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Focus

Syria in search of paradigm

by Stefanie Reiher, Ronny Bechmann
After decades of strict adherence to the principles of central economic planning, Syria needs reforms to open up and strengthen its economy. The German social market economy provides an attractive model, especially given its parallels with Muslim ideas of social justice. In Germany, the economy is propelled by the dynamism of competition, while risks for private households are kept in check by government safety nets. [ By Ronny Bechmann and Stefanie Reiher ]

In 2000, Bashar al-Assad succeeded his father Hafez al-Assad as president of Syria. The younger Al-Assad studied in London, is considered relatively liberal and has pushed for a more open economy. When he took office, economic bottlenecks, low productivity and stagnant or falling per capita incomes heralded a potential economic collapse. In 2001, his government allowed private banks into the banking sector for the first time. There are now ten private banks operating in Syria, and Saudi and Lebanese shareholders have become common.

Trade regulations have also been relaxed. Before 1990, only the state was allowed to engage in international trade. Since then, importation bans have been lifted for many commodities, and lower tariffs, coupled with founder-member status in the Arab Free Trade Zone, have facilitated trade since 2005. The tax system has also seen reforms, including significant income tax cuts.

Conditions have improved for foreign investors, too – partly thanks to Investment Act No.10. Direct investment is now possible throughout the economy. Since 2007, foreign investors have even been allowed to own land and property in Syria.

Social policy objectives

Syria’s active five-year plan, lasting until 2010, commits the government to further expansion of the open market. The goal of a social market economy is spelled out. The plan includes measures to reduce poverty, introduce safety nets and create productive jobs. It is noteworthy that the market system will be introduced in a five-year plan, an instrument typical of central planning. It is interesting, moreover, that the term “social market economy” is currently acknowledged only in Germany as the name of an existing economic system, although similar political models do exist in other European countries. Syria is the first country outside Europe to adapt Germany’s system to its ends. The principles of traditional Arab social security systems align surprisingly well with those of a social market economy: The principles of equal opportunities and social responsibility are cornerstones of both systems (see box). The centrality of these principles in a social market economy distinguishes it as an alternative to the Anglo- Saxon variety of capitalism.

German development policy supports the Syrian government's reform efforts towards a social market economy. As with China, it’s hoped that an open market will eventually lead to political liberalisation. German Technical Cooperation (GTZ), the government agency, is cooperating in a project in Damascus with, amongst others, Syria's reformist Deputy Prime Minister Abdullah al-Dardari. GTZ provides a mix of policy advice, institutional development and capacity building to help improve the analysis, planning and implementation of economic reforms. “Social, labour and employment policy are also important issues,” says GTZ's Michael Krakowski. "Our main aim is to support a regulatory policy that reduces social distortions.”

The performance of the economy suggests that the reformers are on the right path: since 2004, there have been signs of a moderate recovery. While the World Bank recorded just 2 % annual economic growth in 2003, it noted 6 % in 2004 and even 7 % in 2007.

Unresolved difficulties

Of course, pessimists find reasons to see the Syrian reform process in a negative light. Years after reforms began, many problems are still unresolved, even in areas where reforms are largely complete. The banking sector, for example, has been opened to private banks but only if they are at least 51 % Syrian-owned. This and other restrictions impede foreign investment.

The availability of credit in Syria is limited, hampered by a shortage of capital in Syrian banks and the difficulty of pursuing debts through the courts. Progress is also slow on the trade front. An Association Agreement with the European Union (EU) has long been on ice because of Syria's failure to meet the EU's political criteria. It has finally been initiated and should be signed in summer 2009.

Despite sharp tariff reductions, the flow of goods is sluggish. Bureaucracy, opacity and lack of information about regulations present logistical obstacles for foreign companies and drive up real costs – well above the official rates of duty. This discrepancy between rules and reality is also evident in the tax system: the administration, still unreformed, is inefficient and unpredictable.

In other areas, the reform process is only just beginning. Proposals for privatising state-owned enterprises, which employ a large percentage of the working population, receive little political support. A positive sign is the current discussion on "corporatisation", which allows publicly owned corporations to be managed according to private sector rules and principles.

Many in the workforce want to work in the public sector, placing a heavy strain on government finances. Public jobs offer lower salaries than private ones, but remain attractive with the promise of job security and pension entitlements.

Energy subsidies are also a burden on Syria’s budget. In 2004, along with subsidies for agricultural products, water and electricity, they accounted for 14.7 % of GDP. In May 2008, the government lowered fuel subsidies, causing the price of petrol to rise from the equivalent of € 0.38 to € 0.55 per litre. Yet refinery capacities are already inadequate, and Syria will soon become a net importer of oil.

Unless the government cuts subsidies further, it will find itself importing petroleum products at world market prices, only to resell them at the low prices in the domestic market. Even today, subsidies have led to the absurd viability of a backyard industry whereby petrol, imported at a high price and then sold at subsidised rates, is smuggled back out of the country to be sold at a profit in neighbouring countries like Lebanon. Lowering subsidies is a central element of the present five-year plan, but the government is dragging its heels. Syrian economic policy oscillates between bold reform and cautious restraint.

Meanwhile, Syria’s debt burden is growing. In 2007, the budget deficit was 5 % of GDP, and that figure will rise. Without oil revenues, it would have been 10.2 % of GDP in 2006. With the country's oil reserves approaching exhaustion, deficit and debt will undoubtedly increase. If the government wants to continue its reform programme, it faces the medium-term prospect of being unable to finance the subsidies vital to political stability in the country. Its power base is in danger of eroding.

Higher standard of living

Sensible economic reform can boost productivity and raise people’s standard of living – but it takes time. Even if reforms were implemented without increasing total spending and subsidies were both scaled back and better managed, it could be decades before the reforms produce a significant lasting improvement in everyday life of Syrians. In the meantime, administrative and man - agement employees of state-owned enterprises stand to lose some of the job security they now enjoy. Given the difficult road ahead, it is thus understandable that the government would be torn between efforts to open the economy and a desire to keep old structures in place.

Even if a more open market is achieved, it is not certain that the government could retain its authority. To win popular support, reforms must be balanced with tangible social benefits. With oil revenues drying up, Syria’s economic hopes have shifted to a developing tourism industry, improved agriculture, and greater investment from the Gulf states – as well as expanded development assistance. “The Syrian government realised long ago that opening their market is the most promising way out of poverty,” says GTZ programme director Michael Krakowski, who also advises Syria on economic policy issues. “We will patiently support the forces of reform in the Syrian government as they work towards that goal.”

Reaching that goal, however, requires reforms to be simultaneously accompanied by social compensation measures, and those instruments will require a stable source of long-term funding. Securing that funding hinges upon the realisation of Syria’s Association Agreement with the EU and political support for Syria’s admittance to the World Trade Organisation, which Syria has sought since 2001. In order to hang on to the support they have at home, Syria's reformers need the backing of western countries to gain access to the world market. Despite the current global economic crisis, the prospects afforded by entering the world market are still more attractive than stagnating in a centrally planned economy.