James Carty l Palladium - Apr 12 2021
Addressing Corruption in Lebanon to Unleash the Power of Small Businesses and Drive Economic Growth

Source: LEEP

James, the LEEP Team Leader, holds an MPA from the Harvard Kennedy School and has over 15 years of experience in advising governments around the world on business environment, and competitiveness reform.

Lebanon's protracted and painful political and economic crisis has been going on for over a year and an end is still not in sight. The poverty rate has increased from 30 per cent to an estimated 60 per cent, the International Monetary Fund reported a 25 per cent contraction in the economy in 2020, and emigration – legal and illegal – has soared.

The crisis was triggered by corruption, mismanagement, and a fundamental loss of trust in institutions in the country. However, its effects have been exacerbated by the challenges of dealing with a global pandemic and the after-effects of the catastrophic explosion in the Port of Beirut on 04 August, 2020.

Small and medium enterprises (SMEs) will be fundamental to any recovery from this disaster. SMEs represent about 90 per cent of businesses in Lebanon and employ 50 per cent of the workforce. As with many global economies, they are also the drivers of growth and innovation.

Through Palladium's work on the Lebanon Entrepreneurship and Employment Program (LEEP), we have seen the energy and optimism of hundreds of entrepreneurs who are investing to grow their businesses despite the turmoil around them. These businesses have come from across the country and from many different sectors, from traditional agricultural producers to sophisticated digital start-ups, they all see opportunity and a future for the country beyond the current crisis.

SMEs are the Key to Recovery

However, to unleash the sector's true potential and enable SMEs to drive the recovery of the country, widespread reforms to improve the overall business environment are desperately needed.

The LEEP team spent the past six months talking to SME owners about their challenges while doing business and what reforms would help them overcome these challenges. The discussions were wide-ranging and covered a host of issues, from crumbling and inadequate infrastructure and overly bureaucratic processes and procedures to the lack of support for SMEs, and of course, the devastating effects of the economic and financial crisis (including hyperinflation, capital controls, etc.).

Much of the discussions focused on the difficulties of dealing with the government. The majority of SMEs in our survey reported that they spend more than a week every year dealing with government bureaucracy.
But no matter the circumstances and the business or industry, almost all of the challenges raised came down to issues of corruption and a lack of transparency. Over 80 per cent of respondents reported corruption as an obstacle to the operations of their business, with almost 55 per cent viewing it as a severe obstacle.

We heard countless stories of the pervasiveness of corruption and its negative effects on small businesses: competitors who bribed officials to avoid compliance with environmental protection laws and zoning restrictions; business lost because customs officials held up crucial shipments in the port to punish the business owner for refusing to pay a bribe; hours wasted and a small fortune spent in legal fees trying to navigate the mysteries of incorporation; export opportunities lost because no one knew exactly which permits were needed and who was supposed to sign them.

While LEEP hasn't experienced any incidences of corrupt behaviour impacting the program, every company we spoke to had a similar story of graft. This graft is even more damaging to small businesses than to larger companies because they lack the resources to manage – the political connections, the staff to wait for hours in line, or the resources to cover the additional costs of simply doing business in such an environment.

"The majority of SMEs reported that they spend more than a week every year dealing with government bureaucracy."

Addressing and Eliminating Corruption

The good news is that there are relatively cheap and easy fixes to these problems that have proved effective in many similar middle-income countries grappling with the legacy of corruption.

Simplify the process of any interaction with government, publish all relevant regulations in a clear, easily understood and searchable format that everyone has access to, disintermediate as many officials as possible and put as many interactions with government online as possible. The challenge is that this requires both political will and the resources – expertise, equipment and, crucially, training – to accomplish.

Where there is political will, results can be achieved fast. Following the Rose Revolution, Georgia faced similar levels of corruption, but its reformist government launched a wide-ranging and effective anti-corruption campaign and committed to comprehensive business environment reforms, slashing bureaucracy and significantly reducing the opportunities for corruption. The results have been spectacular, and Georgia moved from 124th in Transparency International's corruption perceptions index in 2003 to 56 in 2020 and from 100th in the 2006 Doing Business rankings to 7th in 2020.

As donors and international financial institutions, such as the International Monetary Fund, the World Bank, and the European Bank for Reconstruction and Development look to help Lebanon out of its deep crisis, they must continue to hold the government to account and insist on rapid, comprehensive and effective reforms to stamp out corruption and improve transparency.

These reforms should focus on those areas that will improve the business environment for small and medium enterprises –customs, commercial regulations, employment law, bankruptcy law, and reforms to the court system. In doing this, they will help to unleash the entrepreneurial energy of a remarkable country and put it on the track to recovery.

The Lebanon Enterprise and Employment Programme (LEEP) is implemented by Palladium and funded with UK Aid from the British people. LEEP has been supporting small- and medium-sized businesses in Lebanon through funding and business advisory support since 2017. For more information, visit: http://leeplebanon.com/