Special: Syria's economic system
Syria, Economics, 5/22/1999

Syria's economic system and inward-oriented development strategy has not helped its economic integration objectives.

They, in fact, hindered integration in the following ways. First, the central planning model that Syria and several other Arab states followed were feared by Arab states that followed a free enterprise economic model. Second, the import substitution strategy pursued by Syria was chosen over an export-oriented strategy that could have mobilized Syria's resources to meet the demands of the Arab region for food and manufacturing.

Third, Syria's manufacturing products produced under a protective trade regime were unable to compete in quality and price in the Gulf markets which became in the last twenty years the largest and most buoyant in the Arab world. The Gulf states adopted open trade regimes, importing goods from all over the world almost duty free.

Fourth, the private sector was constrained and was not able to grow enough to explore opportunities for trade with other Arab states. The above factors, in addition to political differences with Iraq, contributed to the relatively limited Syrian trade with the Arab states even after recent economic reforms.

Syria's imports from the Arab states constituted 7% of its total imports in 1993, and its exports to these states represented 11% of all Syria s exports in the same year. Outside trade, Syria's economic system, exchange control regime and inward development strategy did not attract private capital inflow into the country.

Thus, Syria could not benefit from the immense private Arab capital wealth that accumulated over the past twenty years. It did receive, however, about US $12.5 billion of net official aid from Arab states and from Arab development institutions in the 1970 - 1991 period. These funds were extended on concession basis in the form of grants or in the form of low interest and long-term repayment periods.

The funds were directed for project finance and for budgetary and balance of payment support. Syrian labor flew to Arab Gulf states and to Libya as of the beginning of the oil boom, sending remittances to the home country. But the flow of labor dropped when oil prices went down and a recession ensued in the Gulf.

About US $500 million were transferred to Syria in 1993 through official channels, which was about half of what was transferred about ten years earlier. Also constraining the flow of more Syrian labor to the Arab oil states were policies adopted in these states in favor of Asian labor, which was considered less of a political threat than Arab labor.

Syria's recent agreement with Lebanon for the establishment of a customs union holds good promise for both states. Syria will benefit from Lebanon's skilled labor and its more advanced banking system, education facilities and international trade connections, while Lebanon will benefit from Syria's market depth, unskilled or semi-skilled labor.

In the 1980s and 1990s, trade between the two states was hindered by the civil war in Lebanon and by the closed nature of the Syrian economy, but the end of the civil war in Lebanon and other recent change in the methods of operations hold attraction for both countries. Nevertheless, differences in the two countries' trade and exchange rate regimes and the slow pace of economic reforms in Syria remain major obstacles that have to be dealt with.

However, looking into the immediate future the prospects for continued high growth in Syria remain good, on account of the continued production and export of proven oil reserves. In the longer run, however, the economy will remain troubled by high population growth, a heavy defense expenditure insufficient production and export incentives and the still highly protective nature of the domestic economy.

An acceleration of economic reform is needed, together with efforts to increase efficiency and productivity. On the integration front, Syria will do well to respond positively to new Arab initiatives for the establishment of an Arab free trade area, but Syria should simultaneously focus on strengthening and expanding the existing integration agreement with Lebanon to include other Arab countries such as Iraq (once the present political status quo in Iraq changes) and Egypt.

Iraq and Syria, in particular are "natural' trade and economic partners, but the development of the healthy economic relationship between them has been interrupted by political differences. Each of the two countries has, by itself, diversified resources consisting of agricultural, industrial and hydrocarbon resources, and the two have complementary factor endowments. Iraq's is a capital-shortage, labor-surplus economy. Syria provides a cost-effective outlet for Iraqi products through the Mediterranean. The Euphrates river, which originates in Turkey and passes through both of them, is critical for irrigation and power generation for both countries.

While existing custom union agreements between Syria and Lebanon are recommended for the above extension, there should be an attempt to strengthen economic relationships between the proposed integration schemes above and in the Gulf states, perhaps in the frame work of free trade area.

With a much improved production, export incentives and the combined market of the four, Syria, Lebanon, Egypt and Iraq, can provide large and attractive investment opportunities for the immense private capital wealth of the Gulf states.

Last, it should be noted that a settlement in the region will no doubt provide opportunities for increased private and official capital inflow into the region. These will be some of the dividends of peace which Syria and others in the region will collect.

But development in Syria is not likely to materialize unless there is a military balance in the region. Reduced military support to Israel by Western powers will help Syria's development in no lesser way than the flow of aid and external private capital to Syria.

Previous Stories:
  Syria, Jordan to cultivate border areas   (5/19/1999)
  Further development of Syrian-Iraqi relations   (5/10/1999)
  Syrian public sector's exports decline by 30%   (4/24/1999)
  Syria-Lebanon for speeding up gas cooperation   (4/14/1999)
  Foreign currency accounts do not exceed US $6.5 million in Syrian banks   (4/8/1999)
  Syria, UAE to establish free trade zone   (4/5/1999)
  Report: Economic changes in Syria   (3/22/1999)

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