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    Lebanon, Beware of the Irish Meltdown

     

    In 2006 one of us published an article in this newspaper asking whether Ireland could be a model for Lebanon. At the time there was great hope, in the words of one senior Lebanese central bank official, that Lebanon could become the “Ireland of the Middle East,” while a Daily Star editorial argued that Ireland provided “a path for Lebanon’s economic rebirth.”

    How times have changed.

    Fast forward to mid-2010 and the Irish economy is in tatters. Debt is piling, growth is negative and the banking system looks like it needs more infusions of taxpayer’s money to stay afloat. Not surprisingly, the mood in Ireland is one of confusion, anger and growing bitterness at the financial follies of the last few decades and the economic burdens they have now wrought for generations to come.

    In a sad reminder of times past, thousands are once again emigrating to look for a better life. Nevertheless, we still feel that Lebanon has something to learn from the rise and fall of the “Celtic Tiger.”

    So what should Lebanon learn from the Irish experience? The first lesson is to be careful of asset price bubbles, especially in housing. Over the last few years, in a development reminiscent of Ireland not so long ago, billions of dollars have been invested in Lebanese property by expatriates or foreigners buying homes and looking to take advantage of the rising returns from a booming market.

    So far the Lebanese authorities are confident that the rise in property prices is based on real demand, and more importantly that regulation is conservative as the central bank requires that loans not exceed 60 percent of the total value of a project.

    However, the first thing the Irish experience tells us is that policy-makers should never rely on their own forecasts that property bubbles will never burst, credit will never run out, or banking sectors will regulate themselves in a prudent manner. Instead, they should be responsive to the recommendations and heed the warnings of international financial institutions such as the International Monetary Fund.

    They should also pay more attention to the new trends and rules of the post-credit crisis world as well a the long history of asset price bubbles going back to the Dutch Tulip Bubble in the 17th century. Without doubt the most important lesson is the need to reign in credit growth and control spiralling debt. Lebanon has a huge public debt and is currently one of the most highly indebted nations in the world.

    Servicing this debt, which currently stands at $51 billion, absorbs almost 30 percent of total government revenue. This has a direct impact on Lebanon’s capacity for growth as well as funds for education and infrastructure development – both of which are vital if the country wants to be competitive.

    This brings us to the second key lesson. In aiming to foster economic growth and prosperity, Lebanon needs to follow the Irish model and appreciate the key role of an educated young population. Even now, as its economy is under severe stress, Ireland ranks number one in the European Union in terms of the employability of its graduates. This provides an important asset as the country looks to rebuild.

    Lebanon also needs to heed the Irish lesson in terms of the value of “intangible” factors other than education. Economic openness and a friendly business climate, as well as an attractive tax system, are necessary ingredients in spurring economic development.

    In 2003, an international committee appointed by the Lebanese Finance Ministry to advise on tax policy cited Ireland as a case of good practice. Today, no less than then, the Irish tax model deserves serious study.

    The Irish experience also highlights two other important factors. One is to achieve a harmonious combination of local “assets” with international conditions, while at the same time putting in place local buffers to powerful international financial forces, such as the side effects of global interest rates and capital flows for example.

    In the Lebanese case, this means looking to diversify from over-reliance on the $6 billion, around a quarter of the country’s GDP, that is sent back to the country annually by wealthy expatriate communities. Moreover, Lebanon, should learn from Ireland’s failure to save some of the huge revenues generated over the last decade by using these massive inflows from expatriates prudently.

    With the benefit of Irish hindsight, it is also important to integrate economic policy-making with social, foreign policy and institutional elements of policy. This is difficult for Lebanon to emulate as Ireland’s economic attractiveness, in particular its success in attracting foreign direct investment, was predicated on political stability brought about by the Northern Ireland peace process.

    Lebanon is far from achieving similar levels of political stability.

    Nevertheless, the Irish experience not only suggests that strong political institutions are necessary pillars of a strong economy and healthy public life; as importantly, it also underlines that these institutions need to be continually reinvigorated and reinvented.

    Michael O’SULLIVAN & Rory MILLER
    The Daily Star
    02.04.2010

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