print
memri
April 16, 2007 No.
343

The Political Economy of Syria Under Bashar Al-Assad

Introduction

Syria's economy, which is predominantly state-controlled, was characterized in a recent report by the International Monetary Fund (IMF) as "stable but stagnant economy"[1] because of the failure of the narrowly confined political establishment to implement extensive economic reforms. An old-fashioned inefficient and heavily regulated socialist command economy, restricted political freedoms under a totalitarian system of government, and wide-scale corruption at the highest levels of government have impeded the emergence of a viable market economy. The three revenue sectors that Syria relies on annually are oil production; taxes from government services; and the government-owned industrial companies, which are widely politicized, greatly inefficient, and bleeding red ink. Only three segments of the economy are somewhat profitable and, not surprisingly, the three are monopolies: tobacco, telecommunications, and banking, although the latter is being opened slowly to private banking. The tobacco monopoly is run by a member of the Assad family which has a complete ownership of the business and is not subject to pricing control.

Syria, categorized by the World Bank as a middle-income country, has a GDP per capita of about $2,500, equal to $4,000, calculated on the basis of purchasing power parity (PPP). In 2006, the population stood at about 19 million, registering an annual growth of about 2.5 percent and a median age of 20.7 years, a demographic structure which places high pressure on the labor market. The country's gross domestic product (GDP) has, in real terms, remained stagnant in the last four years, rising, in 1987 prices, from 1,006,431 Syrian liras (SL) in 2002 to an estimated 1,155,755 SL in 2006, or the equivalent of $18.2 billion and $21.7 billion at an average exchange rate of 53 lira to the U.S. dollar.[2] The CIA World Factbook estimates the Syrian GDP for 2006 at $24.26 billion in nominal terms and at the official exchange rate. The estimated public debt stands at 37.9 percent of GDP in 2006.

Syria's GDP is highly dependent on the oil and agricultural sectors, both subject to uncertainties affected, as they are, by changes in oil prices and rainfall, respectively. The oil sector provides 25 percent of the GDP, half of the government's revenues and about two-thirds of its export receipts. The reduction in oil revenues will force the government to seek other sources of income. This has led Dr. Muhammad al-Hussein, the Minister of Finance, to call on government officials to "think of revenues before expenditures." He argues, "Revenues are on the decline and we should think of ways to increase revenues to finance expenditures." [3]

Cotton is the second most important cash crop (after cereals). It employs 2.7 million farmers and their dependents, or about 15 percent of the population, and will provide the raw material for the expanding of Syria’s textile industry.[4]

The IMF Review of the Syrian Economy

In a 2005 report, the IMF highlighted the sharp decline in private investments as the most immediate cause for the low economic growth in recent years. The report asserts that "persistent weaknesses in the business climate are the main factors holding back investment." These weaknesses, which arise despite abundance in domestic savings and large reported holdings of Syrian private assets abroad, have several causes: the regulatory environment in the tax, trade and exchange regimes in the financial sector and in public administration, and also government monopolies and poor governance.

In an unusual step, the IMF called on the Syrian government to strengthen its implementation of a Syrian anti-money-laundering and anti-terrorism-financing law. [5]

The External Pressure on Syria

The exit from Lebanon, following the assassination of former Lebanese prime minister Rafiq al-Hariri in 2005, was a political as well as economic blow to Syria. President Bashar al-Assad's regime is isolated both regionally and internationally, although it has made efforts recently to reconcile its differences with Saudi Arabia, a significant diplomatic and financial power in the Middle East. The regime is under external pressures because of the turmoil it has created in Lebanon, the supply of arms to Hizbullah, the uncontrolled daily flow of jihadists across its border to Iraq (many of whom eventually serve as suicide bombers) and its serving as the headquarters of a variety of terrorist organizations, including the political leadership of the Hamas and the Islamic Jihad movements – all of these activities will keep high the risk for foreign investors. The sovereign risk for Syria’s public debt stock will also remain high given Syria’s poor repayment record, which placed it among the few countries on the World Bank’s non-accrual status (an elegant phrase for default) in the years 1987-2002, and hence Syria was ineligible to borrow from the multilateral institution.

The War in Iraq and the Consequences for Syria

Striving to emerge from diplomatic isolation in the Middle East following its expulsion from Kuwait in 1990, Iraq launched what former vice president Taha Yassin Ramadhan termed "the diplomacy of deals" (diblomasiyyat al-safaqat.)[6] Under this unique form of trade diplomacy, trade agreements, referred to as trade protocols, were concluded with most Arab countries, and driven almost solely by political considerations. These protocols often involved far-reaching concessions by Iraq to its trading partners to generate trade, often in violation of UN sanctions which were in place at the time. One of the most preferential trade agreements was signed with Syria in May 2000. Under the protocol, Syria was given preferential status in the export of consumer goods to Iraq. The volume of trade may have exceeded $5 billion over a period of three years, and substantially more if smuggling, particularly if Iraqi crude oil and the so-called border trading, were to be taken into account.

Following the invasion of Iraq in 2003, the oil pipeline carrying Iraqi crude oil from Kirkuk to Banias was shut down, and the free trade policies introduced by the occupation regime have allowed Iraqi traders to deal with other competitive markets, including the Chinese and Iranian markets.

In recent years, there has been an added problem for Syria because of the arrival of Iraqi refugees, estimated in excess of one million, with thousands more arriving every month. While the Iraqi refugees have boosted the local demand for products which will help the Syrian consumer product industry, they have caused difficulties for the Syrian population, especially in the housing sector, where rents have skyrocketed, and in other public services. The refugees are also a burden on the Syrian budget which subsidizes the prices of basic food commodities, particularly bread, eggs, and meat, in addition to cooking oil. Indeed, the Iraqi refugees, residing primarily in urban centers, have caused the prices of many basic food commodities to rise as much as 300 percent, causing one Syrian commentator, Mahmoud al-Rasawi, to apply the "Richter Scale" as a price gauge to drive his point.[7] The rise of prices has also forced the Central Organization for Storage and Marketing, the government food distribution agency, to increase the distribution of subsidized commodities at prices 40 percent below market price.[8] The Syrian dailies use perhaps as much space on the price of eggs as they use on some key economic issues. The rate of inflation remains relatively high, at about 8 percent annually.

There has also been pressure on local schools, which have to absorb approximately 75,000 Iraqi students. The Syrians are concerned that the Iraqi refugees, like the Palestinian refugees from 1948, will permanently stay in Syria, adding another dimension to the Syria's fractured social make-up.[9] By fomenting conflict in Iraq through the unrestricted flow of jihadists into its neighbor, Syria, ironically, is expanding the conflict in Iraq – which can only prolong the stay in Syria of the Iraqi refugees.

Unfulfilled Promises of Reform by Bashar al-Assad's Regime

After assuming power in July 2000, following the death of his father and a subsequent quick constitutional amendment, President Bashar al-Assad promised to undertake economic reforms – such as liberalizing the Syrian economy, opening the market to foreign investments, and licensing foreign banks to operate in Syria. These were to be followed by political reforms.

The argument behind this phased reform was that a significant segment of the population are either poor or living below the poverty line, and they would not necessarily appreciate political reforms that are not accompanied by economic measures that would lift them out of poverty. The attempts for reforms have remained constrained by countervailing domestic interests of a small group of oligarchs, and a commitment to a centralized socialist form of economic management and a non-competitive political system dominated by the totalitarian Ba'th Party which rules the country under the charter of the National Progressive Front, a coalition of nine so-called opposition parties. Under the weight of its own repressive practices, the Syrian regime has become stultified, frozen in time, and incapable of movement.

The Rating of Syria on Various Indexes

Another way of looking at the Syrian politics and economy is by looking at the various indexes which rate Syria within a cohort of other countries. Five indexes are examined: (a) the human development index; (b) the index of economic freedom; (c) the business index; (d) World Economic Forum’s competitiveness index; and (e) the corruption perception index

(a) The Human Development Index: The United Nations Development Programme (UNDP) issues a Human Development Index (HDI) which provides a composite measure of three dimensions of human development: living a long and healthy life (measured by life expectancy), being educated (measured by school level) and having a decent standard of living (measured by purchasing power parity - PPP- income). Syria is rated 107 among 177 countries.[10]

(b) Index of Economic Freedom: The Wall Street Journal and the Heritage Foundation publish an Annual Index of Economic Freedom. The 2007 Index of Economic Freedom measures how countries score on a list of 50 independent variables, divided into 10 broad factors of economic freedom. Among these factors are trade policy, government intervention in the economy, property rights, and informal market activity (unregulated business activity, usually family-run). The higher a country's score on a factor, the greater the level of government intervention in the economy, and the less economic freedom there is. Countries are then divided into four categories: free (score 80-100); mostly free (score 70-79.9); mostly unfree (score 50-59.9) and repressed (score 0-49.9). In the 2007 Index of Economic Freedom, Syria is rated No.145 out of 157 countries. With a score of 48.2, Syria falls under the category of "repressed," followed by Iran (150), Turkmenistan (152), Libya (155), and North Korea (157, and last) In the Middle East, Syria is ranked 15th out of 17 ranked countries. [11] Iran and Libya occupy numbers 16 and 17 in the Middle East

Syria scores below world average on nine out of ten economic freedoms, the exception being fiscal freedom because of low income tax rate. However, it scores the lowest on financial freedom, only 10 percent. Apart from being unsophisticated, this sector is burdened by cumbersome and unclear government regulations, coupled with interest rates fixed by the government.

(c) Business Index: The International Finance Corporation (IFC), the private business arm of the World Bank Group, also rates countries on the ease of doing business. The overall ranking is based on the ranking of ten topics beginning with "Starting a Business" and ending with "Closing a Business." On ease of doing business, Syria was ranked 130 out of 175 countries rated by the program.[12]

(d) Global Competitiveness Index: The World Economic Forum released its annual report for 2006-2007 on global competitiveness. The countries are groups into three categories, with category 3 the highest and category 1 the lowest.[13] The report rated 13 Arab countries – Algeria, Bahrain, Egypt, Jordan, Kuwait, Libya, Mauritania, Morocco, Oman, Qatar, Syria, and the United Arab Emirates. Syria was in category 3, and was rated 12 among the 13 Arab countries, higher only than Mauritania.

A special report on competitiveness in the Arab world underscores the point that the "key to unlocking the potential of the Arab economies can only take root in societies where freedom of thought, enthusiasm for inquiry, and critical thinking are popular values."[14] Clearly, Syria does not meet these criteria. In a special paragraph on Syria, the report points out that while progress has been made in the fields of health and education, "Syria achieves only inferior results on macroeconomic indicators with a high budget deficit and considerable public debt." Future progress requires "comprehensive liberalization of foreign trade and labor markets, facilitating access to finance for business as well as fostering the use of latest technologies."

(e) The Corruption Perception Index. In its Corruption Perception Index, which scores countries on a scale from zero to 10, with zero indicating the highest levels of perceived corruption, Transparency International (TI), has rated Syria 2.9 and ranked it 93-98 among 163 countries rated. Iran, Libya and Yemen scored lower than Syria. TI has determined that countries scoring below 3 indicate that "corruption is perceived as rampant."[15] This view is endorsed by Ghassan al-Rifa'i, the former Syrian minister of the economy who told a gathering in Qatar that the most significant obstacles to foreign investment in Syria "are the horrible bureaucracy and the spread of corruption."[16] The Syrian daily Teshreen lamented what it described as "the deluge of corruption" (tawafan al-fasad) in the government ministries.[17]

Criticism from Within

In his well-publicized interview with Al-Arabiya TV, former Syrian vice president Abd al-Halim Khaddam confirmed that a package of economic reforms, formulated upon Bashar al-Assad's ascension to power, was submitted to the Council of Ministers in October 2000, but has remained dormant ever since. Another package of reforms, submitted by a group of French experts by invitation of the Syrian government, has not been acted upon either. [18] In a subsequent interview, Khaddam said that the Syrian regime "cannot be reformed and there is nothing left but to bring it down."[19]

Another glimpse from the inside was provided by the current minister of industry, Dr. Fuad Issa al-Jouni, the fifth minister of industry since 2000. By his own admission, each new minister discards the work of his predecessor as poorly suited for the needs of the country and starts anew. Dr. Fuad criticized the senior managers of the government enterprises who fail to take responsibility by pushing every issue upward for decision.[20] He complained about a persistent record of nepotism and political favoritism that has often determined the selection of the individual for a senior managerial position. Dr. Fuad has acknowledged that the appointment of directors general for the state enterprises is a matter of considerable importance, yet in responding to a question about whether the prime minister had given him the authority to appoint officials at this level, he replied: "I have not discussed this subject with the prime minister."[21] The answer gives an indication that the government is not ready to adopt a policy for appointing enterprise managers through an open, competitive and transparent process.

Reform Measures

The IMF criticized Syria for having one of "the most restrictive trade regimes" with various prohibitions and extensive licensing requirements.[22] It said the banking system suffered from "financial repression,"[23] and that state banks suffered from "inappropriate accounting, loan classification and provisional rules, collateral appraisal, and the continuous rescheduling of non-performing loans." Specifically, non-performing loans account for 16.5 percent of total assets.[24]

Syria has taken hesitant reform steps in the financial markets. It has recognized that a vigorous private market requires a vigorous banking sector that can advance loans or guarantees, open letters of credit in foreign currency, and above all the freedom to buy and sell foreign currency. A new banking law (Law 8) was enacted in April 2001, allowing the establishment of private banks. The first bank, the Bank of Syria and Overseas, opened for business in January 2004, becoming the first private bank since banks were nationalized in 1963. Three other Lebanese banks, one Saudi and one Jordanian, have since opened for business, and in early April 2007 a fourth Lebanese bank was licensed to operate.[25] The law allowing the establishment of private banks has limited foreign ownership to 49 percent, meaning that a foreign bank in Syria must operate under Syrian standards and conditions and is not entirely subject to control by its overseas headquarters. If such a bank were to run into financial difficulties, the mother-bank is under no obligation to come to its rescue, except perhaps for reasons of protecting business reputation.

The old guard of the Ba'th Party has yet to accept the idea of private banks. It recently called the banks "parasitic," given that there are 5 million Syrians living below the poverty line, as if the private bank were responsible for the extensive poverty. The banks were also criticized for their reluctance to make long-term loans to new enterprises, while the old enterprises would only submit financial statement that were distorted and inaccurate, reflecting a criminal intent for tax evasion.[26]

A Capital Market Authority was established in early 2006 to set the regulatory framework for the securities market, although such a market is not yet operational because clearing all the bureaucratic hurdles could take years. Moreover, most private companies in Syria are individually or family-owned, and the owners may be reluctant to open their books to public scrutiny before they can go public themselves. Ghassan Tabbara, a former member of parliament, pointed out that the most profitable companies pay no more than 2 percent dividends, which are much lower than the interest on fixed deposits in Syrian banks, thereby making investment in such companies unattractive.[27]

Syria has made some progress in reforming trade policies by reducing the list of prohibited products, abolishing the exclusive rights of import agents, and merging import monopolies. Upon signing a free trade agreement with Turkey, similar to ones with Arab countries, Dr. Abdullah al-Dardari stressed that "whatever the negative consequences of globalization, isolation is far more dangerous for Syria."[28] In a modest attempt to isolate the economy from politics, the Syrian government appointed the non-Ba'thist al-Dardari, the head of the Planning Commission, as deputy prime minister for economic affairs during the June 2005 Ba'th Party Congress.

Syria has also approved a new investment law, which will replace the one on the books since 1991. The new law establishes the Syrian Investment Authority to create a more investment-friendly environment by simplifying procedures and allowing more incentives, including the repatriation of profit in foreign currency. However, as was pointed out by the Economist Intelligence Unit, "the pace and irreversibility of some of the reforms will remain in doubt... [because] there does not appear to be a consensus within the ruling elite over the speed or necessity of economic reform…," particularly in such sensitive matters as subsidies and the reform of the inefficient, bloated, and money-losing public enterprise.[29] It is within this context that the IMF study has noted that "the pace and the scope of reforms have been insufficient compared to Syria's medium-term challenges."[30]

Social Market Economy

Recognizing the failure of its command economy, the Syrian regime is promoting the social market economy, sponsored by the Ba'th Party Congress in June 2005. The 10th five year plan 2006-10 approved in January 2006 was designed to move the country in that direction.

Germany's first post-war economic minister Ludwig Erhard developed the concept of soziale Marktwirtschaft as the proper economic model for the rebuilding and reconstruction of the almost completely devastated German economy. This economic model stresses two concepts – free market forces and social welfare concerns. The social market economy was an amalgamation of principles drawn from liberal capitalism and democratic socialism.

The Ba'th Party conference failed to establish the conceptual framework or the principles for a new and far-reaching economic model to reflect the underline philosophy of the social market economy. Obviously, in the absence of competitive environment, internally and externally, and in the absence of a political will to join the global market, a social market economy remains a mere "slogan,"as one Syrian economist labeled it. Slogans, like decrees, do not induce economic reforms which require a wholesale removal of Soviet-era shackles of the economy. In the words of Adib Mayaleh, the governor of the Central Bank of Syria, "we have to move from an oil economy to one based on banking, services, and tourism." He added: "Most importantly, we have to change the mindset of Syrians from a socialist system to a market system.[31]

During a symposium organized by the Damascus branch of the Ba'th Party on January 26, 2007, questions were asked by the audience about whether the social market economy was not in violation of the provisions of the Syrian constitution that calls for a socialist economy. Others have complained that the program has not called for sustainable growth and has not addressed the problem of stagnant personal income. They asked about the social implications of the free trade and complained about the growth of large enterprises which have exacerbated both the problem of unemployment and the spread of corruption.

In responding to the critics, Minister of Finance Dr. Muhammad al-Hussein sought to reaffirm the constructive role of the socialist economy, which is only being redirected to fit into the new model of the social market economy. Al-Hussein said that creating a free market environment will encourage Syrian capital abroad, which he estimated at $60-70 billion, to be repatriated.[32] What the minister did not say was how, in a country whose laws would send a trader in foreign exchange into a long-term prison, so much money has filtered out through the thick layers of government controls over the banking system.

Reform by Decrees

In his attempt to highlight the reform in the Syrian economy in 2005, Prime Minister al-Utri listed 40 laws, 96 legislative decrees (presidential decrees), and 518 organizational decrees. All of these laws and decrees were introduced with the purpose of "achieving economic, financial and administrative reform, [and] simplifying procedures for our brothers the citizens and for the transformation toward a social market economy."[33]

The attempts to deregulate the economy by presidential decrees miss the point, because most of these decrees often impede progress by adding new layers of rules and regulations to an already extensively regulated and highly inefficient system. But this is precisely what the Syrian government has been doing, and it is precisely the reason the reforms lack credibility, as evidenced by the reluctance of investors to put their money into the Syrian economy. Even more significant is the reluctance of Syrian nationals to repatriate their huge capital kept in foreign investment assets.

From Social Market to Tasharikiya

As doubts mount about the working of a social market economy in an environment of authoritarian political system and extensively regulated economy, there is a new slogan being heard in Syria – that of partnership (tasharukiya) between the public and private sectors. In the words of Prime Minister al-Utri, there is no public sector or private sector but "a national sector," within which the responsibility for sustainable development must be borne by everyone in accordance with "the directions of Mr. President Bashar al-Assad."[34] Experience suggests that sustainable development is not likely to occur in response to presidential decrees and political slogans. Sustainable development will require structural changes in the management of the economy and the liberation of entrepreneurial energies of Syrian manufacturers and businessmen, as indicated by the World Economic Forum, quoted earlier.

Sanctions on Syria and their Implications

On January 7, 2003 the U.S. Congress passed the "Syria Accountability and Lebanese Sovereignty Restoration Act 2003" which was signed by the president on December 12, 2003. The act calls on the President of the United States to take various measures against Syria, including the prohibition of "the export of products of the United States (other than food and medicine) to Syria," and the prohibition on U.S. businesses "from investing or operating in Syria." [Sec.5 of the Act)

This was followed by the sweeping Executive Order 13338 of May 12, 2004 "blocking property of certain persons and prohibiting the export of certain goods to Syria." On March 9, 2006, the U.S. Department of Treasury issued final rule against the Commercial Bank of Syria (CBS) along with its subsidiary the Syrian Lebanese Commercial Bank. The rule is sweeping, as it "prohibits any U.S. bank, broker-dealer, futures commission merchant, introducing broker or mutual fund from opening or maintaining a correspondent account for or on behalf of CBS." There may be another point of contention with CBS, which has refused to reimburse the Development Fund of Iraq the proceeds from the illicit sale to Syria of Iraqi oil as required by Security Council Resolution 1483.The amount at issue was estimated at $600 million.

Al-Dardari has since been beating the drums of optimism on a daily basis. He has said that the share of the Syrian industry in the GDP will grow to 20 percent in 2010 from the present range of 5-7 percent. He has promised that per capita income will be doubled by 2010 and that $16 billion in foreign direct investments will be obtained in the next five years. The Syrian government admits that the value of the total private investments in Syria throughout 2006 was $92 million, of which 30 percent or $27 million were from foreign sources.[35] It is a long way from the figure of $16 billion proclaimed by al-Dardari.

Al-Dardari has also been reassuring about the capacity of Syria to weather sanctions. Following the unanimous adoption on October 31, 2005, of U.N. Security Council Resolution 1636, which threatened sanctions on Syria if it did not cooperate with the U.N. investigation, al-Dardari told The Financial Times that his government has moved to establish a crisis team to deal with the matter. He said sanctions would not pose insurmountable obstacles because there was no shortage of "sanction busting." Dardari added: "To be honest, sanction busters are everywhere… there are American companies in Canada that sell to Syria."[36]

There is a lot of bluffing in Dardari’s statement. Sanctions busters can sell to Syria but they take only cash in advance, not credit, and because of the risks they take in dealing in violation of international sanctions they sell at above-market price. Moreover, sanctions busters cannot infuse the Syrian economy with foreign direct investments that it needs to create new jobs in a rapidly deteriorating employment situation. Bashar al-Assad’s two primary soul-mates, Iranian President Mahmoud Ahmadinejad and Venezuelan President Hugo Chavez, both lack the resources to lift the Syrian economy from its doldrums. They are both quick on the draw but their bullets are mostly blanks.

The Frozen Association Agreement with the European Union

The European Union is Syria's largest trade partner, and Syria has strived for years to negotiate an association agreement with the E.U. similar to the agreements that the E.U. has with other Arab countries.

After arduous, five-year-long negotiations, a draft agreement was concluded in December 2004. The agreement was initialed but was never signed because of the failure of the Syrian regime to meet many of the provisions stipulated. On the political side, the agreement called on Syria to address the E.U.'s concerns about good governance, democracy, and human rights. The agreement also sought to address such crosscutting issues as the status of women (gender disparity) and the deterioration of the environment.

On the economic front, the E.U. would like Syria to reduce the transaction costs, which implies reducing the illicit payments to office holders for doing business in Syria. The association agreement requires that Syria reduce tariffs on imported European goods by 50 percent during the first three years following the signing of the agreement and eliminate tariffs on European goods entirely within twelve years, before a full partnership agreement can be reached.

For the moment, however, the signing, let alone the ratification of such an agreement, seems quite remote. It has been reported that Javier Solana, the European Union foreign policy chief, made clear in a visit to Damascus in March 2007 that the Association Agreement will be "unlocked" only "if Syria acts against the suspected flow of weapons to Lebanon and helps ease tensions between the pro-Western government and the pro-Syrian opposition."[37]

Key Sectoral Issues

(a) The Syrian Oil Sector: Oil production in Syria reached its peak in 2000 with 540,000 b/d, but continued to decline to about 405,000 b/d in 2006, of which 230,000 b/d were used for local consumption and 175,000 b/d for export. The decline in production in the last few years was cushioned by rising crude oil prices but this cushion will diminish with the projected decline in both production and export. The prospect of allocating foreign currency for oil imports have, in the words of the Middle East Economic Survey which specializes in oil in the Middle East, "focused minds in Damascus on the need to stem the decline in production and at the same time prepare for a future without the oil revenues which have cushioned it since the 1990s."[38] Similarly, the IMF has warned Syria that "[W]ith budget relying to the tune of 25 percent of GDP on oil revenues to finance public spending, and with these revenues projected to be halved over the next 10 years, current fiscal policies are clearly unsustainable.[39]

The share of crude oil in Syrian exports has also been declining steadily, from 70.3 percent in 2002 to an estimated 64.9 percent in 2005 and 48.3 percent forecast for 2008. During this period, the trade balance has gone from a surplus of $2,210 in 2002 to an estimated deficit of $816 million in 2006 and a projected deficit of $2,343 million in 2008.[40] If Syria were to become a net importer of oil in 2008 or shortly thereafter, the trade balance will show further deterioration.

According to the (2005) study of the Syrian economy by the IMF referred to earlier, the decline in Syrian oil exports will cause a major fiscal and balance-of-payment shock. The study estimates that in the absence of new oil discoveries, Syria is likely to become a net oil importer within a few years, and will exhaust its oil reserves by the late 2020s. This would reduce the net foreign exchange received from oil from $3 billion in 2003 to nearly zero by 2010. The shock resulting from lower oil production was masked by a recent spike in oil prices, but price spikes are a two-edged sword. They will benefit Syria as a net oil exporter in the short run, but they could be a source of a serious trouble once Syria turns into a net importer of crude oil.

Faced with the challenge of declining oil production, and at the same time prepare for a future without the oil revenues which have cushioned the Syrian economy since the 1990s, the Syrian government called on international companies to invest in the country's oil and gas sector "with no exception or discrimination."[41] However, according to Bassam Fatooh, an oil analyst in London, it is not clear whether the new explorations will increase Syrian oil production or merely maintain the present level through compensatory new production.[42]

In terms of refining capacity, Syria has two refineries one in Homs and another in Banias with a combining capacity of about 250,000 b/d, which are below the Syrian need for refined oil. To alleviate the shortage, Syria signed in December 2005 a memorandum of understanding with a Chinese company for a 70,000 b/d refinery, another with Russia in October 2006 for 140,000 b/d, and finally another with Iran and Venezuela, also for 140,000 b/d.[43] As of mid-February 2007, the Syrian press had made no reference to the construction of any of the three planned refineries. Syria has also pursued a number of initiatives with the Iraqi government to re-supply it with Iraqi crude oil which was interrupted after the invasion of Iraq. The U.S., which exercises considerable influence over the Iraqi oil policies, would likely discourage the Iraqi government from meeting the Syrian demand for oil – certainly not before Syria has taken effective measures to stem the flow of jihadists across its borders.

(b) The Issue of Unemployment: The population has experienced a high growth rate of about 2.5 percent per annum, bringing the total population from 12.1 million in 1990 to 17.4 million in 2003, and close to 18.5 million in 2005. At the current rate of population growth, at least 300,000 new Syrians enter the work force each year. Due to decreases in investment, caused largely by an inhospitable political climate, work opportunities are not increasing proportionately to the increase in the number of work seekers. The Egyptian Al-Ahram Weekly estimates that 30 percent of university graduates are unemployed. [44]

Both IMF reports (2005 and 2006) quoted in this article stressed the urgent need for Syria to boost growth in order to (a) diversify and expand the production and export base of the economy before oil resources are depleted, and (b) absorb a "bulge" in entrants into the labor market arising from decades of very rapid population growth.

With the labor force projected to increase at 3-4 percent a year, unemployment could exceed 20 percent by the end of the decade. To reverse this trend, which the IMF described as "a daunting challenge," an average employment growth rate of 4.5 percent a year would need to be sustained over the next 10 years.

The rate of unemployment is a subject of controversy in Syria. For political reasons, the government manipulates the figures to lower the rate of unemployment artificially. The International Labor Organizations has estimated the unemployment rate at close to 18 percent. Using data from the Bureau of Statistics, the government maintains that the rate of unemployment has declined from 10-11 percent in 2003 to 8-8.5 percent in 2006. But the government was quick to acknowledge that the lower rate of unemployment is extrapolated from employment figures in the informal sector, which accounts for at least 40 percent of total employment in the country.[45] In most countries, the data about employment in the informal sector are notoriously unreliable because they often include members of one family giving hand to each other to run a store or a small business, and it often falls under the category of "disguised unemployment." There are also instances, common worldwide, of adding members of family as employees as a way of concealing potentially taxable income.

The figures of unemployment would have been much higher if the public enterprises were not overstaffed by workers of marginal utility. According to government sources, in many public enterprises the number of workers exceeds by at least 50 percent the required labor force. The surplus labor in public enterprises exacerbates the problem of incompetent or poorly trained and skilled managers.[46] Workers' performance is poor and, given the precarious financial situation of many of these enterprises, the workers are poorly paid and motivated.

A World Bank report has noted that the education system in Syria "is not fully prepared to provide quality education and economically relevant skills to the young labor force."[47] As a result, Syrian workers are not economically competitive by regional standards. Massive upgrading of the human resource base will require the opening up of the economy, and upgrading of schools, professors, vocational training systems, as well as civil servants qualified to manage the transition.

A report by the International Labor Organization focused on the difficulties underlying the transition of Syrian youth from school to the labor market. The Syrian youth are characterized by a high degree of "lethargy" and a high rate of unemployment, particularly among those with inferior technical education. Those who are employed work long hours for small wages and the incentive for productivity is lacking. Most of those who are fortunate to get employment do so through connections or family relationships while the labor exchange bureaus are neither active nor helpful. The report also noticed the bias against female applicants.[48]

To keep unemployment figures down, the government keeps redundant civil servants in their assigned positions. By the account of the Minister of Finance Dr. al-Hussein, two million Syrians receive wages and pensions from the state. He estimated that if every wage or pension earner supports four family members, it means that half of the Syrian population lives on a fixed government income.[49] Clearly, such a situation is neither desirable nor sustainable over time.

Syria needs to create 250,000 news jobs every year to alleviate the problem of unemployment. This requires a seven to eight percent annual growth rate that, in turn, requires the doubling of investment as a percentage of GDP from 17 to 35 percent. Such a rate of growth in investment would require a large flow of foreign direct investment which is not forthcoming in view of Syria’s political isolation within the region, particularly among the Gulf countries, which are the traditional source of investments and tourism in Syria. Changes in the political climate and removing the heavy hand of bureaucracy off the economic levers are necessary for shifting the economy into a higher gear.

(c) Agriculture: Syria's biggest accomplishment was in the agricultural sector, to which the government has redirected its priorities from the industrial sector. The purpose was to achieve food self-sufficiency, enhance export earning, and stem rural migration.

Thanks to sustained capital investment, infrastructure development, subsidies of inputs and price supports, Syria has gone from a net importer of many agricultural products to an exporter of cotton, fruits, vegetables, and wheat. One of the prime reasons for this turnaround has been the government's investment in irrigation systems in northern and northeastern Syria – part of a plan to increase irrigated farmland by 38 percent over the next decade. Syrian exports reflect this turnaround. Apart from oil, which accounted for about two-thirds of export receipts in 2004 and therefore remains the main source of foreign earning, agriculture and animal husbandry accounted for close to 15 percent of export earning.[50]

(d) Balance of Payment: With the decline of revenues from oil, and a further decline in foreign currency transfers by expatriate Syrian workers in Lebanon, the balance of payment is rapidly deteriorating. After reasonable surpluses from 2001 to 2003, the balance of payment registered a deficit of $1.6 billion in 2004, and the deficit almost doubled in 2005 to $3 billion.

The big increase in the deficits has to do mainly with the trade liberalization introduced by Syria in 2004 which, among other measures, reduced tariffs on imports considerably. As a result, the smuggling of goods into Syria has declined. Imports are now more accurately recorded, which was not the case when smuggling was rampant. This could lead to the conclusion that the surplus years of 2001-2003 were, in fact, deficit years, and seemed to be surplus years only due to the extensive smuggling, much of which was undertaken by the Syrian army stationed in Lebanon.[51] To finance the growing deficits, Syria has been accumulating new debt which has risen from 18.6 percent of GDP in 2001 to 37.9 percent in 2006.

(e) Environmental Problems: The focus on agriculture, coupled with a rapidly growing population, has had negative consequences in terms of environmental degradation. Syria is suffering today from deforestation, overgrazing, soil erosion, desertification, water pollution from raw sewage and petroleum refining wastes on top of inadequate potable water.[52]

These environmental problems are exacerbated by a serious issue of housing. According to a study by the Syrian economist Dr. Khattam Tamim, the rapidly growing population estimated at 2.5 percent per annum, the arrival of Iraqi refugees, and the accelerated migration of poor people from the rural areas to the large urban centers have created a serious problem of inadequate accommodation for millions of people. A large area of Damascus has turned into slums. Moreover, with cost of building material rising to meet the need of construction of tourism, many poor people have now moved to live in caves, as many poor Egyptians do. Dr. Tamim estimates the randomly constructed sub-standard houses at 1.2 million units, most of them constructed on state-owned land, but the dwellers lack property rights. Construction code violations have reached 36 percent in Damascus and 32 percent in Aleppo.[53] Against this enormous shortage of adequate dwellings, the prime minister promised the construction of 60,000 housing units in the next five years.[54]

The Delusion of Cooperation with Iran

Iran and Syria have maintained close strategic relationships since the refusal by Hafez al-Assad, Bashar’s father, to fall in line with the rest of the Arab countries in support of Iraq in its war with Iran. With its isolation from the sources of capital in the Arab oil exporting countries, Syria has turned to Iran for economic collaboration. However, there is a lot of bluffing in the nature of this collaboration. An example is the recent Iranian private sector mission to Syria and its offer to build an industrial city which will include a steel mill with a production capacity of 800,000 tons a year, an electric power generation plant of 800 megawatts, a glass factory, a variety of other factories and a housing complex with 50,000 housing units that will house the workers in the new industrial city. The total estimated cost of the project was estimated at $8 billion, to be funded entirely by the Iranian private sector.[55] Nothing has been heard about this ambitious project since the announcement was made in the wake of a visit to Damascus by an Iranian delegation. It is doubtful that Iranian entrepreneurs are any keener about investing their money in Syria than the Syrians are keen about repatriating their capital from abroad. Given the dwindling fortunes of the Iranian economy, because of sanctions and declining oil revenues, there is simply not that kind of foreign exchange that can be spared for investment in Syria.

Conclusion

Despite modest economic reforms, which have included licensing private banks, cutting lending interest rates, and raising prices on some subsidized items, most notably gasoline and cement, the Syrian economy remains highly controlled by the government. Long-run economic constraints include declining oil production and exports, weak investment, high unemployment, increasing pressure on water supply, rapid population growth, and economic sanctions.

The forced withdrawal from Lebanon has been costly both politically and economically for the Syrian regime. It has meant fewer Syrian workers in Lebanon and fewer opportunities to plunder the Lebanese economy. One could speculate about the level of damage, but there are no reliable figures to quantify the implications for the Syrian economy.

Syria's authoritarian regime, heavily regulated economy, inadequate infrastructure, outmoded technological base, a bloated public sector, and weak economic institutions, combined with declining oil revenues, make the country vulnerable to future shocks while hampering its ability to compete at the regional and international levels.

The preoccupation of the regime of the consequences of the assassination of al-Hariri will continue to divert attention from the country's serious problems of growth and unemployment. The threat of sanctions on Syria will discourage foreign direct investments. Despite much bravura about Syria's ability to withstand the effects of sanctions, the Syrian economy, under sanctions, could be heavily impacted. All of these factors render the pace and sustainability of the reforms somewhat in doubt.

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

Endnotes:

[1] IMF, Syria Arab Republic: Selected Issues. IMF Country Report No. 06/295, August 2006, p.29.

[2] The figures for GDP are taken from the Economist Intelligent Unit, Country Risk Service, Syria, January 2007.

[3] Reform Party of Syrian circular of March 19, 2007.

[4] IMF, op.cit., p.53.

[5] International Monetary Fund, "Syrian Arab Republic, Staff Report for the 2005 Article IV Consultation," Washington, D.C. 2005.

[6] Taha Yassin Ramadhan, the most senior Kurd in Saddam Hussein's regime, was executed by the Iraqi government in March 2007.

[7] Al-Thawra (Damascus), February 15, 2007.

[8] Teshreen (Damascus), February 11, 2007.

[9] Al-Hayat (London), March 7, 2007.

[10] UNDP, Human Development Report 2006 http://hdr.undp.org/hdr2006/statistics/countries/country_­fact_sheets/cty_fs_SYR.html .

[11] Heritage.org/index. See section on Syria, pp.355-356 .

[12] http://www.doingbusiness.org/ExploredEconomics/?economyid+183 .

[13] World Economic Forum, A Global Competitiveness Report 2006-2007, released September 26, 2006 .

[14] The Arab World Competitiveness Report, released in Doha, Qatar on April 10, 2007.

[15] Transparency International, Press Release, November 6, 2006.

[16] Al-Qabas (Kuwait) April 2, 2007.

[17] Teshreen (Damascus), December 30, 2005.

[18] The Al-Arabiya interview with Abdul Halim Khaddam was printed in Elaf, December 31, 2005.

[19] Al-Sharq Al-Awsat (London), January 6, 2006.

[20] The author has noticed a similar phenomenon in one of India's key ministries. While he was on mission for the World Bank to discuss a particular project with a senior ministry official, he noticed a messenger carrying a big bundle of files and leaving them on official's desk. When the author inquired as to when the official reviews all these files, the latter simply said: "I pass on to my superior."

[21] Al-Thawra (Damascus), May 19, 2006.

[22] IMF (2006), p.43.

[23] Ibid., p.30.

[24] Ibid., p.34.

[25] Al-Sharq Al-Awsat (London), April 9, 2007.

[26] Al-Thawra (Damascus), February 1, 2007.

[27] D. Gassan Tabara, "al-islah al-iqtisadi fi surya" (The Economic Reform in Syria), Syria News, February 13, 2007.

[28] Al-Thawra (Damascus), December 1, 2006.

[29] The Economist Intelligence Unit, Country Report: Syria, January 2007.

[30] IMF, op.cit.

[31] A keynote address delivered at a symposium sponsored by the European Investment Bank, "Integrating Syria into the Global Economy," Damascus, 3-5 November, 2006.

[32] Al-Thawra (Damascus), February 28, 2007. The title of the article" "Heated Debate over the Social Market Economy."

[33] Al-Thawra (Damascus), December 28, 2005.

[34] SANA (Syrian News Agency), January 28, 2007.

[35] Al-Thawra (Damascus), February 11, 2007.

[36] The Financial Times, November 2, 2005. One of the key ironies about the sanctions on Syria is that its capital Damascus is the headquarters of the Arab League's Office for the boycott of Israel.

[37] The Financial Times, April 9, 2007.

[38] Middle East Economic Survey, 49:6 6 February 2006.

[39] IMF (2206), p.53.

[40] These figures are taken from the Economist Intelligence United, Syria, January 2007.

[41] Middle East Economic Survery 48:47, November 21, 2005.

[42] Al-Hayat (London), October 10, 2005.

[43] Al-Thawra (Damascus), February 7, 2007.

[44] Al-Ahram Weekly (Egypt), November 10-16, 2005.

[45] Al-Thawra (Damascus), January 30, 2007.

[46] Al-Thawra (Damascus), February 28, 2007. The article was written by Muhammad Ayman Obeid, who is adviser to the Syrian Center for Business Management.

[47] The World Bank Country Brief, Syria. (September 2005).

[48] Al-Thawra (Damascus), July 20, 2006.

[49] Al-Sharq Al-Awsat (Damascus), December 26, 2005.

[50] Al-Thawra (Damascus), January 5, 2006.

[51] As'ad Aboud highlights the issue of smuggling (but does not mention the role of the Syrian army in Lebanon) as a possible factor in the spike of the trade deficits in 2005. Al-Thawra, Damascus, January 5, 2006.

[52] CIA World Factbook.

[53] Al-Thawra (Damascus), March 1, 2007.

[54] Al-Thawra (Damascus), October 2, 2006.

[55] Al-Thawra (Damascus), September 29, 2006.