Ziad K. Abdelnour is a partner with Continuum Capital, Inc., a privately held investment and merchant banking firm in New York City.

A potential partnership exists between the State of Israel and the Republic of Lebanon that could turn the Middle East upside down and create an extremely attractive emerging market. But this partnership will take place only if circumstances are right, and that includes support from Americans.

LEBANON'S ECONOMIC REBIRTH

Lebanon's macroeconomic development over the past two decades falls into two eras. In the first era, 1975-90, Lebanon's civil war raged and the country was occupied by Palestinian, Syrian, and other Arab forces; there was also a de facto partition of Lebanon. The occupation resulted in more than 150,000 dead, over 300,000 wounded, and extensive destruction of physical capital and basic infrastructure, and led to a major dislocation of markets. Unable to collect taxes, the central government lost control of its funding base, which led to domestic public debt and a substantial weakening of the government. High-skilled labor and professionals fled the country. Real income and labor productivity declined. The legal system was severely disrupted.

In the second period, 1990 to the present, real attempts at economic stabilization have been made. Etudes et Consultations Economiques, a highly respected Lebanese consulting firm, estimates that in the period 1990-93, Lebanon's economy displayed the following features:1

  • GDP rose steadily, from $2.672 billion to $5.920 billion.
  • Balance of payments went from a deficit of $402.1 million to a surplus of $1.137 billion.
  • External debt decreased from $535 million to $375 million.
  • Inflation plummeted from 116 percent to 9 percent.
  • Private-sector deposits more than doubled, from $4.47 billion to $9.21 billion.
  • Deposits of Lebanese pounds surged from $1.4 billion to $3 billion.
  • Imports more than doubled, from $2.373 billion to $4.954 billion.
  • Construction permits jumped from 2.2 million square meters to 13.4 million square meters.
  • In 1993, Lebanon was the Middle Eastern state with the highest growth rate, 7.1 percent. Like a phoenix, Lebanon has emerged from the ashes and is steadily regaining its former vitality.

With these economic indicators all pointing to a strong recovery, investor confidence is clearly on the rise. Lebanon is no longer a high-risk country for investment. Confirming this point, the World Bank in 1993 provided a $175 million loan to Lebanon, with more expected soon. In September 1994, Merrill Lynch issued $400 million in Eurobonds, and these were fully subscribed. In another measure of investor confidence, Euromoney in 1992 placed Lebanon 90th among 170 countries in terms of credit risk, and moved it up to 69th in 1993.2

A partnership of government and private enterprise is currently rebuilding Lebanon. For its part, the government established the Council for Development and Reconstruction (CDR), a public-sector entity reporting to Prime Minister (and multibillionaire) Rafic Hariri and his Council of Ministers. The CDR's National Emergency Recovery Program provides basic quality-of-life services to the people of Lebanon; it has also established Horizon 2000, an ambitious ten-year plan to rebuild the country's infrastructure and develop its economic and social life. The program covers the years 1993-2002 and will cost some $11 billion. Private funding is mainly channeled through the Societé Libanaise pour le Developpement et Reconstruction du Centre Ville de Beyrouth, or SOLIDERE, a joint-stock company created to rebuild Beirut's central business district.

The famed Lebanese appetite for good living reasserted itself with the war's end. Beirut, which was twenty years ago a cosmopolitan metropolis with a French flair and a banking hub that rivaled Geneva, is beginning to reemerge. As hotels and other institutions rise from the rubble, international investors are getting involved. Saison of Japan is reopening the six-hundred-room Phoenicia Hotel in 1995, twenty years after its closing. Ramco Trading & Contracting, mainly based in Saudi Arabia and Spain, has just completed an apartment building, is refurbishing the Mayfair Hotel, and is building a $200 million, thirty-story complex. Lebanon's once-famous casino is slated for reopening, while new bank and business offices open almost daily. The banks have revamped their computer systems to handle the influx of money, mostly in U.S. dollars (the preferred currency), into Lebanon. Long-term industrial investments are also picking up, another sure sign that Lebanon has stabilized and is moving forward domestically and internationally.

To facilitate this process, Lebanon has reestablished the National Investments Guarantee Corporation to protect against war and political risks. In addition, Lebanon has recently been integrated into the Multilateral Investment Guarantee Agency, which provides a more global approach to protecting investors' assets. In summary, Lebanon today offers excellent opportunities for overseas investors.

LEBANON AND ISRAEL

Though roughly similar in size, geography, human skills, and being founded as a state by non-Muslims, Lebanon and Israel have historically had little to do with each other. It's time that distance comes to an end, partly because each needs the other; and also because it is in the best interests of democracies to work together.

Lebanon's need. Until 1975, Lebanon acted as the quintessential cultural and economic bridge between the European West and the Arab East. The Egyptian revolution in 1952 and Gamal Abdel Nasser's subsequent socialism allowed Beirut to replace Cairo as the financial center of the region. The city then rose to prominence mainly due to its economic freedom; financial dealings were entirely free of restrictions and could take place in every currency. Anyone could transfer any assets, including gold and other precious metals. Banking operated under laws of secrecy more strict than those of Switzerland.

The civil war of 1975-90 ended Lebanon's role as intermediary, but the year 1975 also marked the rise to prominence of computers in finance; the Lebanese now find themselves with outmoded skills. Also, the decline of oil revenues and the collapse of the Soviet bloc means that capital flows in new directions. The Lebanese, accordingly, must redefine their place in the world. One way of doing so is by applying their best skill: raising capital. In fact, Lebanese people as a whole have always been very successful at raising both Arab and Western capital and directing it to projects, whether in the Middle East or in the Western world.

It's worth noting that despite Syrian domination, Lebanon remains the most democratic country in the Arab world. Only in Lebanon is the head of state elected by representatives of the electorate. Lebanon has the largest number (eight) and highest quality of universities in the Middle East, catering to Arabs and non-Arabs alike. The press freedom in Lebanon seems almost out of place in the Middle East, a fact reflected in the more than 120 magazines and newspapers produced by a country of just 3 million. Indeed, its media makes Lebanon the sounding box of the entire Arab world, a distinction that makes some of its neighbors nervous, especially Syria. Indeed, if Lebanon and Israel share anything, it may be a democratic spirit that survives despite the dampening influence of their nondemocratic neighbors.

Israel's need. Israel's agreements with Egypt and the Palestinians show just how hard it is to overcome decades of enmity; real peace is not automatic or easy to achieve. Commerce between Israel and Egypt is minuscule. Very few of the many proposals floated since the signing of the Israel-PLO Declaration of Principles on September 13, 1993 have turned into successful deals. Vice President Al Gore initiated Builders for Peace, an organization dedicated to bringing together Palestinian, Jewish, and other Americans to invest in the West Bank and Gaza. Despite Builders' sterling political patronage, it has precious few accomplishments to its name. Of six "quick startup" projects announced by Gore in September 1994, just one has been financed.3 The passage of time makes it clear that Muslim Arabs and Jewish Israelis cannot simply begin working together on business deals.

Two main obstacles stand in the way of Israel before it can fully be accepted by its Muslim Arab neighbors, cultural differences and Arab fears of Israel.

Cultural differences remain a major obstacle to large-scale business relations between Arabs and Israelis. Western-educated and -oriented, the latter lack familiarity with the legal, commercial, and financial systems in Arab countries. Israelis are straightforward, aggressive, and seek to meet deadlines, whereby Arabs are inclined to go at a slower pace and tend to constantly analyze an issue before making a decision. The potential for misunderstandings is very high, especially when one factors in other difficulties, such as those of politics and religion. These realities point to the need for intermediaries.

The second point, Arab fear, is best illustrated with the example of a Middle East bank for reconstruction and development that Israeli leaders are promoting, with American encouragement. The bank is a good idea: it would provide medium-term financing for joint-venture and local enterprises now starving for capital. It would also reinvigorate those sectors not receiving enough financial support, such as water projects, highways, and promotion of tourism.

Unfortunately, leaders of nearly all the Arab states are apprehensive of such a common market, fearing as they do Israel's economic dominance. The United Arab Emirates minister of state for financial and industrial affairs, Ahmad Bin Humayd Al-Tayir, expressed what was on the mind of many Arab leaders when he explained that

The Arab world is not in need of an institution or a development bank in which Israel participates. . . . Before talking or thinking of establishing a common Middle East market, some balance in security and economic interests between the Arabs and Israel must be established, and the Arab world's interests must be assured in political, social, and economic areas against plans to dominate us and impose facts upon us.4

A Saudi official who spoke subsequently on condition of anonymity said, "Our position has been stated repeatedly in the meetings of the Gulf Cooperation Council, which is that any talk of regional cooperation with Israel is premature until Israeli troops leave Arab lands."5

These fears are hardly rational. They wrongly assume that the bank will be underwritten solely with Arab money; and that Western and not Arab standards of accounting will be used, thereby giving a preference to Israeli companies. Trouble is, even those Arabs who should know better find other reasons to reject the bank idea. Ishac Diwan, a senior economist at the World Bank, told the author that

the recently heralded notion of a Middle Eastern common market is not an attractive proposition. For the Arab countries such as Syria and Iraq, which have an industrial base (even if an inefficient and protected one), opening up first to Israel is not the solution. They fear this will lead to industrial destruction when what is needed is more time to fix things up. Other reasons also contribute to making the Israeli option unattractive: Israel is not large enough to play the role of a locomotive; the slow and bumpy nature of the peace process make such a strategy risky, and it is very unlikely that such a deal would elicit sufficient confidence to attract capital and investments.6

In short, Arabs are not ready to deal directly with Israel.

LEBANON'S PLACE

To attain the "warm peace" so essential for them to live in security, Israelis need the Lebanese.

Lebanese are ideally suited to fill the role of bridge between Israel and the Arabs. Their high level of Western education and orientation is evident in the United States, where the great majority of Arab-American business and political leaders hail from Lebanon. For example, James Zogby heads the American Arab Institute and is co-leader of Builders for Peace. No country in the Arab world contains a diversity of people like Lebanon, and this makes it easier for Lebanese to intermediate. The presence of seventeen religious sects in such a small country gives Lebanese an unequaled ease in dealing with people of different faiths and outlooks.

Lebanese are ideally suited to fill the role of bridge between Israel and the Arabs.

Lebanese skills will find new and creative avenues through the integration of the Israeli economy in the region. For example, Israel needs capital. Officials at the Tel Aviv Stock Exchange are doing their utmost to accommodate international investors by listing the stock of Israeli corporations on parallel exchanges; sixty Israeli companies are today listed on both the Tel Aviv and New York Stock Exchanges. (In contrast, not a single Arab company is listed on the NYSE.) In due time, Israeli companies could also be listed in the Beirut capital markets, for with the Lebanese's unparalleled ability to raise capital, they could work together and marry capital to industry. Lebanon can provide a conduit for Israeli companies to seek access to Saudi private money (for it is highly unlikely that Saudis will any time soon take an equity stake in a public company on the Tel Aviv Stock Exchange).

Tourism is another area where both Israel and Lebanon can benefit tremendously. Joint ventures between Israeli and Lebanese tourism companies can turn the Levant into one of the most attractive resort centers in the Near East, taking advantage of such factors as their shared climate and coastline. The wealth of historical sites in the region is a resource with great potential waiting to be tapped. Historical sites of the ancient Phoenician cities of Tyre, Sidon, and Byblos can be revived to attract thousands of tourists, both from the immediate region and from the West. Tours could be developed that visit these sites as well as those of Israel in Jerusalem, Bethlehem, Nazareth, and Jericho. This building-up of tourism between Lebanon and Israel could serve as the springboard for other cooperative efforts, such as the establishment of communication links between them. The potential also exists to engage in other joint projects of benefit to both countries. These range from the establishment of joint-venture companies to promote summer camps for both Lebanese and Israeli children (taking advantage of the beaches, water sports, and cool mountain areas of both countries) to American entertainment companies looking to tap into the potential of the only coastline of its kind in the Mediterranean basin. There is also the potential of developing the Lebanese-Israeli coastline into the Monte Carlo of the Middle East.

Both Lebanese and Jews have large and powerful diasporas, each (according to the Lebanese Cultural World Union) numbering some 14 million people. Over 90 percent of the Lebanese diaspora is Christian, and their $35-$40 billion capital reserves provide a unique source of potential funding.7 So far, only $3 billion of this amount has been deployed in Lebanon,8or less than 10 percent of the Lebanese monies that can be tapped for investments.

Lebanon has clear advantages in working with Israel when compared to Egypt, Jordan, or the West Bank and Gaza. Cairo was the first Arab state to reach formal peace with Israel, yet the Egyptians never built close or extensive ties with Israelis. The two sides don't fit well together commercially; also, the Egyptian sense of Arabness gets in the way because of the persistent Nasserist influence. Lebanon can be a much better ally than Egypt to both Israel and the United States.

In all, Lebanon is the key to breaking the commercial and economic isolation of the Middle East. Its human skills and strategic geographic location give Lebanon a chance to break the logjam in the Levant and forge a political and economic bloc that will help create one of the most attractive emerging markets in the world. With its secular, market-oriented tradition and its people's long-standing relations with much of the Middle East, the Lebanese at large stand out as the outstanding potential interlocutors and best ally for Israel in the region.

OBSTACLES

Two major roadblocks, the Syrian government and fundamentalist Muslims in Lebanon, obstruct these plans any time soon.

Syria. Damascus controls Lebanon and is doing everything possible to prevent Lebanese from having a direct say in the future of their country. In part, this has to do with the Syrian leadership reportedly receiving $1 billion a year from the drug-trafficking trade in Lebanon, especially the Bekaa Valley. The political situation in Lebanon under Syrian rule has become nearly static. A headline in Le Monde Diplomatique captured the prevailing mood by noting that the country was characterized by "power without responsibility, and quarrels without stakes."9 More to the point, Damascus does not want the Lebanese to have anything to do with Israel. For example, it had the Lebanese government charge Lebanon's beauty queen for "collaborating with the enemy" because she posed in a joint picture with Miss Israel.

How can the Lebanese work around the Syrian obstacle and bring about change to Lebanon? By seeking real change from outside the country, not from within it. Specifically, Lebanese should join forces with Jewish and Lebanese Americans to pressure the U.S. government to condemn the Syrian occupation of Lebanon. Better yet, the Syrian occupation should be incorporated as an item in the peace process. To prove acceptable to the United States, Syrian troops in Lebanon must be withdrawn.

Fundamentalist Muslims. Damascus permits the Iranian government to support, protect, and finance fundamentalist Muslims in Lebanon, most especially Hizbullah. To break the Iranian link to Lebanon, the U.S. and other governments should pressure President Hafiz al-Asad of Syria to stop the flow of money, arms, and personnel to them. Getting Asad to dismantle Hizbullah forces in southern Lebanon must also become part of the peace process negotiations. If Asad refuses, the U.S. government and its allies should take serious diplomatic and economic steps to pressure Damascus.

All this may sound idealistic, given the American turn inward; and that during the past twenty years, three states (France, the United States, and Israel) have tried to stand up to Syrian rule in Lebanon, and all three failed. But Asad now lacks a Syria patron, American influence is at an all-time high, and economic dynamics are taking on ever-more importance. By taking a firm stand on this small but important issue, the U.S. government could well get a process started that eventually leads to the resurrection of an independent Lebanon, with benefits for that country, Israel, the region, and the United States itself.


1 Lebanon Investor's Guide 1994 (Beirut: Strategic and Economic Information Center, 1994), pp. 12-15.
2 Euromoney, Mar. 1994, pp. 68-72.
3 The Jerusalem Report, Apr. 20, 1995.
4 The New York Times, Feb. 16, 1995.
5 Idid.
6 Telephone conversation, Mar. 7, 1995.
7 Central Bank of Lebanon "The Renaissance of Beirut's Financial Markets", Oct. 1994.
8 International Herald Tribune, Nov. 22, 1994.
9 Le Monde Diplomatique, July 18, 1994.