How the Lebanese economy cannibalizes itself
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.
The ideal of the Lebanese entrepreneur nonetheless pervades Lebanon’s economic landscape. The central bank has dedicated over 400 million USD 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 LBP, or slightly over 3,000 USD. 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 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 comedic 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.”
Moreover, 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 five dollars 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, 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.
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, they 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 cooptation 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.