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Economic Liberalization-Business Environment

5th Economic Freedom of the Arab World ConferenceCairo, November 1-2, 2010

Mounir Rached- Vice PresidentLebanese Economic Association

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Contents

I. Introduction

II. Ranking index

III. Global ranking

IV. Relative ranking in MENA

V. Lebanese economy

VI. Recent achievements in Lebanon

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I. Introduction Impact of Economic Freedom Economic freedom has been shown to correlate strongly

with: Higher average income, Higher income of the poorest 10%. Higher life expectancy. Higher literacy. Lower infant mortality, Higher access to basic services (water, medical), and less corruption

Economic freedom does not mean anarchy, to the contrary it promotes quality of governance:

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cont

Economic freedom provides: Right of property ownership Protection of property Free movement of labor, capital, and goods Absence of coercion or constraint of economic

liberty beyond necessary

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II. Index of Economic Freedom The index adopted by most rating groups:

Fraser Institute Heritage FoundationEconomic Freedom Network)

comprises:

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1. Size of Government Taxes (government revenue/GDP), Marginal tax rates

Government spending

Transfers & subsidies

Public enterprises share in GDP

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2. Legal Structure

Commercial law, Security of Property Enforcement of contracts Judicial independence

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3. Sound Money

Money growth: high rates cause inflation Inflation: distorts pricing, misallocates

resources, discourages saving and investment Credit to Government: crowding out private

sector Foreign currency accounts: freedom to hold

foreign currencies

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4. Freedom to trade internationally

Tariffs (customs) High tariffs restrict trade and impede growthIncrease prices that consumers pay for imports

Size of foreign trade

Regulatory trade barries

Capital market controls: FDI Other capital

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5. Regulations of Credit, Labor & Business

Credit market regulation Ownership of banks, interest rate controls

Labor market regulation

Business regulation: licensing, starting/closing business, administrative requirements:

Without redundant regulations & harmful barriers In some countries obtaining a business license

requires filling a single form (few hours) in others it takes a full year

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III. Global rankingFew MENA countries have espoused fully (proper) liberal

economic policies since independence

The public sector remained engaged in many functions: In education, in production, other sector activities etc.

The state is main holder of natural resources in all

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Global cont

Most countries have a relatively low ranking in the global economic freedom index

Bahrain is ranked highest at 18th

(low scale higher ranking)

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Global cont

Countries are burdened by several components, some of the most prominent.

Corruption is perceived to be high in many- has one of the highest among peers.

Corruption is well entrenched

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Global cont Property rights (enforcement of contracts) score is low Its legal system is perceived to be politically manipulated Business (Investment) freedom score is low

Restricted licensing- cumbersome administrative procedures- multiple phases- Ceilings on certain investments Restricted foreign ownership- restricted Direct Foreign Investment Most though allow free movement of capital

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cont Global ranking of MENA countries (Fraser Inst 2008): Bahrain 10 Qatar 27 Syria 140 Oman 34 Iran 171 Jordan 38 Libya 173

UAE 47 Saudi Arabia 54 Kuwait 61 Morocco 93 Egypt 96 Tunisia 100 Yemen 127 Algeria 132

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cont

Lowest rating is for Korea: 179

MENA countries have lowest ratings among their peers (based on GDP)

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Cont

Does not mean absence of welfare services

Some countries with high ranking (low score) have extensive welfare systems, such Iceland, Finland and Sweden, however they are less regulated than most others

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IV. Relative ranking in MENA

2002 2003 2004 2005 2006 2007 20087

7.2

7.4

7.6

7.8

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8.2

Top Economic Freedom Achievers in the Arab World (Fraser Institute)

BahrainJordan KuwaitLebanonOman Qatar Fi

nal G

rade

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Lebanon- Economic freedom index

Lebanon’s Ranking in MENA (Fraser Institute):

Year 2002 : Rank 4

Year 2003 : Rank 4

Year 2004 : Rank 5

Year 2005 : Rank 4

Year 2006 : Rank 4

Year 2007 : Rank 3

Year 2008 : Rank 3

V. Lebanon: Size of Government

2002 20080.01.02.03.04.05.06.07.08.09.0

10.0General government consumption spending as a percentage of total consumption

Transfers and subsidies as a percentage of GDP

Government enterprises and investment

Top marginal tax rate

Year

Gra

des

Rank in the Arab World (2008): 1

Lebanon: Legal Structure and Security of Property Rights

2002 20080.01.02.03.04.05.06.07.08.09.0

10.0

Integrity of the legal system

Regulatory restrictions on the sale of real property

Legal enforcement of contracts

Year

Gra

des

Rank in MENA (2008): 15

Lebanon- Sound money

2002 20080.01.02.03.04.05.06.07.08.09.0

10.0

Money growth

Standard deviation of inflation

Inflation: Most recent year

Freedom to own foreign currency bank accounts

Year

Gra

des

Rank in MENA (2008): 3

Lebanon: Freedom to Trade Internationally

2002 20080.01.02.03.04.05.06.07.08.09.0

10.0

Taxes on international trade

Black-market exchange rates

Capital controls

Year

Gra

des

Rank in MENA (2008): 11

Lebanon: Regulation of Credit, Labor & Business

2002 20080.01.02.03.04.05.06.07.08.09.0

10.0

Credit Market Regula-tions

Labour Market Regula-tions

Business Regulations

Year

Gra

des

Rank in MENA (2008): 3

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Lebanon’s Score Over Time2002 2008

Overall Score 7.8 7.6

Size of Government 8.7 8.4 Subsidy score

Law & Security of Property Rights

6.1 6.1

Access to Sound Money

9.6 8.8 inflation score

Freedom to Trade Internationally

7.3 6.8 capital controls score

Regulation of Credit, Labor, and Business

7.2 8.0 labor market improved

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Lebanon: Prominent Features of Lebanese economy

Lebanon is by far the best performer in the size of government rating compared to the rest of MENA as it does not possess natural wealth (oil or minerals)

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(Cont.)

2007 1. Gov Consumption /Total consumption =

13.82%

MENA Average = 24%

Transfers & Subsidies/GDP = 7.1%

MENA Average = 7.84%

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(Cont.)

2. Taxes relatively low

Tax Revenue/ GDP = 14.8% World Average = 29.26%

Top Corporate Tax Rate = 15% World Average = 25.1% VAT =10%

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Cont. 3. Trade Freedom: one of the highest scores

8.9

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VI. Lebanon: Recent Achievements Gradual reduction of customs Introduced VAT Developing and modernizing tax procedures Restructured Tax office Automated tax payment Transparency and openness to the public

improved

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Achievements

New competitiveness law (not adopted yet)

New Property rights law-WIPO based (not adopted yet)

New procurement law (not adopted yet)

Social security reform initiated

Privatization remains undecided (how to privatize) `

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Achievements Free Trade Agreements were signed with Lebanon’s major

trading partners; namely:

The European Union (EU), The EFTA States (Switzerland, Lichtenstein, Norway, Iceland) and The Gulf Cooperation Countries (GCC); and A full establishment of the Greater Arab Free Trade Area

(GAFTA) was achieved in January 2005

Lebanon is also actively negotiating accession to the World Trade Organization (WTO) 

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Achievements

Recapitalized banks

Improved supervision

Political impasses delay reform END