered on how to tweak budget lines and thus decrease the fiscal deficit-to-GDP ratio from the current 11% for 2018 to anywhere below 8%, thus unlocking the nirvana of CEDRE—the draft 2019 budget proposes an ambitious 7.5 deficit-to-GDP ratio.
    A forensic analysis of government spending in past decades is perhaps the only positive side effect that has emerged from the recent budget saga. It has revealed the anatomy of corruption underpinning Lebanon’s postwar political economy. One can glean the capillaries, and the socioeconomic winners and losers, of this political economy from a long-term perspective of the structure of government spending over the last three decades.
    According to one estimate, and of the $216 billion in government spending in the period 1993-2017, the share of debt servicing amounted to $77 billion or 35.6%, salaries and wages $46 billion or 21.29%, transfers to Electricité du Liban (EdL) $20 billion or 9.25%, and retirements and pensions $19 billion or 8.79%. Fiscal year 2018 expenditure figures reflect a similar political economic profile: Public wages and benefits amounted to 35% of government spending, transfers to EdL 10%, debt servicing 32%, and capital expenses, other subsidies, and other expenses 18%. The remaining balance of current government expenditures, including subsidies to CSOs, constitutes 5% or $800 million. Making up about $16 billion in government spending against revenues of $11 billion, this placed the 2018 budget deficit at about $5 billion, or so the government hopes.
    Yet this political economy has extensions beyond the boundaries of the official state budget. It is sanctioned by any combination of overlapping clientelist, material, and political interests—the role of sectarianism in this process is epiphenomenal. The tentacles of this alternative political economy can be appreciated from figures circulated recently in the quest to find ways to either increase state revenues or decrease spending. Take, for example, the volume of unearned state revenues accumulating from a bevy of obvious sources. A group of experts at the Association of Banks in Lebanon (ABL) estimate the cost of unearned state revenues at about $4 billion annually: $1.7 pertaining to technical and not so technical losses in the electricity sector, $1.15 billion in tax evasion, $200 million in unearned inheritance and real estate taxes, $500 million in uncollected commodity and customs taxes, $200 million in tax exemptions, and $300 in additional potential telecom charges. Moreover, the IMF estimates that the size of Lebanon’s untaxed informal economy averaged 31.6% of GDP annually during the 1991-2015 period: It peaked at 36.7% of GDP in 1991, dropping to its lowest level at 24.6% in 2010, only to increase again to 29.2% or $14 billion in 2015. These are astonishing numbers in a country with a population of about 6 million (including multiple refugee communities) and a GDP of $56.6 billion in 2018.
    For his part, MP Georges Adwan, who heads the parliament’s Administration and Justice Committee, estimates licit annual customs tax evasion at $700 million: Licit because it seems everybody knows that most of the country’s imports enter via not-so-accurate invoices, either through the black hole that is the port of Beirut or the many smuggling land routes dotting the border area. Adwan also claims that despite the telecom sector making $14.5 billion in profits over the last decade, only $10 billion found its way to the state treasury, with the balance designated as operating expenses. Even in the aforementioned very visible state budget, some 20% of public spending operates outside parliamentary oversight and is dedicated to state institutions divided along sectarian clientelist lines.
    The sinus of the parallel political economies outlined above reflect the very rentier, non-productive, lopsided structure of Lebanon’s postwar economy, one in which the state has played a central distorting role: It bankrolled expensive and bloated clientelist obligations, froze wages—in the private sector from 1996 until 2012, and in the public sector from 1998—but then increased the latter in 2017 for mainly populist electoral reasons and without thinking through their fiscal consequences, prescribed regressive taxes on profits and proscribed taxes on real estate profits, incentivized investments in T-bills and bank deposits through high interest rates, and punished the industrial and agricultural sectors. All this led to a ballooning of the fiscal deficit and the public debt, and the wasting of external cash flows—estimated at $280 billion in 1993-2018—on an import bill of $317 billion, compared to exports of $55 billion for the same period. The result is the concentration of wealth in the hands of a very visible superrich subsection of the population: less than 10% of the population controls more than 55% of the national income, 70% of total (financial and real estate) wealth, and 90% of bank deposits.
    Ironically, when the political and economic elite debates the nefarious effects of corruption or tax evasion on public finances, they do so in the abstract, conveniently forgetting that corruption is the lubricant of a political economic pact that serves as the lynchpin of the postwar power-sharing arrangement better known as the Taef Accord. In fact, postwar public institutions were captured and transformed into what Reinoud Leenders labels ‘bastions of privilege’ for the political elite’s clients, instrumentalized to sanction different forms of corruption in what was a veritable allotment state or ‘dawlat al-muhasasa’.[1] The result is the emergence of a very sectarian postwar public sector characterized by endemic corruption, cronyism, and all types of distortions.[2] By the way, does anyone know the real size of the public sector? Unofficial figures range all the way from 310,000 to a whopping 400,000! Has anyone explained the vast disparities in income and retirement packages in the public sector? Are these based on merit or a co-opting clientelist strategy?
    The great Italian Marxist thinker and political activist Antonio Gramsci once commented that ‘between consent and force stands corruption/fraud (which is characteristic of certain situations when it is hard to exercise the hegemonic function, and when the use of force is too risky)’.[3] In the course of the noisy debate surrounding the 2019 budget, we have gained more access into the anatomy of corruption embedded in the postwar political economy. It is a corruption that pays the price of a life of uberconsumption and vanity in a non-productive 21st century economy. It also serves to ensure the durability of an extended postwar political economy reproducing sectarian clientelist modes of mobilization. But as the political and economic elite start running out of financial options, and begrudgingly begin swallowing the difficult pill of economic reforms, how will they then sustain their political control? Through what balance of consent and coercion will they do so as more and more people start feeling the pain of difficult but inescapable economic choices? And what will be the role of the genie of sectarianism in this process? If anything, the proposed 2019 draft budget suggests that they have opted to bide their time and wait for the promised mana from oil and gas explorations, and the fantasy of privatization.

    [1] Leenders, R. 2012. Spoils of Truce: Corruption and State-Building in Postwar Lebanon. Cornell University Press.
    [2] Salloukh, B. 2019. Taif and the Lebanese State: The Political Economy of a Very Sectarian Public Sector. Nationalism and Ethnic Politics, 25.
    [3] Anderson, P. 2019. “Bolsonaro’s Brazil.” London Review of Books 41.
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