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Introduction

The Development Challenge

Although the civil war ended in 1991, the confessional, regional, feudal, political and cultural frictions that caused the war remain. The political accommodation imposed by Syria at Ta'if, in 1989, produced an executive power-sharing troika based on confession, as is parliamentary representation. This has led to government by consensus that makes bold decision-making and policy reform difficult. Corruption is endemic, though the current government has made efforts to curtail the worst abuses. During the period 1992-1998, government efforts were focused primarily on massive reconstruction of infrastructure and utilities, both to reestablish the basic needs of society and to rebuild the economy. However, little was done in terms of economic and administrative reform or in support of industry, agriculture, services or the social sectors. Physical reconstruction has been successful, though costly, soaring public domestic debt, by 1999, soared to $18 billion, 120% of GDP. Also during this period, economic growth rebounded, until 1996, but slowed again, in 1999, due to a mild recession. The new government, inaugurated in late 1998, has taken appropriate austerity and modest structural reform measures, and is in regular consultation with the IMF. A mixed blessing for the Lebanese economy has been a continued high investor demand for Lebanese issued Eurobonds and treasury bills. Unfortunately, this demand has been driven by the high interest rates the GOL must pay.

Prior to the war, Lebanon enjoyed a burgeoning economy, increasingly based on services, banking and tourism, with some light industry and a relatively stable agriculture sector. Sustained economic growth had created a large middle class, and the demographics of Lebanon were increasingly reflective of a more developed country. The war and its effects destroyed the tourism sector, severely depressed industry and agriculture, and facilitated the slow extinction of the middle class. The small middle class who remains continues to shrink, and this trend is exacerbated by emigration. Though per capita income currently exceeds $5,000 per annum, this number is highly skewed by the disparity in income distribution. However, the economy has some bright spots. Banking has enjoyed a substantial recovery, and light industry a modest one. Tourism has rebounded modestly and is expected to continue to grow as more hotels are rebuilt. The services sector is generally strong. And even though economic growth has stagnated, inflation has been maintained at modest levels and the currency is stable. Agriculture remains the most depressed sector contributing only 12 percent of GDP, but with perhaps 40 percent of the population dependent upon it.

During the war, the environment suffered, and has experienced increased pressure from unrestrained residential and commercial construction in most areas of the country. Perversely, some areas have been preserved due to continuing conflict, displacement, or benign neglect. Pollution of water resources is a major problem, as is urban air pollution, mostly from automobiles. Nevertheless, with the exception of the areas subject to urban sprawl, most of the environmental damage that has been sustained is reparable if measures to mitigate are taken now.

Although the Syrian presence and the strictures of the Ta'if accord do not lend themselves to dynamic reform, progress is being made. Municipal elections, held in 1998 for the first time in 35 years, have produced dynamic local governments that should prove to be an element for positive change. Lebanon enjoys a free press, and political debate is remarkably open given the political climate. The Government is under increasing pressure to institute reforms, and recent polling by USAID finds a general and strong consensus to stamp out corruption and institute administrative and economic reforms.

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