Restoring Post-War Lebanon

On October 5, 2006, the Saban Center for Middle East Policy held a policy luncheon to discuss the challenges and opportunities of Lebanon’s reconstruction in the aftermath of the recent war between Israel and Hizballah. Carlos Pascual, Vice President and Director of Foreign Policy Studies at Brookings, and Mark Ward, Senior Deputy Assistant Administrator for Asia and the Near East, offered their proposals and perspectives on the basis of their findings from recent, separate trips to Lebanon. Martin S. Indyk, the Director of the Saban Center, chaired the event.

Pascual began his presentation by saying that he had left Lebanon surprised by both the unity of the Lebanese people, reflected in the non-sectarian response of Lebanese society to the war and the post-war Israeli blockade, and the sense of opportunity that was mostly driven by a perception of the strength of local capacity.

Pascual commended the Lebanese Minister of Finance, Jihad Azour, and the Governor of the Banque du Liban (the central bank), Riad Salameh, for their efforts in keeping the Lebanese pound stable, despite the $2.5 billion of capital flight that resulted from the conflict, and for their restraining of consumer price inflation. Saudi Arabia and Kuwait were also given credited for initially depositing $1.5 billion into the Banque du Liban to bolster its gross reserves.

According to Pascual, Lebanon faces challenges of three kinds: the first consists of the near-term humanitarian requirements and economic recovery; the second is the mid-term social, economic, and physical infrastructure rebuilding that is required; and, the third is that of long-term structural and financial reform. Stabilization and reconstruction requirements, Pascual said, are estimated to total around $5.1 billion. However, Pascual believed that the true financial needs will actually be much higher than the current estimates.

On Lebanon’s first challenge, Pascual underscored the importance of urgently putting in place basic resources for shelter, water, electricity, schools, and some aspects of job creation. In Pascual’s assessment, based on the number of Lebanese families that were displaced, $600 million is necessary to fund near-term humanitarian and economic recovery programs.

To finance the rebuilding of social, economic, and physical infrastructure, Lebanon, according to Pascual, will need no less than $3.5 billion. Pascual described in detail the level of destruction in southern Lebanon and in the southern suburbs, highlighting the needs of the population in these areas.

Pascual argued that it was important to think about reconstruction in broader terms and to keep in mind the dashed expectations of the Lebanese after the 1975-90 civil war. He called for a break from previous corrupt reconstruction methods that had been undertaken by the Lebanese government.

As a result of the war and the blockade, the Lebanese economy, Pascual maintained, was estimated to have moved from what was a pace of 6% real GDP growth to stagnation. According to Pascual, an expected primary budget surplus for 2006 has turned into a primary deficit, forecast at around $1.6 billion.

In Pascual’s view, the reconstruction of the Lebanese economy is not sustainable unless there is a serious commitment by the Lebanese government to restructure its $41 billion stock of public debt (the highest in the world in per capita terms). In addition, the Lebanese authorities have to move ahead with reform of the electricity sector, which is subsidized and so imposes an extra burden on the public purse.

Pascual then surveyed the international community’s financial pledges to Lebanon, arguing that there is still a significant gap between commitments and Lebanese needs. He also faulted the United States for pledging too little.

Regarding the military aspect of the reconstruction process, Pascual urged the United States to adequately assist the Lebanese Armed Forces (LAF) arguing that the needs and challenges of post-war security for Lebanon remain substantial.

One of the most important challenges in the reconstruction process, Pascual stressed, is the basic principle of using resources in a manner that will strengthen the capability and capacity of the Lebanese government. Pascual reasoned that resources should enable the Lebanese state to reach out to the Lebanese people and demonstrate that it can help provide an environment that addresses their basic needs, ensures their security, and allows them to invest in their economy and society to promote growth.

According to Pascual, political difficulties in Lebanon have also taken their toll on the reconstruction process. Pascual explained this aspect of the process by analyzing who was administering the resources and on what basis they were doing so. The Lebanese government, Pascual asserted, was adopting some policies that might superficially make sense, but that might prove to be highly problematic. According to Pascual, some of the policies need to be rationalized. By contrast, Pascual singled out the banking system and the non-governmental organization (NGO) community in Lebanon as important assets in the process of reconstruction.

Pascual urged the United States and the international community to consider some creative, though non-urgent, recommendations for Lebanon. These include the development of an independent fund that can support feasibility studies in Lebanon and the establishment of public-private partnerships among Lebanese to address issues of transparency and corruption.

Pascual concluded by addressing the issue of the perceived challenge posed by Hizballah’s role and presence in south Lebanon to the international community’s assistance efforts. In his view, there are essentially two options for the international community: the first alternative is to work with the Lebanese government and try to find effective means to channel resources using NGOs (initially as proxies) and the banking system. The second, evidently less acceptable, alternative is to give in to the impression that the only actors capable and committed to effectively addressing the needs of the Shi’ah community in Lebanon are Hizballah and its proxies.

Ward also serves as the co-chair of United States Agency for International Development’s (USAID) new Task Force for Lebanon. He began by stressing the importance of U.S. President George W. Bush’s private sector initiative for Lebanon, which he saw as an encouraging new U.S. government approach to foreign aid. Ward voiced optimism about the future, having traveled to Lebanon with three enthusiastic chief executive officers (CEO) from the private sector delegation. The private sector delegation, Ward explained, was committed to looking for long-term solutions in Lebanon, rather than just raising money.

Ward then talked about the contributions of USAID during and after the Lebanon crisis. These included the mobilization of a disaster assistance response team which was in charge of providing basic services to the Lebanese population in Beirut’s suburbs, the Beka’a Valley, and in a number of regions in the south including Tyre and Nabatiyeh.

Ward went on to explain how USAID had to take into consideration the sensitive issue of ensuring that it was not funding Lebanese organizations that had links to foreign terrorist organizations. To that end, USAID initially focused exclusively on funding international NGOs and UN agencies that have been working in Lebanon for a long time, as such agencies knew which local organizations USAID could partner with.

Following the relief phase, Ward said that the U.S. government turned its attention towards the need to rebuild roads and bridges, rehabilitate schools, support housing reconstruction, remove unexploded ordnance, and help with the oil spill cleanup. The latter is particularly important to the tourism sector, which is Lebanon’s main foreign exchange earner.

Instead of focusing its efforts on the physical infrastructure and the healthcare system, USAID has worked on stimulating the Lebanese economy and on creating jobs in the agricultural sector, business, information, communications technology, and tourism sectors. USAID has also invested heavily in higher education by providing scholarship funds to the four American universities that operate in Lebanon. Finally, USAID has worked on enhancing municipal capacity and on coordinating with civil society groups on issues of transparency and accountability.