The missed opportunity for economic reform in Syria
By: Sren Schmidt : Roskilde University Centre, Roskilde, Denmark
Bashar al-Assad, the incumbent President of Syria, declared in his inauguration speech in 2000 that economic development was his absolute priority. In February 2001 in an interview with the London-based daily Al Sharq Al Awsat he reiterated that his general vision for Syria could be summed up in seeing Syria more prosperous.
Even in Syria, gone are the days when nationalist and anti-Zionist rhetoric provided sufficient legitimacy to govern. Bashar al-Assad seems to have understood that income and jobs are increasingly important to the Syrian people who hold the regime accountable for the fact that all neighboring countries (except probably Iraq) are faring much better than Syria.
While Syria's Gross National Income per capita was 1,190 USD in 2004, Jordan's was 2,140 USD, Turkey's 3,750 USD and Lebanon's 4,980 USD.
By and large, Bashar al-Assad has not succeeded in improving the Syrian economy since 2000.
Economic growth has not exceeded population growth, and as a consequence only a fraction of the almost 300,000 people who enter the labor market every year have found employment.
Unemployment has as a consequence been rising and is now officially estimated at 15 percent of the working population, but unofficially at almost the double. In 2002, The International Labor Organization estimated youth unemployment (ages 15-24) to be 73 percent.
What is even more disturbing is that the illiteracy rate has lately risen by more than ten per cent and now stands at 19 per cent, and that the number of people considered below the poverty threshold and not able to satisfy their basic needs is now estimated by UNDP to comprise 11.4 per cent of the population.
Expectations of reform were high when Bashar al-Assad took power in 2000. The funeral of his father, Hafez al-Assad, was attended by prominent leaders such as Madeleine Albright, Jacques Chirac and Romano Prodi, who by their presence gave Bashar al-Assad their nod of approval, together with the promise of support to bring change and reform to Syria.
Likewise, during the last five years, EU commissioners and EU Presidents have visited Syria several times. The EU has made commitments of technical assistance for more than 100 million Euros through the MEDA program, as well as offering Syria a Free Trade Agreement and the promise of future strategic and economic help.
These opportunities were however quickly squandered.
First the young President overplayed his hand in relation to the American invasion of Iraq by not making good on an explicit promise to the US to stop Jihadists entering through the Syrian-Iraqi border and Syrian businessmen providing equipment to Iraqi insurgents.
Then the President allowed his security apparatus to resort to old time tactics of intimidation and assassinations of anti-Syria voices. The result of these blunders is that the Bush administration has enacted the Syria Accountability Act, which details punishment of Syria if it continues its support to Iraqi Jihadists, Hezbollah and radical Palestinian organizations. France also agreed with the US and the international community to pass UN security resolution 1553, which demanded that Syria cease any future involvement in Lebanese affairs.
The relationship between Syria, the EU and the US has been aggravated since autumn 2005 by the Mehlis report on the assassination of Lebanon's former Prime Minister Rafiq Hariri in February 2005.
The report points to the likely involvement of top Syrian officials including the brother-in-law of the President, Asif Shawqata, in the killing of Hariri.
The US has apparently settled on a strategy of regime change in Syria while the EU seems willing to toe its line for the time being by putting the signing of the Association Agreement on hold sine die.
The Association Agreement is the document that would provide the basis for further development in relations between the two entities.
Under such unwelcoming conditions, increasing risks and uncertainty, Syrian or foreign private investors shy away from undertaking longer term productive investments and bringing much needed know-how and technology to Syria.
Bashar al-Assad has indeed had a real window of opportunity to bring Syria onto a new course, but he did not seize it. Through serious missteps, he seems to have forfeited the chance for indispensable Western cooperation to bring the Syrian economy afloat again. As a result, the window of opportunity is closing and the wellbeing of the Syrian population seems to be made hostage to its own government.
What went wrong and why?
In this profile, I shall suggest some answers to these questions. The Heritage
During Hafez al-Assad's reign, Syria became a politically stable country, but it was not a stability based on a sound economic footing and an institutionalized political system. The economy that Bashar al-Assad has inherited consists of a medium-productive agricultural sector, a small and weak industrial sector, and the oil sector.
It is strengthened by remittances from Syrian workers abroad, adding roughly fifteen per cent to incomes.
In a sound economy the share of manufacturing industry would increase over time and be able to earn needed foreign exchange to the country. This has not been the case in Syria. Value-added in manufactures has declined over the years and accounts now only for 15 percent of GDP, almost purely earned on domestic consumption.
Export of manufactures - mainly in textiles and food industry - declined drastically during the 1990s and accounts now only for seven per cent of total exports, while oil amounts to more than 70 per cent. The remaining share of exports is made up of raw cotton. During the 1990s, the productive capacity of the Syrian economy eroded dramatically, and the country became more and more dependent on the vagaries of rain and oil.
Politically, Hafez al Assad built his regime on a combination of repression and a precarious legitimacy based on economic subsidies to peasants, state employees and the general public, as well as hand-outs to businessmen closely connected to the regime.
Oil revenues financed all of this. Unlike Egypt, the Syrian regime has never made an effort to at least open a dialogue with major oppositional forces, whether based on a liberal-democratic or an Islamic platform.
The sectarian character of the regime, whose coercive nucleus rests on the minority Alawite community, has hardened this lack of negotiating and communicative avenues with important forces in the population.
The ability to agree on reforms is clearly not facilitated by a political system, where the inevitable short-term cost of reforming the economy is turned into anti-regime grievance possibly resulting in regime change before longer-term benefits can be accrued.
Besides the debilitating political system, the capacity of Syrian state institutions to provide public goods, whether regulations and incentives, legal adjudication or services, has almost been destroyed after many years of using public employment as patronage for its proselytes, lack of accountability measures and not least the absence of moral leadership by the regime. The public sector, which Bashar al-Assad inherited, is bereft with corruption, disillusionment and inefficiency.
In short, the state understood as a device to provide third party intervention in society is almost gone. What remains is its raw coercive capacity.
This is the gloomy heritage that Hafez al-Assad left to his son.
Presuming that Bashar al- Assad had the inclination and wish to transform the dead-ended Syrian economy, the challenge to turn this heritage into sound development would indeed a very able, wise and shrewd politician at the helm of the state. Reforms
The short political opening of the "Damascus Spring" in 2001 was quickly followed by the still ongoing "Damascus Winter, which is characterized by the crackdown on and imprisonment of reformers transgressing the red lines of the regime. The reformers main point is that any economic reforms would require democratization and political liberalization as a precondition to making politicians and officials accountable. Specific demands such as rescinding emergency laws and the political monopoly of the Ba'ath were reasonably heard by the regime as its death tolls and rejected.
Regardless of pious wishes and campaigns targeting selected minor personalities, corruption and inefficiencies continued.
Elementary government functions were in shambles. When Syria negotiated the Association Agreement with the EU, it took the government more than a year just to provide the figures on custom duties in force which stalled the negotiations accordingly.
Matters of policy formulation were similarly chaotic and improvised. During 2004 three separate wide-ranging economic reform plans were put forward without any relation to each other. All plans are made up of grand ideas and wish-lists and devoid of operational goals and reflections on implementation. Five years after the incumbent President made economic reform his highest priority; analysts agree that Syria still lacks a proper economic reform plan.
Beside empty gestures to open a virtual university and allowing unsupervised and unaccredited private universities, the main economic reform during the last five years has been to allow the establishment of private banks. More than four years after the highest authority of the Ba'ath party issued a decree on this issue, the first of three banks opened in early 2004. Although a reasonable step in improving the business climate in Syria, the reform does not address the main problem of the financial sector, which is that it is the public oil sector and not the private sector that generates foreign exchange.
As long as the state is not able to channel at least a portion of this foreign exchange into productive private investments in stead of financing the imports of the loss-making state industries and subsidies, private banks will only improve the delivery of technical financial services, but will not facilitate productive investments.
Privatizing state industries and ensuring that scarce foreign exchange is used for productive investments instead of consumption is a political challenge that the Government so far has avoided.
The need to underpin private banks with regulations and strong monitoring capacity from the Central Bank in order to avoid that they are used as conduits for scams and foreign exchange flights is well known. The nomination of the former employee of the French Trade Office Adib Mayaleh as new Governor of the Central Bank of Syria does not bode well for the ability of the bank to perform this function.
Mayaleh held no previous position in financial institutions prior to his appointment and his nomination has impressed neither businessmen nor economists in Syria.
The other main economic reform issue during the last five years has been the intention to enter into a free trade area with the EU, which is the cornerstone of the Association Agreements of the Euro-Mediterranean Partnership. It is however hard to see how entering a free trade agreement with Europe will solve the main problem of the Syrian economy, which is its lack of competitiveness. Under the preferential status Syria presently enjoys through the General System of Preferences by which the EU unilaterally gives tariff reductions to developing countries within certain quotas, Syria could not muster much export. In 2003 Syria only exploited its allocated quota for clothing to thirty per cent,, while the exploitation rates for leather and live plants, flowers, fruits and vegetables were only thirty and sixty per cent respectively.
Clearly, a further liberalization of Syria's trade regime would not help it much, when its record has been so dismal in exploiting existing free entrance to the EU. Why has the Syrian economy not been able to compete? Instead of looking for the answer to this question in easy stroke-of-the-pen reforms, the real problems of the Syrian economy are related to the capacity of its state to complement and support market-based development as well as to the inability and lack of inclination of the regime to address the genuine political issues related to reforming its political economy.
I shall in the following indicate some of the policies that would address such institutional and political reforms, but have so far been skirted by the regime. Non-reforms
Many observers attribute the economic problems of Syria to its socialist economy. However, since the undertaking of economic liberalization in the late 1980s, the private sector share of production has grown steadily. While the private sectors share of industrial, non-oil GDP in 1990 was only 45 per cent, it grew to 82 per cent in 1999. To describe the Syrian economy as socialist is therefore not correct. Instead, the private sector in Syria exists alongside a state that is easily penetrated and used for private purposes.
The huge business empire of Rami Makhlouf, the cousin of the President on his mother's side, is a case in point.
Amongst many other things, Rami Makhlouf is owner of one of Syria's two mobile phone operators and co-owner of the other.
When in 2002 he wanted to take over the share of his original co-investor, the Egyptian mobile phone company Orascom, he engineered that the Syrian authorities chased the company out of the country in order for him to take over Orascom's share of the company. This example illustrates the problem of soft states, like Syria, that not only are assets of the state easily privatized, but private actors make use of the state to prey on each other.
Administrative reform is indeed on the top of Bashar al-Assad's reform list, but unless it includes some measures of public political and administrative accountability (i.e. exactly what the Damascus Spring reformers demanded), such reforms will be superficial and never able to deal with close associates to the President himself, such as Rami Makhlouf.
Other related institutional reforms include reestablishing the judiciary as a neutral and independent adjudicator. It is presently very difficult to enforce private contracts with the help of the judiciary, which of course does not help the business climate.
The EU has for years promoted the idea that free trade is the key to economic development. This is clearly contradicted by the fact that almost any late-developer has used preferential state treatment of domestic industries to catch up with the competitiveness of already industrialized countries. Syria is no exception to this. Syrian industries suffer from a host of disadvantages. Without constructive incentives to overcome these and develop competitive industries, a free trade regime will simply result in Syria being de-industrialized, as hardly any of its present industries can compete with European companies. A strong and benign state instead of the present underfinanced and overstaffed predatory state apparatus is therefore needed as an active co-player in developing the competitiveness of the Syrian economy.
The EU as well as some liberals in the Syrian reform camp such as the former World Bank economist Nabil Sukkar in contrast still seems to favor the neo-liberal philosophy of the 1980s that as long as the private sector gets a free hand, development will follow.
Finally one may point to the need to reduce and redirect public expenditure. Vital public expenditure on education and public health has been starved (public spending on public health was less than two per cent of GDP in 2004 and public spending on education was in 1998 only 3.6 per cent of GDP - far below average spending in the Middle East), while administrative salaries, the military and subsidies are the big items of public expenditure. The expenditure for the generalized subsidy of heating oil, for instance, is estimated to be almost ten per cent of GDP.
Public expenditure reform is hard and difficult political work, where losers have to be juggled against winners and short-term interests against long-term interests. So far it seems that Bashar al-Assad neither has the inclination, the power nor the political legitimacy to bring about such much-needed reforms. Conclusion
While Hafez al Assad learned the ropes of being a politician the hard way by fighting his way to the apex of power, Bashar al-Assad gained power by means of the manipulations of his father and his jamia (inner group of associates). As a result, Bashar al-Assad's legitimacy amongst the strongmen of the regime as well as amongst the general public is weak. His dilemma is that if he gave way to a more inclusive political system, which could facilitate the forging of a broader reform constituency, he would in fact alienate the very individuals within the security establishment who groomed him as president.
Instead, Bashar al-Assad has attempted to strengthen his power by further transforming his regime into a family affair by his recent nominations of Asef Shawkat, his brother-in-law, as head of Military Intelligence, and his own brother Maher as well as Manaf Tlass, the son of former Defense Minister Mustafa Tlass, as heads of the most potent fighting force in Syria, the Republican Guard.
In the economic field, Bashar al-Assad has given a free hand to regime tycoons such as his cousin Rami Makhlouf.
Just before the Ba'ath meeting in June 2005, al-Assad closed the single remaining civil society salon of the Damascus Spring debates led by the moderate Jamal Atasi because it allowed a letter from the exiled head of the Muslim Brotherhood to be read at its meeting.
In the logic of the regime, closing the club, toying as it is with the idea of uniting the moderate Islamic and liberal-democratic opposition, seems well justified. It is exactly such a pincer movement by the opposition that may mobilize sufficient force and numbers to bring about the democratic undoing of the regime. The Tenth Regional Conference decided to maintain the political monopoly of the Ba'ath, to uphold the emergency laws and to agree on such platitudes that its economy should be a social market economy.
It seems evident that the foundation of political rule will require a complete overhaul before real steps to reform the time-warped and unhealthy political economy in Syria may be reformed. The improvised and superficial steps taken so far will surely not bring any change. The problems lie eminently in the lack of capacity of the Syrian state to play a constructive role in developing a market economy, as well as in the regime's lack of any inclination to pursue public interests instead of the personal material interests of its members.
So far, the regime does not have an imminent economic crisis on its hands. Present oil prices provide ample means to finance the Syrian renter economy. Oil production reached almost 600,000 barrels per day in 1995 but declined to less than 450,000 barrels per day in 2005.
Although estimates on future oil reserves are subject to large margins of error, experts have estimated that by 2012 Syria will become a net importer of oil. By that time, hard political choices can surely no longer be ignored.
The latest killings of the prominent Kurdish moderate Islamist Sheikh Mohammed Khaznawi and the ensuing deadly clashes in Qamishli in north-east Syria between the police and demonstrators as well as the shoot-out in Damascus last year where a number of people were killed indicate that radical Islamism and Kurdish nationalism are on the rise.
At the same time, Bashar Al Assad's room of maneuver for repressive measures against the political associates of these forces has been seriously narrowed by Syria's regained candidate status as a new international pariah country.
Syria is now subject to much closer scrutiny by the EU and the US on human rights and democracy issues than it was when Bashar as-Assad took over.
It might indeed demand more leadership quality than al-Assad can muster to get the regime out of this bind.