Syria beyond conflict: the economic test

The geography of the Syrian uprising is a reflection of the significant economic and social crisis faced by large segments of the Syrian population since the early 1980s. The core of the revolution is political, in the sense that its backers are overwhelmingly demanding “freedom and dignity”; but strong underlying economic factors are determining its dynamic – and will weigh on the post-revolution period.

It is, indeed, in the areas that historically formed the core constituency of the Ba’ath party that the protests have been strongest, in particular the southern city of Dera’a that sits at the heart of an agricultural plateau, the cities and rural areas of Homs and Hama, and the suburbs of Damascus.

In the late 1970s and early 1980s, after two decades of strong government investment in the economy and society, most Syrians remained solidly behind the regime against protesters led by the Muslim Brotherhood. Now, after three decades of state divestment, trade liberalisation, neglect of agriculture and of the rural areas, and government priority to the services sector, many Syrians are in the streets calling for the demise of this same regime.

An end to illusion

Hence, the few years of strong GDP growth enjoyed by the Syrian economy in the early 1990s (spurred by a growth in oil output) and in the late 2000s (spurred by the oil boom of the Gulf region and the cash surpluses it generated) hid the fact that since the early 1980s, Syria has not been generating enough economic growth to employ its rising population.

The economy, according to most economists, needs to grow by an average of 8% per annum to generate enough jobs for new labour-market entrants – but it has not reached this level even once since 1980. In other words, unemployment has been increasing every single year in Syria for the last three decades.

These difficulties were compounded by poor government policy-making. The free-trade agreements signed with Turkey and the Arab world in the mid-2000s, for instance, as well as a general reduction in custom tariffs, led to an “invasion” of foreign products in the local market that put countless industrial plants and workshops out of business and, consequently, thousands of people out of their jobs. Similarly, a reduction in agricultural input subsidies accompanied by a severe drought forced tens of thousands of farmers from their lands and reduced the contribution of agriculture from around 25% of GDP to 19% in less than a decade.

In addition, in order to respond to its dwindling revenues, the government drastically reduced its investment and spending, and applied what in practice was a copy of the structural-adjustment programs imposed by the International Monetary Fund (IMF) on emerging countries. This contraction of the government’s role in the economy was most obvious in rural areas, where the core constituency of the Ba’ath party resided.

In the midst of all these difficulties and state divestment, there was one positive consequence: the government managed to accumulate billions of dollars in foreign-currency reserves and save them for future generations, thanks to an oil boom that, albeit short, lasted most of the 1990s.

This is exactly what Syria is set to lose through the international sanctions imposed on its crude exports. The loss of billions of dollars incurred by the government in the last few months because of the sanctions will render the reconstruction of the country and future investment requirements more difficult to fund.

The issues highlighted above point to the tremendous economic problems faced by Syria’s society. There must, indeed, be no illusions. A happy end to the current protest movement, including the establishment of a democratic political system, will not mean an end to Syria’s economic woes. Syrians must recognise the challenges ahead and adopt a new economic strategy that puts economic development and employment at the centre.

 

Note: This article appeared first in May 2012 in openDemocracy.net

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The celebration of suffering

The announcement by French Foreign Minister Alain Juppé on April 17 that Syria’s foreign currency reserves had halved since the beginning of the popular uprising in the country is hardly something to celebrate. Valued at $17 billion at the end of 2010, they would now be standing at some $8.5 billion according to Juppé’s estimate.

Providing a correct measure of Syria’s foreign reserves has always been problematic. While in most parts of the world foreign reserves are handled by the central bank, in Syria they are managed by two separate institutions: the Central Bank of Syria and the Commercial Bank of Syria (CBS). This is a consequence of the fact that CBS has been acting for decades as the bank of all public sector enterprises, including the Syrian Petroleum Company whose exports of crude oil were the main source of the Syrian government’s foreign reserve accumulation in the last 20 years.

The foreign assets previously known to be held by these two banks, however, adds up to only about $10.7 billion — somewhat short of $17 billion. One explanation for this, according to some insiders, is that not all reserves are calculated at the same conversion rate, with some pegged at 47 Syrian pounds to the United States dollar (the going rate at the end of 2010), and others at 11.5 pounds to the dollar (a rate the government used in some transactions until the late 1990s). The conclusion of all this is straightforward: you cannot rely much on Syrian central bank data.

But let’s go back to Mr. Juppé. The French FM made his announcement a few days before foreign ministers of western countries were set to meet in Paris to discuss additional sanctions on Syria. The collapse of Syria’s reserves was presented as a success for the international community in using sanctions to inflict damage on the Syrian economy — and, as a consequence, on the regime, as many analysts would have us to believe.

However, one needs to be clear: rejoicing in a country losing in less than a year assets it took decades to accumulate is simply insane, if not cruel. The implosion of Syria’s middle class and a gradual decline in the average purchasing power began in the mid-1980s, when a severe foreign currency crisis reduced the country’s reserves to the equivalent of less than one month of imports. Things began to improve only from the latter part of the decade when the first oil fields discovered by Royal Dutch Shell and Total S.A. began production.

Syria’s production of crude oil then increased gradually until it peaked at around 600,000 barrels per day in 1996. The period witnessed strong economic growth but also the implementation of a strict austerity program by the government, similar in many ways to the stabilization measures applied by the IMF in various countries across the world.

This program was strongly criticized by economists, and has been blamed for the state’s disinvestment from vast segments of the economy and for the stagnation in real incomes, but it had one benefit, namely saving foreign reserves for future generations.

This is what Syria is now set to lose. Not only are years of efforts being spoiled, but it is the reconstruction of the country that is rendered more difficult; future investment requirements that are made more difficult to fund. One good argument for this state of affairs, from the point of view of Western governments at least, is that a weakening of the state — because that is what the fall in reserves is about — would lead to a weakening of the regime and as a consequence to its fall.

There is historical precedent. This is exactly what many decision makers were saying in 1990 when sanctions were imposed on Iraq. We all remember the consequences of that, not least that Sadam Hussein stayed in power for 12 more years. In the meantime, the Iraqi population suffered, its social fabric was destroyed, and millions were displaced and driven into poverty. Failed sanctions were then followed by an American-led invasion.

 

Note: This article appeared first in the May 2012 edition of Executive Magazine