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1. 1
Public Policies to Tackle the Rising Cost of Living
Alban THOMAS
Toulouse School of Economics, INRA and IDEI
Beirut, May 31, 2012

2. 2
Public Policies to Tackle the Rising Cost of Living
Upgrading Lebanon's Economic Analytical Capacity, Beirut, May 31, 2012
Background
 Economic situation is deteriorating:
• Increasing and more volatile commodity prices
• Dependency upon imported energy sources
• Increasing housing and energy shares in household budget
 Role of public policies:
• Limit cost of living increases, protect consumer welfare
• Maintain local firms’ profitability
• With a sustainable public deficit
 First, examine household expenditures and price increases
• To determine policy targets (which goods)
• and which population categories

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Public Policies to Tackle the Rising Cost of Living
Upgrading Lebanon's Economic Analytical Capacity, Beirut, May 31, 2012
Item 2003 2004 2005 2006 2007
Food 3.5 3.5 3.8 8.0 11.1
Tobacco 1.8 -1.8 2.3 1.2 0.2
Textiles 7.4 1.5 6.3 5.7 -4.2
Energy & water 2.3 4.9 0.8 1.7 3.8
Durable goods 4.6 7.9 1.1 3.2 4.7
Other manufactured goods 10.7 4.3 2.2 2.3 5.2
Transport & telecommunication 0.4 0.2 2.2 2.3 5.2
Rental housing 0.2 0.1 0.0 0.0 0.0
Education 5.7 3.1 1.7 1.1 2.7
Health 3.7 1.0 -0.6 -0.8 3.3
Other services 2.9 1.2 0.5 1.1 6.3
Total 3.4 2.8 2.1 3.2 5.0
Consumer price changes (%)
Source: Economic Accounts of Lebanon, 1997-2007

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Public Policies to Tackle the Rising Cost of Living
Upgrading Lebanon's Economic Analytical Capacity, Beirut, May 31, 2012
Item Average expenditure
per HH (LBP 1000’s)
Budget share
(%)
Food & tobacco 6 490.8 27.10
Clothing & footwear 1 431.6 5.97
Housing 3 620.2 15.11
Equipment & household services 1 540.6 6.43
Health 1 857.9 7.75
Transport & communications 3 221.3 13.45
Education 2 596.8 10.84
Leisure 1 147.2 4.79
Personal care, other expenses 2 042.5 8.53
Total 23 948.9 100.00
Household expenditures and budget shares, 1997
Source: CAS, Household Living Conditions 1997, n° 13.

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Public Policies to Tackle the Rising Cost of Living
Upgrading Lebanon's Economic Analytical Capacity, Beirut, May 31, 2012
Industry 2003 2004 2005 2006 2007
Agro-food 16.6 10.2 4.1 5.1 16.5
Textiles, leather & clothing -5.3 -2.5 -5.1 1.5 1.8
Non-metal ores & products 4.8 6.4 9.5 5.8 11.6
Metals, machinery & equipment 8.6 11.1 4.0 5.6 14.7
Wood, rubber & chemicals 8.0 10.6 9.9 4.0 12.5
Furniture -2.2 4.0 5.6 1.7 7.3
Other industries 3.5 9.4 2.4 1.0 5.0
Total 9.8 11.1 8.7 5.4 11.6
Industrial imported input price changes (%)
Source: Economic Accounts of Lebanon, 1997-2007

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Public Policies to Tackle the Rising Cost of Living
Upgrading Lebanon's Economic Analytical Capacity, Beirut, May 31, 2012
This presentation:
1. Can we minimize imported inflation by giving up pegging to US$?
2. What public policies to control rising food prices?
3. How can Lebanon minimize in the short run the impact
of oil price increases on energy prices?
4. What are effective policies from other countries to control
rising housing costs?
5. Conclusion

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Public Policies to Tackle the Rising Cost of Living
Upgrading Lebanon's Economic Analytical Capacity, Beirut, May 31, 2012
1. Imported Inflation and Public Policies
 In small importing economies, imported inflation depends on:
• Share of imported goods and production inputs
• Competition in international markets
• Global resource scarcity or tensions on commodity markets
• Exchange rates, tariffs, and transaction costs
 Given trade patterns, would it be worth replacing USD with a
basket of currencies for pegging to the Lebanese Pound?
• Depends on long-term changes in trade patterns
• Instability of the ratio US$ / €
• Other considerations (remittances, gasoline/diesel/fuel)
• Biofuel perspective: USD or Euro?

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Public Policies to Tackle the Rising Cost of Living
Upgrading Lebanon's Economic Analytical Capacity, Beirut, May 31, 2012
2007 2008 2009 2010 2011
Consumer Price Index 100 105.5 109.1 114.1 117.6
Real GDP growth 7.5% 9.3% 8.5% 7.0% 4.5%
(National Accounts)
Real GDP growth 7.5% 9.3% 8.5% 7.0% 1.5%
(IMF)
Exports/Imports 23.8% 21.6% 21.5% 23.7% 21.2%
Source: Ministry of Economy and Trade and IMF.
Statistics on Inflation and Growth in Lebanon

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Public Policies to Tackle the Rising Cost of Living
Upgrading Lebanon's Economic Analytical Capacity, Beirut, May 31, 2012
2000 2011
Import value to Lebanon, by product

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Public Policies to Tackle the Rising Cost of Living
Upgrading Lebanon's Economic Analytical Capacity, Beirut, May 31, 2012
Source: Economic Research Unit, Trade Information Center and Lebanese customs.

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Public Policies to Tackle the Rising Cost of Living
Upgrading Lebanon's Economic Analytical Capacity, Beirut, May 31, 2012
20112000
Import value to Lebanon, by country

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Public Policies to Tackle the Rising Cost of Living
Upgrading Lebanon's Economic Analytical Capacity, Beirut, May 31, 2012

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Public Policies to Tackle the Rising Cost of Living
Upgrading Lebanon's Economic Analytical Capacity, Beirut, May 31, 2012
2. Food Prices and Public Policies
 Policies to control rising food prices in the medium run?
 Examples of Egypt, India, the Philippines:
• Procurement prices for farmers and processors in agro-
food chain
• Subsidized consumer prices on “vital” goods
• Strong impact on govt. budget, also due to poorly
targeted policies
 Tax policies also have indirect effects through changes in
available income (after tax)

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Public Policies to Tackle the Rising Cost of Living
Upgrading Lebanon's Economic Analytical Capacity, Beirut, May 31, 2012
 Prefer direct income transfers to price controls and subsidies
• Provided targeting is adequate
• Account for implementation and management costs of
policy
 FAO:
• Reduce tariffs to encourage food imports
• Discourage / restrict food exports to increase domestic
food supply
• Promote pro-competitiveness policies in local markets
• Open market operations through public stocks to stabilize
prices (Asia)

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Public Policies to Tackle the Rising Cost of Living
Upgrading Lebanon's Economic Analytical Capacity, Beirut, May 31, 2012

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Public Policies to Tackle the Rising Cost of Living
Upgrading Lebanon's Economic Analytical Capacity, Beirut, May 31, 2012
 Food price pass-through in Lebanon:
A 1 percent increase in world food prices translates into a 0.3
percent increase in the prices of domestic foodstuff.
Food Item Net Imports Import Share Cons. Share
(% of consumption)
Grains 87% 39% 32%
Oils 38% 7% 8%
Meat 56% 38% 49%
Sugar 100% 16% 11%
Food 70% Total 100% Total 100%
Source: Elena Ianchovichina, Josef Loening and Christina Wood, 2012. How
Vulnerable Are Arab Countries to Global Food Price Shocks? World Bank Policy
Research Working Paper 6018

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Public Policies to Tackle the Rising Cost of Living
Upgrading Lebanon's Economic Analytical Capacity, Beirut, May 31, 2012
3. Energy Prices and Public Policies
 How to minimize the impact of oil increases on energy
prices in the short run?
 Consider demand-side management (more efficient use of
energy)
 Coupled with social tariff of electricity
 In the longer run, supply-side policy (restructure energy
sector in Lebanon)
 Example: conversion to natural gas for power generation
(allowing for long-term contracts)

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Public Policies to Tackle the Rising Cost of Living
Upgrading Lebanon's Economic Analytical Capacity, Beirut, May 31, 2012
Electricity rationing outside Beirut: 8-12 hours/day
Energy and Water Minister Jebran Bassil in 2010:
reasonable hourly electricity rate by private generator owners
should not exceed a ceiling of LL350 ($0.23) for 5 Amperes

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Public Policies to Tackle the Rising Cost of Living
Upgrading Lebanon's Economic Analytical Capacity, Beirut, May 31, 2012
Electricité du Liban (EDL)
Public monopoly (protected by Law 462)
Average fee 37$/month/household in 2004
Slow switch from oil to natural gas?
Private (illegal) operators
Supplying 61%-85% Lebanese population
Average generator fee 19$/month/household
2011: Minimum fee for 5 A: 100 $ / month
Windplant projects
Govt. objective: 60-100 MW/h in 2013
Awa Akkar Project (Albert Khoury):
30 windmills for 60 MWh (60,000 housings)
Investment cost: 100 million $US

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Public Policies to Tackle the Rising Cost of Living
Upgrading Lebanon's Economic Analytical Capacity, Beirut, May 31, 2012
4. Housing Cost and Public Policies
 What are the effective policies in other countries to control
rising housing prices?
 Most policies are dealing with a long-term issue:
Growing gap between demand for housing and supply
 Either demand-side management or supply-side policies
 Long experience of OECD countries in designing housing
policies: to what effect?

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Public Policies to Tackle the Rising Cost of Living
Upgrading Lebanon's Economic Analytical Capacity, Beirut, May 31, 2012
Housing Cost and Public Policies
Statistics for the Lebanese Housing Sector
2007 2008 2009 2010 2011
Construction permits 10,358 13,727 15,438 17,922 18,347
Surface (1000 m2) 9,038 16,067 14,343 17,625 16,465
Number of sales 67,041 81,709 83,622 94,202 82,984
Sales value (million $) 4,198 6,481 6,955 9,479 8,841
Nb. Buildings 246,791 267,358 273,417 292,196 306,213
Change prev. Year - 8.3% 2.3% 6.9% 4.8%
Source: Ministry of Economy and Trade.

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Public Policies to Tackle the Rising Cost of Living
Upgrading Lebanon's Economic Analytical Capacity, Beirut, May 31, 2012

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Public Policies to Tackle the Rising Cost of Living
Upgrading Lebanon's Economic Analytical Capacity, Beirut, May 31, 2012
Housing markets and structural policies in OECD markets
Dan Andrews, Aida Caldera Sánchez, Åsa Johansson,
OECD Economics Department Working Paper 836, 2009
 Policies influence housing supply:
• land-use and planning (e.g., conversion of land)
• provision of infrastructure and public services
• social housing and rental regulation (eviction, rent control)
• tax policy in the building sector
• enhance competition in construction industry
 And demand for housing:
• Financial market deregulation for access to credit
• relaxation of lending standards
• tax exemptions on mortgage payments
• preferential housing taxation and rent allowances

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Public Policies to Tackle the Rising Cost of Living
Upgrading Lebanon's Economic Analytical Capacity, Beirut, May 31, 2012
OECD countries: housing supply is negatively correlated to
population density delay to obtain land use regulation
a building permit

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Public Policies to Tackle the Rising Cost of Living
Upgrading Lebanon's Economic Analytical Capacity, Beirut, May 31, 2012
Rent control indicator, OECD countries (2009)

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Public Policies to Tackle the Rising Cost of Living
Upgrading Lebanon's Economic Analytical Capacity, Beirut, May 31, 2012
 House prices tend to increase more in rigid supply environments
 Housing policies (land-use and building regulations) and
competition in construction industry matter in housing supply
responsiveness
 Financial market deregulation has eased access to credit and
raised demand for housing
 Mortgage cost reliefs tend to be capitalised into house prices,
leading to price increases
 Housing should be taxed in the same way as other investment and
consumption goods
Housing policies: main findings in OECD countries

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Public Policies to Tackle the Rising Cost of Living
Upgrading Lebanon's Economic Analytical Capacity, Beirut, May 31, 2012
 Rent allowances
• Affect demand for rental housing and households’ housing
opportunities
• May end up being capitalised into rents
• Are likely to be less harmful for mobility than direct
provision of social housing
 Rent regulation
• Greater security of tenure may enhance demand for renting
• Strict rent regulation hinders mobility
• Seems to be associated with lower housing supply
• No clear evidence that rent control leads to lower rents

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Public Policies to Tackle the Rising Cost of Living
Upgrading Lebanon's Economic Analytical Capacity, Beirut, May 31, 2012
5. Conclusion
 Policies can be
• short-term (demand-side management)
• long-term (structural adaptation)
• budget-neutral or not (sustainability?)
 Lessons from subsidy policies
• Non neutral policies are not sustainable
• Efficient tax policies are politically difficult to accept
• Critical to have alternative ways of
consuming/producing/living to promote with tax policies
 Distinguish between policy objective and policy effectiveness
 Given the objective, identify the most efficient policies

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Public Policies to Tackle the Rising Cost of Living
Upgrading Lebanon's Economic Analytical Capacity, Beirut, May 31, 2012
Thank you for your attention
thomas@toulouse.inra.fr