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Economic Liberalization-Business Environment
5th Economic Freedom of the Arab World ConferenceCairo, November 1-2, 2010
Mounir Rached- Vice PresidentLebanese Economic Association
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Contents
I. Introduction
II. Ranking index
III. Global ranking
IV. Relative ranking in MENA
V. Lebanese economy
VI. Recent achievements in Lebanon
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I. Introduction 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:
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cont
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
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II. Index of Economic Freedom The index adopted by most rating groups:
Fraser Institute Heritage FoundationEconomic Freedom Network)
comprises:
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1. Size of Government Taxes (government revenue/GDP), Marginal tax rates
Government spending
Transfers & subsidies
Public enterprises share in GDP
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2. Legal Structure
Commercial law, Security of Property Enforcement of contracts Judicial independence
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3. Sound Money
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
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4. Freedom to trade internationally
Tariffs (customs) High tariffs restrict trade and impede growthIncrease prices that consumers pay for imports
Size of foreign trade
Regulatory trade barries
Capital market controls: FDI Other capital
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5. Regulations of Credit, Labor & Business
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
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III. Global rankingFew 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
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Global cont
Most countries have a relatively low ranking in the global economic freedom index
Bahrain is ranked highest at 18th
(low scale higher ranking)
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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
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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
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cont 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
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cont
Lowest rating is for Korea: 179
MENA countries have lowest ratings among their peers (based on GDP)
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Cont
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
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IV. Relative ranking in MENA
2002 2003 2004 2005 2006 2007 20087
7.2
7.4
7.6
7.8
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8.2
Top Economic Freedom Achievers in the Arab World (Fraser Institute)
BahrainJordan KuwaitLebanonOman Qatar Fi
nal G
rade
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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
V. Lebanon: Size of Government
2002 20080.01.02.03.04.05.06.07.08.09.0
10.0General government consumption spending as a percentage of total consumption
Transfers and subsidies as a percentage of GDP
Government enterprises and investment
Top marginal tax rate
Year
Gra
des
Rank in the Arab World (2008): 1
Lebanon: Legal Structure and Security of Property Rights
2002 20080.01.02.03.04.05.06.07.08.09.0
10.0
Integrity of the legal system
Regulatory restrictions on the sale of real property
Legal enforcement of contracts
Year
Gra
des
Rank in MENA (2008): 15
Lebanon- Sound money
2002 20080.01.02.03.04.05.06.07.08.09.0
10.0
Money growth
Standard deviation of inflation
Inflation: Most recent year
Freedom to own foreign currency bank accounts
Year
Gra
des
Rank in MENA (2008): 3
Lebanon: Freedom to Trade Internationally
2002 20080.01.02.03.04.05.06.07.08.09.0
10.0
Taxes on international trade
Black-market exchange rates
Capital controls
Year
Gra
des
Rank in MENA (2008): 11
Lebanon: Regulation of Credit, Labor & Business
2002 20080.01.02.03.04.05.06.07.08.09.0
10.0
Credit Market Regula-tions
Labour Market Regula-tions
Business Regulations
Year
Gra
des
Rank in MENA (2008): 3
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Lebanon’s Score Over Time2002 2008
Overall Score 7.8 7.6
Size of Government 8.7 8.4 Subsidy score
Law & Security of Property Rights
6.1 6.1
Access to Sound Money
9.6 8.8 inflation score
Freedom to Trade Internationally
7.3 6.8 capital controls score
Regulation of Credit, Labor, and Business
7.2 8.0 labor market improved
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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)
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(Cont.)
2007 1. Gov Consumption /Total consumption =
13.82%
MENA Average = 24%
Transfers & Subsidies/GDP = 7.1%
MENA Average = 7.84%
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(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%
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Cont. 3. Trade Freedom: one of the highest scores
8.9
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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
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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) `
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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)
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Achievements
Recapitalized banks
Improved supervision
Political impasses delay reform END