Re-globalization of macro-social responsibility
Addressing urgent social and economic imbalances
Due to a combination of emergency needs and years of efforts, Lebanon has at the beginning of the year signed off with the World Bank on a $246 million loan for implementation of an Emergency Crisis and COVID-19 Response Social Safety Net project, or Emergency Social Safety Net (ESSN) for short, voted upon in Parliament on March 12.
Following more than a decade in which the country had seen numerous proposals for reform of its antiquated national social security system and subsidy regime, the establishment of the ESSN – which had been pushed forward inch by inch by the earlier creation of a limited
National Poverty Targeting Program (NPTP) – conceptually could be a big step towards establishing a morewelfare-inclined Lebanese state. In terms of social and fiscal policies, it could be the turning point on a journey from a free-market practice to a social-market capitalist paradigm.
The background against which the emergency social program is being implemented is of course the tsunami of social challenges, namely growing poverty, losses of work and productivity, and exorbitant and still escalating inequality which have in recent months been and are still being painted in shocking colors all over Lebanese society. Giant faces of hopeless workers, both white and blue collar, have been increasingly illustrating the plight of the nation, alongside frustrated smiles of highly educated but unemployed university graduates and the growing army of destitute street dwellers who beg at virtually every stoplight and street corner.
While subsidies and rent controls have been long-standing – and much debated – components of the Lebanese political system in combination with the National Social Security Fund (NSSF) system for partial medical insurance and end-of-service indemnities of the formally employed, only a very modest social safety net
has been developed, in collaboration with the World Bank and United Nations, as late as the 2010s through the small NPTP (launched in 2011). To give an example for the laboriousness of the effort, a social action plan for the development of a SSN was released at the level of the Lebanese government as far back as January 2007 but only in January of this year, a World Bank loan agreement to fund one year of social assistance programs for needy Lebanese was signed after a long period of preparation and negotiations, as usual for such agreements.
Approved by the World Bank Group’s Board of Executive Directors and signed on January 12, the ESSN will deliver cash transfers to an estimated 147,000 households comprising nearly 790,000 individuals, which arithmetically translates into a household size typically ranging between 5 and 6 persons. For any eligible household, the aid will be accessible via a monthly stipend that is loaded onto an electronic card that can be used to withdraw cash or shop at qualifying stores. According to a World Bank press release, the monthly support will amount to 800,000 Lebanese pounds for a sample family of six, calculated as base of 200,000 Lebanese pounds per household and 100,000 Lebanese pounds per individual. Additionally, the ESSN will provide schooling assistance to 87,000 poor children. That is, if the tentative plan is implemented by the domestic forces.
The coverage of basic needs through the ESSN will by recent estimates mean a partial coverage of impoverished Lebanese households, given that the total number of individuals below the poverty line under impact of the combined Lebanese crises of 2020 has been projected by the World Bank at 1.7 million persons, meaning that 45 percent of the nominal Lebanese population are embattled by poverty. About half of them, or 22 percent of the population, are calculated by the same estimates as falling under the food poverty line.
In addition to the one year provision of cash aid, the ESSN project will “support the development of a comprehensive social safety net delivery system” the World Bank’s lead for human development in Lebanon, Jordan, and Syria, Haneen Sayed, was quoted in the ESSN press release as saying. If it works as designed, the system will be abuse-resistant, enabled for the identification of needy households through something called the Proxy Means Testing methodology, a compound poverty score that is favored by the World Bank Group for means testing eligibility of households in poverty targeting programs. (For Sayed’s article on SSN, please see Executive’s recent special report on poverty).
QUESTIONS AMIDST THE NEED FOR A FISCAL BEGINNING
Nonetheless, the prospect of having a disbursement program for the
new Lebanese poor – but administered by the well-known service ministries of the Lebanese state, with the equally notorious history of partisan political alignment of such ministries – certainly does raise serious eyebrows among local experts. “Social assistance in Lebanon has been much politicized,” says Ibrahim Muhanna, a Beirut-based actuary and pensions expert who has had many experiences in working on pension reform proposals for replacing the dated NSSF indemnity system.
In his view, so-called service ministries such as health, social services, labor, and others, have been targeted for control by political factions which used these ministries to dish out clientelistic benefits and curry favors with their partisan electorates. Additionally, he says that the actual dimensions of poverty among the Lebanese population, while very real, are difficult to assess and the mantra-like repetition of estimates that were made in the midst of last year’s economic and pandemic stresses, is not convincing.
These factors of historic corruption of politically managed social services with clientelism and of opacity of many people’s economic situation – illustrated by the Lebanese society’s tendency for ostentatious demonstrations of wealth in posh vehicles, superlavish home interiors, and showy real estate – lead Muhanna to be very skeptical and wonder if the entire poverty mitigation and cash disbursement program has the marks of a “scam” or, as externally financed undertaking, is more of a social painkiller and temporary band aid that moreover entails the danger of further entrenching attitudes of external dependency.
“It is a big issue to have a society living on handouts. You cannot really respect a society that lives on handouts,” Muhanna argues, adding that this sort of external reliance has already become habitual in the past two to three decades. “Although I hate to say this: in Lebanon it is in the blood of people to be like beggars. In the past 20 years we have been taught that the only way we can live is by begging and asking for help,” he opines, “There are many ways [the state] can alleviate pressure on [poorer people] and create jobs for them.”
Social standards for a viable polity, which in the Lebanese republic for the longest period have been organized, albeit imperfectly, under a free market paradigm with religiously rooted social balances, are severely challenged by the existential crisis of the Lebanese economy – but also by changes in societal priorities, such as increasingly less sectarian ways of living both in principle and in practice. Besides the need to reduce and ideally remove politically induced distortions of social services and subsidies from the country’s social coexistence formula, the forward-thinking question in this situation is if an ESSN arrangement can be made viable beyond the period of funding via a World Bank loan. This is because doing so requires constructing elements of a social security transfer system that includes both revenues and creation of social mobility to the benefit of people living in traps of poverty or welfare dependence.
Although the real cost of developing such a system is – by historic experience of how those entitlement and transfer dynamics proved expansive beyond expectations when these systems were instituted in developed economies during the last century – practically incalculable in the longer run and loaded with upside cost risks, conventional wisdom says that construction of social assistance and redistribution in any form hinges on activation of the tax base in combination with fiscal and structural reforms.
For expert Muhanna there is no doubt that the best way to create a viable scheme would be to start by reforming the tax system, specifically redesigning components such as income tax, inheritance tax, and property tax. “This kind of reform will hit the wealthy, and the wealthy are many, although not many in numbers but large
The actual dimensions of poverty among the Lebanese population, while very real, are difficult to assess
in their wealth,” he tells Executive.
A calculation for the possibility to achieve the solution of the Lebanese revenue problem, published by UN-ESCWA researchers by Vladimir Hlasny and Khalid Abu-Ismail https://www.executive-magazine.com/ special- report/ lebanese- povertyrates- swell- across- income- groups in Executive’s poverty report, found under a similar rationale that closing the extreme poverty gap in Lebanon could be accomplished with a one-time tax on wealth amounting to “around 1 percent of the total assets held by the richest 10 percent” in the highly unequal, and inefficiently taxed, country.
Although widely acknowledged, the survival necessity of fiscal and structural reform with a more proactive tax regime has been slower than sluggish in being addressed. For Muhanna, the lynchpin for embarking on this path with any prospect of success is international involvement and specifically the International Monetary Fund. “They should put their foot down and say ‘this is the tax regime that you need to apply’, take it or leave it,” he adds.
THE INFORMAL TIES BEHIND RESILIENCE
However, the issue of Lebanon’s social resilience and its people’s ability to navigate the crisis of 2020 entails many more aspects than can be subsumed under a state-led paradigm of fair taxation and improved provision of social services or support for the economic precariat. This has been amply demonstrated in 2020, as it was a year that juxtaposed a total breakdown of the political process and creaking political governance mechanism with the astounding reality that society and economy kept moving – badly limping at some periods, but moving along – despite constant expectations of societal disintegration and despite recurrent speculations by some that either domestic or foreign political forces were actively pursuing the failure of Lebanese democracy because of nefarious interests.
One significant component of the Lebanese polity in this regard has been the reality of remittances. While the domestic and global shocks caused a drop in remittances in the first quarter of 2020, the second quarter – prior to the Beirut port explosion – had already seen a lessening of this contraction, and by end of December, the full-year contraction of remittance inflows gave a vexing picture that after an estimated 20 percent drop in the first half of the year, the inflows recouped, despite the confessed vast loss of trust in the Lebanese banking system, and were projected by the World Bank at $6.9 billion for FY 2020, representing a year-on-year contraction of 6.6 percent. Moreover, these estimated remittances now account for approximately 36 percent of Lebanon’s GDP for the past year, which is an extremely high share both in global and in historic comparison for Lebanon.
According to data from money transfer company OMT, the local partner of the Western Union agency, about $100 million in hard cash have been flowing into the country on a monthly basis and retrieved either in greenbacks or in Lebanese pounds at the daily exchange rate of the parallel market. This influx alone, as OMT chairman Toufic said in recent interviews, meant that some 150,000 families in the country had a diaspora-based social support net at their disposal that was significantly more capacious and flexible than the World Bank loan-financed ESSN.
At an average of $300 per transfer, this kin-based system must of course be assumed to be partisan in favoring families that had the ability to send their offspring to one of the country’s private universities or at least provide them with some tertiary education and it seems unlikely that the people receiving OMT transfers would be among the extreme poor segments of Lebanese communities. Nonetheless, the contribution of the diaspora through remittances can be considered an essential part of the country’s social fabric, and while studies of remittance flows and uses in years before the sharp recent drop in GDP indicated then-problematic conversions of remitted funds into consumption, up to the level of a remittance trap, the crisis context might elevate remittances to a life-line for the so-supported families, and thus a non-governmental social safety net.
It seems furthermore appropriate to reconsider the post-pandemic
era role of the original instruments of economic safety that have been existing considerably before the fully institutional arrival of the state to the social table (the various poor law editions in the United Kingdom from the parish-level 17th support to paupers and the famous Speenhamland system to the centralized 19th century systems in the same country represented some of the early incarnations of what has been touted as state-organized social safety). Simply put, small and family based businesses for centuries have been weaving social safety nets in collaboration with religious institutions and secular communities, and these economic structures involved elements of solidarity that went beyond kinship-based altruism.
Contemporary parlance has family businesses categorized as anything from micro to small and medium enterprises that comprise the bulk of economies. In the globally distorted economics of the pandemic, concerns have been voiced in many developed countries that family businesses and small enterprises will be plunged into waves of bankruptcy during this and next year, because even if viable, they will not have the long breath of big corporations that can moreover rely on politically determined support measures which their small peers often have difficulty accessing.
Lebanon is no exception to the fact that most of the world’s economic actors are SMEs and certainly no exception to the difficulties that family businesses have in obtaining state support. As experts on the matter tell Executive, the pandemic and economic crisis in this country has highlighted once again the upside of its family businesses, meaning their social role and economic importance, as well as the downside – the existential struggles of family businesses in a country that provides next to no fiscal support to its enterprises of any size during crises, a deficiency that is highlighted by the contrast to highly developed and even many second-tier economies. OECD member countries and emerging economies have initiated trillions of dollars’ worth of fiscal support and monetary measures to alleviate the humongous economic impact related to the Covid-19 disruptions – with such financial interventions during 2020 amounting globally to $14 trillion in fiscal and $9 trillion in monetary actions as per the International Monetary Fund (IMF).
WHAT OF LEBANON’S FAMILY BUSINESS SECTOR?
In this context it can in no way surprise that the situation of the family business sector today is alarming and family businesses are in a survival fight in which they have to deal with extreme uncertainty, Josiane Fahed-Sreih, dean of management studies and the director of the institute of family and entrepreneurial business at Lebanese-American University, confirms to Executive. The pressing problems of Lebanese family businesses, according to her, extend today besides the much belabored monetary transfer and exchange rate problems to upward cost pressure from international markets, challenges of achieving revenues from weak domestic consumer markets, struggles to retain working capital, and even tax liabilities for profits that exist merely on paper.
“If companies sell products [for which they have adjusted their Lebanese pound prices upward] even
The resilience of [family] businesses, if properly harnessed, would be vital in course of an economic recovery once the wave of the crisis has crested
without profit, on their books the profitability will show at 250 percent, on which they have to pay taxes. This shown profit is not real, because all companies can do is maintain stock. The government needs to find a formula for this,” Fahed-Sreih says, adding: “Today family businesses in Lebanon are trying to survive but they are very weak. In order to survive, [they need to] hedge and strategize for the unknown that they are experiencing or that is still to come.”
According to her, not relieving these cumulative pressures on family businesses is most unfortunate and counter to Lebanon’s best economic interest, because the resilience of these businesses, if properly harnessed,
would be vital in course of an economic recovery once the wave of the crisis has crested. “Family businesses are able to regenerate, to innovate, and also to stand out at the times of crisis. It is a known advantage of family businesses that they are able to stand at the period of crisis,” she explains.
In addition to their being part of the country’s economic backbone, Fahed-Sreih credits family businesses for being embedded in their communities and fulfilling their social responsibility without much ado or special acclaim. She says that for example boards of many supermarkets and large retail organizations have in recent months been flooded with requests from local charities, independent civil society organizations, and individuals to assist them with putting together food aid packages at no or minimal profit, and have quietly complied. “I have seen a lot of help coming to society from individuals and family businesses. In Lebanon, the entrepreneurial spirit of people goes into social entrepreneurship and I see that a lot of people are helping without anything in return,” says the academic who also sits on boards of trade and retail companies.
In Fahed-Sreih’s view, it would thus be prudent for the government to facilitate ways in which family businesses can extract part of their tax dues and channel these funds into aid projects that help society directly. While acknowledging the risk of abuse of such funding instruments for public needs by some family enterprises, she says, “I am sure that family businesses will be helping in their majority, and this will become a social safety net for society. If you want to encourage this, the government in my opinion needs to waive taxes on those family businesses who will be helping [in their communities].”
As a consequence of the paradoxical experiences of crisis-ridden Lebanon, these examples of remittances and family businesses with their embeddedness in their communities can be seen as providing hints that the entire task of designing and implementing new and better social contracts in post-2020 Lebanon must be assessed and tackled from a far vaster range of perspectives than mere taxation, notwithstanding the centrality that conventional concepts of state-led society apportion to public capture of the polity via fiscal mechanisms for the funding of social assistance as well as achieving equitable redistribution. The reality of Lebanon, with its aspects of remittances and companies that are embedded in their society, in this sense reflects a many-colored need for initiation of new social contracts and structural reforms from a higher perspective of this polity’s best interests and power of self-determination than either the self-interests of vested political stakeholders in the country or the international order of power with its embedded self-interests.
A STRESSED AND IMBALANCED GLOBAL PICTURE
Moreover, the global dimension of the problems of the existing social contracts and the need for their constant but tender development cannot be ignored. This global dimension notably includes the worldwide growing debt mountain, the need for climate change rollback, and the need to manage labor markets from a maximum sustainable work and occupation perspective. The past decade, with an added and perhaps pivotal push coming from the pandemic experience, has certainly witnessed the rise of new impulses in several G7 economies to address the increasingly pressing societal problems.
To grasp the importance and appeal of such impulses, one does not have to recall the wide arc of civil society concern from the Occupy Wall Street anti-inequality movement to the climate protest movement Fridays for Future but can consider staid central bankers and their policy adjustments. Just at the start of 2021, for example European central bankers – having acknowledged so-called green swan risks of climate havoc
A resilient social safety net and fiscal transfer system is as direly needed as a new social contract that has been overdue for years if not decades
back in early 2020 – are in the process of reviewing their policy frameworks in favor of “greener” guidelines and practices. In the United States, Federal Reserve chair Jerome Powell delivered a speech on February 10 in which he lamented that America is presently a long way from a strong labor market that delivers “substantial economic and social benefits.” According to him, the pandemic has sharply reversed a rise in the prime-age labor force participation rate (all between 25 and 54 who are in the workforce or actively seeking jobs), which had been improving since 2015. Powell intoned that the country’s post-WWII message, of declaring full employment as broad objective, is an important economic and social mandate for the postpandemic period, emphasizing how the Federal Reserve has over the past year adjusted its longer-run goals and monetary policy to say that maximum employment is indeed a “broad and inclusive goal.”
Moreover, there have been and are gathering signals from around the developing world that the precarious imbalances of labor and capital, of markets and government, of private wealth and public goods, of finance and real economy, of male and female leadership, are nearing a point where a more constructive