Economics of the Syria - Lebanon Relationship
Thank God for Andrew Tabler. Once again he has cut through the fog to tell us what we do know about the Syrian-Lebanese economic relationship. His article from "Executive", copied below, should be of interest to many readers who have been carrying on a vigorous debate on these pages about who is going to be hurt more - Syria or Lebanon - if relations between the two countries worsen.
Tabler's article is followed by an interview with Fouad Siniora, who was economic minister of Lebanon. He also helps to shed some light on the economics of the relationship.
The economic relationship: Beyond all political fallout, the economies of Syria and Lebanon remain deeply intertwined and complimentary
Executive Magazine, (April 2005 No.70)
By Andrew Tabler,
In the current political furor, it must be remembered that the Lebanese and Syrian economies are and have been strongly interdependent – a situation that predates Syria’s military intervention in 1976 and will probably remain so in the short to medium term.
Prior to former Prime Minister Rafik Hariri’s assassination, the Lebanese economy was finally picking up steam, built on stronger trade with the region, including Syria. Should the opposition win the upcoming Lebanese elections, it will not necessarily mean that Lebanon will be cut off from Syria economically. The special bilateral agreements of the early to mid 1990s have been replaced with Arab-wide trade pacts that have slashed tariffs on a wide variety of goods and facilitated inter-Arab investment. They will remain binding. Restrictions on Syrians working in Lebanon are a possibility, but the fact of the matter remains that Syrian labor is not easily replaced by other foreign workers, as they require housing and residency permits to the tune of $1,800 per year. If economic reform accelerates in Syria in response to the crisis, which it has in terms of banking, Lebanon’s could lose its share of Syrian savings, and with it, a vital source of deposits that can be invested in everything from Lebanese treasury bills to credit cards – all of which keep the Lebanese dream of material progress going. But as US pressure increases on Damascus, Syrian reform is likely to grind to a halt for the foreseeable future unless a working compromise can be found.
Despite ebbs and flows in Lebanese-Syrian relations over the years, bilateral trade has continued unabated and has seen rapid growth in bilateral trade. In 1997, for example, the volume of bilateral trade stood at $76.81 million, for which Syrian exports to Lebanon accounted for 92.7%. As more agreements were signed, Lebanon gradually began tipping the trade balance in its direction. In 2000, for example, bilateral trade volume stood at $190.1 million, with Syrian exports making up 87.8%. By 2003, trade volume stood at $277.2 million, but Syria’s share of the pie had slipped to 74.06%. In the first half of 2004, total trade volume stood at $136.95 million, of which Syrian production accounted for only 63%. While such figures are susceptible to fluctuations in energy prices (almost half of Syrian exports to Lebanon are oil products), Lebanese exports to Syria more than doubled between 2001 and 2003, and Lebanon’s share of official trade volume continued to grow.
Official statistics on Lebanese-Syrian economic activity are deceiving, however, as they do not reflect services Lebanese enterprises provide to Syrian clients, as well as rampant black market activity. The Lebanese state’s ability to assess taxes and customs duties during the war was severely curtailed. Getting a handle on the volume of black market activity between the two countries is therefore incredibly difficult. But a brief look at some of the reasons Lebanese and Syrians took their economic activity underground sheds light on what remain important needs of both sides that are likely to quickly show through the current political posturing.
Refuge for Syrian money
First and foremost are financial activities. Following Syria’s Ba’athist Revolution of 1963 and the nationalization of the banking sector, Syrian money poured into Lebanon. Syrian financiers set up shop in Beirut and in Chtoura to service the needs of Syrians, due in large part to the inefficiencies and restrictions that accompanied state domination of Syrian finance. Syrians are not inward-looking people cut off from the rest of the world and over the last century, Syrians migrated to the West in large numbers due to extensive political instability, and carried their trade with them. Thus, unlike many other “socialist” countries, Syrian had a strong need to keep and effectively use hard currency.
Lebanon fits Syrians needs to a tee. Its famous banking secrecy laws made it easy for Syrians to hide their true income and worth from the Syrian authorities. The banks’ top-rate services, in terms of transfer facilities, suited the needs of Syrian traders all over the world. Last but not least, the banks’ ability to make smart investments and make strong returns made Lebanon Syria’s piggy bank.
When the Syrian state imposed harsh foreign currency restrictions following its forex crisis in 1985 to 1986, Lebanon became an important conduit for black market currency transactions in and out of Syria, known in the region as the HAWALA system. When Syria’s private sector began to grow in the early 1990s, and Syrian banking regulations remained high restrictive, this activity became semi-sanctioned, with Syrian authorities openly turning a blind eye to the illicit activity. Lebanese banks asked few questions, as per their banking confidentiality regulations.
Lebanese banks also became active in loans to major Syrian enterprises, charging high rate of interest and special terms in exchange for forgoing the ability to secure collateral in Syria (which is restricted to Lebanese banks). Last but not least, Lebanese banks provide, and still provide, the lions share of L/C and other import finance facilities to Syrian importers. Only in the last few weeks, following Hariri’s assassination, have Syrian regulations been eased to allow Syrian banks to provide L/Cs in foreign currency.
The second area concerns black market trade activities. Despite changes in Syria’s customs regulations over the past few years, the country remains a highly protected economy. Lebanese products skirt these restrictions through the abovementioned free trade agreements. As Syria’s private sector has grown, so has its appetite for goods either banned by Syrian customs regulations, or those forbidden by US trade restrictions on Damascus. As a result, Lebanese traders have become masters of “re-exporting”, where goods such as US computers or car parts are shipped on to Syrian suppliers in violation of US law. In response, US corporations have put heavy pressure on Lebanese import agencies to obtain “end-user” licenses for various products. Strong family business ties straddling the border, high commissions made by Lebanese re-exporters, along with no increases in the capacity of the US embassy to monitor such transactions, make such demands virtually unenforceable.
In terms of services, Syrian producers utilize Lebanese expertise in everything from production techniques and marketing. Most Syrian businessmen say Lebanon’s close proximity and the international experience of its workforce make Lebanon the best source at the best price. But perhaps more important is the willingness of Lebanese companies to receive large “off the books” payments from Syrian sources that in most other economies would be considered money laundering. This fact is not due to the Lebanese penchant for “business” but rather their understanding of, and willingness to circumvent, Syria’s foreign exchange restrictions. Along with, of course, Lebanon’s banking secrecy policy.
The third area involves Syrian labor in Lebanon. Since independence, Syrian workers have satisfied Lebanon’s demand for skilled, cheap, and unreported labor – an important factor in the profitability of Lebanese businesses. While many Lebanese now complain that the estimated 1 million Syrian workers in Lebanon are in fact stealing jobs away from Lebanese, the simple fact of the matter is that Syrian workers, in the words of one Lebanese businessman, “will do what most Lebanese feel is beneath them.” It is easy to understand: Lebanon’s skilled and polyglot workforce invests in its education with the hope of obtaining a white-collar office job. Syrian workers, therefore, fill the blue-collar gap in Lebanon ask construction workers, garbage collectors, handymen and house cleaners. This makes Lebanon an important source of remittances to the Syrian economy, with some estimates reaching $4 billion per year.
Not all these funds leave Lebanon, of course, as most Syrians are still reluctant to repatriate their savings to Syria’s nascent private sector banks. Many Syrian workers are also married to Lebanese nationals, making estimates of the Syrian labor drain on Lebanon hard to quantify. Nevertheless, Syria continues to suffer from high unemployment, and the economic opportunities for Syrians in Lebanon are an important part of keeping food on the table among the families that straddle the anti-Lebanon range.
A brief history of Lebanese-Syrian economic pacts
In the year’s following independence, different Syrian governments tried to placate the wishes of businessmen from all over the country who historically preferred using Lebanese ports. This culminated in the signing of the Lebanese-Syrian Economic Pact of 1953 – a document designed to help integrate the two economies. The agreement allowed for quota and duty free trade in agricultural products and exempted industrial production from all or half of customs duties, depending on the product in question. In terms of labor and services, Lebanese and Syrians could obtain a six-month residency permit on the border, which allowed Syrian surplus labor to serve the Lebanese market – a situation that continues to this day.
During the civil war, Lebanese-Syrian trade continued, albeit on a much more limited basis with areas under the control of Christian militias. In the early 1980s, Lebanese President-elect Bashir Gemayal tried to uproot Syrian business ties with areas under his control and led the Azharis – a financier family of Syrian origin – to sell their controlling stake in Credit Libanais in 1984. Following Syria’s role in implementing the Ta’if Accord, both countries signed the agreement for Brotherhood and Collaboration of 1991.
While the agreement is often framed in terms of its bilateral commitments to overall cooperation, external affairs, and security, equally emphasized are economic and social affairs. Such matters are overseen by the Committee for Economic and Social Cooperation, an offshoot of the Lebanese-Syrian Higher Council, which oversees the agreement.
In 1993, Syria and Lebanon concluded yet another pact - The Agreement for Economic and Social Cooperation and Coordination. Perhaps more than any other agreement, it outlines in detail the goal of gradual economic integration between Lebanon and Syria, as well as the principles on which such goals would be met. Six clauses outline free movement of persons, labor (based on the laws of each country), services, goods, capital, and transport. In addition, a “mechanism” was established to coordinate national policies in water, energy, electricity, taxation, and finance, amongst others, with the goal of achieving a common market between the two countries.
As each state adjusted its legislation to meet such goals, bilateral trade expanded. When the Arab leaders began looking to liberalize pan-Arab trade in the mid 1990s, in part to counteract its free trade agreements with the EU and the WTO, the 1993 agreement was held up as a success story. This led in 1997 to the conclusion of the Greater Arab Free Trade Agreement (GAFTA), in which Lebanese-Syrian economic relations have been framed ever since. GAFTA established the goal of eliminating all tariffs and quotas (with some exceptions) on January 1, 2005. Ahead of that date, Arab countries were free to conclude bilateral agreements to accelerate economic liberalization – a clause Lebanon and Syria took quite seriously. Some 23 bilateral agreements were subsequently concluded, including everything from investment guarantees and industrial and agricultural production to the protection of the environment to emergency medical services.
Lebanese-Syrian Trade ($m)
Year Volume Exports (Syrian) Imports (Lebanese) % Syrian
1997 76.81 71.2 5.6 92.7
2000 190 166.83 23.2 87.8
2003 277.2 205.3 71.9 74.1
2004(1st hlf) 137 85.97 50.98 63
Source: Syrian Ministry of Economy and Trade/Central Bureau of Statistics
Top Bilateral Exports ($m)
Oil Products 89.3
Phosphate products 16.8
Fruits and Vegetables 13.2
Milk and Dairy Products 6.3
Iron rods and products 5.3
Paper products 10.7
Aluminum products 4.6
Sugar products 2.3
Juice and water 2.1
Source: Syrian Ministry of Economy and Trade/Central Bureau of Statistics
Q & A: Fouad Siniora - Forward thinking (April 2005 No.70)
The former finance minister outlines Lebanon's economic priorities and prospects amid ongoing political instability
What do you think of comparisons and calculations where people come up with numbers, how much we gave, how much they gave, how much they profited, and so forth? Do you have any view on the net balance of the Syrian-Lebanese relationship in those terms?
I think it is very difficult for anybody to say today but I can really tell you that there really is a synergy and it definitely is in the interest of Lebanon and in the interest of Syria to work together and have closer economic relations, not one overriding the other and taking advantage of the other. Syrian labor is very important to Lebanon and people are mistaken when they talk about Syrian labor. I personally have not heard of any situation under which somebody had Syrian labor imposed on him. In the agricultural sector, the basic labor force is Syrian, in the construction sector, the same thing. Lebanon imports cheap labor and Lebanon exports expensive labor.
After elections, what are the priorities in economic policy that need to be addressed?
We have to address growth, employment and the fiscal situation. Fiscal stabilization has been a big responsibility of the Hariri years. Under your leadership and direction, the ministry of finance has been successful in pursuing reform, implementing VAT since 2002 and lately increasing fiscal revenue. Does the current situation endanger this progress? What really counts now is to proceed in expediting the process and moving to the next phase, which must first begin with the [Syrian] withdrawal. Mind you, my point of view personally and one I believe shared by many reasonable Lebanese in this is that we have to really be on good terms with Syria. Syria is our neighbor and no matter what happens, nobody can change geography. It is our interest to be on good terms with Syria, because Syria is our gateway to the Arab world. We also have no interest in signing any agreement like the May 17th or anything of that sort because it is not in the interest of Lebanon to do so. On the other hand, we have to really work out with Syria something that we can abide by – a very simple formula, as Hariri once said, set by Bcharra Khoury in the old days, [which held] that Lebanon is not supposed to be a place or a passage for colonialism against Syria. As Hariri said, Lebanon cannot be ruled against Syria but it also cannot be ruled from Syria. This is the arrangement that we have to respect. I think this will lead us to great potential for the development of Syria and of Lebanon.
You mentioned that the Lebanese government has been very slow to implement measures. Would disentanglement of the political processes, meaning reduction of Syrian political involvement in Lebanon and reduction or removal of MOUKHABARAT structures, help to improve public sector governance decisively in the short term?
I think this is going to be very helpful, because it means that each organization will have to concentrate on what it is supposed to do. The MOUKHABARAT, according to the Taif Agreement, should really have worked for military objectives, not against the people, taping their phone calls. They are wasting their time. It would have been a very strong message if the Syrian withdrawal from Lebanon had happened without the Hariri assassination. We would have seen the country going places.
How about the impact on Syria? Would it also bring a strong positive effect on Syria?
If I were in the Syrian shoes, yes, I think this is going to be. How are they going to take it; how they are going to deal with it? This is for the Syrians to decide. I am not going to interfere in their business, but I think this is something that can be converted into a new opening, a new opportunity.
From a fiscal perspective, does Syrian labor bring about damage to Lebanon?
They are creating value, my friend. I am not in favor of something that is the manipulation of certain things or the interference in many affairs in the country, this is definitely not productive at all; this is destructive. But when you talk about Syrian labor, why don’t you talk about the 100,000 Sri Lankan housemaids? Are you against 300,000 Syrians but not against the 100,000 from Sri Lanka?
How about taxation and work permits for the foreign workers?
If you go to Switzerland, they get labor from France, from Italy, from Spain, or from Portugal and all of them are illegal. Why would you impose taxes on Syrian labor? We can impose taxes, but who is going to eventually pay the taxes – the Lebanese will.
So from the fiscal perspective, would you impose taxation and collecting fees for work permits or would you personally favor a totally open labor environment?
If you want to organize it in terms of simple paperwork, then fine, why not. Nobody is questioning that. But why don’t you ask the same thing between Mexico and the United States? Let’s not concentrate on the side issues instead of the main issues. What we are really complaining about is the interference in political affairs and administrative affairs and everything pertaining to the functioning of the operations in the country. Here, the [Syrian] intelligence is interfering and this is counterproductive and damaging to the economy. Would this be a good time for devaluation of the Lebanese pound, given that the rate of dollarization is high?
It would be counterproductive. You are not gaining anything in terms of reducing your liabilities. You could reduce the debt by a trickle. The benefits, however, are very limited and the costs are very high. I don’t think this is helpful.
Could there be a Paris III and who would be the person to bring the international institutions and donors to the table, now that Mr. Hariri is gone?
I don’t know. It depends on who is going to be the prime minister then. If we wanted to really have a Paris III, we would have to prove to the world that we are serious and are ready to do what is really required so that we can carry on the reforms. We have committed ourselves with the world that we are going to do the reforms and what happened to the contrary was that we did nothing to carry out these reforms. It is high time to realize that the world is not going to do anything for us if we cannot do anything for ourselves. God helps those who help themselves. [Paris II] was an opportunity that was given to us and we abused it and did not take advantage of it.