Upgrading Lebanon’s Economic Analytical Capacity

Rima Turk Ariss, Ph.D.Lebanese American University

& Lebanese Economic Association

May 31, 2012

Background

• Following the end of the civil war, the first wages adjustment process took place in 1996:– A unique amendment in 2008 granted a lump sum increase of LBP

200,000 per month bringing the minimum wage up to LBP 500,000.

• Wages adjustment became one of the top priorities on the public scene between Sep 2011 and Jan 2012.– Adoption of the wage adjustment decree No. 7426 during the

January 18, 2012 session of the Lebanese Cabinet.

• Still people feel there is a gap between the inflation measurements and the reality of the increase in prices.

• Five lessons learned from the wages adjustment discussions.

Background

1. Lack of agreement on the magnitude and causes of inflation– CAS and CRI provide different inflation rates.– Are price rises attributed to imported inflation?– Is inflation due to an increase in the prices of non-tradables? Clothing and

footwear? Transportation costs?

2. Revival of the Price Index Committee and expanding its inclusiveness, despite not adopting its recommendations– Includes the Minister of Labor, representatives from economic bodies,

General Labor Confederation, Coordination Committee of Syndicates, and from CAS & CPI.

– Has the official mandate to recommend wages adjustment in the country.

Background3. Introduction of the social wage concept

– Proposals aimed at including transportation expenses as an integral part of the salary, as well as extending health coverage to all Lebanese citizens.

– Greater attention given to attempt reducing inequality gaps among the Lebanese population and towards strengthening the social safety net.

4. Predominance of political considerations when undertaking economic decisions– A total of six wages adjustment proposals were discussed and circulated.

– Lengthy discussions even threatened the unity of the Cabinet.

– Final consensual decision did not account for the PIC recommendations.

5. Absence of a robust framework to monitor price increases and enforce compliance– Unfounded price increases hiked prior to and following the adjustment.

Consistency and Validity ChecksMonthly Inflation Rate Evolution: CAS vs. CRI

Jan-

10

Mar

-10

May

-10

Jul-

10

Sep-

10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-

11

Sep-

11

Nov

-11

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00% CAS

CRI

`

Discrepancy: CAS vs. CRI• CAS covers numerous points of sale from all over the

Lebanese territory whereas CRI figures are collected from selected outlets in Beirut and its suburbs.

• CRI excludes the lowest and highest income category from the CPI calculation compared to the comprehensive coverage of CAS of all income group categories.

• CAS uses weights that are derived from the 2004 household survey whereas CRI extracts its weights from the 1997 household survey because it questions some of the findings of the 2004 survey.

Consumption Weights: CAS vs. CRIExpenditure Category CAS 1997

weights %CAS 2004 weights %

CRI 1997 weights %

Food and non-alcoholic beverage 32.3 19.9 35.4

Tobacco and Alcohol 2.3 2.1Clothing and Footwear 6.3 6.2 6.55Housing 1.6 16.2 1.68Water, Electricity 7.2 9.5 4.81Furniture and Household Maintenance 7.9 3.9 8.18Health Care 8.8 6.8 9.82Transportation 9.8 12.3

 14.39Communication 1.5 4.8Recreation 2 3.7

 2.7Restaurants and Hotels 3.4 2.7Education 13.4 7.7 12.45Other goods and services 3.5 4.2 4.02Total 100 100 100

Consistency and Validity Checks 1Yearly inflation rates: CRI, CAS and OECD Europe

-20

24

68

01jan2008 01jan2009 01jan2010 01jan2011 01jan2012

yearly CRI inflation yearly CAS inflationyearly OECD Europe inflation

Consistency and Validity Checks 2Yearly inflation rates: CRI, CAS and OECD U.S.

-20

24

68

01jan2008 01jan2009 01jan2010 01jan2011 01jan2012

yearly CRI inflation yearly CAS inflationyearly OECD US inflation

Jul-1

0

Aug-10

Sep-1

0

Oct-10

Nov-10

Dec-1

0

Jan-1

1

Feb-1

1

Mar-

11

Apr-11

May

-11

Jun-1

1

Jul-1

1

Aug-11

Sep-1

1

Oct-11

Nov-11

Dec-1

1

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%FAO food inflation rate

IMF food inflation rate

CAS food inflation rate

Food component: CAS, IMF & FAO inflation rates

Consistency and Validity Checks 3

Food component: CRI, IMF & FAO inflation rates

Consistency and Validity Checks 4

Jul-1

0

Aug-10

Sep-1

0

Oct-10

Nov-10

Dec-1

0

Jan-1

1

Feb-1

1

Mar-

11

Apr-11

May

-11

Jun-1

1

Jul-1

1

Aug-11

Sep-1

1

Oct-11

Nov-11

Dec-1

1

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00% FAO food inflation rate

IMF food inflation rate

CRI food inflation rate

Transportation component: CAS vs. Ministry of Energy and Water Inflation rates

Consistency and Validity Checks 5

Jan-1

0

Mar-

10

May

-10

Jul-1

0

Sep-1

0

Nov-10

Jan-1

1

Mar-

11

May

-11

Jul-1

1

Sep-1

1

Nov-11

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%Ministry inflation rate

CAS inflation rate

Transportation component: CRI vs. Ministry of Energy and Water Inflation rates

Consistency and Validity Checks 6

Jan-1

0

Mar-

10

May

-10

Jul-1

0

Sep-1

0

Nov-10

Jan-1

1

Mar-

11

May

-11

Jul-1

1

Sep-1

1

Nov-11

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0% Ministry inflation rate

CRI inflation rate

Proposals for New Price Indices: Food Imports Price Index

• Extract data on Lebanese agro-food commodities and products imports between 2008 and 2011 from the Lebanese Customs website– Items selected correspond to two hs levels of the detailed

taxonomy of agro-food sections : 1 (hs1 between 1 and 4) and 2 (hs2 between 1 and 24)

• Compute the unit price of imported goods per kilogram and then derive an imports price index using a monthly bugdet share weighted Laspeyres price index

Lebanese Food Imports CPI vs. IMF Food Component CPI

Consistency and Validity Checks 780

90

10

011

012

013

0

01jan2008 01jan2009 01jan2010 01jan2011

IMF Food Component CPI Lebanese Food Imports CPI

CAS Food Component CPI vs. Lebanese Food Imports CPI

Consistency and Validity Checks 890

10

011

012

013

0

01jan2008 01jan2009 01jan2010 01jan2011

CAS Food Component CPI Lebanese Food Imports CPI

CRI Food Component CPI vs. Lebanese Food Imports CPI

Consistency and Validity Checks 990

10

011

012

013

0

01jan2008 01jan2009 01jan2010 01jan2011

CRI Food Component CPI Lebanese Food Imports CPI

Proposals for New Price Indices: Real Estate Price Index

• Data on real estate prices is scarce in Lebanon and no official entity collects such information– Preparing a real estate price index is practically impossible.

• CAS imputes a rent component without disclosing the methodology, and CRI ignores housing costs in its CPI.

• However, several Lebanese households typically spend a large share of their income on housing expenses– Failing to adequately capture these expenditures in the CPI

may cast doubts on the usefulness of the price index.

Real Estate Price Index: Hedonic Price Estimation

• Real estate prices for new apartment listings are first collected from Lebanon Opportunities, which publishes new apartment listing regularly since 2009.– Covers 5 geographical areas: Beirut and suburbs, Baabda,

Aley, Metn, and Kesrouan.

• Reported prices are not equilibrium prices but asked (or demand) prices that are likely to be overstated by sellers. – However, changes in a constructed real estate index based on

asked prices also reflect changes in real estate conditions.

Hedonic Price Estimation:Sample & Methodology

Time Period Number of Apartment Listings

Fall-Winter 2009 533

Winter-Spring 2010 580

Summer-Autumn 2010 505

Winter-Spring 2011 701

Summer-Autumn 2011 990

Winter-Spring 2012 1110

Each square meter of living space adds βt to the value of the house, parameters γt , δt , φt , and

ώt capture the location premium for apartments in different regions. εijt includes all other non-

size characteristics (number of parking spots, time to delivery, number of rooms…)

Empirical Results

RegionFall-Winter

2009Winter-

Spring 2010Summer-

Autumn 2010Winter-

Spring 2011Summer-

Autumn 2011Winter-Spring

2012

Aley 1,017 1,196 1,278 1,354 1,504 1,496

Beirut 3,002 3,659 3,144 3,076 3,410 3,266

Metn 1,509 1,569 1,842 1,966 1,976 2,069

Baabda 1,758 1,946 1,860 2,037 2,306 2,468

Kesrouan 1,358 1,834 1,685 1,820 1,904 1,816

Average Apartment Price in USD across regions Predicted by Hedonic Regressions

Yearly Changes in

Region Winter-Spring 2010-2011

Summer-Autumn 2010-2011

Winter-Spring 2011-2012

Aley 13% 18% 10%

Beirut -16% 8% 6%

Metn 25% 7% 5%

Baabda 5% 24% 21%

Kesrouan -1% 13% 0%

Conclusions: Real Estate Price Index• Real estate prices peaked in the first quarter of 2010 for Beirut

and Kesrouan regions and decreased afterwards– The first quarter of 2011 even witnessed a deflation in real estate prices.

• Prices in different regions do not move in the same direction:– Prices in Baabda picked up over the past 2 years while Metn witnessed a

decrease in prices.

• In comparison, the corresponding housing CPI component

reported by CAS was reportedly unchanged at 111.2 over the

same period, pointing to no fluctuation in the rent price

imputation component.– It appears that the CAS housing component might not be an adequate

reflection of households’ expenditures on this major component of the

goods basket.

Summary: Validity Checks• Strong positive correlation between domestic & international inflation rates

– Domestic inflation rates are more correlated with U.S. than E.U. inflation rates, as expected

in light of the peg of the Lebanese currency to the U.S. dollar, and despite Europe being the

major trading partner of Lebanon.

– However, local rates are always above comparative international rates.

• Food inflation rates are below comparative international rates and did not correct

downwards as international food prices declined recently.

• Transportation component of domestic inflation rates is less volatile than global

trends in fuel prices.

• Housing component of CPI does not capture the reality of housing costs.

• The above validity checks suggest that current CPI measures in Lebanon may need

to be revised either in terms of collecting a more representative data sample or

improving the methods involved in its calculation, as well as conducting a more

recent household budget survey to better reflect household consumption patterns.