Economic Liberalization-Business Environment 5 th Economic Freedom of the Arab World Conference Cairo, November 1-2, 2010 Mounir Rached- Vice President Lebanese Economic Association 1

Contents I. Introduction II. Ranking index III. Global ranking IV. Relative ranking in MENA V. Lebanese economy VI. Recent achievements in Lebanon 2

I. Introduction 3 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:

cont 4 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

II. Index of Economic Freedom  The index adopted by most rating groups: Fraser Institute Heritage Foundation Economic Freedom Network)  comprises: 5

1. Size of Government 6  Taxes (government revenue/GDP),  Marginal tax rates  Government spending  Transfers & subsidies  Public enterprises share in GDP

2. Legal Structure 7  Commercial law,  Security of Property  Enforcement of contracts  Judicial independence

3. Sound Money 8  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

4. Freedom to trade internationally 9  Tariffs (customs) High tariffs restrict trade and impede growth Increase prices that consumers pay for imports  Size of foreign trade  Regulatory trade barries  Capital market controls: FDI Other capital

5. Regulations of Credit, Labor & Business 10  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

III. Global ranking Few 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 11

Global cont  Most countries have a relatively low ranking in the global economic freedom index  Bahrain is ranked highest at 18 th (low scale higher ranking) 12

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 13

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 14

cont 15  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

cont 16  Lowest rating is for Korea: 179  MENA countries have lowest ratings among their peers (based on GDP)

Cont 17 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

IV. Relative ranking in MENA 18

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 19

V. Lebanon: Size of Government Rank in the Arab World (2008): 1

Lebanon: Legal Structure and Security of Property Rights Rank in MENA (2008): 15

Lebanon- Sound money Rank in MENA (2008): 3

Lebanon: Freedom to Trade Internationally Rank in MENA (2008): 11

Lebanon: Regulation of Credit, Labor & Business Rank in MENA (2008): 3

Lebanon’s Score Over Time Overall Score Size of Government Subsidy score Law & Security of Property Rights 6.1 Access to Sound Money inflation score Freedom to Trade Internationally capital controls score Regulation of Credit, Labor, and Business labor market improved

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) 26

(Cont.) Gov Consumption /Total consumption = 13.82% MENA Average = 24% Transfers & Subsidies/GDP = 7.1% MENA Average = 7.84% 27

(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% 28

Cont Trade Freedom: one of the highest scores 8.9

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 30

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) ` 31

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) 32

Achievements 33  Recapitalized banks  Improved supervision  Political impasses delay reform END