Local Economic Development (LED) Assessment: A Challenging Recovery for Local Economies
Between 2021 and 2022, a Local Economic Development (LED) assessment process was conducted within the framework of the Municipal Empowerment and Resilience Project (MERP), in partnership with United Cities Lebanon (UCL) /Technical Office for Lebanese Municipalities (BTVL), in the Urban Community Al-Fayhaa, the Federation of the Northern and Coastal Matn Municipalities and the Union of Tyre Municipalities. Informed by the “Growth Diagnostic Framework” developed by the Harvard Growth Lab and various approaches developed in the economic literature on crisis and firms, the LED assessment implemented three firm-level surveys (one in each Union) complemented by a series of Focus Group Discussions held with representative of various economic sectors to identify, at the Economy and Market level, the constraints and challenges faced by local firms and to understand the specific ways through which local governments can reintegrate workers into quality jobs and sustain local job creation.
Most of the surveyed firms are small private entities (less than 5–12 workers as opposed to less than 20 employees according to World Bank standards) producing manufactured goods as well as services. These firms have been affected by major aggregate shocks. At the national level, this includes the economic downturn, the financial crisis and drying up of credit, and the COVID-19 epidemic, and at the local level, mainly constraints related to their markets, the local infrastructure they have access to, the availability of local creditors, and their local authorities and the overall governance system within which they operate. To cope with these crises, they resorted to various survival strategies from the introduction of remote work and digital platforms on the positive side to the laying off a significant portion of their staff on the negative side (up to 42 percent of firms in Matn for example). The statistical analysis indicates that this strategy was triggered by the absorption of two market related shocks on both sides of their balance sheets:
(i) A significant increase in their costs level (more than 10 percent) also known as a supply-side shock. This was particularly pronounced in Matn and Tyre areas and particularly harmful for the manufacturing sector.
(ii) A significant drop in their sales level (more than 10 percent) also known as a demand-side shock. This was pronounced in Al-Fayhaa and Matn areas and particularly harmful for the services sector.
These shocks and the resulting lay-offs have to be understood within a broader context of
several major constraints that were more or less prominent depending on the concerned region and/or economic sector, mainly:
A. The volatility of the Lebanese pound exchange rate which affected all economic sectors.
B. The significant increase in costs (mainly raw inputs, electricity, and transport) and the gradual phasing out of subsidies on energy products since the beginning of the crisis which was particularly harmful to sectors such as agriculture, manufacturing, and services.
C. The dependence on internal funds, as support from local sources was not available, access to credit/microcredit became restricted and supportive policies were not put into place by national and local authorities. This is particularly constraining for agriculture, manufacturing and services sector.
D. Poor quality infrastructure and utilities (e.g., roads, electricity, wastewater, water provision, solid waste management and, effective environmental policy).
E. Governance constraints such as security (prominent in Al-Fayhaa and Tripoli) but also traffic regulation (like in Tyre).
F. Public services constraints such as access to health services for their workers (prominent in Tyre).
G. Structural constraints that have plagued Lebanon’s productive sectors before the crisis (e.g. access to local and international markets, trade barriers, technological costs etc.)
H. Government regulations related constraints were mentioned but were mostly marginal (taxation, bureaucracy, etc.).
Although, firms did not usually consider “labor cost” to be a constraint, the impact of the “market shock” on workers has been significant and deep despite regional differences. The worst impacted region has been Matn where 42 percent of firms laid off workers with services and manufacturing as the sectors that were most affected. It was followed by Al-Fayhaa, where 34 percent of firms laid off workers with the biggest concentration of cuts to employment observed in the services and trade sectors. Finally, while employment reductions were limited to only 13 percent of local firms in Tyre (mostly in manufacturing), they were particularly deep, exceeding 50 percent of the companies’ workforce.
In summary, the laying-off affected firms across the sectoral spectrum and was characterized by its depth and had a very pronounced impact on the size of local firms. Firms in Matn got smaller on average by 33 percent (from 12 employees/firm on average prior to the crisis to 8 employees/firm after the 2019–2020 and 2020–2021 “shocks”). Firms in Al-Fayhaa shrank by 25 percent (from 6 employees/firm on average prior to the crisis to 4.5 employees/firm after the 2019–2020 and 2020–2021 “shocks”). Firms in Tyre resisted better decreasing by 12.5 percent only but this must have been partly due to their small size to begin with (4 employees on average and the median firm has only 1 employee).
Contrasting growth prospects
The study covered two dimensions of growth prospects: the long term, as measured by growth over the next 3 years, and the short term, as measured by viability over the next 6 months. Firms in Matn are the most pessimistic in both categories and the most likely to close in the short-term because of lack of liquidity. In the South, firms are optimistic about their long-term growth prospects, but in the short term, 44 percent believe they are likely to close in the next 6 months. As for the North, businesses are also positive about their longer-term prospects but, unlike Matn and the South, they are not as constrained in the short term, which may be explained by their conservative approach and, in contrast to Matn, their low exposure to the financial sector and reliance on their own financing to operate.
Roadmap for business recovery
Operating well below capacity, only a minority of firms across the 3 regions currently see the benefit of hiring workers even if the situation improved, underlining the need for policy to achieve long-term employment growth. This is where local governments can intervene. How can they help firms stay in business and hire workers? The study recommends, as a first step, that local governments focus on providing basic services (e.g. primary health care) and improving infrastructure (particularly alternative sources of electricity and roads) to reduce overall costs to the private sector and help offset job losses. as the private sector, particularly in Matn and the South, has also expressed its willingness to pay for well-provided local services and infrastructure.
However, business recovery alone will not be sufficient to fully restore jobs. The study found that there was virtually no LED interaction between the private sector and municipalities or union of municipalities in the three regions surveyed. The second step is therefore to improve communication and LED interaction, so that municipalities and unions can play a facilitating role in linking donors and expatriate investors with the local private sector, directing resources to where the potential gains are the greatest, marketing the locality, developing export markets, and pooling resources to meet the common needs of many small firms.
In the longer term, growth will eventually return. Small firms in all three regions have great potential; they are coping without support and finding ways to survive despite shocks. More importantly, they have good long-term profitability and are optimistic about their prospects, albeit to varying degrees. This opens the way for more creative solutions, at the municipal and donor level, to adapt to the changing Lebanese economy and market shifts, in order to restore jobs, hire workers and provide basic services.
Click here to download “Union of Municipalities as Enablers of Local Economic Development — Federation of the Northern Coastal and Central Matn Municipalities”.
Click here to download “Unions of Municipalities as Enablers of Local Economic Development — Union of Tyre Municipalities”.
Click here to download “Unions of Municipalities as Enablers of Local Economic Development — Urban Community Al-Fayhaa”.
