A Word On The Syrian Economy And The IMF Report, By EHSANI2

A word on the Syrian Economy and the IMF report
By EHSANI2
June 20, 2006

(Also see addendum at bottom by Steven Heydemann)

Dr. Landis earlier posted a story entitled “Former Chancellor Schroeder puffs Syrian Economy: So does IMF”. One of commentators in the previous post (Nafdik) asked if I had a comment on the report. Even though this subject has been discussed repeatedly on this forum, I decided to post this comment at the expense of repeating myself.

First, I would encourage everyone to read the full IMF report rather than depending on Mr. Dardari’s summary of it.

These are some of the things that you will learn if you took the time to read the fine document:

Though non-oil growth was 5.5%, overall growth was limited to 3%, given the decline in oil production. The main reasons behind the economic growth are thought to be:

-Higher private investments from the Gulf region.
-Expansion of domestic credit as ceilings on maximum lending were raised
-Continued effects of the already announced public sector wage increases.
-Lower tariffs on imports, which has resulted in increased private sector investments.
-Low real interest rates because inflation has risen to 7%.

Not surprisingly, Mr. Dardari chose to highlight the 5.5% number out of the entire document as a proof that the country’s economy is on a strong path to growth and prosperity. He correctly assumed that most people will not read the report in its entirety. Those who do will notice that enormous challenges lie ahead. Indeed, the report opens up with this statement:

“The Syrian economy is facing daunting challenges”.

It ends with this:

“We wish the authorities success in pursuing the demanding agenda of reform ahead”.

My own observations follow:

Syria’s GDP is estimated to be $22 billion. 5.5% GDP growth translates into $ 1.2 billion in extra income/production per year. Dividing this increased income by the size of the population yields a per capita increased income of $61. In other words, if Syria’s per capita GDP started from a base of $1100, last year’s 5.5% growth has raised this number by $61 to $1161. In reality, the actual total GDP growth was 3% according to the report. This means that the actual increase in per capita GDP (income) was $33.

What the above numerical example highlights is that this economy needs a sustained and long period of above average growth before the low per capita GDP level is substantially affected. Mr. Dardari would like to see the economy create 1.2 million jobs in the next four years. This is going to be the minimum required to absorb the new entrants in the ever-expanding labor force. Without this level of job creation, the unemployment rate is likely to keep going higher. If you read between the lines of what Mr. Dardari says, you will conclude the following:

200,000 jobs were created as a result of 5.5% non-oil GDP growth rate. Since the country needs to create 300,000 jobs, it stands that the non-oil economy needs to grow by as much as 8.25% to achieve this goal (5.5*300)/(200)- not the 7% that Dardari targets in the five-year plan.

With all due respect, this is a monumental task.

While certain reforms are being implemented, the report makes it clear that the country continues to rank as one of the worst in the world for ease of doing business. Syria’s rank of 135 out of 155 countries in the world highlights the heavy burden imposed by outmoded or ill-conceived regulation. In enforcing contracts, the country ranked 149 out of 155. It takes 47 procedures and an average of 672 days to enforce contracts. On trading across borders, it ranked 146 in the world. In order to complete an export transaction, a business needs 12 documents and 19 signatures. Those who want to import goods must negotiate an even worse obstacle course - 18 different documents and 47 signatures are required from start to finish. In an OECD country, you need an average of 3 signatures by contrast.

This is shameful. After six years in office, there is no excuse for continuing to keep these outmoded regulatory burdens on businesses. The President’s economic team needs to reform these laws immediately and without hesitation.

As for foreign investments, there is no question that this has been part of a clear upward trend recently. With close to 20 million people and being the fifth most populated country in the region, Syria has tremendous potential. Gulf investors saw an opportunity to buy into that potential on the cheap, and they did. Buying real estate for the long haul in a country like Syria is a sound strategy. The Syrian coast boasts less than 850 beds in 5-star establishments (I personally would not rate them 5-star). This is amazingly low for a country of this size. It is inevitable that the country will need new residential buildings, hotels and resorts. In Beirut for example, one is hard pressed to find even a handful of empty lots suited for such developments. They have been bought already. Now, these same large investors and others see Syria as the next opportunity judging by the low price entry point. Such investors will likely enjoy handsome price appreciation on their investments.

Anyone who feels the urge to rush to the Syrian coast looking for land, however, is likely to be disappointed. The usual suspects have already snapped up most, if not all, of the land suited for such developments. Indeed, in the case of Syria, most new laws are usually drafted to custom fit investments that have already taken place. Happily for them, and sadly for the rest of us, this trend is likely to continue.
[end]

Addendum: Steven Heydemann of Georgetown University wrote me this important observation:

Joshua,
The link between comments promoting investment and comments noting what needs to be changed to improve the investment climate are clear, intentional, and important. They are not afterthoughts, as your column suggests. European incentives via negotiations over the association agreement (now shut down) are seen in Syria as having been a source of positive pressure for economic policy change. What these European leaders are trying to do is to maintain those incentives in the absence of the formal association agreement framework. So they do the old two-step: promote investment, but link it to the need for change.

No one imagines this as a major or powerful source of pressure, but the focus should be as much on what these politicians are saying needs to be changed as on their "puffs" for the economy.

Steven's remarks about my "Puff" post are important. European powers have been skeptical of Washington's "democratize-or-else" policy from the beginning. They have maintained that it is important not to cut off relations Syria, but to pursue a policy of positive engagement. This was centered on the Madrid process or association agreement, as Steven maintains.

Because that was taken off the table after the Hariri murder, European powers have been at sixes and sevens to preserve their policy of positive engagement without stepping on Washington's and France's toes.

With the publication of the lack-luster Brammertz report, which gives Syria a further reprieve and which holds out the distinct possibility that evidence of authorship of the Hariri murder may never be sufficient to convict, Europe is looking to ease its way back into its old policy of constructive engagement.

Recent pronouncements by the French foreign minister suggest France is reaching a hand out to Damascus much as Germany is by OK-ing Schroeder's recent visit to Syria to fluff the economy.

What we have here is a return to the established routine of Washington playing the bad cop and Europe playing the good cop, offering a fistful of carrots. Steven Heydemann wants people to understand this and suggests that Damascus take the carrots, move ahead with reforms, and patch up its relations with Europe. The promise - I guess - is that Washington can be brought around, if Damascus takes the right steps in correcting its relationship with Lebanon. France has made it crystal clear that the only agenda it has is Syria's relationship with Lebanon. There are real policy differences between Europe and the US. France and Germany are offering Syria a chance to move back into the comfort zone.

If not - Washington is sitting there with the hammer. Here is a bit of George Bush's most recent speech (Merchant Marine Academy June 19):

U.S. President George Bush has said that the United States and Europe will continue working for Lebanon's independence and stressed the need to spread democracy in the Middle East.

"We've worked with the United Nations to end the Syrian occupation of Lebanon and we will not rest until the Lebanese people enjoy full independence," Bush said Monday in a speech to the U.S. Merchant Marine Academy in Kings Point, New York.