Lebanon’s damning McKinsey report: how the experts reacted

An aerial view of the Lebanese capital Beirut. (AFP)
Updated 07 January 2019
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Lebanon’s damning McKinsey report: how the experts reacted

  • Hard-hitting consultants' report reveals severe deficiencies across public and private sectors
  • Leading economists call for end to corruption, greater transparency, massive education reform

DUBAI: Lebanon must eradicate corruption and improve transparency to address its economic problems, leading economists have told Arab News in the wake of a damning report by the American consulting firm McKinsey.

The 1,200-page report, released by the country’s Ministry of Economy last Wednesday, warns of a crippling political stalemate in government and says the country is facing economic collapse.

One of the damaging figures reveals that Lebanon’s residents spend 50 percent more time than needed on congested roads, only 15 percent of which are in good condition. It also discloses that Lebanon’s infrastructure ranks 113th out of 137 countries.

A woman wears a mask reading “happy uprising” as anti-government protesters demonstrate in central Beirut. (AFP)

“These numbers come from a variety of sources like the World Bank and others, so these have been assessed by various international parties,” Dr. Nasser Saidi, former chief economist and head of external relations at the Dubai International Financial Center, told Arab News.

“What’s more important is the cost of this in terms of productivity and income, because when you spend time on the road you aren’t producing anything, so congestion costs are very large in terms of both loss of business opportunities, lost income and lost productivity.”

Lebanon was found to have the world’s fourth-worst quality of electricity behind Haiti, Nigeria and Yemen. “Electricity in Lebanon is just more expensive, but everyone has 24-hour electricity if they can afford it,” Nadim Shehadi, an associate fellow at Chatham House, told Arab News.

“If you measure electricity supply by state provision then it’s the worst in the world, but if you measure it by what’s available to people, it’s not so bad. There are sometimes indicators that have to take into account the fact that Lebanon is a mixture of private sector, illegal activity and government sector, and sometimes illegal activity compensates for the government sector.”

He said the government is failing but will not change the law to allow people to supply electricity. “So the only alternative is illegality, which supplements the government,” he said. “Illegality is not necessarily totally negative (in this case).”

Lebanon’s perceived corruption was shown to have increased by 26 points since 2012 to 146 out of 180. 

“In terms of governance, it has been deteriorating over the past five to six years on a continuous basis,” Saidi said. “It’s corruption, bribery and nepotism. In all reports on transparency and corruption, Lebanon is unfortunately one of the most corrupt (places) in the world, and the importance of it is not only that we want to be able to fight corruption, but that it has become a cancer and it is so pervasive.” 

He emphasized the issue as it is a major contributor to public finance and the budget deficit. “Corruption is directly related to government procurement and government contracts as well as government revenue,” he said. “So there is widespread tax evasion, and corruption is at the core of Lebanon’s large budget deficit, which was close to 11 percent in 2018 and likely to be the same or higher in 2019... The economic and fiscal impacts are extremely important.”

Lebanese workers fix electricty wires in the southern village of Srifa. (AFP)

The report further outlined that the country’s gross domestic product (GDP) per capita today is only 30 percent higher than it was in 1980, which was five years into the Lebanese civil war. Shehadi said  prior to 1975, Lebanon’s standard of living and GDP per capita were on par with some European countries such as Spain, Ireland and Portugal.

“If you want to measure the real damage that the civil war and the (Israeli) occupation have done to the country, it’s where Lebanon stands vis-a-vis countries that were equivalent to it before the war,” he added. “So it has regressed a lot by that measure.” Saidi said the poor quality of statistics in the country needs to be improved as the central statistics office lacks resources and figures on key areas including GDP and investment. 

He said the lack of field productivity growth and investment means it is unsurprising that there has not been much of an increase in per capita income or real GDP.

The McKinsey report highlighted the country’s education system, deeming it to be of low quality and in decline. It said many skills are not being taught to suit labor force needs, partially because the curriculum has not been upgraded since 1997. Experts, however, said this is only the case for public sector schools and universities. 

“The picture is diverse and there’s a big gap between public and private education,” Saidi said. “The major private sector universities are St. Joseph, the AUB and the LAU, which are able to deliver competitive quality education. The evidence for that is that our graduates are able to go to top-notch universities internationally.” But the problem is that it is mostly elites who can afford high-quality education, leaving behind most of the population, including Syrian refugees, he said. 

He pointed the finger at the Arab world as a whole. “You need to think of two things: Education for employment, which should give you skills to be able to get jobs, and digital education for digital employment, because economies on a global basis and in the Arab world are increasingly going to have to move to become digital.”

Low productivity growth and high poverty rates were said to increasingly prevent Lebanon’s younger generations from being endowed with the education required to participate in the modern economy.

Changing the official curriculum of public schools was also perceived as a difficult step, as is “anything to do with the government,” Shehadi said. “It’s very slow, inefficient and doesn’t work. That’s why 70 percent of education in Lebanon is private or non-governmental.” He spoke of Lebanon as an exception globally in that it never provided 20th-century state services. As such, and with global reliance on government on the decline, it could be seen as “more on the right track” and an easier issue to resolve.

In terms of the country’s diaspora and its $6.9 billion in remittances sent back to Lebanon, the report said they are not largely channelled into productive areas. Although Shehadi blames it on high interest rates in the country, putting Lebanese living abroad off investing in other sectors, Saidi said such money is financing the government’s budget deficit.

“There’s very little public investment, and all remittances and the capital coming in from the diaspora go into bank deposits, treasury bills and to finance the budget deficit,” Saidi said. “We have one of the highest levels of debt to GDP in the world, in excess of over 158 percent, which makes it the third most indebted country in the world after Japan and Greece.” 

He attributed the problem to very little public investment, which trickled down to poor infrastructure performance. “It’s all going to finance wages, pensions and interests on public debt,” he added, calling it a resource curse due to the government’s dependency on it. “They’re happy to pay high rates just to attract them. Had we not had them, they would’ve had to adjust on their own and had fiscal reform.”

The main issues at hand, he believes, are fiscal reform and corruption, cutting down the budget deficit and the level of public debt.

A reflection of unfinished cement columns at a halted construction site in Beirut. (AFP)

Shehadi said Lebanon should come up with its own vision and policies through dialogue between the private sector and the government. “It should be a comprehensive process,” he said. “The government of Lebanon is paralyzed for political reasons, and there are very good political reasons for its paralysis. It’s dysfunctional, and the main blockage is political.”

Dr. Albadr Al-Shateri, politics professor at the National Defence College in Abu Dhabi, said the economy of any country is closely aligned with its politics. “Lebanon’s politics is marred by a high level of instability due to its political system, which teeters over volatile sectarian politics,” he told Arab News. “The combination of weak, more like dysfunctional, government and fragmented civil society hampers public policy-making.” He said no matter how well-informed policy recommendations are from consultancies, the lack of political will to implement these recommendations will defy any expertise. 

“Lebanon has always been between a rock and a hard place geopolitically. Today, Lebanon carries the burden of the region: A raging civil war to its east (Syria), a trigger-happy state to its south (Israel), huge numbers of refugees from current and past wars, and a rampant cold war between different camps in the region. The country has its work cut out for it: It can’t form a government, much less produce public policy to rectify economic woes.”

But the economic potential of Lebanon is great, Al-Shateri said, with its arable land, water resources, and a highly educated, industrious and entrepreneurial population. “However, without political stability and a rules-based business environment, Lebanon’s economic transformation will remain a will-o-the-wisp.”

Karen Young, a resident scholar at the American Enterprise Institute, said the report reveals a number of weaknesses, in government effectiveness and in vulnerabilities to other regional economies, especially in the Gulf. “It’s a useful outside view of Lebanon’s current economic situation,” she told Arab News. “What policy path the government takes to put this information to use is a political process, also fraught.”

She said there is a difference between the presentation of economic data and the consultancy prescription for growth. “The government can take the economic analysis and find different policies to pursue to confront them. And some of the policy prescriptions are probably unrealistic in the Lebanese political context, but that’s what you pay consultants for: An outside perspective that’s detached from political constraints. It’s a re-imagining of what could be in Lebanon... The report is a wake-up call for consensus-building, but it also allows an outsider to break the bad news.”


How ‘liquid of life’ is under threat in the Middle East

Updated 22 March 2019
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How ‘liquid of life’ is under threat in the Middle East

  • An increasing number of people in the region do not have access to clean water and basic sanitation
  • In 2015, there were more than 51 million people in the Arab region lacking access to basic drinking water services, and more than 74 million without access to basic sanitation services

DUBAI: World Water Day had somewhat of an abysmal feel to it across the Middle East this year, as the region witnesses a growing number of people with no access to supplies of the vital resource.

Although the issue of supply has always been critical for the Arab region, known to be one of the most water-scarce in the world, matters are only getting worse with a rise in refugees and the displaced.

“The freshwater scarcity situation is aggravated by several factors, such as dependency on shared water resources, climate change, pollution, non-revenue water losses from aging systems, intermittency, inefficient use, and high population growth,” said Ziad Khayat, first economic affairs officer in water resources in the Sustainable Development Policies Division at the United Nations’ Economic and Social Commission for Western Asia (ESCWA). “Occupation and conflict also affect people’s ability to access water and sanitation services. The Arab region is perhaps the only one in the world still experiencing direct military occupation.”

He spoke of the Israeli occupation of Arab territories, which affects access to water resources and the ability of countries to properly manage and provide required water and sanitation services, with a ripple effect on food security, health and development. “Armed conflict in the region has resulted in the destruction of the water and sanitation infrastructure, hampering the provision of safe drinking water and sanitation,” he said. “In response to shortages, households resort to unregulated water vendors relying on compromised resources, such as unprotected wells. In addition, damaged wastewater systems have resulted in river waters and shallow wells becoming contaminated.”

Water shortages and electricity outages have rendered many health care facilities non-functional, while vulnerability to the outbreak of waterborne diseases, particularly for people living in conflict-affected countries, has greatly increased. “The systemic conditions affecting the Arab region’s water security are not expected to improve in the near future,” he said. “In fact, climate variability and change are projected to impose additional pressures, with adverse impacts on the quantity and quality of freshwater resources in an already water-scarce region, affecting its ability to ensure food security, sustain rural livelihoods and preserve ecosystems.”

A higher frequency and intensity of floods, droughts and extreme weather is being experienced in many countries, which aggravates the situation of vulnerable communities and has led to economic losses and environmental degradation in several parts of the region. “The region has a high population growth rate and is one of the most urbanized in the world, with more than 58 percent of the population now living in cities,” Khayat said. “It has witnessed significant and uneven urban transformations, with some countries undergoing rapid wealth generation, others confronting economic challenges, and several afflicted by conflicts that have led to major displacement and migration of large sections of the population.”

Such trends are expected to place more stress on the urban infrastructure, particularly in water, given the scarcity conditions in the region. And with 86 percent of the region’s population — or nearly 362 million people — living in countries under water scarcity or absolute water scarcity, action is needed. “The predictions are that water scarcity is only going to get worse unless we change the way we manage the resource,” said Monika Weber-Fahr, executive secretary at the Global Water Partnership. “I remain an optimist. We were able to meet some of the water-related Millennium Development Goals (MDGs) and now, with the Sustainable Development Goals (SDGs), there is a new and broader resolve to, not just improve water supply and sanitation, but take a more holistic approach to managing water, including its transboundary aspects.”

“Leaving no one behind” is the theme of this year’s World Water Day at the UN. The central challenge, Weber-Fahr believes, is that to achieve efficient, equitable, and sustainable water management, all parties must have genuine opportunities to actively participate in water management decisions. “Only then can decisions be taken that reflect how we all value water — reflecting its social, economic and environmental value,” she said. “We need to create a safe space for people to come together to build common ground for water management decisions, working with everyone, everywhere.”

In 2015, there were more than 51 million people in the Arab region lacking access to basic drinking water services, and more than 74 million without access to basic sanitation services. Access to water and sanitation  is also lacking in rural areas compared with urban areas. “The record shows that in the past 10 to 12 years in the Arab region, the overall proportion of population with access to safe drinking water has improved from 85 percent to 90, almost reaching the global average of 91, but deteriorated in Palestine, Syria, Iraq, Jordan, Lebanon and Yemen, where it dropped from 94 percent to 88 due to military occupation, civil conflicts and insufficient investments,” said Dr. Waleed Zubari, professor in water resources management at the Arabian Gulf University in Bahrain. “Disparity between urban and rural population in both services continues to be considerably large, especially in the lower-income countries. This is expected to continue with the civil conflicts in Syria and Yemen and in Iraq, and under the military occupation of the West Bank and the blockade of the Gaza Strip.”

If only excess water during rainy days can be stored for use during the dry months, water shortage wouldnot be much of a problem. (AN file photo)

Climate change and drought are also expected to worsen river flows, which is the main source of water for many Arab countries such as Egypt, Iraq and Syria. “Whether we have achieved a universal access to water for all the population or not, there are some challenges that will stay with us in the Arab region,” he said. “Scarcity of water resources and limited endowments facing increasing water demands due to increased population will continue to be a major challenge in the region. Another issue that needs immediate attention is the water supply and use efficiency, recycling and reusing water, considered very low in the region, and if worked on, will reduce water stress tremendously.”

Peace and stability will also help improve the situation, as well as rebuilding the water sector in countries shattered by civil war and occupation. Similarly, water management, efficiency and conservation in policies will need to progress.

For Dr. Ahmed Murad, dean of the college of science at United Arab Emirates University, said that providing clean water for the population is essential for all communities. “Historically, the absence of water could increase conflicts between nations,” he said. “Latest statistics show that about 844 million people in the world live without access to safe water, and one in nine lack the access to safe water.”

He spoke of more pronounced circumstances in the Middle East, with high temperatures and a low amount of rainfall. “Such conditions with population growth may reduce the availability of clean water due to a high demand on water resources,” he said. “The limited and diverse water resources will pressurize natural resources, and this will continue to deteriorate if no action is taken.”