Tuesday, February 28, 2006

The Economy - Jihad Yazigi Weighs in

Jihad Yazigi weighs in on the economy debate. Jihad is the editor of "The Syria Report," the best Syrian economic digest. He gives some historical perspective to the debate. He writes:

Hi Josh,

Syria Comment has recently posted a few contradictory essays on the economic situation in Syria. I will try to give my own appraisal of the situation.

In the last few months there has been a strange feeling that things are improving in the economic front among many policy analysts in Syria. There are several reasons for that.
One of these is that the Syrian economy grew by 4.5 percent last year. This is its highest rate over the last decade. At the same time the number of investments that were announced in the last 3 months alone is higher than the country’s annual Gross Domestic Product, which is around US$ 22 billion ! In the real estate sector alone you had three large projects from Gulf investment houses worth a combined US$ 21 billion. UAE’s Emaar is committing US$ 2 billion, the Kuwaiti Aref US 4$ billion and another Emirati group, Bunyan, close to US$ 15 billion for an investment in Mount Hermon. Then you had 2 large cement projects, 2 other sugar refineries, hotel resorts, etc. Syria never witnessed anything close to that maybe in its entire contemporary history. What is obviously striking is the fact that all this is taking place while the country is under very strong international pressure and the Syrian pound lost almost 10 percent of its value late last year, before recovering since.

What you have to do to understand this is to look at what is behind these data. Let’s start with GDP growth.

True, GDP grew by 4.5 percent last year. But, according to the official Central Bureau of Statistics itself, the two factors behind GDP growth in 2005 are (1) the rise in the price of crude oil (crude oil represents 70% of exports and 40% of budget income in Syria) and the excellent rainy season which helped agricultural production grow (agriculture makes up around 25% of GDP). So last year’s growth had not much to do with any significant capital inflow in the country but rather with two factors on which Syrian policy makers have no leverage. All other things remaining equal, GDP will be stagnant this year should the price of oil return more or less to normal and the rainy season be less wet.

As to private investment one has to be very careful. None of the very large real estate investments announced lately is anywhere close to materializing. Either the developers have only purchased the land on which they plan to build their estates or in some cases these announcements were only….announcements! and nothing else. Actually, there has been almost no single major construction site anywhere in or around Damascus in the last 3 or 4 years, except for the Four Seasons hotel. These investments won’t probably see the light of day before the overall political situation of the country stabilizes.

Then you have other projects that are taking place, in particular in the industrial sector. In terms of overall volume these investments are not insignificant and are a partial reflection of the country’s huge potential but also of the regulatory environment that has slightly improved in the last 2 to 3 years. Abdallah Dardari, Vice PM for Economic Affairs, and the strong man in the government, as well as Mohammad Hussein, Minister of Finance, have to take credit for that.

That’s for the good data regularly released by the government. Now if you dig in more and look at the business community and the people at large, I just have to refer to the post of your Aleppine friend, K, who best expresses what is taking place on the ground. The latest rise in the price of fuel (25%) and cement (50%) has raised the heat. The next move that everyone expects the government to take is to raise the price of diesel. Diesel is heavily subsidized and is costing the Government hundreds of millions of dollars every year. But should its price go up, every other item in the country will see its price go up, because of the increased cost of transport, the increased energy costs for industrialists, etc. The purchasing power of people will fall once more as it has been falling for the last two decades.

I would like to insist on that last aspect. While most analysts in Syria mention the rise of Islamism as the most significant change in Syrian society, in my view it is the rise in poverty that I have found most striking. I have been visiting Syria very regularly in the last 15 years and I have seen how at a very rapid pace purchasing power has been falling. The weakening and public avoidance of state institutions (schools, hospitals, etc.) is most worrying because it is a major reason behind the gradual reduction in the role of the state as a major integration tool for society. While, for instance, all my Syrian friends who are my age have studied in public schools none of their children is schooled there, but rather in private schools. Obviously not everyone can afford private schooling. State schools have classes of 50 children on average, the salaries of the teachers are so low that their motivation is also very low. (As they used to say in the USSR, “They pretend to pay us, and we pretend to work..”) Roads and public gardens are dirty, pavements are full of holes, etc. One should actually go to the suburbs of Damascus to see the conditions in which the struggling remains of the Syrian "middle class" live. Unemployment has been growing without interruption in the last 25 years in Syria, except for a 3-year respite in the early nineties.

What is upsetting and frustrating in this situation is that there is no excuse for it. Syria is neither heavily indebted nor is it scarce in resources. Ironically, the overall deterioration in the social conditions of average Syrians started in the early to mid-eighties at a time when the country started to pump high levels of crude oil (1987), when investment and production in the agricultural sector was on the rise (early nineties) and when the liberalization of the economy also started (1986).

Maybe the picture of the Syrian economy I am giving is bleaker that what I intended it to be. One, indeed, should not forget that this is a country of huge potential. Syria has the opportunity to become the most diversified economy in the region with a strong agricultural output, a very cost-competitive industrial sector, an amazing tourism industry, and an ideal geographic location. Unfortunately it has remained an unfulfilled potential and it will probably remain so as long as you don’t get to the core of the problem: the fight against corruption, the introduction of transparency and accountability, and the protection of a real independent judiciary that can provide guarantees for investors - in short, before the rule of law is enforced.

Jihad Yazigi
The Syria Report
editor@syria-report.com

15 Comments:

At 2/28/2006 04:09:00 PM, Blogger Innocent_Criminal said...

My concern with the previous economic discussions was that it lacked any “professional” experts in the dialogue. I'm glad that Jihad has given his two-cents because it was by far the most realistic. Syria-report is a great initiative and their newsletters are quiet insightful.

 
At 2/28/2006 04:50:00 PM, Blogger majedkhaldoon said...

Jihad wrote an honest and true picture, I want to stress that the increase price of Cement, and OIL will make those projects more costly to construct so some may not materialize at the present time, also oil revenue is in good hands, this mean Assad and his family steal it and take the money to european banks, just like Rifaat Assad did, also I expect the dollar to hit 64 lira by june.

 
At 2/28/2006 09:22:00 PM, Blogger ghassan said...

I have not kept uptodate with the developments in the Syrian economy but as a person who has written, taught, researched and lectured extensively about economic issues in general and economic development in particular it seems to me that the Syrian regime was not able to prevent the economy from falling prey to the "Dutch Disease" which is extremely difficult to avoid. In the case of Syria, if I am right, it manifests itself in a growing oil sector but at the expense of the other sectors. This is a model of unbalanced growthwhose deleterious effects could be ameliorated by a well informed public policy.

 
At 2/28/2006 09:29:00 PM, Blogger EHSANI2 said...

Ghassan,

You are being too kind. The Syrian economy suffers from way more than a Dutch Disease

 
At 2/28/2006 09:32:00 PM, Blogger EHSANI2 said...

Suffering from "Socialism Disease" is perhaps closer to the real prognosis

 
At 2/28/2006 10:13:00 PM, Blogger norman said...

Corruption is a big weight keeping the Syrian economy stagnet,that is somthing many agree on,coruption in Syria is two kinds first is low level corruption ,bribery by low level employees ask for bribes to take care of their famlies because their salarie are so dismal correcting that is easy -give goverment employees good salary with good benefits then make it illegal to bribe or get bribed then launch a couple of stingt opperations and take some people to court,that will make it clear to everybody that bribes are not tolerated anymore these violation should be investigated by the local police and the district attorny in each county (Muhafaza)and a free phone number should be established for complains .the second kind of corruption is the high level corruption commeted by high level govorment employees giving cotracts for a commotion with or without bids ,to solve that Syria will submit potential contracts to bid and announce that in the official newspaper the open the bids in fronct of a commitee and chose the winner eather for the lowe price or for any other declared reason the put the results in the official newspaper and giv sertain time for chalenges ,having a commitee and making the process open will make it difficult to recieve bribes.

 
At 2/28/2006 10:56:00 PM, Blogger syrian said...

The conclusion of the sixth paragraph assumes that a rise in prices is equivalent to a decline in the purchasing power of people. The fact of the matter is, eliminating subsidies will now direct resources to better uses. Any commenter would be hard press to argue that the subsidies in Syria had no negative effect on the economy. When diesel fuel is subsidized, the demand for the fuel would exceed the available quantity at the low price and a shortage would ensue. If my memory serves right, shortages were rampant in Syria for as long as the subsidies have been in place.

I would suspect that the reason you have not seen a whole lot of building activities in Damascus is because there was no cement for any new projects to take place. I understand that building the Four Season hotel too forever to complete.

The rise in the price of cement has already worked its magic in moving resources to the production of cement (2 large cement projects.) The cement will probably be used to make the new construction projects feasible

The post mentioned 2 new large sugar refineries; I bet the subsidies on Sugar were removed as well.

As the laws become more relaxed and more subsidies are removed you will witness increases in the production of all products. All the added production will need workers and the unemployment rate should drop from the ridiculously high levels that exist today. The decline in the unemployment rate translates to an increase in the national purchasing power not a decline –more working people will necessarily buy more things. Nominal wages might stagnate for a while, (until the unemployment rate drops to reasonable levels). Nominal wages will eventually have to increase raising the standard of living for every person.

I find the paragraph before last amusing because it fails to recognize the result of new wealth found in a heavily regulated, over-subsidized economy. You use the new wealth to keep the subsidies going and you maintain all the wrong incentives that lead to excessive consumption. But, I also don’t know what liberalization measures were taken in 1986. (If the economy we have now has been liberalizing for 20 years then I guess we are in a whole lot more trouble that we think.)

One of the examples used is the teacher whose pay is too low they have no motivation to work. It assumes that the teachers are qualified, just unmotivated. I’m more willing to bet that the teachers are not all that qualified which explains why they would accept such low paying work. (All the qualified Syrian teachers are probably working in other countries)

The part about corruption is absolutely ridiculous. What is so difficult about implementing a system where the incentive to not be corrupt is stronger than the incentive to be corrupt. We are too attached to the idea that we should expect people to be good and not corrupt. It would seem better to assume that people are corruptible and design your system make them better off choosing to be honest.
But then again, what do I know???

 
At 2/28/2006 11:04:00 PM, Blogger ugarit said...

Sadly Corruption is a necessity in Syria. Without it most government employees can't feed their families.

 
At 3/01/2006 04:50:00 AM, Blogger Pål Sletten said...

I have seen very little discussion of the GDP figures, but in my opinion it is quite possible that they understate GDP growth over the past 7-8 years, perhaps by as much as 15-20% (cumulated).

The results from the household income and expenditure survey (published in the UNDP report on poverty at http://www.undp.org.sy/publications_national.php#Poverty) show private consumption growth of 2.0% from 1996 to 2002 while the GDP figures show private consumption growth of only 0.3% over the same period. In principle these two should be the same, but they are calculated differently: The survey figure (2.0%) comes directly from asking households about their consumption (detailed data collection throughout the year) while the GDP figure (0.3%) is a residual after calculating overall production, investment and government consumption.

I tend to believe the household income and expenditure survey more (better sample frame, less risk of underreporting for tax reasons), and if the true figure is indeed 2.0%, GDP should be at least 18% higher in 2002. Hence, GDP growth has been underestimated.

 
At 3/01/2006 06:28:00 AM, Blogger ugarit said...

SYRIA’S OIL WOES

 
At 3/01/2006 07:50:00 AM, Blogger t_desco said...

"Hariri dismissed as lies allegations that the notorious al-Qaida terror group was behind the assassination of his father former Prime Minister Rafik Hariri.

"This is a big lie that the remnants of the Lebanese-Syrian security regime are trying to propagate," the slain leader's son said.

He said this was just a diversion tactic to discredit accusations against those suspected of involvement in the murder, including some "big pillars of this regime."
...

Hariri accused Syrian intelligence forces of being behind the infiltrations into Lebanon of Qaida operatives to undermine the security situation in the country."
Naharnet

 
At 3/01/2006 10:49:00 AM, Blogger I Want to Break Free said...

To Norman,
How about auctioning off the assets of the Assads and the Makhloufs and paying pack what the government owes to deprived ex-land owners. If they can not pay for it, why not return it back to its rightful owners. The US government did not make a law and confiscate property then did not compensate. Let me just point out that your anoology is completely off-track

 
At 3/01/2006 11:05:00 AM, Blogger norman said...

Syria 30 ,i could not have said it better ,one more thing, most teacher give private leasons and their undeclared income is much higher ,sure they do not pay taxes on that.

 
At 3/01/2006 01:53:00 PM, Blogger ugarit said...

Please reread american history. The US government stole most of the land from the native population and the US government broke almost every treaty with that population.

I Want to Break Free said...: "The US government did not make a law and confiscate property then did not compensate."

Let's ask ourselves why did a few syrians prior to 1958 control so much of the land? How did they get it? Did they get the land fairly? I am in favor of compensating the land owners who lost land in 1958, but the hard questions must be asked.

 
At 3/01/2006 02:01:00 PM, Blogger ugarit said...

Guys, let's define corruption. What is meant by it in the Syrian context?

I'm seriously asking.

Please look at this Corruption in the world.

Syria is ranked 64th out of 130.

 

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