Solving the Syrian riddle

This article is a transcript of a phone interview given to openDemocracy.net  on the challenges posed by the Syrian uprising on reconstruction efforts and future economic policies.

 

The only Arab country where protests started from rural areas might find itself facing an internationally funded reconstruction which will award money to urban centres, thus abandoning the very roots of the current crisis. The only solution is to build economic awareness. Starting from now.

One just has to look at the geography of how events evolved in Syria, the locations where demonstrations started, the places where people took to the streets, to realize that, at heart, this revolt started from rural areas, whether it was from the countryside or the suburban peripheries outside Damascus and Aleppo.

This beckons us to question ourselves over the economic roots of the current upraising. After all, the business classes of inner Damascus and Aleppo were initially in support – or, when not in support, at least tacitly affirmative – of keeping the status quo. Joining the opposition was simply not in their interests.

This is because of the economic unease which was there prior to the uprisings, and how the decade of reforms had undermined the old basis of Ba’athist support, the rural working class, in choosing to benefit an urbanized business class and encourage increasing concentration of wealth among a reduced number of people. One good example, for an instance, is how the share of agriculture in Syria’s gross domestic product fell from 25% in 2003 to 16% in 2010: a fall of 9% in just seven years which is in fact a huge figure.

True, liberalization opened up a banking system, allowing everybody to have a bank account and withdraw money, and reducing pressure on a private sector which, until 2000, had to pay something like 90% of its income in taxes. In fact, when we talk about Assad’s liberalization we need to be careful with terminology, and call things by their proper name. When you talk about privatization you probably look at a western paradigm where state assets are sold off to private sectors. This is not what took place in Syria under Bashar’s reforms. What happened was rather a gradual reduction in the participation of the state in the economy, leaving behind important sectors such as industry and agriculture.

Subsidies on oil products, for example, were suddenly cut, leaving small farmers to face all costs alone, while already under the stress of the drought that’s been hitting Syria these last years. Aid that was cut from agriculture was simply not reinvested anywhere else. Economic decision-makers would be obsessed about those figures everybody in the international community looks at, such as GDP growth and balance of payments. But it was pointless for the government to pipe up and boast about a 5% growth in GDP, without first saying that for Syria, in order to create jobs, the economy had to grow by at least 8%.

And then you had the opening of the border to foreign trade, which was equally disastrous; the Syrian market was literally flooded by cheap Chinese and Turkish imports, which might have favoured business dealers but in fact forced hundreds of thousands of small workshops and factories to shut down and their occupants to face unemployment.

The Syrian opposition

This happened in a country where the state had supported agriculture and represented the farmer’s interests for 40 years, and where bread and electricity were still subsidized by the Government. Today, it is all reflected in the current outline of the Syrian opposition, where the first ones to revolt are the farmers and the inhabitants of the poverty belts outside major cities.

Traditionally, this is not a class represented by the Muslim Brotherhood. The brotherhood is generally known to cater for the former landowners reaching into the city, the engineers and doctors, in a word, the brotherhood is traditionally an urban phenomenon. It is then inevitable to pose the question of whose interests are going to be represented by future economic policies in a post-conflict Syria.

And while the class dimension is only one of the different factors that need to be taken into consideration when looking at events which unfolded against a dictatorship, and which see also political activists and freedom demands being advanced, the economic roots of this revolt need to be taken into consideration starting from now by opposition groups, which are still partly unaware of this problematic.

Because all this is clearly reflected within the current Syrian uprising and its social components, and proves how politically decisive it will be to have a clear economic plan in mind once – in six month, a year, two years – this conflict is over and probably Qatari or Saudi money could prove to be more powerful than any political economy discussion, if there is no plan ready.

Solutions that take time

It is difficult to be optimistic at a time when Syria is ravaged by such death and destruction. But I tend to see as a positive factor the fact that solutions are taking time. Journalists tend not to realize that there is a real factor on the ground, and that this factor is the dynamic one. It is people.

Ba’ath has been ruling for 40 years. Islamist ideas have been around for at least thirty. The really new thing is that people are speaking out. It is first of all a popular uprising, unlike the case of Iraq and Lebanon. And because of this, the conflict in Syria is a dynamic one, an evolving phenomenon, where after two years civil society does still take to the streets whenever the voice of weapons falls silent, and where no largescale massacres of Alawite villages have taken place.

For example, I see it as a positive thing that Jabhat el Nusraa is imposing Shari’a courts now, in time for people to test them and possibly discard the option in the future.

This applies to the economy as well; there is time to plan and discuss viable solutions to the roots of this crisis. Of course, what will be crucial from a political perspective will be the organization of free and transparent elections to gain legitimacy. But once again, in order to win back that wider middle class fleeing the country which is now buying houses in neighbouring Beirut and Amman, in order to encourage the return of those thousands of male graduates who escaped military service, in order to achieve social peace, in order to address the discontent of the rural class which started all this – the crucial role will be played by the economy.

Some things that won’t work

The risk is that a post-conflict scenario will see international aid heading towards the main urban areas, replicating the regime’s neglect of a larger rural reality – which was the first one to take to the streets.

If there are chances of reconstruction funding to come, I do not expect an influx of western money coming into Syria, because the USA and the EU are clearly facing other problems at the moment. Should the present conflict end with a clear defeat of the Assad regime, it is in fact more likely that Gulf countries will be more interested in having a political grip over Syria. And in my opinion, this is how capital and investments will come in.

But these are countries looking for new markets while, at the same time, traditionally investing in real estate, finance and hospitality. Despite real estate reconstruction being an urgent problem, given the level of destruction and death Syria has faced, the future leadership will need to keep in mind a priority on working to create long-term employment by investing in agriculture and factories, which is in fact unlikely to happen if you depend on Gulf money.

To this, one must add a political problem: Gulf countries, especially Qatar but also Saudi Arabia, rely heavily on state money. The scenario, in this case, is State-to-State aid. But Syria, unlike Gulf countries, cannot become a rent economy; nor we can afford the geo-political dependence that such an exclusively State-to-State plan would entail.

It is clear that diversification of the sources of reconstruction funding, and therefore a carefully thought economic policy, will be key to the future of post-conflict Syria. The new leadership will have to look for various different alternatives other than just Qatari and Saudi money, taking into account the different political economies they imply.

And in this case it is probably Turkey that will have a crucial role to play in creating long-term added value – in a word, durable jobs in productive sectors. Turkey is not a rent economy, and what we will probably have is private Turkish enterprises investing in Syria because costs are competitive.

Our understanding of the Syrian economy must take all this into consideration starting from now. Because when Syria will finally emerge from this conflict, when the choice will be between bad and very bad, it will be too late to consider. We must be aware of Syrian contradictions, and prepare ourselves to adapt our policies to what will be realistic on the ground.

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Speaking Event at Carnegie

Together with Samer Abboud and Omar Dahi, two economists based in the US, I speak here on the economic and social background of the uprising. The event was held in November 2012.

You can see the video here.

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

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