Union of Municipalities in Lebanon as Enablers of Local Economic Development: The Threat of Human Capital Erosion

The Constitution of Lebanon defines the economic system of the country as “free”. As such, economic growth in the Lebanese context is directly dependent on private investment and entrepreneurship. This, therefore, shifts our investigation to identify and understand the variables determining the level of a private investment and entrepreneurship in a free economy.

In a seminal paper, published in 2005 through the Harvard Growth Lab, economists Hausmann, Rodrik, and Velasco proposed a conceptual framework that considered private investment and entrepreneurship to be constrained or on the contrary facilitated by the expected level of returns to economic activity and the cost of finance. While cost of finance is shaped by a combination of national and international factors, the returns to economic activities are usually the outcome of a complex combination of purely domestic factors that they classify under two major categories:

i. Factors determining the ability of a society to generate what they call ‘social returns’. These include geography, public infrastructure, and fundamentally human capital.

ii. Factors determining the ability of investors and economic actors to appropriate these ‘social returns’. Good and bad governance or functioning and failing markets, for example, fall under this category.

This approach informed the Local Economic Development (LED) assessment process launched by 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 Municipalities of the Northern and Coastal Matn and the Union of Tyre Municipalities. The LED assessment is funded by the European Union through its Regional Trust Fund in Response to the Syrian Crisis “Madad Fund”.

As such, the assessments included the implementation of three (3) local human capital surveys covering at least six hundred (600) households per Union to investigate how the financial crisis through its impact on education and health was affecting the quality of human capital and, therefore, the potential social return level in each respective local economy.

A decrease in the standards of health and nutrition have immediate adverse effects on the ability of individuals to engage actively in the economic sphere, while lowered access to education plays a major role in weakening the pool of skills and knowledge that can shape local economic development in the long term.

The findings across the three Unions display strikingly similar patterns with some regional particularities:

Worsening human capital due to poor national-level management of the healthcare and education sector and the absence of robust social protection systems to address the explosion in vulnerabilities.

The economic shock is affecting human capital through the following channels:

(i) Sharp reduction in real income, increase in income volatility, and inability to access savings leading to lower investments in health, education, nutrition, or housing. The situation has been particularly bad in Al-Fayhaa and Matn. The significant role of overseas remittances seems to have provided some relative cushion to Tyre. However, even there, 48 percent of households are now dissaving.

(ii) Decrease in the access to and quality of healthcare households, and particularly children, receive since 2019 mainly attributed to financial difficulties and medication shortages, which are preventing individuals from seeking and receiving proper care. The deterioration of healthcare has been particularly strong in the Matn, which prior to the crisis reported solid results in this area given its centrality to the real economy.

(iii) There is a significant rise in malnutrition, as a majority of households have had to compromise their nutritional needs in order to cope with the deteriorating financial situation, and lower-income households have changed their nutrition habits at significantly higher rates.

While this is witnessed across the three unions, in the case of Al-Fayhaa, the population health in the long-term is at risk due to the rise of malnutrition and food-insecurity, as nearly all households have been compromising their nutritional needs as a coping strategy to deal with the crisis.

(iv) Levels of education vary between the Unions in ascending order and as follows: Matn, Tyre and Al-Fayhaa. The challenges, however, differ in their significance. While in Matn and Tyre the main issue reported is “high tuition fees’, in Al-Fayhaa, the main concern is “teacher absenteeism and/or frequent strikes” which reflects probably different level of reliance on private versus publicly funded education.

(v) Households renting their homes are at increased risk of insecurity and worsening housing conditions. Lower-income households have comparatively worse housing conditions, compared to higher-income households. There is a real struggle to pay rent in the Urban Community of Al-Fayhaa.

The crisis has also exacerbated one key historical and structural weaknesses of Lebanese society and economy which is often referred to as the “brain drain” phenomena. Willingness of Lebanese households to emigrate is reaching very worrying levels. This particularly the case among those below the age of 45 with eventually disastrous consequences for the local human capital pools. There are barely gender differences with both male and female headed households willing to leave the country.

The findings of the local human capital surveys that MERP conducted are consistent with the national level studies published since the crisis on multi-dimensional poverty (UNESCWA, 2021), and crisis impact assessment (WFP, 2020). While these studies highlighted the importance of national level policy responses such as the “establishment of National Solidarity Fund” and the “development of social protections plans” among others to help alleviate the humanitarian and poverty crisis, the local human capital surveys and analyses we conducted should be a timely opportunity to complement these recommendations from the perspective of the local level.

In particular, the role of Unions and members municipalities and their priorities should be revisited in light of our findings:

(1) Provision of food aid to households in collaboration with non-government organizations given the importance of nutrition and food security for a healthy and productive workforce.

(2) Addressing access to quality of healthcare through investment in and support to public hospitals, public health care centers and medical staff in collaboration with the Ministry of Public Health and Social Development Centers of the Ministry of Social Affairs.

(3) Tackling the mounting challenges in education through the provision of support and investment in public schools in collaboration with the Ministry of Education and Higher Education and facilitating access to education financing for pupils and students.

Beyond the support of social service provision, the protection of local human capital will also require UoMs to play new roles for which they are likely to need technical support:

(1) To get active in the placement of youth seeking for jobs and employment by working in partnership with the private sector to help identify the profile of workers and skills in demand and facilitate matching between employers and youth joining the labor market.

(2) Although housing policy does not fall within their mandate, unions should leverage their authority as a trusted local council to support tenants during this crisis. In the short-term, it could use both regulatory prerogatives and mediatory capacities to protect households from evictions and ensure rents do not spiral out of control, remaining in line with market fundamentals. In the long-term, the Union could explore actively how it could support the provision of affordable housing in partnership with the private sector.