Introduction

Syria is categorized by the World Bank as a middle-income country with a per capita of $1,200. The population stood at about 18 million in 2004, registering an annual growth of about 3 percent, which places high demographic pressure on the labor market. The country's gross domestic product (GDP) has remained stagnant in the last four years, rising only slightly from $21.6 billion in 2002 to $21.7 billion in 2005 in nominal terms. At the same time, the debt service ratio doubled between 2002 and 2005, representing 6.2 percent of the GDP. Available data, including data from the Syrian government, suggest that the Syrian economic landscape remains bleak.

Syria's GDP is highly dependent on the oil and agricultural sectors, both subject to uncertainties due to changes in oil prices and dependency on rain. The oil sector provides half of the government's revenues and about two thirds of its export receipts. As oil reserves continue to decline, this source of revenues will diminish.

Controls Deter Investments and Growth

Syria's economy, which is predominantly state-controlled, has been relatively stagnant in recent years because of the failure of the narrowly-confined political establishment to implement extensive economic reforms. An old-fashioned socialist command economy, inefficient and heavily-regulated investments, restricted political freedoms under a quasi-totalitarian system of government, and wide-scale corruption at the highest levels of government have deterred foreign direct investments, as well as the emergence of a viable market economy. Moreover, Syria's inadequate infrastructure, outmoded technological base, and weak economic system, together with declining oil revenues, make it vulnerable to future shocks and hamper its ability to compete at the regional and international levels.

Unfulfilled Promises of Reform by Bashar al-Assad's Regime

After assuming power in July 2000, following a hasty constitutional amendment that has created a sort of hereditary republic (an honor shared with North Korea and briefly with Congo), 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 would be followed by political reforms.

The argument behind this phased reform was that the 30 percent of the population living below the poverty line, 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 a quasi-totalitarian ruling Ba'th socialist party.

In his well-publicized interview with al-Arabiya TV, former Syrian vice-president Abd al-Halim Khaddam has confirmed that a package of economic reforms, formulated upon al-Assad's ascension to power, was submitted to the Council of Ministers in October 2000, but has remained dormant ever since. Another package of reforms, submitted by a group of French experts by invitation of the Syrian government, has not been acted upon either. "It is when I became convinced that the development and reform, whether political, economic or administrative, would not be acted upon, that I decided to resign," said Khaddam. [1]

It is immaterial whether Khaddam resigned or was forced out. What is irrefutable is that political and economic reforms, which are intertwined, have not taken place. The reasons for this failure are rooted in the very nature of a quasi-totalitarian regime that is amenable to only marginal change. Experience with totalitarian regimes in the 20th century, whether on the right or on the left, suggests reform was possible only after complete destruction of the foundations of these regimes. The Syrian regime is no exception. In a subsequent interview, Khaddam said that the Syrian regime "cannot be reformed and there is nothing left but to bring it down." [2]

Under the weight of its own oppression and mafia-style leadership, the Syrian regime has become stultified, frozen in time, and incapable of movement. Khaddam referred to "a shameless mafia [in] control of the country. [3] In its most recent report, Transparency International, which issues a Corruption Perception Index, has rated Syria 3.4 on a scale of 1-10, with 10 being the least corrupt. [4] The government daily Tishreen lamented what it described as "the deluge of corruption" [tufan al-fasad] in the government ministries. [5]

The assassination of former Lebanese prime minister Rafiq al-Hariri has added the additional burden of a regime being treated as illegitimate, if not criminal. Bashar al-Assad's regime is isolated both regionally and internationally, save in the eyes of the Iranian regime.

The War in Iraq and the Consequences for Syria

Striving to emerge from diplomatic isolation in the Middle East following its occupation of Kuwait in 1990, Iraq launched what the former vice president Taha Yassin Ramadhan termed as "the diplomacy of deals" [diblomasiyyat al-safaqat.]. [6]

Under this unique form of the Saddam regime diplomacy, trade agreements, referred to as trade protocols, were concluded with most Arab countries, and driven almost solely by political consideration. These protocols often involved far-reaching concessions that were beneficial to one side - not the Iraqi one.

Indeed, one of the most preferential trade agreements was signed with Syria in late May 2000. Under the agreement, Syria was given preferential status in the export of consumer goods to Iraq such as furniture, soaps, electric goods and fixtures, water purification equipment, pharmaceuticals, and ceramic tiles. [7] The volume of trade may have exceeded $5 billion over a period of three years and, perhaps, substantially more if we consider smuggling, commonly referred to as border trading, and the illegal supply of oil by Iraq to Syria. The protocol also provided for the supply of Iraqi oil to Syria at heavily discounted prices.

One of the significant consequences of the trade protocol was the sudden increase in the number of Syrian nationals who were granted visas to visit Iraq. According to an official record, the number of such visitors was eight in 1996 and two in 1997, none listed in 1998 and 1999, but 19,989 visitors in year 2000. In the same year, 85,439 Iraqis entered Syria. [8]

Iraq's Oil Smuggling to Syria and its Aftermath

Iraqi oil smuggling to Syria started shortly after the trade protocol was signed. In addition to the Kirkuk-Banyas pipeline which carried approximately 200,000 b/d (barrels/day), there were also truck and rail shipments of oil to Syria. Records supplied by Iraq's SOMO (State Oil Marketing Organization) provide evidence of shipments of approximately 310,000 barrels of oil by trucks in January 2001 and about 384,000 barrels in June 2002. [9]

The protocol provided that 60 percent of the oil sale proceeds was to be devoted for the purchase of Syrian goods, and the remaining 40 percent was to go to Iraq in cash. SOMO records supplied to the Volker Committee investigating the United Nations-managed Oil-for-Food Program show that Syria paid Iraq more than $2.81 billion for oil smuggled though the pipeline and by truck or by rail. [10]

Syria's Flagrant Denials

Despite mounting evidence, the Syrian representative at the Security Council asserted in late 2001 that "[t]here was no oil flowing through the pipeline and his country was not exporting Iraqi oil through its ports" and that the "singling out of the Syrian Arab Republic was an attempt to force the [U.N.] Committee [established on the basis of Security Council Resolution 661] to apply double standards." In a later meeting in January 2002, the Syrian representative stated that "smuggling existed in various forms" but that his country has not paid a single cent to Iraq. [11] In late September 2002, he urged members of the 661 Committee not to focus "on unfounded allegations about a pipeline that was not operational." When the U.S. presented data showing that Syria was exporting 200,000 b/d in excess of its production capacity, the Russian representative stated that "the only reliable information before the [661] Committee was that provided by the Syrian side." [12] When the Syrian Government was presented by the Volker Committee with evidence about the use of the pipeline (provided by the Iraqi Ministry of Oil after the fall of the Iraqi regime), the Syrian response was that "it was not used," but only "tested." [13]

The Syrian Oil Sector

The above background is relevant to the oil sector in Syria today. Oil production in Syria reached its peak in 2000 with 540,000 b/d, but continued to decline with a projected production of 414,000 b/d in 2005, and 394,000 b/d in 2006. During the same period, Syria exported 364,000 b/d in 2000, an estimated export of 211,000 b/d in 2005, and a projected export of 183,000 b/d in 2006. The big spike in the export of Syrian oil in 2000-2003 must obviously be attributed to the flow of Iraqi oil.

According to a study of the Syrian economy by the International Monetary Fund (IMF), the decline in Syrian oil exports will cause a major fiscal and balance-of-payment shock. The study estimates that, in the absence of new oil discoveries, Syria is likely to become a net oil importer within a few years, and will exhaust its oil reserves by the late 2020s. This would reduce the net foreign exchange received from oil from $3 billion in 2003 to nearly zero by 2010. [14] The shock resulting from lower oil production was masked by a recent spike in oil prices, but price spikes are a two-edged sword. They will benefit Syria as a net oil exporter in the short run, but they could be a source of a serious trouble once Syria turns into a net importer of oil.

Faced with the challenge of declining oil production, the Syrian government called on international companies to invest in the country's oil and gas sector "with no exception or discrimination." [15] However, according to Bassam Fatooh, an oil analyst in London, it is not clear whether the new explorations will increase Syrian oil production or merely maintain the present level through compensatory new production. [16] In any event, given the political uncertainties faced by Syria at this time, and particularly the risk of economic sanctions, it is unlikely that many international oil companies would agree to set up shop in Syria at this time.

Deteriorating Balance of Payment

With the decline of revenues from oil, and a further decline in foreign currency transfers by expatriate Syrian workers in Lebanon, the balance of payment is rapidly deteriorating. After reasonable surpluses from 2001 to 2003, the balance of payment registered a deficit of $1.6 billion in 2004, and the deficit almost doubled in 2005 to $3 billion.

Some economists suggest that the big increase in the deficits has to do mainly with the trade liberalization introduced by Syria in 2004 which, among other measures, reduced tariffs on imports considerably. As a result, the smuggling of goods into Syria has declined. Imports are now more accurately recorded, which was not the case when smuggling was rampant. This could lead to the conclusion that the surplus years of 2001-2003 were, in fact, deficit years, and seemed to be surplus years only due to the extensive smuggling, much of which was undertaken by the Syrian army stationed in Lebanon. [17] To finance the growing deficits, Syria has been accumulating new debt which has risen from 18.6 percent of GDP in 2001 to an estimated projection of 26 percent in 2005.

The IMF Review of the Syrian Economy

A recent report by the International Monetary Fund highlighted the sharp decline in private investments as the most immediate cause for the low growth in recent years. It said that "persistent weaknesses in the business climate are the main factors holding back investment." These weaknesses arise despite abundance in domestic savings and large reported holdings of Syrian private assets abroad. They are caused by several factors: the regulatory environment in the tax, trade and exchange regimes in the financial sector and in public administration, and also by government monopolies and poor governance. [18]

The IMF report stressed the urgent need for Syria to boost growth in order to (a) diversify and expand the production and export base of the economy before oil resources are depleted; and (b) absorb "a bulge" in entrants into the labor market arising from decades of very rapid population growth.

With the labor force projected to increase at 4 percent a year, unemployment could exceed 20 percent by the end of the decade. To reverse this trend, which the IMF described as "a daunting challenge," [19] an average employment growth rate of 4.5 percent a year would need to be sustained over the next 10 years.

The IMF has also expressed concerns about the medium-term prospects of the Syrian economy. Despite reform measures to address structural rigidities, "the pace and the scope of reforms have fallen short of Syria's medium-term growth and employment challenges." The IMF warns that:

If structural reforms and fiscal consolidation are not accelerated, there is a risk that oil reserves will be exhausted before the ongoing reforms have had time to generate new sources of growth and income. If this risk were to materialize, Syria may get locked in a cycle of financial volatility, fiscal deterioration, low growth and rising unemployment. [20]

Furthermore, the IMF directors said the government should strengthen its implementation of a Syrian anti-money-laundering and anti-terrorism-financing law.

With oil revenues declining, Syria must find new streams of income. According to Adib Mayyalah, the Governor of the Central Bank of Syria, "we have to move from an oil economy to one based on banking, services and tourism." He added: "Most importantly, we have to change the mindset of Syrians from a socialist system to a market system. This is the hardest task of all." So far, Syria has licensed five foreign banks from Lebanon, Saudi Arabia and Jordan. But these banks are still "subject to strict foreign exchange controls and can't set their own interest rates." [21] The government daily Tishreen related the case of a businessman who recently offered to sell $500,000, and another €100,000 to a bank in Aleppo. The man was kept waiting for three hours pending the arrival of the central bank bulletin, which establishes the exchange rate for that day. [22]

The Issue of Unemployment

The population has experienced a high growth rate of about 3 percent per annum, bringing the total population from 12.1 million in 1990 to 17.4 million in 2003, and close to 18.5 million in 2005. [23] At the current rate of population growth, at least 300,000 new Syrians enter the work force each year. Due to decrease in investment, caused largely by an inhospitable political climate, work opportunities are not increasing proportionately to the increase in the number of work seekers. The Egyptian Al-Ahram Weekly estimates that 30 percent of university graduates are unemployed. [24] The Syrian Prime Minister Mohammad Naji al-Otri estimated the number of persons gaining employment through November 2005 at 82,500. [25] Even if the number were to increase to 100,000 for the entire year, it is still less than a third of the new employment opportunities required to accommodate the new entrants into the labor market. The likely consequences of an ever growing unemployment are not difficult to assess.

A World Bank report has noted that the education system in Syria "is not fully prepared to provide quality education and economically relevant skills to the young labor force." As a result, Syrian workers are not economically competitive by regional standards. Massive upgrading of the human resources base will require the opening up of the economy, and upgrading of schools, professors, vocational training systems, as well as civil servants qualified to manage the transition. [26]

To alleviate the problem of unemployment, the government keeps redundant civil servants. By the account of the Minister of Finance Dr. Muhammad al-Hussein, two million Syrians receive wages and pensions from the state. He estimated that if every wage or pension earner supports four family members, it means that half of the Syrian population lives on government fixed income. [27] Clearly, such a situation is neither desirable nor sustainable over time.

Agriculture

Syria's biggest accomplishment was in the agricultural sector, to which the government has redirected its priorities from the industrial sector. The purpose was to achieve food self-sufficiency, enhance export earning, and stem rural migration.

Thanks to sustained capital investment, infrastructure development, subsidies of inputs and price supports, Syria has gone from a net importer of many agricultural products to an exporter of cotton, fruits, vegetables, and other foodstuffs. One of the prime reasons for this turnaround has been the government's investment in irrigation systems in northern and northeastern Syria - part of a plan to increase irrigated farmland by 38 percent over the next decade. Syrian exports reflect this turnaround. Apart from oil, which accounted for 68 percent of export receipts in 2004 and therefore remains the main source of foreign earning, agriculture and animal husbandry accounted for close to 15 percent of export earning. [28]

Environmental Problems

The focus on agriculture, coupled with a rapidly growing population, have had their negative consequences in environmental degradation. Syria is suffering today from deforestation, overgrazing, soil erosion, desertification, water pollution from raw sewage and petroleum refining wastes, and inadequate potable water. [29]

Syrian Economy - "Mostly Unfree"

The Wall Street Journal and the Heritage Foundation publish an Annual Index of Economic Freedom. The index 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 (black market). 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 1-1.99); mostly free (score 2-2.99); mostly unfree (score 3-3.99) and repressed (score 4-5). Under the 2006 Index of Economic Freedom, Syria is rated No.145 out of 157 countries. With a score of 3.93, Syria occupies the bottom of the category of "mostly unfree." [30]

Reform by Decrees

In his attempt to highlight the reform in the Syrian economy in 2005, Prime Minister al-Otri listed 40 laws, 96 legislative decrees (presidential decrees) and 518 organizational decrees. All of these laws and decrees were introduced with the purpose of "achieving economic, financial and administrative reform, simplifying procedures for our brethren the citizens, and for the transformation toward a social market economy." [31] For some reason, the prime minister could not foresee the debilitating effects of so many new rules and regulations added to those already on the books. Economic reforms cannot take hold in an environment of political uncertainties.

Impediments to Growth

In a speech before party loyalists, Prime Minister al-Otri admitted that the economic growth for 2005 was modest (no figure was provided but, judging by the Syrian economic performance in recent years, it was probably in the 2-3 percent range). Al-Otri attributed the moderate performance to eight negative factors:

· Weakness in the performance of some economic sectors and low personal income

· Population growth pressures

· Dependency of exports on declining oil production

· Small return on investment

· Low levels of national and foreign investments

· Low productivity and growing unemployment

· Low levels of wages and corresponding low levels of incentives

· Poor technical standards in the production sectors [32]

What the prime minister failed to mention was that the regime, which is implicated in the assassination of Rafiq al-Hariri, is now fighting for its very survival and pays little attention to everything else.

Social Market Economy

Recognizing the failure of its command economy, the Syrian regime is promoting the social market economy, sponsored by the Ba'th Party Congress in June 2005.

Germany's first post-war economic minister Ludwig Erhard's developed the concept of soziale Marktwirtschaft as the proper economic model for the rebuilding and reconstruction of the almost completely devastated German economy. This economic model stresses two concepts - market and social. Because of the Nazi experience, post-war Germany opted for an economy free of state intervention and domination. The only role of the state in the new Germany was to protect the competitive environment from monopolistic and oligopolistic tendencies. The term "social" was stressed because the Germans wanted an economy that would not only help the wealthy but would also care for the workers and for others who might not be able to cope with the strenuous competitive demands of a market economy.

The Ba'th Party conference failed to establish the conceptual framework or the principles for a new and far-reaching economic model of this sort. Obviously, in the absence of competitive environment, internally and externally, and in the absence of a political will to join the global market, a social market economy remains a mere "slogan," [33] as one Syrian economist labeled it. Slogans, like decrees, do not induce economic reforms.

Association Agreement with the European Union

The European Union is Syria's largest trade partner, and Syria has strived for years to negotiate an association agreement with the E.U. similar to the agreements that the E.U. has with most other Arab countries.

After arduous negotiations that lasted for five years, a draft agreement was concluded in December 2004. Most of the delay was caused by the demands made by the U.K., Germany and the Netherlands to include a provision against the WMD development by Syria. The association agreement called for reducing tariffs on imported European goods by 50 percent during the first three years following the signing of the agreement, and for the dismantling of the remaining tariffs in the following twelve years, before a full partnership agreement could be reached. [34]

The Association Agreement was initialed in October 4, 2005 but has not been signed. If and when signed, the agreement will have to be ratified by the 25 members of the E.U., in addition to the European and Syrian parliaments. For the moment, however, the signing, let alone the ratification of such an agreement, is quite remote.

Sanctions on Syria

The rush for reforms has been driven largely by the fear of sanctions and by the regime's desire to mobilize the Syrian people in face of its crumbling foundations. Al-Ahram Weekly put it exactly right when it wrote that, taking into account the experience of the Saddam regime, the Syrian government "realized that a population that is dissatisfied will not defend its government in times of crisis." [35] In a modest attempt to isolate the economy from politics, the Syrian government appointed the non-Ba'thist Dr. Abdallah al-Dardari, the head of the Planning Commission, as deputy prime minister for economic affairs during the June 2005 Ba'th Party Congress.

Al-Dardari has been beating the drums of optimism on a daily basis. He said that the share of the Syrian industry in the GDP will grow to 20 percent in 2010 from the present range of 5-7 percent. He promised that per capita income would be doubled by 2010 and that $16 billion in foreign direct investments would be obtained in the next five years. He has also been reassuring about the capacity of Syria to weather sanctions.

Following the unanimous adoption on October 31 of U.N. Security Council Resolution 1636, which threatened sanctions on Syria if it did not cooperate with the U.N. investigation, al-Dardari told The Financial Times that his government has moved to establish a crisis team to deal with the matter. He said sanctions would not pose insurmountable obstacles because there was no shortage of "sanction busting." Dardari said: "to be honest, sanction busters are everywhere… there are American companies in Canada that sell to Syria." [36]

Conclusion

The Government of Syria under Bashar al-Assad has initiated modest economic reforms in the last few years, including cutting interest rates, opening private banks, consolidating some of the multiple exchange rates, and raising prices on some subsidized foodstuffs. However, the Syrian economy remains highly controlled and correspondingly inefficient. The Wall Street Journal noted that these initiatives "face formidable hurdles, and skeptics say the moves will do little to unseat the oligarchs and ruling families that control the nation's wealth." [37] Among the biggest oligarchs are members of Bashar al-Assad's immediate family, including his brother and sister. It is not surprising that the IMF study observed that "the pace and the scope of reforms have been insufficient compared to Syria's medium-term challenges." [38]

The success in the implementation of any reform policies is measured by their palpable results, and not by the number of law and presidential decrees, which often impede progress by adding new layers of rules and regulation to an already highly inefficient system. But this is precisely what the Syrian government has been doing.

The preoccupation of the regime of the consequences of the assassination of al-Hariri will continue to divert attention from the country's serious problems of growth and unemployment. The threat of sanctions on Syria will discourage investments. Despite much bravura about Syria's ability to withstand the effects of sanctions, the Syrian economy, under sanctions, could go downhill quite rapidly.

*Dr. Nimrod Raphaeli is Senior Analyst of MEMRI's Middle East Economic Studies Program.