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Report calls for bigger role for public sector to boost Lebanon's economic development

15 September 2010

BEIRUT: Lebanon needs to achieve a greater visibility of the public sector in order to boost economic development in the country, a renowned economist said on Tuesday.

“A reorientation toward a greater visibility of the public sector for development in Lebanon would be definitely important for the long term. However, this, of course, is difficult due to the geopolitical constraints,” AUB professor of economics Marcus Marktanner told The Daily Star during the launch of the Trade and Development Report (TDR) 2010 at the UN headquarters in Beirut.

Moreover, he added, Lebanon has a very small fiscal space, which he said was due to macroeconomic mismanagement over the past couple of years and the fact that a lot of the budget was used for the debt repayment.

Meanwhile, he praised Lebanon’s ability to avoid the negative repercussions of the global financial crisis. “It turned out that Lebanon has emerged as a safe haven for investments,” he said. “A lot of money was flushed in to Lebanon so the country is basically extracting what is called a geopolitical rent.”

Although the country was lucky to benefit from the recent crisis, Marktanner said that in many ways Lebanon has an unlucky fiscal environment.

Marktanner also said that money currently flowing to the country must be used for sustainable development. He believes that Lebanon needs to stabilize aggregate demand and has a lot to learn from the report.

TDR 2010 is a review of the implications of global economic interdependence and recent trends in the world economy from a trade and development perspective. It examines the potential impact on developing countries of macroeconomic policies and ongoing adjustments in major economies as well as in financial and primary commodity markets. In particular, the report considers the role and design of countercyclical policies to overcome the global economic crisis.

Marktanner summarized the report by giving a presentation of the main ideas. He started by saying that the crisis is still very fragile. “The report argues that the biggest risk is the premature termination of fiscal stimulus for the sake of balanced budgets which may jeopardize recovery and lead to debt deflation,” he said.

In this aspect, the report placed a great importance on the fact that any withdrawal of a stimulus policy seems rather premature, since in many countries private demand remains fragile, having only partially recovered from its trough so far, and with no sign of even approaching its pre-crisis level.

It also added that a stimulus withdrawal risks undermining the incipient global recovery and raises the spectre of a double-dip recession that could push the global economy into a vicious circle of debt deflation.

With fiscal stimulus measures petering out and systemic shortcomings such as insufficiently regulated financial markets and global current-account imbalances still in place, growth rates in most countries will probably decline again in 2011, the study predicts.

Failure to coordinate policies at the G20 level carries the risk of such imbalances re-emerging, especially among developed countries, the report says.

The report also highlights the dangers global trade imbalances. Marktanner said that as global trade volumes decrease, export-oriented countries experience income leakages that need to be offset by stimulating domestic demand.

“When it comes to the development of the trade volume there was a sharp decline in trade activity on the global scale especially in the year 2009 but it seems that the worst is not behind us, and the latest data on trade development shows that trade is actually recovering again but it is also clear that the recovery is still fragile and vigilance is important,” he added.

Meanwhile, the report stated that world trade is estimated to have fallen by more than 13 percent in volume in 2009.

TDR 2010 emphasizes the need for countries to give a bigger priority to both domestic consumption and domestic investment. Moreover, it said, in regards to aggregate demand, the state has to play a bigger role in the promotion of employment and social mobility.

“The government should increase its spending on infrastructure like transportation and communication systems, social safety nets such as healthcare, education and social system programs to the most vulnerable, as well as investments in the public administration reforms and the promotion of collective bargaining mechanisms between employers’ organizations and employees,” said Marktanner.

He added that empirical evidence shows that job creation depends not on lowering prices of factor labor relative to factor capital, but on a country’s productive capacity, according to the report.

“If you create a virtuous wage productivity cycle, the labor income share stays always high, and aggregate demand keeps on steadily increasing while this will also avoid price distortions on the labor market,” he said.

The report states that emerging market economies, especially in Asia and Latin America, are leading the recovery; some achieved double-digit growth rates in the first quarter of 2010. They had avoided large external deficits and had accumulated significant international reserves before the crisis, it said. As a result, they were able to contain rises in unemployment during the crisis and were able to achieve rapid recoveries in domestic demand, it added. With trade volumes restored to their pre-crisis levels, Asia’s GDP is expected to rise by almost 8 percent this year, while Latin America’s is forecast to grow by 5 percent, according to TDR 2010

By contrast, recovery has been weak in the transition economies of central and eastern Europe. Prior to the crisis, these countries had often run huge current-account deficits and had depended heavily on net capital inflows. This has since been exacerbated by restrictive macroeconomic policy responses to the crisis, often under IMF-led programs.

African countries were less directly affected by the financial turmoil, since they are much less integrated into international financial markets than other developing regions, the report notes. While the whole of Africa is expected to grow at a rate of 5 percent in 2010, growth will be closer to 6 percent in sub-Saharan Africa (excluding South Africa).

In developed countries, as in some emerging market economies, immense financial rescue packages prevented the collapse of the financial system, while supportive fiscal and monetary policies compensated for sluggish private demand. Consequently, most developed countries returned to positive growth rates between the second and fourth quarters of 2009. Yet the pattern of the recovery is very similar to that of imbalanced global demand growth during the build-up to the crisis, the report says.

© Copyright The Daily Star 2010.