December 11, 2002 No. 36

We Wish to Offer Our Muslim Readers 'Idkum Mubarak

December 11, 2002 | By Dr. Nimrod Raphaeli*
Jordan | No. 36

I. Special Focus

Syria: Economic Reform or Economic Stagnation
Syria's predominantly state-controlled economy remains stagnant because of the failure of the political establishment to implement extensive economic reform. Falling growth rates, rapidly rising population, an old-fashion socialist command economy, inefficient and heavily-regulated public sector, and restricted political freedoms have deterred direct foreign investments or the emergence of a viable market economy. Syria's inadequate infrastructure, outmoded technological base, and weak economic system make it vulnerable to future shocks and hamper competition both at the regional and at the international levels.

Since assuming power in July 2000, President Bashar Al-Assad has promised to follow a path of economic reform, such as liberalizing the Syrian economy, opening the market to foreign investors, licensing foreign banks to operate in Syria and, above all, introducing political competitiveness and transparency. The attempt for reforms seemed to have remained constrained by counter-veiling domestic interests and a commitment to a centralized, socialist form of economic management and a non-competitive political system. Given the unusual circumstances of his rise to power in a political system best defined as a hereditary republic Bashar Al-Assad's emphasis on liberalization and deregulation has provoked strong resistance from the "old guard" who put him in power. As a result, Syria's economic growth has stalled and the reforms are kept in abeyance. A good example is the failure to license private banks. Despite many past promises, Syria has failed to issue licenses to private banks to operate in its territory. Dr. Muhammd Al-Hussein, Syria's deputy prime minister for economic affairs, told the ruling party's daily, Al-Thawrah, that although executive orders have been issued to grant such licenses, the small number of applying banks which "did not exceed the fingers of one hand," leaves little choice for the government. [1]

A Leading Syrian Economist Speaks His Mind
Dr. Nabil Succar, a former World Bank economist and current head of the Syrian Consulting Bureau for Development and International Investments, a private consulting firm in Damascus, was recently interviewed by the London-based Saudi daily Al-Sharq Al-Awsat[2] , about the current economic situation in Syria. His views are uncharacteristically revealing and, indeed, bold.

Dr. Succar says that the debate on the reform started by President Hafez Al-Assad, Bashar's father, shortly after he began his fifth mandate [in the late 90s when he was already rumored to be gravely ill.] Assad made no attempt at hiding the fact that serious mistakes were made and that Syria could not continue on the old path. Today, says Succar, no one denies the need for both political and economic reform but there has been more talk than action. It is as if the decision makers believe that by simply talking about reforms they have done all that needs to be done. This is a dangerous strategy because it keeps Syria isolated from the global markets. [3]

On Privatization
Dr. Succar says that the discussion about privatization is on-going but nothing has happened. The authorities are focused on the reform in the public sector. In his opinion, the public sector is "in a state of comma and it is preferable if it were left to die a natural death instead of spending efforts to revive it" because it is impossible to save it. In practice, there is no person who will buy a public entity that is inefficient and mired in red ink. The ideal policy for Syria, Succar emphasizes, is to encourage the emergence of genuine private sector, and that means that the government must allow businessmen, whether Syrian or foreigners, "to invest, produce, buy and sell in accordance with the rules of a market-based economy." The experience in many countries, from Russia to Algeria, suggests that the privatization of state-owned enterprises is not an effective method to modernize the economy. What is the use, he asks, of energizing the public sector for which there is no longer any use?

The Syrian economy had enormous growth rates in the 70's of the last century, averaging between 7 and 10% annually. He attributes this high rate of growth to the enormous flows of capital from oil-producing Arab countries. But Syria itself has become an oil-exporting country and has benefited from the availability of capital.[4] In the second half of the 90's, the rate of economic growth has declined to 2.5% [and further declined to 1.5% in the last 2 years] which hardly covers the rate of population growth. The fiscal and deflationary policies adopted by the government to control inflation led to an almost 40% drop in both private and public investment. At the same time, unemployment has reached 20%, affecting the young. To solve the unemployment problem Syria will need to create 250,000 new jobs every year. This requires an annual rate of economic growth in the range of 7-8% that, in turn, requires a doubling of investments as a percentage of GDP from 17-35%. This cannot be accomplished under the planned Socialist regime and command economy. Only a strong and modern private sector, Succar stresses, can accomplish these objectives. This will also require the integration of Syria into the world economy.

Dr. Succar said "investors are not placing their money in Syria, since they do not feel that Syria has made a complete disengagement with the old regime. When the changes are made the place will be attractive to investors. Syria is a country wealthy in natural resources and with industrial capacities. There are opportunities in agriculture, services, industry, tourism, and information technology, and there is no reason why Syria should remain poor."

President Assad's Position Regarding Economic Reform
Dr. Succar believes that Assad would like to continue along the path chartered by his father. His heart is in the right place but he knows that he cannot build a better future for Syria with the existing archaic structures and discredited policies in place. But the fact remains that the liberal voice within the establishment remains weak. Many of those who place their hopes on the ruling Ba'th party such as the bureaucrats, the public sector, the army, and the security apparatuses, feel threatened by a genuine reform. They are unable to terminate the discussion about reform and will not stop taking certain measures in that regard. But they can, and have done so, by slowing the process of reform. The ruling Ba'th party which claims to be part of a Socialist family, lacks the courage and vision necessary to review its ideology and its policies, as was done by many Socialist parties in other parts of the world. "I'm not saying," confides Succar, "that they have to change the name or renounce socialism, but I ask that they interpret socialism to mean justice and equality without remaining prisoners of a failing economic model." Most Socialist parties in Europe and Latin America, and in some instances even Communist parties, have achieved this transformation, and avoided remaining unsuitable for a new world. "The Syrian Ba'th party," concludes Dr. Succar "has not dared to face the challenge and remains engulfed in ideas and programs which belong to another age."

II. Regional Economic News

Rising Costs of Arab Borrowing
The director general of the Arab Monetary Fund, Jasem Al-Mena'i, warned that as the risks in the Middle East rise, so will the cost of borrowing, which would render many new planned projects unprofitable. In addition, if war breaks out in Iraq, other countries, such as Egypt and Jordan, will be affected, because Iraq is a major market for their exports. In the meantime, investment activities have slowed down because of growing war risks. The small repatriation of Arab capital, which has taken place so far, was driven mainly by fear of confiscation rather than by regional economic opportunities. [5]

Fifth Meeting of Islamic Banks Focuses on Frozen Assets
The primary topic of the fifth annual meeting of the Islamic banks was "The Design of a Strategy for Complementarity of the Islamic Banks." The meeting was organized by the Arab Academy for Banking and Financial Sciences and held in Amman, Jordan, on October 12-14.

Many of the 130 participants, mostly heads of financial and banking enterprises, raised the issue of money belonging to charitable organization frozen by Islamic banks. For example, Dr. Na'im Beidha, the director of accounting at the Lebanese Baraka Bank, argued that the money frozen in Islamic banks should be released to its owners, particularly if the account holders are charitable organizations which have nothing to do with terrorism.

On the other hand, an economic researcher at the Islamic Development Bank in Jeddah argued that as long as these [charitable] organizations remain on the list of organizations supporting terrorism the Islamic banks cannot release their assets without the risk of being themselves classified as terrorist-supporting organizations. [6]

Manama, the capital of Bahrain, has become the world center of Islamic banking activities. In a statement at the meeting, Sheikh Ahmad bin Muhammad Aal-Khalifa, governor the his country's Monetary Fund, said there are currently operating in Bahrain 26 Islamic banking institutions, 5 Islamic insurance companies and 32 Islamic investment funds. [7]

Vast Investments Required for Developing Oil and Water Sector in the Arab World
Experts in the oil sector estimate the investments requirements for the oil sector at $113 billion in the next two decades. This will include oil, gas and petrochemical projects.[8]

Similarly, the World Bank has estimated that the Arab countries situated between the Atlantic Ocean and Iran would have to spend $40 billion in the coming decade to meet acute water shortage in strategic sectors such as agriculture, tourism and municipal services.

It is estimated that 45 million people in the Middle East have no access to drinking water because they are poor or live in remote rural areas. They are most susceptible to diseases associated with unhygienic water.

Rich oil producing countries have solved the problem of water shortage through desalinization. Qatar leads the way with 98%, followed by Kuwait (80%), U.A.E. (60%), Bahrain (50%), Saudi Arabia (44%), and Libya (20%). In Algeria and Israel the amount of desalinated water does not exceed 5%.[9]

Marketing Battle to Sell Oil
Saudi Arabia, Kuwait and Iran are competing to increase their market share in Asia, principally in South Korea and China.[10] This competition is likely to heat up as Russian oil begins to flow in growing quantities to the Asian markets.

Arab Countries Maintain Trade Surplus with U.S.
According to trade data issued by the U.S. Department of Trade, the U.S. has exported $8.3 billion to the Arab countries in the first 7 months of this year against total imports of $15.6 billion, generating a surplus of $7.3 billion in favor of the Arab countries (a group of 22 countries). Oil remains the largest component, accounting for 90% of Arab export to the U.S., but it is subject to sharp price fluctuations which affect the size of the surplus.[11]

Conflict between Saudi Arabia and Egypt over Dumping
In an unprecedented measure affecting inter-Arab trade relations, Egypt has imposed special tariffs on Saudi petrochemical imports for alleged dumping that has harmed Egyptian producers. The Saudi minister of finance, Ibrahim Al-Assaf threatened that unless Egypt rescinded the anti-dumping measures, Saudi Arabia will take counter measures against Egyptian products, although he refused to be specific. [12]

Economic Normalization between Iraq and Saudi Arabia
The Iraqi authorities re-opened the 'Ar-'Ar border crossing with Saudi Arabia to permit the passage of people and goods for the first time since its closure during the Gulf war in 1990 [interestingly, the "Gulf war" was downgraded in the official communiqué to "Gulf crisis" as when a hurricane is downgraded to a tropical storm!]

A large Saudi delegation of trade officials and businessman, headed by the chairman of the Saudi Export Development Center, Abd Al-Rahman Al-Zamel, crossed to Iraq to represent 43 major Saudi companies taking part in the 35th Iraqi fair which opened in Baghdad on November 1-10.[13] Forty-six countries participated in the fair.

U.S. Opposes Iraqi Oil Pipeline to Syria
The United States again raised the issue with Syrian officials of the illegal flow of approximately 200,000 barrels of oil a day through an Iraqi pipeline which connects between Karkuk (Iraq) and the port of Banyas (Syria), in violation of the U.N. sanctions on Iraq.

Syrian officials refuse to discuss the matter. They only say that the pipeline "is still in the testing stage and it is being rehabilitated."[14]

III. Country Economic News

A Pro-Market Paper Calls on President Mubarak to Reform Economic System
The editor of Al-Seyassah, Ahmad Al Jarallah, criticized President Husni Mubarak for applying "military deception" or "war deception" in his style to bring about changes and renewal to the Egyptian economy.

More than ever, says Al Jarallah, Egypt is in need of "administrative revolution" that would block the path of those who fraudulently benefit from the maintenance of a socialist economy. How is it possible that in a liberal economy there is still a socialist prosecutor? Why does the state own shares in banks and insurance companies? Egypt needs a new brainpower to restore the country's economic vitality and provide employment to a burgeoning labor force. President Mubarak ought to understand that the economic laws in Egypt should compare not with those of Iran and Iraq but with those in America, Britain, Singapore, Malaysia and China. China has accomplished its great economic reforms because it was able to discard the economic cocoon which was similar to that of Egypt without weakening of the regime.[15]

Egypt Discusses with U.S. Efforts to Curtail Money Laundering
An Egyptian delegation visited Washington, DC in early October to discuss Egypt's efforts to curtail money laundering. The U.S. has warned Egypt that the slow progress in implementing the law against money laundering is impeding economic relations, particularly with regard to membership in the International Trade Organization. Moreover, the U.S. has tied the quick disbursement of its $1.2 billion aid to Egypt to the latter's action on intellectual property rights and money laundering. [16]

Low Per Capita Export in Egypt
The Planning Committee of the Egyptian parliament warned that the export per capita, as a percentage of GDP, has declined from 14% in 1990/91 to the current level of 7%. The value of exported manufactured goods per capita in Egypt is $81 compared with $608 in Tunisia and $3,493 in Malaysia.

The Committee called for a review of the tax and tariff regulations. It also called for the encouragement of small and medium-size industries. These industries contribute only 14% to the total exports in Egypt, compared to an average of 35% in Turkey and China.[17]

Egyptian Labor Federation Does Not Provide Permits to Egyptian Workers in Israel
The President of the Egyptian General Labor Federation, Sayyid Rashed, insisted that his federation does not provide labor permits to Egyptian workers in Israel. The employment of such workers, he said, is not sanctioned by his Federation and most likely is carried out through a third country.[18]

French, Italian and Russian Oil Companies amongst Biggest Losers in War on Iraq
Three major oil companies, the French Total/Fina, the Italian ENI and the Russian Luk Oil stand to be the biggest losers if the Saddam regime is deposed. All these companies have signed lucrative agreements with Iraq for oil explorations but can not start working unless the sanctions on Iraq are lifted. The Iraqi opposition in exile has asserted its determination to reexamine these agreements when, and if, it comes to power.

It is worth noting that, according to the President of Total/Fina the agreements with Iraq do not provide for compensation in case of their abrogation.[19]

Financial Markets in Iraq Remain Steady
The Baghdad stock exchange, established in 1992, continues to operate despite threats of an American campaign. According to Taha Ahmad Abd Al-Salam, director of research of the Iraqi Stock Exchange, his bourse has maintained a steady performance despite continuous threats for more than a decade. There are currently 114 companies traded, including 70 private companies and 64 mixed companies (public/private) with a total market capitalization of $137 million. He admitted that this is a modest amount compared with market capitalization of $70 billion of the Saudi bourse but these are nevertheless "astronomical figures," given that the average monthly income in Iraq is $40 per capita.[20]

Germany will Occupy the Largest Space in the Iraqi Fair
While the German foreign minister was in the U.S. attempting to repair the countries' foreign relations, 100 German businessmen representing the 12 largest corporations in Germany arrived in Baghdad to participate in the Iraqi fair. The German wing is the largest, including those of France and Russia.

The spokeswoman for the German foreign ministry said that "this was a private activity" and the German government has nothing to do with it.

Official German statistics indicate that German exports to Iraq have increased 20 fold from 21.7 million euros in 1997 to 336.5 million euros in 2001. The biggest exporters to Iraq are Siemens (electronic and communications) and Daimler-Chrysler (cars).[21]

War on Iraq will Cause Serious difficulties for Saudi Economy
Analysts maintain that a war in Iraq could have disastrous consequences for the Saudi economy which relies heavily on oil. Should oil prices eventually decline as a result of the war, Saudi Arabia will have great difficulties meeting the needs of a growing population, currently estimated at approximately 22 million. As a result, a social structure built on loyalty to the rulers in return for social welfare could be threatened. Moreover, a decline in oil prices would have serious consequences for the Saudi budget which consumes 85% of oil revenues, representing three quarters of total state revenues.

Saudi Arabia has been showing a poor economic performance in the last two decades of the last century. During that period the Saudi population has grown from less than 10 million in 1980 to 22 million in 2000, or close to 3% per annum, whereas the economy only grew by 1.6% annually. [22]

High Dependency Rate in Saudi Arabia
An economic study carried out by the Saudi British Bank in Riyadh warns that unless the unemployment situation improves, the GDP per capita in Saudi Arabia will decline to 10,000 riyals ($2,700). What is driving the per capita down is the fact that there are 490 dependents for every 100 Saudi wage earners. According to the study, this rate of dependency is 2.4 times the world average.

The study drew attention to two major problems: first, the education system is not geared to meet the needs of a modern economy. For example, only 8.8% of university graduates have degrees in engineering. Second, 86% of all jobs are in the private sector while only 1.4% are in the oil and gas (suggesting that foreign workers occupy the highest number of jobs in that sector.)[23]

Damascus Hosts Israel Boycott Meeting: The Office of the Arab Boycott of Israel Convened in Damascus October 26-30 for its 69th Session
Mahmud Al-Ajami, the executive director of the Office of the Arab Boycott of Israel, reaffirmed the need to activate the boycott against Israel as "a legitimate weapon in the fateful struggle with the Zionist enemy."[24] In recent meetings, Egypt, Jordan and Mauritania which maintain full diplomatic relations with Israel, did not attend. Very few Arabic newspapers paid any attention to the meeting as the Boycott Office is considered a moribund entity.

One in Five Israelis Live Below Poverty Line
A report issued by the National Insurance Institute of the Israeli ministry of labor and social affairs shows that 1.17 million Israelis, of whom 531,000 are children, live below the poverty line.

The report was based on economic standards for 2001, under which an Israeli couple is considered poor if its monthly earnings fall below $584. The poverty line for a couple with two children was set at $934 and with four children at $1,241.[25]

Palestinian Economy Suffered Enormous Losses during Intifada
According to various reports, including those from the United Nations Conference on Trade and Development (UNCTAD) and the Department for Palestinian Affairs in the Jordanian ministry for foreign affairs, the Palestinian economy has suffered $7 billion in losses during the two years of the Intifada. Three manifestations of the problem are the heavy destruction suffered by the agricultural sector, the drying up of construction work and the closure of the Israeli markets to Palestinian workers (there are 18,000 Palestinians officially employed in Israel although the number is likely much higher.)[26]

Saudi Arabia Assists Palestinian Budget Saudi Arabia has transferred $15 million to the trust account administered by the Arab League for the benefit of the Palestinian Authority. This will be the Saudi support for the months of October and November, and brings the total Saudi support since the Arab summit in Beirut last March to $61.6 million.[27]

A New Classification for Dates in the Egyptian Bazaar
On the eve of the holy month of Ramadan, Egyptian traders have introduced a new classification for Egyptian dates, which are an essential ingredient for breaking the fast. The highest quality date is "Leila" (the closest equivalent in Arabic to Juliet, as in Romeo and Juliet), followed in descending order by "Saddam the Mass Destruction," "Arafat," "bin Laden" and ending with "Sharon" which is "sold to cemetery visitors." [28]

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

[1] Al-Thawrah, November 4, 2002.

[2] Al-Sharq Al-Awsat, November 18, 2002.

[3] It is ironic that on the same day Succar's interview was published, the Syrian official daily, Teshreen, published an article on "The 32nd Anniversary of the Glorious Reformist Movement-a Clear Strategy in the Field of Comprehensive Development' launched by the 'immortal leader,' Hafez Al-Assad.

[4] Syria's ability to export oil is enhanced by the flow of Iraqi oil through the Karkuk-Banias pipeline which is done in violation of the UN sanctions on Iraq.

[5] Al-Hayat, October 25, 2002.

[6] Al-Hayat, October 20, 2002.

[7] Al-Ahram, November 3, 2002.

[8] Al-Hayat, October 13, 2002.

[9] Al-Hayat, October 18, 2002.

[10] Al-Hayat, November 2, 2002.

[11] Al-Hayat, September 26, 2002.

[12] Al-Hayat, October 30, 2002 and October 31, 2002.

[13] Al-Quds Al-Arabi, November 1, 2002.

[14] Al-Hayat, October 26, 2002.

[15], September 21, 2002.

[16] Al-Hayat, October 2, 2002.

[17] Al-Sharq Al-Awsat, October 30, 2002.

[18] Al-Sharq Al-Awsat, September 30, 2002.

[19] Al-Quds Al-Arabi, October 10, 2002.

[20] Babil, November 4, 2002.

[21] Al-Sharq Al-Awsat, November 1, 2002.

[22] Al-Quds Al-Arabi, November 1, 2002.

[23] Al-Hayat, October 28, 2002.

[24] Al-Thawra, October 28, 2002.

[25] Ha'aretz, November 4, 2002.

[26] Al-Hayat, October 31, 2002.

[27] Al-Sharq Al-Awsat, October 14, 2002.

[28] Al-Sharq Al-Awsat, November 6, 2002.

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