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Sami Atallah and Nancy Ezzeddine, respectively LCPS director and economic researcher at LCPS

September 2019
In Need of a New Economic Approach: The Case for the Manufacturing Sector

While the government is currently struggling to contain the chronic fiscal and trade deficits, economic growth remained stagnant in the first half of 2019. The government’s plan to jumpstart the economy rests on the CEDRE projects and the McKinsey study that has yet to be approved by the Council of Ministers.
Even with such plans in sight, it is not evident that inclusive and sustainable growth will materialize. For one, the CEDRE projects—even if we assume they will be properly managed—are largely infrastructural. This is necessary but not sufficient for sustainable growth or the creation of good jobs. Two, the McKinsey program, which emphasizes that the manufacturing sector is key to growth, does not go far enough in terms of optimizing or leveraging the sector.
Looking back, Lebanon has a poor track record of sustaining growth rates and creating jobs. In fact, economic growth has stagnated to an average of 1.3% between 2010 and 2017. The growth has been volatile and largely dependent on inflows and remittances, and so, even during periods of higher growth rates, the economy was not able to generate enough jobs. In other words, the post-civil war economic model has run out of steam.
What Lebanon needs is a different mindset to approach economic growth, where the manufacturing sector is part of the strategy. Policymakers must develop an explicit industrial policy with an emphasis on promoting exports rather than just protecting domestic production. In fact, countries that have sustained high growth rates had large manufacturing sectors, experienced structural change in the sector, focused on diversiļ¬cation, and promoted the export of sophisticated products. In other words, what sustainable growth needs is to structurally transform the economy where the country’s export basket is not only growing but also evolving to include the production of more sophisticated products.
Despite the recent decline in the country’s exports from $5 billion in 2012 to $3.9 billion in 2017, a recent LCPS study has shown that Lebanese exports exhibit interesting qualities that need to be actively encouraged. For one, Lebanon exports 1,147 products from various sectors including agro-food, machinery and electrical equipment, chemicals, and paper and wood, which indicate a high level of product diversification. Two, export diversification is not only across sectors but within each sector, proving that innovation is maximized and industrialists don’t produce only one type of product. And so, an apple factory also produces jam, juice, and vinegar. Three, Lebanese products reach more markets than countries within the same income group: Lebanon sold its products to 171 countries in 2017, compared to 108 for Costa Rica, and 156 for Jordan. Based on its current market position, market accessibility, and global demand, Lebanon’s untapped export potential is set at $1.7 billion per year.
With this potential, the government must develop a two-pronged approach to promote exports: The first and the easier one is to actively push to open markets and facilitate the exports of products that Lebanon has already a comparative advantage in. According to a recent LCPS policy brief, Lebanon has a comparative advantage in 337 out of the 1,147 products, and these account for 70% of total export value. Furthermore, these products are distributed across 16 sectors, of which the agro-food and chemical sectors have the highest share in dollar value. More precisely, there are 24 agro-food products such as jams, sauces, olive oil, chocolate, dried legumes, wine, biscuits, and fruit juices, among others, that have an untapped export potential of $140 million, mostly to Arab countries like Saudi Arabia, Kuwait, and the UAE. As for the chemical sector, there are 13 products, which include beauty products, soap, paints, and medicaments, with an overall untapped potential of $68 million in Middle Eastern countries but also in places like India, Bangladesh, Brazil, Portugal, the Netherlands, and Spain.
Hence, there is a strong need to deepen the exports of products in these two sectors. Given their already existing advantage, promoting them would require little or no structural change in the production process. Instead, it would require strategically supporting the promotion of the right product toward the right market, by improving trade logistics (like infrastructure, shipping arrangements, and quality of logistics services), negotiating trade agreements, and reducing cost of production to sustain competitiveness.
While the first strategy would strengthen or expand the exports of existing products, the second strategy aims to focus on encouraging the development of new, more sophisticated ones. It is in these products where present and future growth lies and good jobs can be created. In another LCPS study, we show that, although Lebanon produces products of low and medium complexity, it has the potential to produce some complex products. For instance, in 2017, it has exported 38 out of the world’s 100 most complex products—such as machine tools, machining centers, equipment for photographic labs, and chemical preparation for photographic use—with an export value of at least $100,000 for each. This means that Lebanon sits on a large reservoir of production capabilities and know-how that could facilitate the production of complex productions. In effect, the country has the potential to compete in producing complex products particularly in the machinery and chemical sectors but it has not been able to sustain it. Such products include generating sets, bakery machinery, transformers, and pharmaceutical products, among others. To this end, there is a need to develop a more nuanced industrial strategy that encourages the development of such products, and to identify their key markets. This includes encouraging research and development with a focus on product development, technological transfer, specialized educational reforms, and human capital in the sectors and products that have a high potential to make a breakthrough. 
At the heart of both approaches lies a stronger collaboration and deliberation between the government, represented by the Ministry of Industry and the Association of Lebanese Industrialists, where export promotion is developed and implemented. For this to succeed, other ministries like that of finance and economy, and institutions like the Central Bank, should be brought around the table to participate in such discussion.
Political commitment at the highest level is needed to support this sector, through passing key measures and policies. This requires a change in the mindset of the political elite in how they see the role of the state in supporting the sector. It is about time that they realize that countries that have developed a competitive export potential had a strong and effective state, that provides the infrastructural, technological, and institutional base, instead of wrongly believing that the market, left to its own devices, can efficiently provide these prerequisites.

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