The Political Economy of Syria Under Bashar Al-Assad

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]

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 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.

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.

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.

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]

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.

No wonder Nancy Pelosi went there, picking up some pointers.

The oil sector provides 25 percent of the GDP, half of the government’s revenues and about two-thirds of its export receipts.

Syria has oil? Why aren't we kissing their a** and giving them money to kill us

2 posted on 04/14/2007 1:49:39 PM PDT by txroadhawg ("To compare Congress to drunken sailors is an insult to drunken sailors." Ronald Reagan)

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