Adonis Diaries

Posts Tagged ‘Clientelism

How the Lebanese economy cannibalises itself

A horror State for enterprising people

14 August 2018

Conventional wisdom holds that Lebanese are born entrepreneurs—and it’s generally true, everywhere but in Lebanon itself.

They’ll succeed in Silicon Valley, carve out their own space in Nigeria and manage multimillion dollar projects in Saudi Arabia.

But a core reason for all this activity abroad is, precisely, how difficult it is to break through back home, in an economy that preys on small and medium enterprises (SMEs) while continuously feeding corruption and clientelism.  (And a small market and when regional trades are closed due to constant conflicts)

The ideal of the Lebanese entrepreneur nonetheless pervades Lebanon’s economic landscape. The Central Bank has (supposedly) dedicated over $400 million to support investments in the digital sector.

Western embassies bankroll incubators and mentoring programs expected to churn out the next generation of innovators.

Politicians in Beirut speculate that Lebanese companies will rebuild Syria.

And Lebanese elites recently attended a much-heralded conference in Paris, with the poorly defined goal of saving Lebanon’s economy through partnerships with the country’s private sector.

Amid all this haphazard bustle, conspicuously absent is a clear understanding of what makes the country’s entrepreneurial environment so self-consuming, especially when it comes to small-scale, productive ventures.

Unease of doing business

At first glance, setting up shop in Lebanon seems easy. Creating a limited liability company takes a matter of days and requires modest capital–5,000,000 LP, or slightly over $3,000.

Yet serious problems soon arise.

As the owner of several high-end restaurants put it: “Being an entrepreneur in Lebanon is effortless for the first 48 hours. After that, it becomes virtually impossible.”

At a macro level, the World Bank’s “ease of doing business” indicator—which measures regulations and procedures to open and run a company—ranks Lebanon below the already dismal average for the Middle East and North Africa.

From poor infrastructure to labyrinthine bureaucracy and a nonsensical regulatory environment, the challenges to successful business are myriad.

While no single issue in and of itself is necessarily prohibitive, problems pile up to the point where little gets done.

Simply paying bills and taxes can be extraordinarily time-consuming, and therefore resource-intensive.

Your phone? Set a reminder to go to the local branch of the national supplier once a month, where you will queue at the counter to avoid being disconnected for pending invoices.

Electricity? Chase down both the owner of the neighborhood electricity generator (private energy provider) and the representative of the public electricity provider, who have an uncanny tendency to show up outside office hours.

A lucky business opportunity? Submit hard copies of your contract to the Ministry of Finance within five days of signature, or risk penalties.

Taxes? Drive to the bank through heavy traffic, fill out forms, get a banker’s check, and bring it to the Ministry of Labor—each time a specific tax is due.

Merely collecting a receipt conforming to state-imposed standards may entail waiting at a special counter to acquire a size A4 printout complete with various stamps and signatures.

Such rules are a nuisance made worse by the almost comic lack of clarity regarding their application.

In 2017, the country spent months wondering if the value added tax, or VAT, was 10 or 11%—while national politicians dithered on the matter.

That same year, the government bumped up social security contributions retroactively and with no advance notice. In 2018, tax evaders enjoyed a sudden, sweeping amnesty.

In short, entrepreneurs simply cannot trust existing laws to provide consistency.

Foreign investors or employees can be denied work or residency permits that they are formally entitled to, if they fail to play by the system’s informal rules—namely through kickbacks and commissions.

“I have been waiting for visas for two Chinese nationals for three months,” grumbled the founder of a digital startup. “Now I am told that I can only get one and I have to choose whom to give it to—there is no logic to it.”

Essential aspects of a business-friendly legal framework are missing entirely.

In particular, Lebanon does not enforce intellectual property rights. It also lacks, amazingly, a bankruptcy law.

As a result, it is virtually impossible to shut down an existing company. “What we do is that we wait for five years, deliberately not doing anything,” explained a public accountant. “That’s how far back the Ministry of Finance can go to ask for documents in our archives. Then it’s over. The company continues to exist in perpetuity, but is considered dormant.”

On top of structural impediments to business, the Lebanese environment also throws up sporadic, petty obstacles—notably in the form of official negligence that sometimes borders on sabotage.

The owner of a street food restaurant, having incurred a devastating sewage leak in front of his establishment, recounted: “I called the municipality and heard that they couldn’t come for the next two weeks. So, I had the road fixed myself. I pay taxes and also foot the bill for public works.”

A trader in perishable goods shared another horror story: “I have to import my cargo in refrigerated containers, because the port administration delays my merchandise so much that it goes to waste. That would be expensive in itself if I didn’t have to send someone every day to check that they don’t unplug the air conditioning!”

The broker economy

In typical Lebanese fashion, SMEs have responded to this obstacle course not by lobbying for reforms, but through makeshift solutions that have become part of the system.

The entrepreneurial spirit that exists is, unfortunately, predominantly invested in navigating the economy’s structural deficiencies, rather than investing in its potential.

As a result, a sector has flourished around intermediaries who position themselves between SMEs and the numerous public administrations they must contend with.

Most companies retain at least one full-time employee whose sole function is to carry out the pesky, menial tasks that are essential to running a business in Lebanon—such as spending a day in traffic to pick up and deliver a banker’s check, for a service that could easily be done over the internet.

Such errands multiply in ways that often seem absurd: Subscribing to the state electricity grid requires a rental contract that must be approved by the municipality, a formality which can take days without a dedicated middleman.

Banks themselves have turned this go-between function into a remarkably profitable service.

They will settle a company’s internet, mobile phone and electricity bills for $5 per invoice per month. That may sound expensive, and it is—but it is still appealing compared to the resources otherwise wasted in transportation, parking and queuing.

Another form of mediation consists in buffering SMEs against Lebanon’s convoluted fiscal and legal framework.

Accountants and lawyers are essential allies in sustaining any enterprise, not so much by clarifying the rules, but by capitalizing on their inherent flexibility.

Accountants often use personal connections and bookkeeping wizardry to find arrangements with the Ministry of Finance to circumvent penalties or minimize taxes.

Lawyers tend to tap a higher-profile network to resolve more serious obstruction originating within specific public institutions.

Brokers help negotiate relations with the authorities at all levels.

While red tape and inefficiencies are in no way unique to Lebanon, the amount of time, energy and money that Lebanese must spend to overcome them is indeed special.

Business would prove literally impossible without such efforts. For instance, a digital startup operating outside of Beirut only gained decent access to the internet via an old friend at the Ministry of Communications.

Bigger problems require higher level brokers, leading many companies to operate under the umbrella of political patrons, or zuama.

These public figures (militia leaders of civil war in power) , who typically trade favors for electoral support, have the power to unlock seemingly hopeless situations. They are the ultimate brokers, to the point where their goodwill can become an existential issue.

Compete with the wrong people and you may soon see ordinary problems multiply, to the point of putting you out of business.

This phenomenon is deeply entrenched, not least because it dates back generations.

In his History of Beirut, Lebanese historian and journalist Samir Kassir refers to the handful of families who controlled the economy up to the mid-1970s as “the consortium.” They dominated imports from the US—then the country’s major trade partner—and economic pillars such as finance, services and industry.

Members of the consortium were either directly involved in politics or enmeshed with the political elite.

Today’s system functions in similar fashion, with small groups of individuals running oligopolies in key fields of activity, where competition is minimal and returns inflated.

Such profits provide the happy few with ample financial capacity to deal with all the problems mentioned above—by hiring a host of assistants and brokers, bribing bureaucrats, or giving kickbacks to the political patrons on whom their businesses depend.

Rent extraction

Generally speaking, entrepreneurship in Lebanon is heavily constrained by a number of very high barriers to entering the market.

Communication services are among the most expensive in the world.

Basic postal services likewise: “Even with higher labor costs and taxes and stricter regulations, France and Germany have lower delivery costs than we do,” raged the CEO of a delivery company.

Trivial banking operations are outrageously priced, and hourly rates for ordinary legal counsel can easily reach hundreds of dollars.

Standard accounting fees are officially set at 5,000 USD per year, even when minimal work is required. The CEO of a social impact company described his astonishment upon the discovery: “I asked for a few quotes and they all gave me the same figure. I had no employees and little activity. I thought, ‘what a rip off!’”

Meanwhile, contracts, value added and profits all incur significant taxes, while social security contributions add at least a 20% overhead cost to salaries (despite providing staff with such poor services that many are forced to purchase private insurance anyway).

In short, costs are often similar to those in developed economies with high-functioning infrastructure, services and regulatory frameworks.

The end result is a layered landscape that leaves little space for conventional business.

At the bottom, a bulging informal economy accommodates most would-be entrepreneurs, who fail to create SMEs precisely because the entry costs are too high.

At the top sit the large corporations, who are sufficiently well-connected and profitable to consider such expenditure trifling.

Worse, top corporations have a vested interest in keeping the economy as exclusionary as it currently is, to repress the healthy competition that could change the rules of the game.

In between these extremes, small and medium-sized companies struggle. Typically, they end up being dependent on bigger fish, who patronize them by helping them survive but not thrive.

Hence many SMEs remain in a grey area where it is impossible to sign contracts with public administrations for tenders or trade with foreign partners.

Tripoli is a case in point, as home to several billionaires, a sprawling informal sector, and just a handful of SMEs—despite cheap labor, affordable industrial space and adequate infrastructure.

The great fortunes built on an otherwise thoroughly stagnant economy evoke the notion of “rentierism,” denoting economic systems where elites extract wealth from existing resources rather than generating it through productive activity.

In Lebanon, numerous rents are derived from controlling niche markets in which oligopolies ramp up the prices—as customers enjoy no alternatives. A wine merchant acknowledged: “Lebanese wines are more expensive in Lebanon than abroad, amazingly. Here they can afford to be over-priced because imported wines are themselves kept artificially expensive.” In other words, the rent is “extracted” from the purchasing power of ordinary citizens, who find it increasingly hard to make ends meet.

Just as an oil state redistributes its riches through subsidies and co-optation into the state bureaucracy, Lebanon generates a plethora of unproductive jobs that implicitly serve a similar function.

Banks are replete with people and functions that would not be necessary were absurdly archaic services to be automated.

While companies hire poorly qualified staff to pick up banker’s checks and pay the bills, administrations do as much to process them.

Across the board, inefficiencies go hand in hand with low-paying jobs meant to supplement them. In a sense, this system offers an essential social safety net by creating accessible employment.

But the argument of solidarity only goes so far: The fact that Lebanon’s unproductive economy is geared toward oligopolistic accumulation is the reason why people struggle to find suitable jobs in the first place.

The government and its international partners are right in pinpointing the crucial role SMEs must play in generating and circulating more wealth.

But that will only happen once local authorities and their external backers take steps to restrain the ferocious appetites of Lebanon’s oligarchs, by reaching an agreement on basic reforms in exchange for sustained investments.

So far, all that talk about entrepreneurship has done little more than cover up lack of action.

This piece is excerpted from a series of short essays, the Lebanese Economy Watchdog, which unpacks economic issues most critical to Lebanese citizens, from their vantage point and in accessible terms. To sign up for updates, go here.

Lebanese Elections: Clientelism as a Strategy to Garner Votes

Sami Atallah and Zeina El-Helou, respectively LCPS executive director and researcher and development consultant. March 2018

Lebanon’s adoption of a proportional representation (PR) system is seen by many as a step in the direction of fostering a more representative system to select some of the most important decision makers in the country.

Members of parliament (MP) are constitutionally endowed with the authority to collectively elect a president, issue a vote of confidence to new governments, set national policies including the budget, and hold the government accountable using its oversight function, among other duties.

Yet, the new electoral law is being undermined by some of its most central tenets, which preserve clientielistic networks through, among other factors, requiring that a preferential vote be cast and the redrawing of districts in concert with the parliament’s confessional quota.

Taking all this into consideration, it behooves us to consider those power structures and tactics that underlie our elections.

It should also be recognized that as much as the electoral law is crucial to determining the outcome of an election, electoral behavior will have an equal say on the outcome, if not more.

More to the point, how parties and candidates manage their campaigns, mobilize and persuade voters, manipulate the media, shape opinions, and buy votes are largely ignored. (The law was delayed an entire year to include a few reforms, but no reforms were discussed or considered on the law)

Many of these tricks are unknown by the wider public. (For example, a candidate must be able to deposit $100,000 in a bank: a condition that excludes most of the people in this poor economy, and this requirement was never made public)

While this article will not highlight all the methods that parties and politicians employ to win elections, it does look into the clientelistic relationship that links parties and candidates to voters whereby parties or politicians provide services or jobs to voters in return for their political loyalty.

While some people vote based on their sectarian beliefs or ideological convictions, many others support one party or candidate over another based on the services provided to constituents or the cash handed out on election day.

In fact, this provision of services and even outright vote buying goes hand in hand with the majoritarian electoral system that was in place. That is, once parties agree on how to gerrymander electoral districts to their own liking under a majoritarian system, they only need to mobilize a certain number of voters from within these districts to be elected.

PR should in theory make gerrymandering harder, particularly with large districts in which every vote counts.

Such a system would make vote buying and the provision of services much more expensive, meaning political parties would be forced to develop new strategies to mobilize voters.

However, the new Lebanese electoral law has managed to sustain some key facets of clientelism, namely the preferential vote, relaxing electoral spending limits, inflating the number of registered election delegates, and permitting charitable organizations to offer quid pro quo services during elections.

With the support of Konrad Adenauer Foundation, LCPS conducted focus groups with voters in regions across the country, taking into account gender, age group, sect, income level, and the competitiveness of the district.

Some of the key findings are synthesized here.

For one, while most participants would like to vote for parties and candidates with national political visions, most opt for existing sectarian parties out of fear of other groups.

Hence, many participants made their electoral decision out of a perceived need to protect their own community based on the myth of being threatened as a confessional group— in terms of both physical and resource-based security—by other groups.

Two, citizens expect their MPs to provide them with targeted services, jobs, and other favors, especially since state institutions have failed in designing and implementing policies that make public goods available for everyone, such as jobs opportunities, free and quality education, and universal health coverage.

MPs, on the other hand, prefer to provide targeted goods to individuals and families rather than design policies that serve those communities and regions which are most in need.

According to focus group participants, politicians give high-value goods as rewards for active, long-term support from dedicated partisans, especially those who have leverage over large groups of voters. In some instances, politicians provide services to voters with influence, even if they are not party loyalists.

High-value goods mainly include jobs and scholarships, and to a lesser extent, payments for medical care.

Political parties also threaten to deny or withdraw these services from voters who fail or cease to support the candidate or party in question, especially in areas where residents are highly dependent on one powerful party to provide employment and educational or health services.

By comparison, low-value goods such as food and petty cash are distributed to weakly affiliated and persuadable voters with limited resources and significant material needs. These goods are sometimes provided on a regular basis, particularly if the party has a strong distribution system, but appear more frequently and in greater quantity in the months leading up to elections, as a form of vote buying.

Parties enlist community leaders such as mayors and mukhtars as brokers (who happen to be tribal elders in most of the cases, especially in rural and periphery areas) to identify and approach persuadable voters in their communities for the purposes of vote buying.

It is important to note that in most cases, services are not supplied voluntarily by parties, but are demanded by citizens themselves. Parties also target large families as they have more votes to deliver than smaller ones.

The former electoral law 25/2008 made these abuses ‘legitimate’ as it stipulates under article 59 that ‘financial donations including service provision or payment of money to voters such as in-kind and cash donations and support to individuals, charity, social, cultural, family, religious organizations or other, or sports clubs and all non-public institutions shall be prohibited during the campaign period, except for those granted by candidates or institutions owned or run by candidates who have been doing so on a regular basis for not less than three years prior to the commencement of the electoral campaign.

This counter-intuitive law not only legitimizes clientelism, but also provides an advantage to long-term clientelistic-based parties and candidates over newcomers to the system.

While some contend that clientelism does provide services to citizens when the state falls short in doing so, it is argued that the state—managed by the same governing elite—is prevented from doing so, giving political parties the opportunity to manipulate the election in their favor by effectively holding voters hostage. In this way, clientelism undermines both democracy and development.

For one, the notion that citizens are able to elect their representative or hold them accountable has been undermined as a result of this clientelistic network, where now it is parties that reward or punish voters for their vote choice.

This behavior has impacted development as the political elite have no incentives to provide or ensure development for the country since they managed to be elected by buying votes and providing some services to specific groups of people in their districts under a majoritarian system.

Clientelism cannot actually improve voters’ socio-economic condition beyond dolling out some cash or favors to voters, which provides only a temporary boost in income. In fact, we argue and it should be recognized that the opposite is true, namely that these campaign strategies impoverish people by denying them services that they ought to have access to as a right.

Note: I contend that we have No political parties in tiny Lebanon: they are all funded and directed by foreign State governments. The same goes to local news media.




May 2022

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