Lebanon’s Agricultural Potential: A Policy Analysis Matrix Approach

Atif Abdallah Kubursi

McMaster University and Econometric Research limited

1.0 Introduction

Thanks to its climatic diversity with more than 9 different agro-ecological and climatic zones and its relative self-sufficiency in water resources, Lebanon with an area of no more than 3,950 miles (10,452 km), has always been a major producer and exporter of a variety of agricultural products. The fertile Bekaa region was at one time the main food producer for the entire Roman Empire.

Located on the eastern shore of the Mediterranean Sea and bounded to the north and east by Syria and to the south by Israel, Lebanon consists of a narrow strip of territory approximately 135 miles long from north to south and about 20-55 miles wide from east to west.

Throughout the 1950s and all through the early 1970s, the Lebanese economy grew rapidly and cumulatively. This high growth was characterised, however, by severe imbalances between sectors, regions, classes and sects. Agriculture in Lebanon did not grow to its full potential and was constrained by insufficient government attention and encouragement and by an adverse macroeconomic regime that promoted services and trade at the expense of productive activities.

In 1974, on the eve of the civil war, agriculture contributed 9% to GDP, employed 20% of the labour force and sustained a rural population that stood at 14% of the total population. The agricultural sector’s contributions to the economy were, however, dwarfed by the rapid expansion of the overall economy but particularly by the unparalleled growth of the services’ oriented sectors. The unbalanced growth of the services sector was the outcome of many factors. Among the most important of these are the following:

· the dissolution of the Custom Union with Syria in 1950 leaving Lebanon with an overspecialised and overgrown services sector.

· the perennially over-valued Lebanese currency that promoted imports and discouraged exports and domestic production

· the legendary Laissez Faire policies of the government that promoted free trade and discouraged local production

· the dendretic development of infrastructure that promoted and accommodated trade, banking, tourism and other services but neglected agriculture..

Lebanese agriculture could and should contribute more to the national economy. This could be realised through a more accommodating overall macroeconomic framework and through specific public policies that are more sensitive to the needs and requirements of a more productive and export oriented agricultural sector. It is inconceivable that the agricultural sector can flourish under an over-valued exchange rate and where scarce resources such as water are not valued at their replacement cost. Lebanese farmers have shown a great proclivity to use the correct factor proportions and to respond correctly and speedily to changed economic circumstances.[i] What is missing perhaps are the institutional framework and the correct signals that will allow farmers to adjust appropriately and correctly to economic signals and opportunities.

Lebanese agriculture passed through many phases and challenges defined by clearly demarcated historic periods. We will single out three such periods beginning with the pre-war period, then the war period and finally the reconstruction period.

2.0 The Pre-War Economy of Lebanon

Lebanese economic success in the 1950s and throughout the 1970s was the outcome of several simple factors. A central feature of the Lebanese economy that goes way back to the early 1940s was the high ratio of investment to GDP. In fact this ratio, on average, had rarely fallen below 20 percent throughout the 1950s until the eve of the civil war. Starting with a capital-output ratio of about 2.47 (see Saidi, 1986), this investment ratio could have theoretically supported an annual GDP rate of growth of about 8 percent; a rate that was in fact typical of the Lebanese economy for much of the pre-war period. Given that services accounted for about seventy percent of Lebanon's GDP, the 20 percent investment ratio understated the magnitude of investment per unit of output in the commodity producing sectors of the economy, particularly agriculture.

A high investment to value added originating in commodity producing sectors explains the relatively high capital-labour ratios in these sectors of Lebanon before the war. This, in turn, explains the relatively high labour productivity indices that were generally observed in Lebanese manufacturing and agriculture before the civil war.

Another central feature of Lebanese development before the war was a young and growing population heavily investing in education and supplying a dynamic, well trained and highly motivated labour force (Saidi, 1986). Lebanon had the highest adult literacy rate (73.5%) in the Arab region and one of the highest among developing countries (Richards and Waterbury, 1990). This domestic skilled manpower was supplemented by a large pool of cheap semi-skilled Palestinian workers trained by UNRWA at little or no cost to Lebanon and a large group of unskilled seasonal immigrant Arab workers from neighbouring countries, particularly from Syria that came to work in construction and agriculture. Estimates of the foreign labour force in the early 1970s put the total number at about one third of the national labour force (Khalaf and Rimlinger, 1982).

Lebanese prosperity then had also much to do with the fact that Lebanon had a jump start in economic and social development over neighbouring countries rich in resources but relatively poor in skills, world contacts, water and developmental experience. The advanced educational system in Lebanon and the extensive connections the Lebanese had garnered with the west bestowed on Lebanon some real advantages in her ability to act as the indispensable middleman in much of the contacts of the Gulf and other Arab countries with the west.

The Palestinian enclave (sub) economy contributed also to Lebanon's prosperity. The Palestinian "infrastructure" within Lebanon may have been a destabilising political factor, but it certainly injected into the Lebanese economy a good amount of operating and capital money in addition to cheap semi-skilled and unskilled workers and some first class bankers and entrepreneurs. At one time, this sub-economy was estimated to have pumped over $4 billion annually on social services, wages and salaries to its "public servants and army” and other goods and services in the domestic economy.

Last but not least, a relatively stable political environment (relative to its neighbours) combined with a banking system designed to attract and protect foreign hot capital, meant that Lebanon was able to capitalise on the growing pains and political instability of other neighbouring countries.

The war undermined most of these favourable factors and processes and, in addition, created some very negative mechanisms and attitudes of its own that are proving to be difficult to reverse or correct.

A brief account of some of these negative processes and a simple analysis of their underlying mechanisms is attempted below by way of sketching the necessary framework to deal with them.[ii]

3.0 The War Economy

Without the war, the uneven sectoral, regional, sectarian and class developments were bound to create social tensions, contradictions and conflicts. Whether they would have exploded into open warfare the way they did in 1975 is debatable. Several mitigating factors could have easily thrown these tensions and inequities to simmer for a long time on the back burner of history. The new explosive opportunities in the Gulf region were just beginning to loom on the horizon. The uninterrupted and continuous growth that began in the early 1950s was just as solid in the 1970s as it were in the 1950s. Furthermore, a new vigorous economic spurt was just about to begin fuelled by the emergence of a vibrant and dynamic small scale manufacturing and agricultural activity that was primarily export oriented. The war blunted this growth and sent the economy reeling on a contracting spiral that lasted over 17 years.

Perhaps the most long lasting damage was that of the profuse brain drain triggered by the war. Professionals and skilled workers with international transfer prices emigrated leaving behind semi-skilled or unskilled workers to fend for themselves. Losses in productivity were experienced in most sectors and real incomes of the unskilled plunged sharply exacerbating an already iniquitous and skewed income distribution system. Conservative estimates of net emigration suggest a total of 740,000 people had left Lebanon between 1975 and 1988 (Labaki, 1989 and 1990). Another 240,000 are believed to have emigrated in the first eight months of 1989. The total tally of all those who emigrated during Aoun/Lebanese Forces conflict was difficult to estimate precisely, but the conflict was believed to have triggered another wave of emigration of no less significance than that experienced in 1989. Eighty percent of all Lebanese emigrants to Arab oil producing countries between 1975-82 had some technical qualifications. In the mid-seventies over 50 percent of the emigrants were part of the labour force. In the 1980s this bias was toned down to 25-30 percent as earlier emigrants gathered their families.

This out migration of talent and skills could have been partially compensated for by fresh crops from the educational system. The Lebanese educational system did, however, suffer too as good and experienced teachers left the system and schooling days were cut short by frequent and incessant fighting. The growing and dynamic population that was heavily investing in its education and training was replaced by a declining population with less years of schooling and little or no on-the-job training. While more than one third of the Lebanese emigrated between 1975 and 1989, less than a third of them have returned between 1990 and 1997.

In attempting to identify the consequences of demographic and manpower movements and adjustments caused by the war we had to rely rather heavily on a limited and outdated sources. These included the official manpower survey of 1970, ECWA's (now ESCWA) Statistical Abstract of the Region of the Economic Commission for Western Asia, 1978, and on data provided by the United Nations, International Labour Office. The most reasonable conclusion one could draw from all these sources is that the level of non-agricultural employment in 1977 was half the aggregate level it would have been without the civil war. Employment levels recovered slightly in the mid-1980s, but slumped again in 1989. The consequences of this major slump in employment have been drastic. They have had, however, a differential impact on the various sectors of the economy. In the early 1970s manufacturing activity grew faster than most other economic activities, but only slightly faster than commerce, hotels and the restaurant sector. The result was that the earlier dominance of services in the economy was unaltered. The Lebanese economy remained a basically service-oriented economy with services accounting for 50 percent of total employment and about 70 percent of non-agricultural employment shortly before the war (Khalaf and Rimlinger, 1982). The largest drop in employment following the start of the civil war was in the construction industry where employment losses exceeded 72.2 percent (Khalaf and Rimlinger, 1982). The reason why the construction sector suffered more than any other sector despite the fact that other sectors were comparably sensitive to political instability, had to do with the fact that construction workers in Lebanon were recruited to work in the Gulf region that was then embarking on a massive development program to construct its infrastructure following the explosive increases in oil prices and oil revenues.

Manufacturing and extractive industries lost (57 %), transportation (63.2 %), and commerce (53.5 %). All of these losses involved above average employment losses between 1974 and 1977 (Khalaf and Rimlinger, 1981). Services related activities, however, appeared to have weathered the difficulties with more resilience losing only 23.6 %. This was perhaps a reflection of the local nature and the predominance of the informal sector in this activity. Public sector employment did not change much as the government resisted obstinately to down-size its operations despite the drastic fall in government revenue. Agricultural employment registered an increase in absolute and relative terms as the agricultural sector acted as a buffer sector which absorbed large numbers of people from the urban areas that sought refuge in the rural areas and who would otherwise have been counted as unemployed (see Table 1). In a very special and unique way the contributions of the agricultural sector to GDP increased in absolute terms although a minor decline was registered in the relative contributions of this sector to the overall economy between 1970 and 1979 (see Table 1).

Table 1

Sectoral Contribution To Lebanon’s GDP, 1970, 1979

(at factor cost and in million US dollars, at current prices)

Total GDP

Agriculture

Mining & Quarrying

Manufacturing^*

Construction

Services

1970

1488.5

136.1

---

202.2

66.7

1083.5

1979

2523

215.2

76.1

391

86.3

1754.4

Percentage Sectoral Contribution to GDP

1970

100

9.1

---

13.6

4.5

72.8

1979

100

8.5

3.0

15.5

3.5

69.5

^* Manufacturing includes electricity, gas and water.

Source: Sayigh, Y.A. The Arab Economy: Past Performance and Future Prospects.

Oxford: Oxford University Press, 1982. Tables 18 and 19.

Human capital losses were matched by massive losses in physical capital that was either destroyed or lay wasted. Few repairs were made and new investment virtually ceased during war years. Actually, net investment turned negative for most of the years between 1976 and 1989. New additions to the capital stock were below the depreciation rate. While it was difficult to conduct extensive and complete surveys of the total damage inflicted on the economy's capital stock during the war, the Council for Development and Reconstruction (CDR) completed some partial surveys shortly after the cessation of hostilities that presented some benchmarks of these damages. The evidence collected by the CDR suggested that the Lebanese capital stock suffered on two important counts. First, there was considerable evidence that the existing capital stock was over used during the war with little or no maintenance or replacement. The typically high investment to GDP ratio of 20 percent before the war declined to less than 3 percent by 1985 (Saidi, 1986) and to even lower magnitudes in 1989. The Lebanese simply consumed their capital. While the ratio of gross investment to real capital exceeded 8.2 percent in 1974, this ratio declined to below 1.2 percent in 1985. There were enough indications that pointed to an even lower ratio in 1990. Second, there were extensive and massive destruction of buildings, bridges, power stations, schools, refineries and factories that the capital stock stood at less than 45 percent of its 1974 level (See Table 2). Estimating the capital stock losses using the concept of potential capital stock (that level of capital that could have been accumulated had the war not happened and had Lebanon maintained its pre-war capital formation levels), would result in a decline in its level to less than 32 percent of the pre-war capital stock.

Notes: I denotes gross investment at constant 1974 prices.

K denotes capital stock at constant 1974 prices.

(I/RGDP) denotes the investment output ratio.

(I/K) denotes the ratio of gross investment to capital stock.

(K/RGDP) denotes the capital-output ratio.

Markets were segmented and an already small economy was fragmented into yet smaller "enclave" economies with even smaller goods and labour markets. The south which Israel occupied under the pretext of establishing a "security" zone became essentially a captive market for their products and a source of cheap labour and non-saline water, and more recently a source of fertile top soil. The Bekaa valley and the north were tied more strongly to the Syrian economy and less and less to the rest of Lebanon. The "Christian" enclave was severed from the rest of the economy, and the Palestinian enclave was dispersed into smaller sub-enclaves. This fragmentation increased the transactions cost of exchange and production and reduced measurably the productivity of the economy as goods and labour were not allocated efficiently to their best uses and where the efficient economic size of producing firms was further compromised. Exports markets particularly of agricultural products were also curtailed as foreign importers diverted their demands to more reliable and secure suppliers.

A rampant inflation fuelled by currency speculation, declines in domestic production and unchecked monetary expansions was an early product of the war. The economy was shielded from the full vagaries of this situation in the early years of the war as the economy was still receiving enormous remittances from Lebanese working abroad and aid from friendly governments and “militia sponsors”. Besides the government was still in a position to collect some custom revenues and the enclave Palestinian high-spending economy was still thriving and profligate.

As the war proceeded unimpeded, oil remittances started to decline, help dried away, traditional government revenues were usurped by the militias, the Palestinian economy driven away and foreign reserves started to dwindle at rapid rates. The government was forced to lean heavily on borrowing from the commercial banking system and from the Central Bank. Borrowing from the latter was tantamount to printing money. Borrowing from the former was constrained by the ability of government to pay back interest and principal. To the extent that interest on the public debt grew larger than the normal revenues of government, the public sector fell into a state of de facto bankruptcy. The government had occasionally resorted to shoring its finances by using Article 115 of the Lebanese Code of Money and Credit which credits the government account (treasury) with the foreign exchange revaluation gains (losses) on the Central Bank holdings of gold and foreign exchange reserves. This had the unfortunate consequence of tying the interest of government to depreciating the value of the Lebanese pound and drove the Central Bank into pro-cyclical speculation.

Throughout the war period the increase in the velocity of money did not keep pace with the huge increase in money supply; the public preferred instead to shift its holdings of liquid funds into foreign currency deposits. Actually, from 1986 to 1987, the money supply, M2 jumped from LL293 to LL1402 billions-- a fivefold increase, whereas the velocity about doubled increasing from a value of 3.49 to a value of 6.32. The impact on local inflation; however, is the sum of the increases in the monetary base and velocity. Shifting deposits into foreign currency accounts helped moderate what could have been a worse inflationary bout, but this reduction in the private sector's desire to hold pound-denominated liquid balances exacerbated the pace of depreciation of the Lebanese pound and the linkage coefficient between inflation and depreciation.

To make matters even worse, the bankrupt government purchased a considerable amount of weapons from foreign countries to tighten its grip on the shaky political situation. The government diverted funds away from foreign reserves to finance these purchases. Foreign reserves decreased from $1883 in 1983 to $652 millions in 1984. As a result of this considerable contraction in foreign reserves, the Central Bank's ability to adopt pre-emptive policies decreased, and with it its power (or perception of loss of power) to counteract the attempts of speculators to alter the exchange rate in order to reap extraordinary profits.

There is an inextricable link between the inflation rate and government deficits, and between the inflation rate and the exchange rate. But these links are so complex and dynamic that it is often impossible to draw the direction of causation or to assess precisely the relative contribution of the various factors.

Deficits were primarily financed by borrowing from the Central Bank, this increased the money supply, raised inflation, depreciated the Lebanese pound, increased the government’s cost of operation which raised further the deficit, increased the borrowing from the Central Bank and again raised inflation and further depreciated the Lebanese pound. The economy was caught into a vicious circle of deficits, inflation and depreciation. Adding to this the impact of inflation on the exchange rate, we had another dynamic spiral that worked against the Lebanese economy. Higher inflationary expectations triggered a flight from the Lebanese pound into dollars thus depreciating further the value of the pound. In turn, it raised the domestic prices of imported goods (these typically account for over 70 percent of total domestic supply) which added new fire to inflation and the spiral proceeded unchecked on its own. The only check on this was the price elasticity of demand for imports, which actually acted to constrain the vagaries of this dynamic spiral.

Increases in money supply are not necessarily inflationary. They become so to the extent that the increase in supply is not matched by an increase in demand. Actually, the situation in Lebanon was one of generalised excess supply of money as demand faltered under pressure from continuous declines in GDP, a rampant inflation and a cumulative tendency towards currency substitution and capital flight. Decreases in output provoked commensurate decreases in the demand for money for transaction purposes and the rampant inflation enticed economic agents to flee away from the Lebanese money into safer assets. The rise in world interest rates at the time intensified the currency substitution process and the spread of dollarization of the Lebanese economy. In 1985, domestic currency denominated deposits amounted to $4,013 millions and foreign currency denominated deposits to $2,478 millions, whereas in 1987 they were $270 millions and $ 3,222 millions, respectively. The Lebanese pound depreciated sharply from a level of as low as LL2.2 for $1 in the early 1970s to a low of LL2,200 in the summer of 1992.

Inflation distorts the pattern of investment away from productive endeavour and into speculative and socially undesirable allocations. It further imposes a tax on the private sector, plays havoc with income distribution favouring those with market power to protect their real income and disfavouring the weaker classes and those on fixed incomes or those who are incapable of adjusting their incomes sufficiently to maintain their purchasing power. It also hurts an economy that needs to export to pay for its mounting imports. Its only advantage, if one can call it that way, was its dilution of the public debt that was increasing at the time at very high rates.

The inflation ultimately succeeded in destroying the proverbial Lebanese middle class that shouldered and cemented whatever little social stability Lebanon had experienced in the early days of the republic. Inflation also increased the volatility, uncertainty and risk factors in economic calculations in addition to those directly associated with the war. This contributed further to the deterioration of the operating economic environment and its predictability, and finally compromised the competitive posture of the economy against its trading partners with lower inflation rates. Given that Lebanon, up to the eve of the civil war, had no or little inflation, the hyper inflation of the 1980s saw the cost of a bundle of goods that normally cost LL10 in 1974 go as high as LL741 in 1987 and as high as LL1,500 in 1989. With the demise of the private sector and the erosion of the middle class, the public sector had to shoulder a number of responsibilities that were not within its domain and was ill prepared and equipped to deal with them.

The war saw the public sector increase its relative size from about 15 percent of GDP in 1974 to over 50 percent in 1989. In the pre-war years, the government did not participate actively in the economy and did not practice counter-cyclical policies-- a feature characteristic of most advanced capitalist countries. Between 1965 and 1975, the government showed no inclination to increase its share in domestic production or to engage in any direct management of the macroeconomic affairs of the economy where it would be willing to go into debt to shore the economy in times of slow-downs. In fact, the opposite was true. The Lebanese government activities were on the whole pro-cyclical (see Saidi, 1986).

The war also forced the government into a new stance. Real government expenditures increased throughout the war at an average annual rate of 5 percent suggesting that nominal expenditures had increased faster than inflation. With real revenues declining and with the private sector down-sizing its operations the government attempted to absorb part of the slack in the economy and to subsidise consumption of some essential goods. It also continued its operations but primarily with an ambitious rearming scheme of the Lebanese army without linking these schemes to its revenues, foreign exchange reserves or the wholesale absenteeism and low discipline of the public service. The public debt (a phenomenon unknown before the war) climbed to 150 percent of GDP. Interest payments on the debt alone grew larger than government revenues from normal sources.

Warlords with access to resources and revenues, without having to shoulder most of the burdens of government, entrenched themselves at major access and trading routes and added to the fragmentation of the economy and to its transaction costs. In a way, the economy was paying for its demise, fragmentation and dis-figuration and the warlords developed vested interest in sustaining trouble that became their lifeline to influence and power.

Not all the war effects were negative. Some aspects (a small set) were indeed positive. These relate to the reduction in imports, depreciation of the currency to levels that were more supportive of exports, the revitalisation of local agriculture and manufacturing and the reinvigoration of rural and mountainous regions. The depreciated value of the Lebanese pound gave impetus to agricultural exports and revived the fledgling industry. The fragmentation of the domestic market, the increased transaction costs on exports as access and trading routes were intercepted by warlords and the general destruction of the infrastructure militated against the gains that could have been realised on the more favourable exchange rates.

4.0 Reconstruction and Rehabilitation

From a relatively advanced and prospering economy in the 1970s, Lebanon tethered on the brink of total collapse in the late 1980s. It is miraculous that it did not implode the way most had expected. Surely, the Lebanese per capita income in US dollars slipped from a high of $1800 in 1974 to below $500 in 1989, from the ranks of middle income countries to the ranks of least developed countries, but the economy survived. The question is why has it survived and what accounted for this phenomenon.

A great deal of credit goes to the resilient Lebanese people that capitalised even on their troubles and kept the economy going. When electricity was cut, a number of local entrepreneurs started their own generators, small shops selling all kinds of goods sprang on every corner and many families retreated into their villages and produced their own food. Equally important was the fact that many left the country and emigrated to where the jobs could be found. They showered Lebanon with remittances and reduced the social costs of unemployment. The massive depreciation of the Lebanese pound acted as a shock absorber that moderated and fuelled a countervailing adjustment process. Imports declined, real wages were eroded, debt was monetised, rents were almost eliminated, barter emerged and Lebanese exports and assets became cheaper. Meanwhile, the Lebanese government that had shied away from the economy before the war played a significant balancing role during the war as was discussed earlier.

Surely, unemployment rates increased, but their increase was far below what could have been expected in the circumstances. Evidently, as stated above, other accommodations were taking place. The war precipitated a reverse rural-urban migration as people fled the cities to the comfort and security of their villages where they grew their own food and bartered their services. Militia ranks swelled with fresh recruits as the unemployed were re-absorbed into this informal sector.

While the precise figures on the outflow of labour during the civil war do not exist, there was ample evidence to suggest that over 260,000 foreign workers left Lebanon between 1974 and 1978 (Khalaf and Rimlinger, 1982) and a slightly larger proportion in the early 1990s. Probably more Lebanese left the country during the same period. This out-migration of labour represented a major adjustment mechanism. They combined to reduce measurably the economic costs of employment losses. In their absence, what was a major economic set back could have been a major economic catastrophe.

When the guns lay silent, there were ample reasons for believing that with political stability and the reconstitution of the Lebanese polity, the economy could be turned around and growth could again resume its normal course. There were, however, many obstacles to surmount before the economy could reclaim its health and vigour. First, the basic physical infrastructure that was destroyed during the war had be repaired and rehabilitated quickly and effectively. Second, the inherited rampant inflation should be arrested and the depreciation of the Lebanese pound stopped or slowed down. Third, the profuse and continuous loss of Lebanese talents should seize and the outflow turned around into an influx. Fourth, the proverbial Lebanese middle class that was decimated by war and inflation need to be rebuilt. Fifth, the Lebanese government coffers were empty and fiscal order should be restored. Sixth, the social and economic imbalances of the past whether those between regions, classes, sects and sectors should be addressed and redressed. This was a tall order even for a strong government and a healthy economy. It was doubly so for a fledgling government and a hampered economy. There was no time to spare and achievements had to be realised quickly and simultaneously. It has now become clear, however, that there are serious pitfalls in repairing a damaged economy and society without a coherent plan and a clear prior vision of the final outcome of the reconstruction program.

When the Hariri government embarked on its ambitious reconstruction program, the government coffers were almost empty. There was no choice but to borrow. All through the war, Lebanon had almost no foreign debt. This proved helpful in allowing the government to borrow on international financial markets without the encumbrance of past debts. This they did. The foreign debt grew rapidly from a low of $150 million in 1992 to over $2.7 billion in 1998. The combined external and internal debt reached $17 billion in 1998 (Table 3, Figure 1). Servicing this debt today requires over $2.1 billion annually. This debt service is now over 89% of the total regular government revenues. The combined debt is today larger than the entire GDP of the economy (Figure 2). The latter was continuously revised upwards but still fell short below estimates of the total debt.

The level of the debt is increased by the yearly deficits on the government budget. These deficits are of two kinds—a primary deficit that reflects the difference between program expenditures and government revenues and a secondary deficit that represents interest and other payments on the debt. The primary deficit in Lebanon was rather low and is expected to even turn into a positive (surplus) value in 1999. The difficulties arise from the debt service payments. These are too large. They increased from a low of $282 million in 1992 to over $2 billion in 1997. Their level is determined by the size of the debt and also by the interest payments made on it. Unfortunately, the high interest paid on both the domestic and foreign components of the debt is responsible for the high deficit that raises the debt. It is hard to break away from this vicious cycle without higher economic growth, higher government revenues and lower interest payments. Not surprisingly lower interest rates and higher economic growth are also highly correlated (and possibly the former is a cause of the latter).

While borrowing was a necessary option, the terms at which the borrowing was made were high (for the foreign component of the debt, about 250-350 basis points above comparable borrowing rates of the US government) and the maturity period was relatively short. This is true for both the domestic and the foreign components. It is true that Lebanon’s credit worthiness was not high after the war, but borrowing at rates that were significantly higher than the prevailing rates on dollar accounts, taking into account a reasonable risk premium, is not defensible. Similarly, with the Lebanese pound exchange value fixed in terms of the US dollar (actually it even appreciated in value), the double digit rates paid on the Lebanese pound denominated treasury bills and bonds exceeded by far the opportunity returns on comparable dollar accounts. These rates have already become a significant burden on the economy. The higher interest rates that were needed to stabilise the foreign exchange value of the Lebanese pound so as to play the role of a financial anchor for reducing inflation have driven a wedge between fiscal policy and monetary policy, distorted investment, and compromised production. Higher interest rates were required to attract foreign capital, sustain constrained domestic liquidity, finance the government deficits and stabilise the foreign exchange value of the Lebanese pound. But they also increased the deficits, the borrowing requirements of the government, the diversion of liquidity towards government bills and bonds and away from trade and investment credits and appreciated the Lebanese pound far above its true equilibrium value. In the process they constrained investment, domestic production and exports. Perhaps worse, the brunt of economic adjustment is now borne exclusively by output and employment (quantity adjustments versus what could have been a price-quantity adjustment process). As is clear from Table 3, annual GDP real rates of growth fell from 13.3% in 1993 to 3% in 1997.

The population at large is already paying for the cost of borrowing to build this infrastructure. The poor, however, are probably bearing more of the burden of the cost of this infrastructure than the rich given the prevailing regressive tax structure in Lebanon which is disproportionately made of custom duties, consumption taxes (gasoline and tobacco) and flat income tax rates. Unfortunately, the poor in Lebanon are already paying for this program with lower job opportunities (as exports and production are constrained by higher interest rates and an appreciated exchange rate). They have not apparently reaped significant benefits from the construction program either, given the high proportions of foreign labour involved in this activity, and the high import content of most of its inputs which has reduced the magnitudes of its associated employment multipliers.

It is great to have a large, clean and modern airport but its capacity should have been tied to traffic volumes that could be realistically expected over the medium horizon. Building a modern and shiny Central Business District may not be the best alternative use of even private investment funds when no large business has been developed or could be expected to develop soon. Constructing highway rings to ease the legendary Lebanese traffic jams may be inferior to developing public transportation alternatives.

There is a serious concern that the reconstruction program has become too costly, too fast, too large, untied to the absorptive capacity of the economy or to its capacity to pay for it and is disconnected from a clear and coherent development plan to guide, monitor and harness it. The vision driving it, if it exists, appears to be insensitive to global changes in industry, technology and the basis of economic success in the new economy. It suffers from a number of structural biases that compromise its developmental worth. The list of biases is long; it includes an urban bias (in contrast to a rural-urban balance), a cement bias (in contrast to a balance between human development, technology and construction), an import bias (in contrast to encouraging exports and domestic production), a services bias (in contrast to a balance between commodity producing sectors and non-commodity producing sectors), etc..

The macroeconomic stabilisation program of the government has produced some major successes and some critical problems. The inflation rate declined from 120% per year in 1992 to less than 7% in 1997 and to even a low 3% in 1998. The Lebanese pound reversed its downward slide and real growth in GDP in 1992-1995 was solid and significant. This success came at a high price. The country is facing a liquidity crunch as banks and people prefer the high yields on government IOUs to real investment returns. The investment GDP ratio has declined despite the massive reconstruction effort (from 33 % in 1995 to 27% in 1997), (Antoine Koniski, The Daily Star, September 23, 1998). Unemployment is still high. The official estimates of 8.5% grossly underestimate the real magnitudes of this problem that is believed to exceed 30%. A large number of apartments in Beirut and surrounding areas are empty and unsold with potential adverse effects on the entire banking system. Growth has slowed measurably. Real GDP growth rates have slumped from 13.3% in 1992 to below 3% in 1998 (Table 3). Exports are a fraction of imports (less that 10%) (The Daily Star, September 23, 1998). The surplus on the balance of payments is dwindling fast. Foreign investment has declined (from $478 million in 1995 to $154 million in 1996 “excluding real estate and portfolio investment”). The deficit continues to rise, debt servicing absorbs almost all of the government revenues and the foreign component of this debt requires a servicing charge that is larger than total export proceeds. Debt has already surpassed the red line of 100% of GDP (see Table 4). The government revenue elasticity is below one (the percentage change in government revenues divided by the percentage change in GDP between 1996 and 1997 was 0.4, suggesting that government revenues grow less than the GDP). Over 61% of all deposits in the Lebanese banking system and over 88% of its loans are in US dollars. (Nicholas Sarkis, Assafir, September 8, 1998).

There is a need to lower the interest rate for investment purposes and more funds should be made available for productive investment in agriculture and industry and for export promotion. The interest rate is at least four to five percentage points above other alternative borrowing rates. Furthermore the Lebanese pound is about 22% above its market value. Now that inflation has been snuffed, it is perhaps advisable to lower the nominal interest rates to levels consistent with the old real rates before the decline in the inflation rates. This will encourage investment and will reduce the debt service charges (every one percent reduction in interest rates reduces debt servicing payments by over $140 million per year). The latter may restore coherence to the policy mix (fiscal and monetary policy co-ordination). The two policies are currently inconsistent—high interest rates raise the deficit, increase the debt and raise in turn the interest rate. There is a definite need for re-alignment and synchronisation between the two planks of public policy. There is a definite and unjustified bias towards monetarism. The interest rate adjustment, if used judiciously, can also bring down, in an orderly manner, the exchange rate to a level that is more consistent with export promotion without causing a major collapse of the foreign exchange market.

The difficulties and challenges posed by large deficits, huge debts, declining growth, over-valued Lebanese pound, high unemployment, widespread poverty, regional and sectoral imbalances are real and substantive. A massive run on the dollar can undermine all the achievements of the government and can sink the country into a serious crisis. It is a miracle that things are not worse than they are given the underlying economic weaknesses and structural imbalances the country had to face. Governments are no longer expected or believed able to do much about their domestic economies in the globalized world we live in today. At a minimum they are expected to create a favourable economic environment for business and growth, provide sufficient inputs that raise the productivity of the economy and meet the basic needs of citizens, moderate and temper extreme distributional outcomes of the market and provide an affordable social safety net. All would certainly agree that it has re-built the basic infrastructure without which the economy could not function. It has failed, however, to articulate a coherent development program, and has provided little or no arbitration to moderate the negative market outcomes on income and wealth distribution among people, regions and sectors. The standard of living study mentioned above points out to high incidence of poverty and depravation among families, particularly in the North, Northeast and the South, especially in the areas of education and health. These are crucial components of human capital and reflect the untenable bias in government investment towards cement, large construction projects and emphasis on Beirut to the detriment of other regions.

There are a number of measures that can be taken to change and improve the economic and social situation in the country. It is difficult to list them all; the short list below is presented without due regard to the priority or sequential logic of these measures.

First, a serious macroeconomic stabilisation effort should target reducing the deficit at once. This can be best achieved by reducing the interest rate by at least 200-400 basis points, renegotiating the maturity terms of the debt, and raising more revenue from progressive taxes on income and wealth and from expenditure taxes that involve high offsets or credits to lower income earners. Equally important is to explore the possibility of borrowing, at favourable terms, from the Lebanese expatriates abroad. Other supporting strategies should involve reducing waste in government expenditure, improving the income earning capacity of the Central Bank reserves, scaling down construction projects and privatising judiciously part of the infrastructure development.

Raising more revenues without fostering growth is unsustainable. Growth can be fostered through the granting of optimal subsidies (tying the subsidy or the soft term of the loan to production and export performance indices), credit expansion towards productive uses, and a more export oriented value of the exchange rate. Allowing the pound to fetch a more export-friendly value should be done in a managed, moderate and orderly manner and co-ordinated with the interest rate policy and other friendly Arab Central Banks. This will bring about the desired synchronisation between fiscal and monetary policies.

Dealing with unemployment seems to have an unjustifiable low priority for the government. Growth with emphasis on employment creation can be achieved through a well-designed employment creation program that can be worked out with the private sector. This policy should be tied to the strategy of fostering growth; the two cannot be separated.

A new development perspective should be formulated with the full participation of the people and their representatives after a lengthy and serious civic debate. Such a framework should address the current imbalances between regions, sectors and classes and should be part of the de-confessionalisation goal. Heavy emphasis should be placed on human development, education, training, fostering the new economy and production and export oriented activities. Resurrecting old Beirut as the financial capital-laundering centre of the world is not a worthy or realistic option. Re-inventing Beirut as a centre for advanced knowledge, software development and design engineering is more realistic.

Lebanese comparative advantage has always been its people, great geographical beauty (whatever is left of it), relative water abundance, climatic and ecological diversity and ingenuity. Building on strength requires developing agribusiness that utilises wisely and efficiently our water relative advantage in the region, integrate the deprived southern and eastern regions in the development program, and open again our traditional export markets. First things first translate into a macroeconomic environment that fosters growth in production and imports. This involves the invigoration of Lebanese agriculture. The discussion to follow will focus on this sector.

5.0 Lebanese Agricultural: A Sectoral and Regional Perspective

The civil war in Lebanon provided a natural laboratory for defining the importance and contribution of the agricultural sector to the economy under special circumstances that allowed for a more realistic exchange rate, a reverse migration from urban to rural areas and a greater need to satisfy local demand for agricultural products from local sources. As is clear from Table 5, the agricultural sector absorbed most of the slack in the services sector and contributed between 15% and 23% of the GDP between 1985 and 1990. In more than one sense, the agricultural sector played the role of a “swing producer’ that made up for the emergent slack in the economy. As the guns lay silent, the relative contribution of agricultural to GDP declined back to its pre-war level.

All through the modern history of Lebanon, the agricultural sector was a net importing sector. During the war and in the pre-war years agricultural exports represented a larger share of total exports of about 30% than in the years after the war where this share dropped to even below 20% (Table 6 and Figure 5). The 20% share in the post civil war years was preserved despite the fact that total exports increased substantially in absolute value between 1992 and 1998 (Figure 6). Exports of agricultural products, however, make up only a small and declining fraction of agricultural imports (see Figure 7). Agricultural imports have risen faster than agricultural exports resulting in a major decline in the share of agricultural exports in agricultural imports from 22% in 1993 to less than 9% in 1998. As a consequence, Lebanon has a large and increasing deficit on its balance of trade in agricultural. In 1992, the agricultural trade deficit stood at $365 million and by 1998 it exceeded $1.2 billion. The widening gap in the trade agricultural balance is inextricably linked to the appreciation in the exchange rate of the Lebanese pound vis-à-vis the US dollar, the increase in domestic income following the war and during the massive reconstruction period, and on account of the high inflation rate at the time. Actually, the Lebanese exchange rate declined (appreciated) from LL1,741 to the dollar in 1992 to LL1,508 in 1999. My estimates of the responsiveness (elasticity) of both of the demands for exports and imports show that they both are elastic with respect to exchange rate changes and therefore can partly explain the rise in imports and the decline in agricultural exports.

Most of Lebanon’s exports of its agricultural products are to neighbouring Arab countries (Table 7). Saudi Arabia and Kuwait are the two major importers in the two consecutive years displayed. Kuwait alone cleared over a quarter of the total Lebanese agricultural exports in 1994. Syria, Jordan, UAE , and Bahrain are also major export markets for Lebanese agricultural products. It is also surprising to see that Russia, the US and Belgium and Germany are also significant importers of Lebanese agricultural products (Table 7). Equally notable is the absence of stability in these market shares. Major changes in these market shares are noted between 1993 and 1994 in Table 7.

Lebanon generally exports apples, potatoes, tomatoes, cucumber, onions, garlic and citrus fruits.[iii] On the other hand Lebanon imports Grains, diary products, meats and fish primarily from the United States, Syria and the European Union.[iv]

The hostile macroeconomic environment within which the Lebanese agricultural sector had to function and develop in the post civil war period was also characterised by high interest rates (Figure 8), deficient physical infrastructure, frequent interruptions in electricity, weak government institutional support, strong bias and preference for urban-biased development, Israeli violence and control over markets, land and water, and at the beginning of the reconstruction period, some very high levels of inflation (Figure 8).

By way of providing a synopsis of the agricultural sector and the typology of its structure, we provide below a brief discussion of the availability and distribution of cultivated land by type of irrigation and political region (Mohafaza and Caza), the total and composition of livestock and crop production. The presentation is concise but it is intended to provide a background to the discussion of the policy issues and challenges that constrain the current development of the sector and can influence its potential development in the future.

5.1 Cultivated Land

Lebanon is administratively divided into six regions or Mohafazats. Each Mohafaza is further divided into smaller districts known as Cazas. It is estimated that 35% of total land of Lebanon is cultivable, but only 60% of this potential is used. The total cultivated area is estimated to approximate 296,554 ha, of which about 60% is rainfed, about 39% is irrigated and less than 1% is under greenhouses (Table 8). In addition, there are over 119,774 ha under forests and 527,790 ha of pastures. The largest agricultural region is the Bekaa Valley which represents almost 38% of the total cultivated land, followed by North Lebanon with 33% (Figure 9). The pattern of agricultural land use differs from one Mohafaza to another. There are almost no greenhouses in the Bekaa or Nabatiye. The largest share of Greenhouses is in Mount Lebanon and North Lebanon. Rainfed agriculture dominates irrigated agriculture in most of the Mohafazats; this dominance is, however, marginal with the exception of Nabatiye (Figure 10). The pattern of agriculture and irrigation type is presented by Caza in Table 9. It is quite revealing that in many parts (Cazas) of Mount Lebanon, irrigated agriculture supersedes rainfed agriculture. This is not true in the rest of the Mohafazats.

Taking a ten-year period into consideration and tracing the development of cultivated land in the 4 major Mohafazats, it is clear that there has been considerable growth in the Bekaa, some growth in North Lebanon, little or no growth in South Lebanon and even a decline in Mount Lebanon (Table 10 and Figure 11). The period 1987 to 1997 is very special. It is basically the reconstruction period. While the no-growth in the South is partly explainable by the daily Israeli bombardment of the region and general lack of stability, the decline in Mount Lebanon has probably more to do with the rise in land prices and the major reconstruction boom that followed the cessation of hostilities.

Land use in Lebanon is partly constrained by the availability of water. While Lebanon is relatively well endowed with water, water exploitation is still limited and highly variable. The water flow from rainfall and snowfall is estimated roughly at 10 billion cubic meters per year, about 4 billion of which is carried by surface flow in 40 rivers. About seventeen of these rivers are perennial and originate from within the Mount Lebanon Range with the exception of the three most well known rivers of Lebanon—the Litani and the Assi (Bekaa) and Hasbani (Jabel Al Shaikh). With the exception of the Litani and the Assi, all the other rivers of Lebanon are quite short (e.g., Nahr Abou Ali 42 km and Nahr Al Bared 24 km).

The average precipitation in Lebanon varies between 1,500 mm per year in the coastal areas, to about 1,000 mm on the mountain slopes and to an average of 400 mm in the Bekaa Valley.[v] This is why agriculture in Lebanon is also dependent on irrigation. Water has long been drawn from rivers and fountains to irrigate crops in the more arid areas of the Bekaa and in the middle and low elevation zones of Mount Lebanon. Most of the rivers of Lebanon are increasingly stressed. The Litani, Hasbani and Wazani rivers are practically under Israeli occupation and probable exploitation. Many other rivers are ecologically stressed from concentrated and unregulated urban and industrial growth and from intensive and unsustainable exploitation.

5.2 Livestock

The livestock subsector has typically constituted 30% of total agriculture production in Lebanon. The civil war drastically affected this subsector. It has since recovered most of its losses. Between 1989 and 1997, livestock production has grown at the average annual compound rate of 4.7% (Table 12) .

The total stock of livestock and its distribution by animal and Mohafaza are presented in Table 11 and figures 12-15. Lebanon produces a large amount of poultry particularly in the Bekaa Valley and in Mount Lebanon. The overall capacity is for 12 million heads. Goats are the largest stock with over 494 thousand heads, again primarily in Bekaa. Sheep is also available in good numbers. A total of 321,726 is counted and most of them are in the Bekaa Valley. Cattle is available in limited numbers with 56,626 cows. North Lebanon accounts for the largest share of these cows.

Lebanon is a major importer of meat. This suggersts that livestock production is not sufficient to meet domestic demand. Since 1989 there has been some notceable increase in almost all livestock numbers but particularly those of cattle (from 59,235 in 1989 to 85,000 in 1997), sheep (from 209,613 to 250,000 during the same period) and horses (from 6,000 in 1989 to 13,800 in 1997).[vi]

There are also some noticeable increases in livestock production over the same period (1989-1997). This is particularly true for cow milk which increased from 64,745 tons in 1989 to 138,000 tons in 1997 and honey from 1,390 tons in 1989 to 2,600 tons in 1997. There were also some noticeable declins in the production of meat (from 91,288 tons in 1989 to 87,390 tons in 1997). This is especially significant because the production of meat ppears to have peaked in 1993 to a level of 100,145 tons. There was also a decline in chicken meat from 62,000 tons in 1989 to 50,000 in 1997. [vii]

5.3 Crop Production

Lebanon’s rich geographical diversity is manifested in the rich variety of its agricultural products. There is hardly an agricultural product that is not produced in Lebanon. The coastal plains in the north and in the south support the production of citrus fruits, vegetables, tobacco, figs and even bananas. The mountainous regions produce fruits particularly apples, pears, peaches, cherries and olives. In the eastern mountain chain, an arid atmosphere makes it difficult to produce any major agricultural crop. This region’s land is basically used for grazing of farm animals.[viii]

The most important agricultural region of Lebanon is the fertile Bekaa Valley. It is there that we find over 38% of the total cultivated land of the country. And it is there that the widest varieties of crops are produced. These range from cereals to vegetables to fruits.

Lebanon’s agricultural potential exceeds by far the realised capacity. Lebanon has highly fertile land, boasts of great geographical/ecological diversity, is relatively well endowed with water in a region that is basically one of the most water-stressed regions of the globe, is geographically close to some of the most lucrative markets for the type of agricultural products it has a comparative quality advantage in producing (the Arabian Gulf and Europe), and has a legendary mercantile culture that goes back to its early history. These areas of strengths have not been fully exploited. The agricultural sector remains basically a neglected sector. The macroeconomic environment is far more accommodating of the services sectors than of agriculture. Despite the precipitous decline in inflation, Lebanon remains one of the most expensive countries in the third world. The increase in production noted in Table 12 is more the outcome of the resilient Lebanese farmer than the consequence of supporting policies and institutions and has a lot to do with the declines experienced throughout the catastrophic civil war.

6.0 Agricultural Policy in Lebanon

We begin first by providing an anthology of agricultural policy in Lebanon and the way it has evolved over the years.

6.1 A Historical Perspective

Lebanon’s agricultural policy is, as in many other countries, conceived within the overall national economic policy framework. While, agriculture is considered as an important and critical economic sector, no special or specific policies were developed that contradicted or deviated from the general liberal and non-interventionist economic policy stance. Lebanon has pursued a liberal economic policy ever since independence. This policy restricted the government to the development of the required social infrastructure and to maintaining a policy environment favourable to free trade. The public sector invested heavily in building an extensive infrastructure of trade routes, ports, airports, warehouses, and an excellent communication network. Unfortunately, this same policy framework also required the government to restrict its activity in promoting competing commodity producing sectors or regions that could undermine the dominance and the free flow of imports. The accepted liberal policy framework also called for a pro free trade, pro business policy environment with minimal government interference, low or no income taxes, bank secrecy laws and a free foreign exchange market.

This general framework constrained the policy options in agriculture. The government built agricultural roads, dug irrigation canals, and helped from time to time in the reclamation of new lands. Very recently the government moved to support the prices of some selected agricultural crops such as sugarbeets, tobacco and wheat. This support had little to do with supporting prices of these commodities as it had in supporting the transition of farming from illegal hashish growing to other crops.[ix]

The production of fruits and vegetables has always received the special concern of the agriculture policy-makers in Lebanon. Farmers in Lebanon have always been capable of meeting domestic demand for these crops and have also been successful in exporting a good proportion of their output of these products. This explains the unique “Agricultural Calendar” policy of the government. This policy dates back to the early 1960s but has also been amended several times, the most recent of which were in 1992 and 1995. The policy stipulates the restriction of imports of citrus fruits, apples, grapes, olives and potatoes. Other agricultural imports may be imported but need the special permission of the Ministry of Agriculture. These include onions, cucumbers, tomatoes and raisons. Alternatively some crops can be imported without this permission but only in special times of the year when similar Lebanese crops are in short supply such as, squash, watermelons, garlic, apricots, peaches, pears, etc.

During the 1950s the official economic five-year plan sought the modernisation of the Lebanese irrigation network and developed the Litani project as well as the Qasimiah project. The aim was to increase the area under irrigation in the coastal plains, particularly in south Lebanon and to increase the production of hydroelectricity. By 1975 on the eve of the civil war, Lebanon succeeded in increasing the irrigated land under cultivation by 20 thousand ha in the south and 14,900 ha in the north.[x]

In 1963, the government sponsored the “Green Plant” program in collaboration with several United Nations’ organisations including the FAO, UNDP and WFP.[xi] The program aimed at:

· Increasing the land under cultivation

· Reforestation of Lebanon

· Preservation and development of the natural water springs

· Rehabilitation of agricultural roads and building new ones

· Expanding the use of irrigation in agriculture

· Water conservation and the expansion of reservoirs and canals.

The program made available at low rental prices tractors and other agricultural implements and distributed improved citrus seeds. The program was considered a successful one as land under cultivation expanded and new forested areas emerged.

In 1993 the government formulated a three-year plan to modernise and expand the agricultural sector. The plan aimed at:

· Increasing the net income of farmers

· Increasing the income of agricultural workers to limit their migration to the cities

· Stabilising agricultural output and input prices while ensuring their competitiveness

· Increasing productivity through increasing the yield on land

· Reducing imports of agricultural products through crop diversification

· Preservation of Lebanon’s agricultural wealth and resources

· Training of farmers through the creation extension services

· Develop new sources and expand old agricultural credit facilities

· Increase the efficiency and effectiveness of agricultural marketing institutions

Many specific measures were taken to implement the plan. These included the streamlining of the Ministry of Agriculture, the revitalisation of the extension services, increasing the number and operating budgets of the agricultural research and development centres, expanding rural roads by 100 km each year, expanding and encouraging farmers to join agricultural co-operatives and targeting the preservation of the animal wealth and the environment within which they develop. The enumeration of these tasks is perhaps misleading because they suggest a much more ambitious plan than was realised and implemented. In fact, the government allocated less than one percent of its annual budget to the Ministry of Agriculture throughout the plan years.[xii] With limited resources only limited results can be expected.

The direct intervention of the government in the agricultural sector, as demonstrated above, is rather limited. The objectives and targets were always ambitious and clear. The problem was with implementation and with the limited political will and resources allocated to effect the plans. But government intervention in the agricultural sector is not limited to its direct involvement, because the government also intervenes indirectly through the impact of its overall macroeconomic policy on the agricultural sector. The government systematic pursuit for establishing a financial anchor through a stable exchange rate has had a major impact on the competitiveness and health of the agricultural sector. The targeting of a stable, if not an appreciating Lebanese pound necessitated very high interest rates that are sustained by tight monetary policies to attract capital and to stem out domestic liquidity that could compromise the stability of the exchange rate. The appreciation of the pound reduced the export potential of this sector and the lack of liquidity raised overall production costs and reduced the capacity to borrow to expand and sustain operations.

Even in a free Laissez Faire economy such as that of Lebanon where the price mechanism and markets play significant roles in resource allocation and production, the public sector plays an important role in promoting efficiency, high production and other social objectives by:

· Providing the necessary infrastructure such as roads, irrigation systems and extension and research services

· Enforcing macroeconomic policies that avoid high rates of inflation and overvaluation of the exchange rate

· Creating suitable environment for competition and the efficient flow of information

· Co-ordinating market activities to protect the economy from the negative effects of market failure

The purpose of this study is to determine the impact of public policies such as input- output prices, factor prices, credit subsidies, interest rates and the exchange rate on the efficiency of selected crops produced in nine agricultural zones in Lebanon. The crops selected in each zone were those that reflect best the type of prevalent agriculture in the zone and where we believed that Lebanon either already have a competitive advantage or could easily acquire one. In particular we have emphasised the following list in the relevant zones:

Apples, Pears, Peaches

Citrus fruits

Tomatoes, Potatoes, Sugarbeet

Cucumbers, Carrots, Eggplants, Onions

Strawberry, Avocado, Melons, Cantaloupes, Watermelon, Banana

Cereals-Wheat and Barley

Crop budgets prepared by ESCWA^[xiii] were used to build several accounting matrices known as Policy Analysis Matrix (PAM). These matrices were designed to assist in understanding the interactions of many policies that influence agricultural incentives and help identify the tradeoffs (if any) between policy objectives and the consequences of market failures and policies used to correct for them.^[xiv]

To compare the return of perennial crops (Tree crops) with annual crops, it is necessary that the cost and return streams of cash flow are first discounted (to find their present value) and then annualised. The rate of discount is of major importance in determining the present value of a stream of future benefits and cost from an investment venture. Discount rates of 6 percent and 12 percent were used for the calculation of the present values in private budgets and social budgets, respectively.

6.2 The Policy Analysis Matrix (PAM)

Economic profits are the fundamental component of the Policy Analysis Matrix (PAM) approach. They act as signals for the optimal allocation of resources. There two types of profits—private profits evaluated at market prices and social profits evaluated at social or efficiency prices. If there are no market distortions, the two are often the same. If, however, there are market failures or distortions then the two are would diverge from one another. Their divergence would act as a signal for policy intervention. Profits are defined as the difference between the value of outputs (revenues) and the costs of all inputs (costs).[xv]

Table 13. The Policy Analysis Matrix

Item

Revenues

Costs of

Profits

Tradable

Inputs

Domestic Factors

Private Prices

Social Prices

Effects of Policy and other Divergences

The symbols (capital letters) are defined as follows:

A Revenues in private prices (market prevailing prices, also called accounting prices).

B Costs of tradable inputs (such as fertilisers, seeds, plastic mulch, etc.) in private prices.

C Costs of domestic factors (such as labour, capital, etc.) in private prices.

D Private profits.

E Revenues in social prices(economic, efficiency prices or shadow prices).

F Costs of tradable inputs (such as fertilisers, seeds, plastic mulch, etc.) in social prices.

G Costs of domestic factors such as (labour, capital, etc.) in social prices.

H Social profits.

Private Profits (D) D=A‑B‑C

** Social Profits (H) H = E‑F‑G

** Output Transfers (I) I = A‑E

** Input Transfers (J) J=B‑F

** Factor Transfers (K) K=C‑G

** Net Transfers (L) L=D‑H or L=I‑J‑K

The PAM model is portrayed in Table 13. Private profits are defined in the first row as D=A‑B‑C. The letter A is used to define the private revenues (the revenues at the prevailing market prices). Costs are divided into two components--Costs of tradable inputs (inputs which are traded on world markets) such as fertilisers, pesticides and seeds. The value of these tradable inputs at the prevailing market prices (private prices) are recorded in the first row and second column and are denoted by the letter B. Tradable inputs can be imported from or exported to other countries. The third column of the matrix includes domestic factors. Domestic factors include land, water, labour, and capital. Domestic factors are also called non‑tradable inputs because there is generally no international market for these inputs. Costs of domestic factors in private prices are denoted by the letter C.

Column four in the matrix is labelled as profits. Private profits are denoted as D in the matrix and are included in the first row of the fourth column. Profits are defined as total revenues minus total costs. A positive value for profits at prevailing market prices confirms the profitability of the business. Positive profits also provide stimulus for existing firms to increase output and for other forms to enter the business. Expansion of existing firms as well as entry of new firms in the market stimulates economic growth. When the market prices of inputs or outputs are distorted by either market failure or by taxes or subsidies, then private profits alone could provide misleading signals.

The second row of the PAM is used to calculate social profits, H=(E‑F‑G). Social profits are those profits calculated at efficiency (shadow) prices. The letter E portrays the revenues valued at efficiency prices (social prices) and F and G indicate the efficiency values of tradable inputs and domestic factors, respectively. Positive social profits (H) indicate that there is a positive social valuation of output and is an incentive for the expansion of the activities under consideration.

The third row of the matrix shows (the divergences or differences between the first row (private valuation) and second row (social valuation). If market failure does not exist, then distorting policies causes all divergences between private and social prices of tradable outputs and inputs.

Policies which may cause divergences include subsidies, taxes and quantitative controls applied to domestic production or trade. of the commodity. Price policies may also cause distortions.

In the third row, if the value of I, defined as output transfer, is positive then private revenues exceed social revenues. This indicates that the Government is subsidising output prices or ion the absence of a subsidy there room for a tax to eliminate this divergence and to scale the output back to where the social and private valuations are equal. If the government is subsidising the output, then the Government and/or consumers are purchasing the commodity in prices greater than international market prices or those that would equate social and private valuations. The value of the difference is theoretically a transfer from the treasury to the producers of that commodity.

If the value of I is negative, then social revenues are greater than the private revenues. This means that the Government is taxing instead of subsidising the producers. In other words, the government and/or consumers are purchasing production in prices lower than those prevailing in international markets or those that equate private and social valuations. The actual or implicit tax, in this case, is a transfer from producers to the treasury.

Standard ratios reflecting the degree of price divergences or distortions are normally calculated to compare profitability and efficiency of different crops. These ratios facilitate comparisons among activities, particularly when the production process and outputs are dissimilar. They can also be used to rank alternatives according to different policy objectives. A number of protection coefficients could be calculated in a standard PAM. The most commonly used protection coefficients are Nominal Protection Coefficients (NPC) and Effective Protection Coefficient (EPC).

The NPC is calculated by dividing the revenue in private prices (A) by the revenue in social prices (E). The objective of calculating NPC is to measure the actual divergences or distortions between domestic prices and international or border prices of output^[xvii]. If NPC is less than one it confirms the presence of taxes (tariffs) on outputs. An NPC greater than one shows the presence of subsidies. An NPC equal to one (in the absence of market failures) reveals the absence of intervention.

The EPC is defined as the ratio of value added in private prices (A‑B) to value added in social prices (E‑F). It is another measure of incentives to farmers.^[xviii] This coefficient indicates the combined effects of policies on tradable commodities (inputs and outputs). The EPC is a useful indicator that measures the whole structure of incentives/dis-incentives which may exist with respect to a given production process. An EPC less than one indicates negative effects of policy (a tax), whereas an EPC greater than one indicates positive effects of policy (a subsidy).

The Profitability Coefficient (PC) measures the incentive effects of all policies affecting the production of the selected products. However, its use is limited when either private or social profits are negative. The PC can be used as a proxy for the net policy transfer (L).

The Private Cost Ratio (PCR), explains the ratio of domestic factor costs (C) to value added in private prices (A‑B). This ratio demonstrates the ability of the production system to cover the cost of the domestic factors and continue to be competitive. It is also a proxy for the degree of processing within the domestic economy. This ratio is important for investors because they can optimise their profits by minimising the cost of tradable inputs and factors.

6.4 Measures of comparative advantage

Comparative advantage could be measured by the Domestic Resource Cost (DRC) ratio. DRC determines whether the production of a specific crop makes efficient use of the domestic resources. The same set of data used to estimate the protection coefficients could also be used to estimate the comparative advantage of a specific crop in a particular region.

The DRC, as a measure of efficiency or comparative advantage, is calculated by dividing the factor cost in social prices (G) by the value added in social prices (E‑F)^[xix]. A DRC greater than one indicates that the cost of domestic resources used to produce the commodity is greater than the contribution of its value added at social prices meaning a comparative disadvantage. A DRC less than one indicates that the country has a comparative advantage in producing that commodity, or that the commodity is making efficient use of the domestic resources.

6.5 Modelling Assumptions

We needed first to select a sample of representative commodities to analyse using the PAM system. We were basically interested in traded commodities. Wee singled out the major agricultural exports and imports of Lebanon. We also needed to define the social prices of traded inputs and the efficiency (scarcity) prices of the nontraded inputs.

6.5.1 Selection of Commodities

Citrus fruits, apples and vegetables were considered first being the major exports of Lebanon. These crops are produced in several of the nine different agro-climatic zones, ecah with its own water, temperature and soil characteristics. They are also produced under different irrigation schemes—rainfed, irrigated and Greenhouses. Again the different irrigation schemes have a different cost/profitability structures. Other potential exports such as tomatoes, potatoes, grapes, tobacco, olives, flowers, etc. were also considered. The major imported agricultural commodities such as wheat, barley and banana were also highlighted and analysed.

Lebanon has over 9 distinct agro-climatic zones. A small country by any comparison, Lebanon has a wide and rich diversity of climates and soils (see Map). These include:

· Zone 1: A primarily mountainous region that spans the entire length of Lebanon from the north to central region. The area is inclusive of: Jroud Akkar, Danieh, Ehden, Pcharre, Hasroun, Tannourine, Jezzine, Kesrouan and Chouf

· Zone 2: A primarily coastal region of north Lebanon. It covers the plains of Akkar and Minieh.

· Zone 3: A region in north Lebanon of limited elevation bounded by the mountains to the east and the coastal plains to the west. It includes Zgharta and Koura.

· Zone 4: A central region also with some elevation. It covers Kesrouan, Metn, Baabda, Aley, the coastal plain of Chouf, Betroun and Jebeil.

· Zone 5: Coastal plains of south Lebanon. It covers the coastal plains of Saida and Sour.

· Zone 6: An interior region between Mount Lebanon and Mount Ante Lebanon. It covers Zahle and West Bekaa Valley.

· Zone 7: Another interior region. It covers primarily Baalebeck region.

· Zone 8: Another interior region. It covers the northern part of the Bekaa Valley of Hermel and Qaa.

· Zone 9: An interior and mountainous region. It covers Nabatiyeh and Marjayoun.

The main objective of constructing the Policy Analysis Matrix (PAM) for about 80 crops in the nine agro‑climatic zones of Lebanon was to estimate the policy incentives regime, the profitability, efficiency, protection or lack of, value added and degree of processing in the agricultural sector. This study draws heavily on the work completed at ESCWA and presented in the National Farm Data Handbook for Lebanon that details the private profitability, cost and revenue structures of farms in Lebanon in the different agro-climatic zones for a large set of agricultural crops. These private valuations need to be complemented by social valuations within the same platform.

6.5.2 Social Valuation of Tradables and Non‑Tradables

Social valuation of outputs and inputs is a major segment in the building process of the Policy Analysis Matrix (PAM). Social prices in the PAM are also referred to as efficiency prices (shadow prices). Social or efficiency prices demonstrate the opportunity costs of use. World prices of inputs and outputs are the cornerstone for estimating most of the efficiency prices. We also need to find the equilibrium values of some of the domestic prices such as the exchange rate, the interest rate and water prices.

Unlike many other developing countries, Lebanon’s free market economy generates a large set of market prices that are derived in purely competitive settings free from any real or substantive government intervention. For example we found very little difference between the prices of modern fertilisers sold in the United States and those in Lebanon save those normal freight, insurance and delivery charges. But like many other developing countries, there are major market failures in a number of spheres. This is particularly so with respect to the exchange rate, the interest rate and the price of water.

In most cases, as is clear in the tables in the Appendix, we used the output border price to reflect the Saudi Arabian import price (FOB) of the commodity in question. This is in view of Saudi Arabia being a major trading partner of Lebanon and a major world importer in the region. No other adjustments were included. We did not feel that the distances in Lebanon are that long to make a significant difference in the calculations. We also did not feel that there are any established handling charges to use as a norm.

Input prices of traded inputs such as fertilisers are taken to be the Lebanese prices of these inputs in US dollars. These were re-estimated in Lebanese pounds using the equilibrium exchange rate.

The equilibrium exchange rate was estimated by running regression equations for the import and export functions with respect to the exchange rate. The equilibrium rate was considered as the one that equates the two functions. It may be claimed that the equilibrium exchange rate should be determined from the entire balance of payments account. This in our opinion would bias the exchange rate towards the capital account. We were more interested in an exchange rate that would balance the trade account.[xx] We found the equilibrium exchange rate to stand at LB 1,842.5 to one US dollar. The current market exchange rate is LB 1,507. This suggests that the exchange rate is about 22% over-valued. In our calculations of social parameters we used the calculated equilibrium exchange rate. This value is consistent with the fact that a great proportion of bank deposits in Lebanon are in US dollars (over 60%). My work and the work of several others suggest that this ratio is high because depositors believe that the LB is artificially over-valued and would soon depreciate its true equilibrium value.

The over-valuation of the Lebanese pound is maintained by a very high interest rate policy. The interest rate is maintained at levels the Central Bank believes as necessary to stabilise the LB. This is done through attracting financial capital into Lebanon and also by stemming domestic liquidity with few borrowers if any besides the government that has become increasingly reliant on banks to finance its large deficits and sustain its debt. Although the interest rate has recently fallen, it is still at least 5 percentage points above the opportunity cost of borrowing in US dollars. It is the US dollar borrowing rate that is used in evaluating the social cost of borrowing (11%).

Can we put a price tag on water? We can at least consider the replacement cost or its marginal cost of production and delivery. At one extreme is the $1.50 per cubic metre replacement value through desalination. On the other hand, my work with WAS (Water Allocation System) at Harvard and my work with ASAP (Allocation System for Agriculture in Palestine), it seems that a value of $0.20-$0.25 per cubic metre is more consistent with the value of marginal product of water in agriculture. This cost is free any subsidies or delivery costs. It simply measures the average shadow price in area that is relatively endowed with water (in WAS and ASAP this would be northern Palestine).

These social prices were used to determine social profitability and the social value of traded and nontraded factors. Actually most of the entries of Table 13 were calculated using the values defined above.

7.0 Analysis of the Results

This section is devoted to the presentation of the results of applying the Policy Matrix Approach to Lebanese agriculture. We have constructed nine tables (Tables 14-22) to present not only the private and social valuations of inputs and profits but also to estimate a large array of efficiency ratios we detailed above. These would be applied to each zone and to the relevant crops in each zone.

In particular we present below our interpretation of the Policy Matrix Analysis and the various ratios that we have estimated to guide us in determining profitability, comparative advantage, degree of protection and the need for subsidies or taxes.

We begin with Zone 1 and with primarily two dominant crops that Lebanon exports abroad in large quantities. These are apples and pears.

The results in Table 14 are clear and striking. The production of apples and pears in Zone 1 is generally privately and socially profitable. With the exception of Kutuba, Hrajel, Fakra and Faria, all other areas considered in Zone 1 result in positive private and social profits. Perhaps more interesting is the fact that Zone 1 has a solid comparative advantage in both pears and apples. For example, the Akkar region has a solid comparative advantage in both pears and apples. This is clear from a DRC ratio that is significantly below one. The DRC coefficient provides information on the amount domestic resources used in production can earn or save a unit of foreign exchange. A DRC less than one shows that few domestic resources are used to earn sizeable foreign exchange. Besides, these areas are earning sizeable foreign exchange with limited use of domestic resources are doing so with little or no effective or even nominal protection. Value added in private prices and social prices are high for the profitable outputs. There is a significant output transfer (revenues in social prices far exceed revenues in private prices). This indicates that despite the over-valued exchange rate and the high interest rates, this Zone is able to produce outputs that are still profitable. This is also shown by high negative net transfers(difference between private and social profits). Such a large negative net transfer suggests that policies are on the whole un-supportive of productive farmers. This justifies a social subsidy to the farmers by way of allowing them to share in the social good they are generating that they cannot capture through the market and private prices. There are significant input transfers. The social valuation of traded inputs are higher than the private valuation of these inputs. The over-valued exchange rate is allowing farmers to buy these inputs at lower prices than they would have to pay if the equilibrium exchange rate were to hold. It is interesting to note that private cost of domestic inputs are above their social cost. This again is a good ground for a subsidy. The farmers are over taxed by the government’s macroeconomic policies (high interest rates).

In Zone 2 farmers produce a wide assortment of crops. Again all of the crops are privately and socially profitable. What is critical here is the fact that social profitability is far larger than private profitability. Farmers are not basically able to fetch in the domestic market comparable prices to those at the border for their outputs. It is also interesting to note that this profitability is differential. Private profitability is highest in Minieh, both for cucumber and tomatoes. There are huge output transfers. The social valuation of revenues and outputs far exceeds the private realisations. This ultimately explains the huge net transfers. Farmers can do much better exporting these products than selling them at home. Besides, there are also significant factor transfers. Private costs are above social costs. The opposite is true for input transfers. This is understandable. Modern inputs are bought with an overvalued exchange rate and domestic capital is borrowed with very high interest rates.

This zone has a decisive comparative cost advantage in every product listed in Table 15 except for wheat and tobacco in Akkar. This comparative advantage is realised without any nominal or effective protection. On the contrary, it is the substantial comparative advantage that is protecting this sector. Unquestionably, cucumber, orange and tomatoes in Minieh, grapes, eggplant, and oranges in Akkar are highly productive, efficiently produced and have a strong comparative advantage.

While Zgharta and Koura support only a limited assortment of agricultural products olives are a dominant and recognised output of this zone. Unfortunately olives do not appear to be socially profitable while they are privately profitable. In the example we have used in Table 16, olives in the Koura region show a negative social profitability and a DRC coefficient that is greater than 1 signifying that the social valuation of domestic inputs is larger (although by not much) than the social valuation of value added. Production of this output does not earn or save Lebanon any significant foreign exchange. Furthermore, this negative showing is despite the fact that olives enjoy huge effective protection. On the other hand, the production of tomatoes in both Koura and Zgharta is privately and socially profitable and this Zone shows a strong comparative advantage in their production.

The policy analysis matrix results for Zone 4 are presented in Table 17. The majority of the crops in this Zone are both socially and privately profitable with the exception cucumbers and tomatoes in Amchit. It is also quite evident that the social valuation of profits is significantly higher than the private profits. This gain follows from the fact that domestic prices are fractions of border prices and that traded costs in social prices are below private costs. The DRC coefficients for most crops in this zone are below 1 signifying comparative advantage in production. The only exception is olives in the Chouf. It appears that olives in the Chouf are socially unprofitable and have a DRC coefficient of 1.59. It is also true that they enjoy substantial effective protection as is the case of this crop in the Koura region. Cucumber in Jbeil and Jieh is productive, profitable and has high comparative advantage. Strawberries in the Cheweifat are highly privately profitable but show a marginal DRC coefficient, a very high ratio of private to social profitability and operate under a very high wall of effective protection. Tomatoes in most of the subregions in this zone are profitable and efficient.

Zone 5 is a major agricultural area in Lebanon noted for its quality citrus fruits. It is not surprising to find that oranges, lemon and valencia show high rates of private and social profitability Table 18). They also make large contributions to private and social value added. They also have strong comparative advantage as demonstrated by DRC coefficients less than 1. They also operate with little effective protection. On the other hand, banana is typically socially unprofitable and its DRC coefficient is way above 1 signifying that Lebanon does not have a comparative advantage in this crop. Besides it is also true that banana production is operating with a very high effective protection. This applies to all regions in this zone except Akabieh where banana production has a DRC coefficient of 0.81. It is also true Lebanon does not have a comparative advantage in the production of avocado. The crop is not socially profitable and has a DRC coefficient of 1.56.

The results for Zone 6 are presented in Table 19. All products reported in Table 19 show positive profitability rates with the exception of table grapes and potatoes. It is also evident that private profitability is way below social profitability. Surely border prices are far higher than the corresponding domestic prices. The net transfers are obviously negative and large. Net transfers, as we know, measure the diversion between private and social profitability. The DRC coefficients for most crops are less than one signifying strong comparative advantage for this Zone in these crops. These coefficients are particularly revealing for cucumber, cantaloupes, tomatoes and watermelons. Interestingly, the DRC coefficient for wheat and sugarbeets are above 1. The Bekaa valley does not have a comparative advantage in wheat and sugarbeets. Wheat and sugarbeets appear to have very high rates of nominal and effective protection. Both of these products are a burden on the government being subsidised and with negative social profitability.

The results in Table 20 present the policy matrix analysis results for Zone 7. A number of relevant results emerged. First, Apples in Yamouneh are not efficiently produced. They show a large negative social profitability. They also have a DRC coefficient that is greater than one. Grapes are also a crop that is not best suited for production in this Zone. Its production is socially negative, its DRC id greater than 1 and there are negative input transfers associated with its production. Tobacco again shows that subsidisation by government raises its private profitability over its social profitability diverting resources into an inefficient product. Ironically, sugarbeets are efficiently produced in this Zone. There is a minor input transfer, but its DRC coefficient is less than 1. But its being produced under a very high rate of effective protection. This crop here is the outcome of a deliberate policy to shift agriculture from illegal outputs into more socially accepted outputs. This policy appears to be socially expensive in terms of social prices. Cucumbers are efficiently produced being privately and socially profitable with DRCs below 1 and involving limited input and output transfers. Brital is particularly suited for cucumber production as well as Kafardan. Potatoes are privately unprofitable but socially profitable. With a minor adjustment in the nominal rates of protection or subsidies, it can be produced with private positive returns. Apples in Baalbeck are marginally productive. Given the enormous advantages to the production of apples elsewhere in Lebanon, producing them in Baalbeck is not supportable.

Zone 8 is not much different than Zone 7, but it specialises in a well-defined vector of goods. Most of these goods are either produced by land under irrigation or under tunnels. All of the outputs considered here are socially and privately profitable. The Zone is particularly suitable for the production of watermelons and cantaloupes. The Zone has a decisive advantage in their production. The DRC coefficients are barely different from zero. Social profitability is multiples of private profitability in all of the four crops considered. They also operate with minimal effective or nominal protection with the exception of watermelons produced in tunnels.

The output transfers are negative for cantaloupes, tomatoes and watermelons produced on irrigated lands. They are marginally positive for watermelons produced in tunnels. This suggests that private profitability in the last crop is larger than private profitability. The social valuation is lower than the private realisation. There is room to improve efficiency by transferring production of watermelons from tunnels to irrigated lands.

The Zone is also particularly suited for the production of tomatoes. With limited input transfers and large output transfers, the value added in private and social prices are significantly large and the DRC coefficient is significantly low.

The last Zone covers an area that is under stress from Israeli occupation or daily bombardment. It has a long history in the production of tobacco and olives. The results in Table 22 are not particularly encouraging. They point out to the production of a highly subsidised tobacco with DRC coefficients that are significantly larger than 1. The area does not have a comparative advantage in tobacco production. In the absence of subsidies this output will not be even privately profitable. It is operating under extremely high rates of nominal and effective protection. Wheat is another major crop in this zone. But again it is also highly unprofitable socially in Ghasanieh but profitable in Nabatiyeh. This difference between the two may be more the outcome of data problems than real and substantive factors. It needs further research and examination before any generalisation can be reached. Olives appear to be efficiently produced in Kferhata but not in Nabatiyeh. It would be worth investigating the microeconomic data to see if the difference is a substantive one or is it the result of data problems. There is no question about the difficulties experienced in this region as a result of 25 years of difficulties. The analysis here is more microeconomic in nature and cannot make broader generalisations about the situation. But when normalcy comes again, there is a great agricultural potential in this Zone that can be exploited to advantage. The preliminary results here point out that crop changes may be in order.

8.0 Conclusion

Agriculture in Lebanon is not a major or significant burden on the government. The Lebanese government has typically allocated a very small proportion of its budget to agriculture. It has introduced, however, the “Agricultural Calendar” which was designed to protect particular crops during the harvest season and advanced cash subsidies to products such as tobacco and sugarbeet to convince farmers to move off illegal products in certain zones into more acceptable crops. But these efforts are marginal and do not represent major distortions to the sector. The distortions, however, came from the macroeconomic policy that targeted an over-valued exchange rate and necessitated very high interest rates. It also comes from the way water is priced and distributed. Water is now used (abused) at prices that are significantly below its marginal cost of production and a typical scarcity premium.

Government policy in Lebanon is wedded to free enterprise. The government intervenes very marginally in market outcomes. The tax rates are exceptionally low by comparison to any other country and rates of collection are even lower. The government restricted its intervention to building infrastructure. This has not been sufficient. What has been done and should have had an effect is thwarted by Israeli encroachment on the Litani project. There are not sufficient rural roads. The Lebanese market is not well insulated for Lebanese farmers. The export potential is there but the over-valued exchange rate and the typical negligence of consistent and effective marketing partnerships between the private and public sectors are increasingly forfeiting it.

While our present study deals with microeconomic issues in the agricultural sector, it also points the many ways the macroeconomic environment impacts the performance of farmers and farms. It is clear that a 22% depreciation in the value of the LB will help immensely the capacity of the agricultural sector to become more profitable and efficient. With this we need a more realistic interest rate. Water need to be priced at its shadow price. Lebanon is relatively well endowed with water. But this water needs to conserved and its quality preserved. There is no room for waste and efficiency calls for limiting waste and for an appropriate price regime. Labour in agriculture is typically Syrian labour. It has kept the Lebanese agricultural sector viable. But the Lebanese policy makers may have to consider the advantages of cheap Syrian labour against cheap Syrian products or a possible compromise between the two. Cheap labour and cheap imports require a thorough consideration of the implicit and explicit trade-offs.

The results suggest that there are a number of agricultural products where Lebanon has a major comparative advantage. These include apples, tomatoes, pears, oranges, cucumber, watermelons, cantaloupes, etc.. There are a few products where the subsidies are sustaining economically (profit-wise) inefficient outputs. This is particularly true for tobacco, wheat and sugarbeets. Olives appear to be marginal and in some cases inefficiently produced. Special studies and care should be directed towards validating this preliminary findings. Lebanon can and must seek efficient allocation of resources and exploit comparative advantage. Other social objectives may be necessary but the cost and benefits of these should be clearly and objectively determined.