Mortgaging Syria’s future

Kobane_0Four years after the beginning of the Syrian uprising, now largely turned into a civil war and a proxy regional conflict, the state of Syria’s economy and society is dire.

A recent report, produced by the Syrian Centre for Policy Research, a Damascus-based organisation, with support from UNDP, puts numbers on this disaster.

In the past four years, the Syrian economy is estimated to have lost more than $200bn, or the equivalent of four times its gross domestic product the year before the uprising; unemployment is estimated to be above 57 percent, from 11 percent in 2010; four out of five Syrians now live in poverty; and, in the space of only four years, life expectancy has fallen from 75 to 55 years.

Some business sectors have been almost totally decimated, such as tourism and oil production, while manufacturing, which has suffered from tremendous destruction, theft and looting, is only worth a fifth of its value prior to the uprising.

This destruction is accompanied by profound changes affecting Syrian society including a massive migration of both financial and human capital, dramatic demographic shifts, a fragmentation of communities and social ties, a rise in criminality and a deep sense of loss of dignity.

In addition to the consequences of the conflict that are already felt, others have serious implications for the long term and are already mortgaging future recovery efforts.

The Syrian government, now largely unable to fund itself, is accumulating an increasingly significant debt in order to import oil products and grain, to pay the salaries of its civil servants and, mostly, to fund its war effort. Someday, this debt, both domestic and foreign, including from countries such as Iran, will have to be paid back by the Syrian people, on top of the massive financial effort that will be required for a reconstruction drive.

Physical assets that have been destroyed, including productive capacity such as factories, machinery, power plants, irrigation canals, tourist sites and residential buildings, will require a very long time to be restored given the decline in the financial capacity of the government and capital flight.

Many of the most prominent Syrian businessmen have now relocated across the region and in some cases they have started to play an important role in their host countries. In Turkey for instance, more than 25 percent of companies opened last year by foreign investors were by Syrian businessmen. Having invested money, built a workforce and opened new markets, many will find it difficult to return when the war ends.

Even more worrying is the disappearance of the Syrian middle class. Business managers, academics, doctors, engineers and professionals of all other specialities have found refuge in Europe or in the Gulf. Having established themselves in these new countries and in need of clear long-term prospects, they will be the most difficult to entice back. With their departure, Syria has lost a significant amount of accumulated human capital, which will need decades to recover.

One other burden for Syrian society will be to undo the many new activities and networks that have sprung up with the retreat of the rule of law and the decline of the central state. Massive interests have been built up around the war economy amongst the warlords, and the networks and the institutions it has created. This too will be difficult to reverse.

Finally, geographic and political fragmentation is becoming increasingly entrenched, breaking down traditional economic and trade networks. Many of what were temporary and shifting front lines have now become quasi-borders between different parts of the country. The division of the city of Aleppo since the summer of 2012, between a western part controlled by the government and an eastern part controlled by the opposition, is one of the best examples of this.

Another is the north of Syria, which is one of the most fragmented parts of the country, with the government, the Kurds, the Islamic State, the Nusra Front and various brigades affiliated to the Free Syria Army sharing territorial control. As almost all production has stopped in that region, it has largely turned to Turkey, rather than to other parts of Syria under government control, for the supply of essential goods. As a result, Turkish exports to Syria last year were close to their record level of $1.8bn reached in 2010.

This shift, together with the rising foreign debt, highlights the growing dependency of the Syrian economy towards external actors.

Given the magnitude of the Syrian catastrophe, it seems difficult to see any light at the end of the tunnel or to offer any policy advice other than asking for an immediate end to the fighting, a prospect that seems as far away as it has ever been since the uprising began.

To an important extent, the Syrian uprising was a revolt of the most fragile, disenfranchised and poor segments of its society. Four years after their cry for change, these parts of the Syrian population are also those that have paid the heaviest price of the war and have only become poorer, and more fragile and distressed. On today’s anniversary, there is very little to celebrate and, unfortunately, very little to hope for.

This article was originally published in Middle East Eye on March 15, 2015

A decline into uprising

While there is a general consensus that the uprising gripping Syria since March 2011 is part of the broader regional movement for better governance and more freedoms, there has been little debate as to the extent to which the economic and social conditions prevailing in the country contributed to the uprising. The question of whether Syrians revolted because of their thirst for freedom, justice and dignity or whether they did so because of their poor economic and social conditions remains, however, important if one wants to understand the reasons that led to the uprising and produce viable economic reconstruction plans.

At the beginning of 2011, Syria had been witnessing for several consecutive years an average annual growth in its gross domestic product (GDP) of between 4 and 5 percent, limited current account, trade and fiscal deficits, a stable foreign exchange rate, rising foreign investments and a curtailed inflation rate. These positive macroeconomic data hid, however, many imbalances that lay behind them, and other longer-term trends must be taken into account in order to better understand the dynamics of the revolution.

The level of GDP growth, for instance, may be high by Western standards but is wholly inadequate by Syrian ones. Indeed, according to most analysts, an average growth of 8 percent is required to generate enough jobs for new labor-market entrants. For more than three decades GDP growth has fallen short of that level, meaning an uninterrupted increase in unemployment for some 30 years in a row.

The fiscal deficit may be limited but this is largely a result of government investment expenditures lagging, thereby contributing to long-term infrastructural shortfalls. As for the trade balance, it remains highly dependent on oil exports, which, in 2010, represented 46 percent of Syria’s total exports. With the volume of crude reserves rapidly declining, there are serious longer-term concerns. Meanwhile, private sector investment is largely geared toward real estate and the services sector, away from more long-term labor-intensive industries such as textiles, which has seen the closure of scores of factories in the last decade. Finally, the foreign direct investment Syria attracts every year may be on the rise but it remains below Jordan’s, a country with a population a fifth of the size as Syria’s, and none of its vast natural resources.

Booms and busts

A look at longer-term trends helps puts things in perspective. In 1946 Syria was a founding member of the General Agreement on Tariffs and Trade (GATT), the predecessor of the World Trade Organization — out of only 23 countries in the world. In the 1950s, when Algeria was still under French rule and the majority of ‘third world’ countries were still fighting for independence, Syria had a buoyant economy and a vibrant political life. Then, three decades of strong state investment in the country’s physical infrastructure and in its health and education services helped boost the country’s development indicators. In the 1970s, Syria’s Human Development Index — a composite statistic of life expectancy, education and income calculated by the United Nations — was growing at a rate among the highest in the world. In 1983, Syria’s per capita GDP, at $1,901, was higher than that of Turkey — $1,753 — and almost on par with that of South Korea ($2,187). That was only 30 years ago.

Surveying what followed in the 1980s is important in order to trace back the economic challenges the country now faces. At the beginning of that decade the Syrian economy contracted sharply, partly as a consequence of the fall in global oil prices and the decline in remittances and aid from Gulf countries. The foreign currency reserves dried up, leading to a rapid devaluation in the value of the Syrian Pound starting in 1986; this year marked the beginning of the implosion of Syria’s middle class. This was only further compounded by a rapid decrease in spending and investment by the government, which, at the time, played an overwhelming role in the economy. The country never fully recovered.

In the last part of the decade oil began to be extracted from new fields in the country’s northeast, around the city of Deir-ez-Zor. A short boom followed, fueling hopes that the state would lead the recovery by investing in infrastructure and by opening up the economy. The opposite came to bear: revenues from oil income gave new fiscal margins of maneuver for the government as well as a new source of foreign currency earnings, and as a consequence reduced the pressure on the authorities to open up — Syrian economists call the 1990s the lost decade.

Starting in the 2000s, and coinciding with Bashar al-Assad succeeding his father as president, the decline in oil production again threatened the government’s fiscal position and serious economic reforms finally began. Geared toward the services sector, the gradual liberalization of Syria’s economy improved with a modernized legislative framework for investment, reduced taxation on private corporations, an unfencing of trade borders and increased private sector investments in new industries.

These developments spurred the creation of modern and relatively sophisticated banking and insurance sectors with the entry of some two dozen regional banks and financial institutions in the market. The expansion of retail trade and of the tourism industry was evidenced with the construction of large malls and the entry of global hotel operators. What is more, concessions were awarded to private international companies for the management of the country’s two ports of Tartous and Lattakia and there was a general boom in the services sector.

However, this policy of economic liberalization was marred with mistakes typical of similar processes in other developing countries.

The downside of opening up

The free trade agreements signed with Turkey and Arab countries, for instance, were implemented with little safeguards to protect or promote Syrian manufacturers. The reduction in customs tariffs led to an invasion of foreign products that put countless industrial plants and workshops out of business and, consequently, thousands of people out of work, while only limited mechanisms were established to promote exports and improve competitiveness.

More significant is the divestment of the state from the agricultural sector. While the sector had for decades been a major contributor to economic output and to the labor market, it had to face a steep decline in subsidies at the worst of times — amid a severe drought.

In 2008, after three consecutive years of drought, the government announced a threefold increase in the price of gasoil — which is used by farmers to fuel their irrigation pumps — and an increase in the prices of fertilizers to world market levels. The combination of these factors — a drought and poor policy decisions — played a major role in the staggering decline in the share of agriculture in the economy, from 25 percent of GDP in 2003 to 16 percent in 2010, or a decline of a third in its contribution to the country’s economic output in some seven years. At one point, the production of wheat, a major staple food for the population, fell by half.

The crisis of Syria’s agricultural sector led to the migration of hundreds of thousands of people from eastern parts of the country, in particular around the city of Deir-ez-Zor, to the working suburbs of cities located further west, including Damascus, Daraa and Homs.

These twin crises in the agriculture and industrial sectors — or the crisis of the “working world” as one Syrian intellectual put it — converged in many of Syria’s rural and suburban areas; the geographical roots of the current uprising very much mirror the impact. Protests began in the city of Daraa, which lies at the center of a large farming area to which fled many of the people living in the drought-affected northeast. The wildfire of popular discontent soon spread to the rural areas of Idlib and Aleppo provinces, where livelihoods depend largely on agriculture, and to the working suburbs of Homs and Damascus — home to many of the artisans who lost out from the process of trade liberalization.

But the state divestment from this “working world” is also a reflection of a more subtle generational change in the composition of the governing elite in Damascus. While farmers, for instance, historically represented a pillar of the ruling Baath Party and a large share of its rank and file — Bashar’s father, President Hafez al-Assad, called himself a peasant — the current generation of Syrian officials were largely born and raised in the cities, disconnected and therefore insensitive to the plight of rural areas.

While there is little doubt that the struggle of Syrians for a better life was driven, before anything else, by their thirst for dignity, justice and freedom, one should make no mistake: The dispossession and injustice felt by large segments of the population cannot be understood without taking into account their economic shades. Poverty, forced displacement, loss of assets and property, and gradual deterioration of living conditions are all major contributing factors to the sense of lost dignity and justice, and hence, in the eruption of the Syrian revolt.

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

Getting Syria back to work

The Syrian government’s admission in early December that the actual rate of unemployment in the country was anywhere between 22 percent and 30 percent testifies to the depth of the social crisis the society has gone through in the last three decades. The new estimates, provided by Radwan Habib, the minister of labor and social affairs, are at least twice the previously acknowledged rate of 11 percent. According to Habib, the new findings are the result of a field survey conducted by his administration. The fact that the range is so wide — from 22 to 30 percent— raises questions on the quality of the survey, but there is little doubt that the new figures are a more accurate reflection of the situation in the job market than the previous data based on the number of people registered with job offices. According to most analysts, the Syrian economy needs to be growing by 7 to 8 percent a year for its unemployment level to stabilize. This very high threshold is a consequence of the rise in productivity and in the size of the workforce, which increases on average by 3.5 percent every year. People entering the job market today were born 20 years ago, when the population growth rate stood at above 3 percent. Meanwhile, female participation in business activity is also on the rise and increases the number of people seeking to enter the job market – currently estimated at around 200,000 per year.

Indeed, since the early 1980s Syria’s gross domestic product (GDP) has almost never been sufficient to accommodate its expanding workforce. Put another way, Syria has witnessed almost 30 consecutive years of unemployment growth. The challenge before the government — the current one or any forthcoming one — is therefore huge: How to create the conditions for the economy to grow fast enough to meet the demand for jobs.

One solution to the problem would be to focus not only on the level of growth but on its quality, on how to attract investment in the sectors of activity that are most labor-intensive and potentially generate the most added value, such as agriculture and manufacturing.

This new policy would represent a shift from the priorities of recent years, when Syria’s decision-makers focused on trade liberalization and the development of the services industry. Indeed, finance, tourism, trade and transport, in addition to real estate, have been the main engines of growth in the last few years. Although Syria has much to gain from a strengthening of its services sector, the neglect of farming and industry has cost it dearly in terms of employment, and prevented it from building a strong production base. A lot has already been written on the catastrophic performance of the Syrian agricultural sector, which suffered from several consecutive years of drought starting in 2007 and from poor policy-making decisions, including a steep increase in the price of agricultural inputs when farmers were most in need of help.

The consequence of all this has been to force tens of thousands of farmers from their ancestral lands and to reduce the contribution of the sector from around 25 percent of GDP to 19 percent in less than a decade. Free trade agreements with Turkey and the Arab world, as well as a general reduction in custom tariffs, have also led to an ‘invasion’ of foreign-made products that put countless industrial plants and workshops out of business and consequently thousands of people out of their jobs. The textile sector, one of the most labor-intensive industries, has been particularly hit by the lifting of the ban on garment imports.

The resolution of this predicament is obviously not only an economic or social issue for the government but it is also political. Unsurprisingly, many of the protests taking place across the country since March 2011 are occurring in the areas most hit by poverty and neglect, such as  Daraa, located at the center of an agricultural plateau in the south of the country, and the poverty belt around Damascus.

There must 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 recognize the tremendous challenges ahead and adopt a new economic development strategy that puts employment at its center.

 

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

Bludgeoning Syria’s economy

The past 12 months have been devastating for Syria’s economy. Gross Domestic Product (GDP) has contracted by several percentage points (possibly by as much as 20 percent), the foreign currency reserves accumulated during the country’s short oil boom have been seriously depleted, the fiscal deficit has at least doubled, the national currency has lost some 15 percent of its value and the confidence the country was starting to gain from international investors has been shaken.

The prospects do not look any better for next year, with western sanctions on the country’s oil and banking sectors gradually starting to impact broader sectors of the economy and the Arab League likely to adopt similar measures.

One of the most frustrating aspects of the last year has been the confusion created by the government over its policies. After decades during which the economy was centrally planned the country adopted in 2005 a “social market” development model, in which the state was expected to limit its intervention to “social services” and to give the private sector more freedom to operate.

The debate over the role and size of the state in the economy seemed to have been finally settled, and until early this year the government had applied this relatively clear road map in spite of its shortcomings and justified criticisms.

Within days of the beginning of protests in the southern city of Daraa in mid-March, however, priorities changed entirely. Subsidies paid on energy products that were deemed “unsustainable” until a few weeks earlier were increased by some 25 percent, civil servants’ salaries rose 30 percent and free trade agreements that had been in place since 2005 were now to be renegotiated.

The moves unsettled analysts and investors and appeared to have been made out of panic rather than on the basis of any rational analysis.

Then, as the year was coming to a close, more confusion came. Minister of Economy Mohammad Nidal al-Shaar, realizing the extent of the damage, said that the decision to raise subsidies and salaries announced in March was “unsustainable” and that the government could not subsidize the economy forever.

The lesson to be drawn from all this is straightforward: You do not solve political problems with economic measures. To protesters chanting “we want freedom,” the government responded by saying “we will pay you better salaries”. The protesters continued to take to the streets because their demands were not met and, as the government was spending above its means, an economic challenge was added to the political problems that remained unanswered.

How dark are the prospects for the Syrian economy?

In the short-term one should not expect miracles. Investment and spending will continue to decline next year, and as foreign currency earnings decrease renewed pressure on the value of the Syrian pound should be expected, with all that entails for inflation and loss of purchasing power.

In the longer term, however, the dramatic political changes that are likely to result from the current unrest carry significant opportunities.

Liberalization alone has not been enough to revitalize the economy and it has in fact highlighted its weaknesses. The country has one of the most diversified economies in the Middle East with four different sectors each generating more than 10 percent of GDP (agriculture, oil and gas, tourism and trade) and three others making up more than 5 percent (manufacturing, finance and real estate). It also benefits from a relatively large market, a well-educated workforce and an extraordinary geographic location.

However, in spite of all these comparative advantages, and years of reforms, Syria attracts less foreign direct investment than its much smaller and resource-poor neighbors, Lebanon and Jordan. And it regularly ranks among the worst performing economies in most global surveys; 14 out of 17 countries in the Middle East in the Doing Business Index of the World Bank and 15 out of 16 countries on the Competitiveness Index of the World Economic Forum.

The underlying reason for this lacklustre performance is a business environment plagued by an overwhelming and corrupted bureaucracy, a judicial system mastered by the well-connected few and a broad sense of unaccountability and lack of responsibility across the state and its institutions.

These are challenges that cannot be solved through economic measures; rather they require deep changes in governance that are unlikely to ever take place under the current political system.

 

Note: This article appeared first in the December 2011 edition of Executive Magazine

Dithering in Damascus

The Syrian government’s September 22 decision to impose a ban on all imports carrying a tariff rate of 5 percent or more — and the reversal of that measure less than two weeks later — have created a crisis of confidence across the local business community and a sense that the authorities have little idea how to handle the country’s economic woes.

Seven months of popular protests across Syria have taken a significant toll on business activity, frightening off investors and tourists, enticing locals to stash their savings and leading to international sanctions on key sectors and actors in the economy. The confusion over the import restrictions has only reinforced a general feeling of malaise and darkened the prospects for the near future.  This partial ban, Syrians were initially told, would help save scarce foreign currency reserves and support local manufacturers who had been negatively affected by the free trade policies of the past decade. In press statements, Adib Mayaleh, governor of the central bank, claimed that the ban would generate $6 billion in annual foreign currency savings, $4.5 billion of which would come from car imports alone.

However, the government acted hurriedly and with little consultation, leading to a general outcry that forced it to reverse the measure on October 4. The strength of the opposition from the business community and the fact that it managed to deal a blow to the government and its credibility — already much affected by its dismal management of the economy in recent months — are a reflection of the changes that have taken place in the Syrian economy in the last decade.

While until the late 1990s Syria relied on local production and was largely closed to international trade, the need to attract foreign investors and to integrate more with the outside world saw a gradual easing of the country’s protectionist policies from the early 2000s.

The Greater Arab Free Trade Area agreement, which liberalized trade among the 18 member countries, came into force in 2005 and a free trade deal with Turkey was established in 2007. Tariff duties on imports from countries around the globe were also lowered, including for consumer items such as cars and garments.

This policy had a direct consequence on the structure of the economy: in 2000, imports represented the equivalent of 18 percent of GDP, rising to 26 percent by 2009; exclude inflation over the past decade and this number would be 46 percent. Meanwhile, bilateral trade with Turkey tripled in less than four years, from $800 million in 2006 to $2.5 billion in 2010. This boom in imports helped spur the development of broad sectors of the economy — including retail trade, banking, insurance, transport and logistics and commercial real estate — which were among the main contributors of economic growth in the last decade. A whole new category of businessmen, from wholesalers to local agents of international brands, saw their wealth jump and their influence increase.

Thus, it is not surprising that among the list of more than a dozen businessmen that have been put under sanctions by the European Union and the United States in the last few months one will find Emad Ghraiwati, the agent for Kia, Ford and Jaguar cars and for LG Electronics, Samir Hassan, partner of Lebanon’s Fattal Group in the consumer goods distribution company UniSyria and Tarif al-Akhras, one of the country’s largest importers of food commodities.

Still, the confusion over the import ban has raised all sorts of questions. Until now the government had claimed that its foreign currency position was stable and had not been affected by the political turmoil. If this is the case then why did it decide to impose a cap on imports in the first place? Now that import taxes have been liberalized again, where is the government going to find the $6 billion in savings? Also, if the measure was initially aimed at helping local manufacturers does its reversal mean that the priorities have changed?

The only certainty that has come out of this debacle is that the government has no strategic plan to rescue Syria’s floundering economy.

 

Note: This article appeared first in the November 2011 edition of Executive Magazine