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memri
April 16, 2003 No.
133

The Liberation of Iraq: Economic Consequences for Syria

Iraq's liberation will have economic consequences for its neighbors, but nowhere are these consequences greater than in Syria. The vehemence of Syrian opposition to the war in Iraq has been driven by two concerns—political and economic. The political concern, which is outside the frame of reference of this analysis, has to do with Syria's ideological affinity with the Iraqi Ba'ath party which ruled the country during Saddam Hussein's reign. The de-Ba'thification of Iraq, which will be a top agenda item of the new Iraqi government, will have a spillover effect on Syria which remains the only country with a regime espousing the quasi-totalitarian philosophy of Ba'athism. Syria is also afraid of political isolation as it is now surrounded by pro-American regimes on all sides: post-Saddam Iraq, Jordan, Saudi Arabia, Turkey, and Israel. Syria's single remaining soul mate is Iran with which it has no geographical contiguity, but shares an affiliation with Hizbullah and Islamic Jihad. The economic concern, however, will have immediate and perhaps disastrous consequences for the Syrian economy, and it is also the focus of this analysis.

The Nature of the Syrian Economy

By way of background, Syria's predominantly state-controlled economy remains stagnant because of the failure of the political establishment to implement extensive economic reforms. Falling rates of growth, a rapidly rising population, an old-fashion socialist command economy, an inefficient and heavily-regulated public sector, and restricted political freedoms have deterred direct foreign investments or the emergence of a viable market economy. Moreover, Syria's inadequate infrastructure, outmoded technological base, and weak economic system make it vulnerable to future shocks. The liberation of Iraq and the emergence of a new economic reality in that country will deliver a profound shock to the Syrian regime.

Trade Relations with Iraq

After 18 years of ideological hostility and personal animosity between Iraqi and Syrian leaderships, trade relations between the two countries were initially restored in 1997 and put in high gear in 2000, following the death of former Syrian president Hafez Al-Assad. Striving to emerge from diplomatic isolation in the Middle East, following its occupation of Kuwait in 1990, Iraq launched what former vice president Taha Yassin Ramadhan termed as "the diplomacy of deals (diplomasiyyat al-safaqat)."[1]Under this form of a uniquely Iraqi diplomacy, trade agreements were concluded with most Arab countries, driven almost solely by political considerations by making trade concessions that were beneficial to one side, which was not the Iraqi one. One of the most preferential trade agreements was signed with Syria. One might add in parenthesis that most of these trade agreements will either be renegotiated on principles of reciprocity or they will be discarded by the incoming government of Iraq.

Under the trade agreement, often referred to as trade protocol between Iraq and Syria, the latter was given preferential status in the export of consumer goods such as furniture, soap, electric goods and fixtures, water purification equipment, pharmaceuticals, and ceramic tiles, among others.[2] The volume of trade may have exceeded $5 billion although it may be higher if smuggling, commonly referred to as border trading, and the illegal supply of oil by Iraq to Syria were considered.

Illicit Supply of Oil

Under an informal arrangement, Iraq supplied Syria approximately 200,000 barrels of oil a day through the Karkuk-Banias oil pipeline, at a preferential price. The spigot is now closed and most likely will remain closed in the foreseeable future. When it reopens, Syria will have to pay the prevailing international price, perhaps minus transit fees. In the meantime, Syria will have to use its own oil for internal consumption rather than for export. Since the shipment of oil from Iraq to Syria was illegal under the UN sanctions regime, there are no figures on the amount of money transferred from Syria to Iraq to pay for the oil. But it is certain that what was transferred was used by the regime of Saddam Hussein for any number of illicit purposes.

The exports from Syria to Iraq have also come to a standstill because roads are closed. Many Syrian factories which catered their production to the Iraqi market may have to be closed, further aggravating the unemployment situation in Syria. Moreover, payment for goods was made upon their delivery, and many Syrian merchants are now afraid that they may not be able to collect for what was delivered before the war and not paid for.[3]When a new government takes over the reigns of power in Iraq it will likely seek consumption goods under competitive rather than preferential arrangements, and Syria will face considerable difficulty competing with the likes of China and Korea, not to mention the U.S. and U.K.

Conclusion

The aforesaid leads to the conclusion that, in post-Saddam Iraq, Syria could emerge as the biggest loser both politically and economically. Unlike his cautious and calculating father, the President of Syria, Bashar Al-Assad, has placed all his eggs in Saddam's basket and will now pay the price.

*Dr. Nimrod Raphaeli is Senior Analyst of MEMRI's Middle East Economic Studies Program.


[1]Al-Sharq Al-Awsat (London), April 10, 2003.

[2]Al-Hayat (London), March 18, 2003.

[3]See Al-Hayat, March 21, 2003, and Al-Thawra (Syria), April 9, 2003.