Living on less

MANAGING AUSTERITY IN LEBANON

Managing austerity in Lebanon

in the past month, the Lebanese have fallen into collective anxiety, dreading the consequences of the na cabinet and is currently awaiting Parliament’s approval. The promise of budget cuts across public sector institutions, including decreased compensation and rampant in various manifestations. When Banque du Liban (BDL), Lebanon’s central bank, was forced by a worker’s strike to stop transactions for a painful two days during which transfers and check clearance across the country were not possible, lines formed outside ATMs. As port authorities raised the specter of suspended imports because of another strike (the

most impactful of which is gasoline), worried locals waited at gas stations. Lebanon’s legal system shut down for two weeks due to a strike by judges during which no courts were held, angry crowds of army veterans and public school employees took to the streets, and the media fed on fear mongering.

While there’s no doubt Lebanon must implement billion national debt, no one wants to carry the weight to corruption for almost three decades. In the past, the government had fought debt with more borrow - nancial burden on future generations. This option is

no longer available, and this reformist budget ushers the country into a time of austerity. The Lebanese - sible for their own long-term good.

LESS IS MORE FRIGHTENING

Having less to live on will undoubtedly force the Lebanese to pick up new habits. In order to learn new behaviors to adapt to tougher times and make do with means the public needs a mental adjustment that includes switching from a mindset of entitlement, to one that looks at every cent as a luxury. “Even under normal conditions, people who are subjected to personal dif to live within their new means,” says Said Elfakhani, associate dean for programs at the Suliman S. Olayan School of Business at the American University of Beirut.

The problem is that people intuitively shudder at - this [fear] is human nature,” Elfakhani says, adding that, “[the Lebanese] are a fun-loving people—we like to spend, live well, dress well, throw parties. But economic conditions force us to change our behavior.”

Part of the fear is rooted in the fact that many Lebanese have lived in tough times during the Lebanese Civil War. Some point to neighboring Greece, which went through its own period of austerity in recent years. “Even though many people say [the case of] - pare, they had riots, they shook the system, and still measures were taken,” Elfakhani says. “People [accepted] them for a couple of years, there was a temporary economic shrinkage, but now they are starting to bear the good fruits of their years [of austerity].” He also argues that as Lebanon has been in a slump for some time, these measures won’t make conditions much worse than they already are—but they will ben

Now Lebanon’s leaders must somehow manage changing expectations so that people accept new measures without falling into despair; thoughtfully - ingly painful measures is the way to move forward. Fadi Makki, founder of Nudge Lebanon, a non-gov - ioral insights to the policy challenges that Lebanon faces, suggests that policymakers use behavioral science to strategically communicate about new policies in order to counter human nature’s bias toward Makki explains. “This means people don’t necessarily process [what is happening] and don’t act in their own right now.” Makki argues that public sector institutions should focus on how austerity measures are linked to to keep hope alive in their messages to the public.

To a rightfully cautious people that already has widespread mistrust in its government, these potentially dangerous suggestions may sound like the encouragement of more lies. To Makki, “it’s not manipulation, but how to communicate the message.”

POWERING THROUGH THE TOUGH TIMES

In times of austerity, behavioral science research shows people tend to spend less, creating non-positive brands, trade, etc. To Elfakhani, short-term consequences of the reformist budget, with increased taxes and - may increase and businesses won’t be able to expand.

- mium segment, will undoubtedly fall on hard times, other so-called inferior products will thrive as more demand for them increases. Many companies will be forced to refocus in order to survive. Some international brands in Lebanon already operate on the strategy of simply sustaining a presence in Lebanon,

“We will not stop consuming, but we will con when there is a recession people purchase less pricey products,” Elfakhani predicts. “People will accept cheaper and lower-quality products, such as secondhand cars. They will go to cheaper restaurants—they will not stop going out. Even those who [had been] getting illegal salaries—they too spend money in the economy.” He also notes that there is a very wealthy segment of the country whose spending patterns will

HELPING PEOPLE HELP THEMSELVES

On the other hand, Makki says the public sector in in general, but especially in the current situation, explaining that leaders need to better understand and work with human biases—such as the fact that most people say they would like to do, and what they ac policies and working on human biases to complement traditional methods of policymaking can be

People tend to save more during tough times in general, but intention-action gap can get in the way— this is called social norms in behavioral sciences.

Makki points out that one area where these insights could make a big impact is in improving debt collection among the public. Giving an example of some innovative methods that have worked recently in Lebanon and abroad, he reveals that explaining to people that they are part of a minority who are not paying their bills can yield positive results. “It’s not just about telling people [to pay their bills] but also applying behavioral science and seeing what has worked elsewhere, where violations are less and people comply more,” Makki says.

HOPE IN THE LONG RUN

Economic and business cycles are the norm, and while Lebanon seems to be in a downtrend at the moment, Elfakhani is optimistic that in the long-term things will start picking up. “If we tighten belts now, But it will pick up,” he argues, explaining that theoretically the government should borrow less, leading to debt is issued at 1 percent interest, this will reduce the country’s general interest rate gradually. If that hap from banks to expand their businesses, which means less unemployment, more growth.”

Elfakhani’s positive hopes for our future, much like that of Lebanon’s political class, rest in CEDRE and the prospect of an oil and gas sector. “I’m not that worried about the budget cuts this year under one condition only—if we start receiving CEDRE funds,” he says. “If we can match the reduction in government nothing changes, in aggregate.” But he admits cer these reforms.

On the whole, we cannot deny that there are tougher times ahead. But, according to Makki and Elfakhani, these will lead to better times. “[Nudge Lebanon] is here - ence, otherwise we wouldn’t exist,” Makki says.

Elfakhani concludes that he is still relatively positive about the long-term future of Lebanon. “I believe Lebanon will survive the one to two year slow economy, as there are abundant economic opportunities ahead of us. We need to trust ourselves, while holding our politicians at check for performance and loyalty.”