Syrian pound (SYP)
The Ba'ath Party and the rule of Hafez al-Asad
In many ways modern Syria has followed the familiar course of Arab nationalism during the 1950s inspired by the Egypt of Nasser and from 1958 to 1961 united with Egypt to form the United Arab Republic. Dispute over leadership dissolved that union quickly, and Syria would form the Syrian Arab Republic in 1961. In 1963 the Ba'ath Party seized power. The Ba'ath (renaissance or rebirth) party professed socialist inclinations and it was conceived by the two Syrian teachers the Christian Michel Aflaq and the Muslim Salah al-Din Bitar as an ideology to fight European colonialism in the 1930s. The Ba'ath is the same nominal party that has ruled Iraq from the same period in the 1960s until April 2003 when the rule of its most infamous exponent, Saddam Hussein was terminated by the Anglo-American invasion that began in March of that same year. It's important to recognize that, while the Ba'athist leaders described their seizure of power in 1963 as a revolution, it was in fact a coup carried out by a few military officers, and did not result, nor did it have the support of, a mass uprising of workers and peasants.
The resulting regime was another military dictatorship. Bitar became the first president from 1963 to 1966 when a more radical faction seized power. A further coup in 1970 brought Hafiz al Asad to power. He ruled Syria until his death in 2000, when his son Bashir al Asad took over. The foundation of the party since the coup has rested with the Alawites, a Shi'i Muslim sect to which less than ten per cent of the Syrian population is affiliated. Asad therefore closed the circle of power to Alawites he could trust and co-opt letting few outsiders into the inner circle. The nominal use of the term 'revolution' to describe what was in fact a coup is crucial in understanding the importance the Syrian Ba'athist party under the Asad regime has placed on maintaining an extensive and repressive internal security apparatus and why reforms, economic and political, have been so difficult to implement. In a very similar approach to that of his neighbouring Ba'athist rival Saddam Hussein, Asad relied on a power group that was organized far more on a tribal or ethnic basis, rather than an ideological one.
Regional Tensions: The Ottoman past, Israel and the USA
Internal problems have been compounded by the events of the region in which Syria has unavoidably become entangled even before the period of the European mandates in the 1920s and 30s that fuelled the rise of nationalist parties and ideologies. During the Ottoman Empire the area now occupied by Israel, Palestine, Jordan, Lebanon and the current Syria was part of the region known as Bilad-al-Sham. The repercussions of this legacy are still being felt. In 1860 there was a civil war that affected Damascus and the Lebanon involving Druze, Sunni Moslems, Maronite Christians and Jews - along with their European patrons engaged in bitter disputes that are still partially unresolved and that have contributed to fuelling inter-confessional tensions resulting in civil wars in Lebanon in the 1950s, 1970s and 1980s. At the end of World War I and the defeat of Ottoman Turkey, The British and the French divided the region of Sham and drew the boundaries of new states. The inter-confessional tensions acquired a trans-national nature and the region continues to endure a constant level of tension. While Syria has enjoyed generally good relations with Turkey, its neighbour to the north, it has engaged in wars against Israel four times on the battlefield maintaining a level of war readiness best described as a 'cold-war'. 18,000 Syrians still live in the territory of the Golan, a precious source of water and arable land, occupied by Israel in 1967.
Moreover, Syria has had disputes with fellow Ba'athist Iraq to the east supporting Iran in the latter's costly war with Iraq from 1980 to 1988 and continues to occupy part of Lebanon in which it played an important military role. Syria's initial involvement in Lebanon was during the 1976 civil war when it supported the Christian Maronites. The 1982 Israeli invasion of Lebanon led by General, now Prime Minister, Ariel Sharon saw another round of military clashes between Syrian and Israeli forces. Meanwhile, as Iran's quiet ally in the war against Iraq, Syria also helped sustain the Shi'a faction represented by Hezbollah. In 1989, Syria endorsed the Charter of National Reconciliation, or "Taif Accord," a comprehensive plan for ending the Lebanese conflict negotiated under the auspices of Saudi Arabia, Algeria, and Morocco. More significantly, in May 1991, Lebanon and Syria signed the Treaty of Brotherhood, Cooperation, and Coordination outlined in the Ta'if Accord, which intended to establish the basis for Syrian-Lebanese relations. The Treaty's provisions have yet to be fulfilled. The Israeli occupation of south Lebanon until the spring of 2000, its frequent attacks on Hezbollah and other groups said to be operating in Lebanon and the second Intifada by Palestinians in the West Bank and Gaza territories have heightened Arab - Israeli tensions and precluded Syria's withdrawal from Lebanon. Syria also claims that the UN resolution 425, which called for Israel's withdrawal from Lebanon, also demanded its withdrawal from the Sheba farms in the Golan Heights. This territory is often used by Hezbollah to launch attacks against Israel and is at the heart of continued tensions between the three countries.
The Two 'Gulf' Wars, Intifada II and the War on Terror
Escalating regional tensions exacerbated by the continuing intractability of the stalled Arab Israeli 'peace-process' and the USA's war on Iraq suggest that the Syrian presence in Lebanon will be extended indefinitely. However, when dealing with the United States, Asad has often adopted more strategic and pragmatic policies rather than ideological ones, confirming the need to insulate the party from popular tensions. Indeed, Asad's participation on the side of the American coalition during the 1991 Gulf War was a calculated gamble that paid off handsomely in terms of regional politics and international prestige - in the West. Syria's support was rewarded by considerable financial aid upwards of $2 billion from the USA and Arab oil producing states of the Gulf - who had, ironically, ignored Syria in the 80s for supporting Iran in the Iraq-Iran war - while also receiving a virtual blessing to pursue its interests in Lebanon. The important element that eluded it was the return of the Golan Heights, which are still occupied by Israel. In the mid 90s Syria's international prestige was heightened as it became clear that Syria's participation was crucial in any comprehensive Arab-Israeli peace arrangement.
The collapse of the Soviet Union also facilitated Syria's position in foreign policy orientation and it succeeded in securing better relations with the West and America during the Bush sr. and Clinton administrations. But, even as Bashir al Asad has taken steps to relax some of the Ba'ath party control while gradually shifting to a more liberal economic system, Syria has been relegated merely one step below 'Axis of Evil' status by the Bush jr. administration after the September 11th attacks and the so called War on Terror. Syria had provided assistance to the US in its pursuit of militant Islamic groups, but was opposed to Gulf War II as Syrian - Iraqi relations improved considerably in the last decade leading to the war. Syria even received oil from Iraq after re-opening a pipeline leading to the Mediterranean Sea, which was shut down in the tense period of the 80s decade. Moreover, the failure of the Arab - Israeli peace process has also relegated Syria to a less favourable geo-political position in the Americans' view and heightened tensions in the region of Sham, particularly in terms of allegations by Israel and the US that Syria continues to back Hezbollah, which is now also a fully recognized political party with representation at the Lebanese parliament. It seems that little has changed since Ottoman times. The political risks that Syria faces now are high as tensions between itself and Israel continue to increase, but there are also internal issues related to Bashir al Asad's gradual efforts to liberalize the economy as well as the political system.
The economy and economic liberalization efforts
Most analysts have conceded that during the 1950s Syria was one of the most rapidly developing countries in the Third World. Its economic growth was diversified and relied on one of the healthiest agricultural production systems in the entire Middle East that was even in the declining growth years of the 1980s, still capable of guaranteeing a high degree of self sufficiency in food supply. Few countries in the MENA (Middle East and North Africa) region can claim such an achievement. Syria was also industrializing at a better rate than Egypt and could also count on petroleum and natural gas resources. However, the frequent coups and political instability in the early decades of Syria's independence mismanaged the many advantages that it held over its neighbours, not least of which were a relatively strong supply of water and arable land. Ideological concerns led to the nationalization of most enterprises and the alienation of the business and economic establishment. Many of the Sunni capitalists fled to neighbouring Lebanon where they shifted their economic activity from capital intensive industry and agriculture to services and trade.
The economy of Syria, then, has since the 1960s been characterized by varying degrees of state intervention designed to reduce regional and class disparities. This is crucial in understanding the Asad's regime's reluctance to adopt full liberalization measures and the ineffectiveness of reforms. As in any highly nationalized economy, reform presents severe economic as well as political challenges; Syria's situation is made all the more difficult as such reforms also have a delicate ethnic dimension.
The Reforms and Their Political Risks
Economic reform in Syria has been a gradual process that was actually begun with the ascension of Hafez al Asad to power in 1970. He relaxed some of the nationalization measures of the 1960s and fostered the emergence of a new business class based on state officials who were allowed to amass fortunes in exacting transaction fees from foreign companies wishing to do business in Syria. He also took a risk by inviting some of the Sunni capitalists and landlords, who left Syria in the wake of its nationalization, back, inviting them to invest in the important industrial, tourism, construction and agricultural sectors along with the government officials - mostly from the Alawite minority - as they accumulated wealth. Industry is very important in the Syrian economy accounting for 15% of the labour force and even in the recession in the 80s, Syrian GNP was still made up 18% by industrial manufacturing, while oil exports only accounted for 4% in a pattern which is the very reverse of the Gulf States.
The 1980s saw the first important efforts to implement market reforms. The Iran - Iraq war caused shortages in foreign exchange, while subsidized oil from Iran and budget spending cuts of 5% were unable to sustain the subsidies on which the distributive socialist pretensions of the government rested. Its greatest concern was to prevent a rise of the unemployment rate, while also blocking the rise of the Sunni capitalist class that dominated politics prior to 1958. By 1988, the Syrian pound was devalued by 70% to invite inflows of hard currency and mixed private - public sector enterprises in agriculture (a precursor of Britain's Private Finance Initiatives) were formed with the aid of twelve entrepreneurs. The measures worked, but the government used the extra revenues to re-invest in public enterprises and was then faced by having to import food after a long drought severely reduced agricultural output.
Nevertheless, while these reforms appear rather typical on paper, it must be appreciated that Asad had to play a skilful balancing act in managing the tensions in the all important ethnic element of the equation. Inviting Sunnis to resume a role at the commanding end of the economy, even if limited, was an affront to the Alawite elite that relied on Asad. The revolt of the Muslim Brotherhood in Hama, which ended with the ruthless extermination of 20,000 of its inhabitants in 1982 by the armed forces, was largely a revolt by the Sunnis against the Alawite minority and was supported by the Sunni business middle class of Damascus. It was this continued threat of reprisal against Sunnis that also gave the government some room for reform. Hama had sent a clear message of what just how much dissent would be tolerated. The Sunnis were allowed to take part in the economy but only so long as the Alawites dominated. The balance that is needed in managing the ethnic tensions is a continuing factor in slowing the rate of reform today.
Bashir al-Asad cannot move too rapidly in order not damage his Alawite basis of support, which is the only real support he can count on, given the nature of his succession and the continued reliance on a repressive security apparatus to sustain him. Asad the younger, a British trained ophthalmologist, was a reluctant choice as successor and lacks the political determination to engage the kind of massive violent reprisals that his father, a military man, showed with Hama. In many ways, Bashir al Asad is a prisoner of the strong minority that relies on the perpetuation of the Asad legacy for its survival. Reforms will, therefore, inevitably be gradual as he faces both the internal threat of dissent, from his own Alawite sect as well as from the Sunni majority, as well as the external one posed by increasing tensions in the region and continued threats from the United States.
Bringing Globalization to Syria
Political risk is doubtless very high. Meanwhile, support from the Gulf States is declining and the unemployment rate, which Asad's father was so concerned in reducing, is now estimated at 25% to 30%. The political and likely military tensions in the region mean that military spending will be sustained and even increased in order deal with the multiple threats. This will free up even less money for social welfare support, which would in political terms allow Bashir al Asad to consider increasing the rate of market reform. A solution to this problem could come in the form of greater foreign involvement in the Syrian economy while increasing efforts to integrate it in the global economy. In other words bring Syria into globalization. Regional efforts promoted by the European Union such as the Mediterranean free trade zone which has been proposed for 2010 are welcome by Syria.
Indeed, Syria maintains very good relations with Italy and Spain, two countries that are sure to play a very significant role in a more open Syrian economy. Hoping to generate foreign investments, Bashir al Asad has announced the privatization of the banking sector in 2002 ending forty years of the exclusively government run financial system. The problem remains, nevertheless, that the legal system is not designed to protect the accumulation of capital; there being no mechanisms in place to protect it institutionally. Any serious effort to invite foreign investment will have to address this fundamental lack of financial structures, which is currently keeping Syria out of the fold of globalization.
The current instability of the region may also play to Syria's advantage in terms of restructuring the financial system. Lebanon's advanced financial services and its long trading traditions have long played a role akin to what Hong Kong has done for China. In the eventuality that Lebanon became fully absorbed by Syria as part of a regional re-stabilization that also include a peace treaty between Israel and the Arabs, the economic prospects for Syria and the region would improve dramatically. The chances of this happening in the short term are extremely slim, barring a miracle - in a region long famed for this type of phenomenon - but for the time being such hopes merely reflect how many and how obstinate the obstacles are to balanced and sustainable economic growth.
Update No: 002 - (01/01/04)
2004 has the makings of a significant year in Syria both politically and economically. Not all the prospects are good in either area, however, and their outcome depends in many ways on the hardening or softening of regional tensions. Meanwhile, in 2003 Syria announced an ambitious program of financial reforms aimed at inviting the private sector to take greater part in the economy. In the right political climate these reforms could bear good fruit by the end of the year.
Saddam Hussein's Capture, Syria and the United States
The last update discussed the effect of growing regional tensions on Syrian political and economic reforms. The capture of the former president of Iraq, Saddam Hussein by US troops on December 14th, adds a new dimension to reform prospects in Syria. Indeed, the sight of a captured Saddam Hussein, once the most fear inspiring and powerful Baathist ruler in the region must have sent shock waves to Syria's own Baathist elite. The Syrian press unsurprisingly largely ignored the arrest, though in Lebanon most of the press reported favourably on Saddam's capture as one hailing the beginning of a new era for Iraq. As for Syria, the Saddam's capture poses an important dilemma. The more likely reaction will be that political reforms already hampered by Israel's military strike in October and US sanctions, will proceed even slower than the Baathist leadership envisaged. Between 2000 and 2002, President Bashar al-Asad was determined to be a gentler ruler than his father had been but military tensions have strengthened the position of hardliners in the Baath party who fear, perhaps correctly from their point of view, that too many freedoms will erode the party's authority.
Apart from the visual and psychological impact of seeing Saddam 'in fetters' that could prove all too dangerous an inspiration for Syrians, there is a growing sense of uncertainty looming as Iraq is showing dangerous signs of an incipient civil war. The certainty of Saddam Hussein's political demise along with that of his party has allowed more Iraqis, now convinced they need not fear his return and reprisal, to take justice in their own hands. Former regime beneficiaries in the north central area of the country between Baghdad and Mosul have attacked those seen to be collaborating with the occupation, while there is increasing fear that those who suffered under the regime, and not all were Shi'a - indeed many high rank Baathists were drawn from the Shi'a - will take their revenge. Should this develop into a outright civil war with the US trying to keep the peace, not leaning one way or the other, Iraq will begin to look much like Lebanon did in the 1980's and Syria played a key role in that war through its support of Amal and then Hezbollah. Syria is still engaged in Lebanon and their Hezbollah has been looking to justify its existence not knowing whether to become a full scale political party and give up its militia. A civil war involving the Shi'a in Iraq could potentially re-kindle Hezbollah's militant aspirations as well as that of their Iranian patrons, a situation that would inevitably draw Syria into the quagmire in Iraq. This is something it has been very careful to avoid, fearing American military and diplomatic reprisals. Not surprisingly, inside observers have noted that even Lebanese critics of Hezbollah and the Syrian presence in Lebanon have been reluctant to support the US occupation of Iraq, the more so, when Damascus is cited as a potential US target. In the New Year such prospects, albeit the worse case scenario, cannot be excluded entirely. There was always a chance that the war on Iraq would draw Syria and Iran into the conflict, or generate additional internal tensions within those countries themselves. In 2004 the evolution of the American occupation of Iraq will be an indicator of political developments in the region as a whole.
Nevertheless, should the United States decide to adopt a more ameanable course of action, Syria's prospects for reform and prosperity might be considerably brighter. As the US calls on Syria to reduce its support for what it considers to be terrorist organizations, it should be even more determined to outline the practical benefits this policy may produce. However minimal in terms of economic impact, Washington's renewed sanctions on Syria do little to inspire confidence in better bi-lateral relations in the near future. The alternative Israeli-Palestinian peace plan put forth in Geneva early in December is far more indicative of the kind of gains that Syria may expect from cooperating with US policy prerogatives in the Middle East. A fair and lasting Syrian peace with Israel would help boost Syrian political and economic reforms, as implied in the previous update, while directing Damascus' efforts to transform Hezbollah into a purely political party. Should the neo-conservatives' influence decline, those that now appear to be overly hopeful prospects could take precedence.
Of course, the as yet undetermined trial of Saddam Hussein and what emerges from it, both on the ground in terms of Iraqis' resistance and revelations about US collusion, the former Iraqi dictator's rise to power and arms acquisition will surely influence the course of US policy in a more or less belligerent direction. Meanwhile, Syria is moving quickly to ratify its cooperation agreements with the European Union and has held talks with Greece and Turkey advocating a nuclear free Middle East. Bashir al Asad has visited President Kostandinos Stephanopoulos highlighting the strong cultural and historical bonds that exist between Greece and Syria as two ancient peoples of the Mediterranean. The event also served as the occasion to highlight cultural activities to promote Syrian culture in Europe noting the strong connections that exist in the Mediterranean. Clearly, Syria is scrambling to secure good ties to Europe having banked its political and economic future on its support.
If political and international issues continue to present considerable uncertainty, Syria has taken relatively significant steps to generate a healthier environment for business and international investment. In its bid to attract increasing European involvement, economic reforms are likely to continue in 2004 even if political ones may be less likely. Already in the summer of 2003, the Syrian President abolished the two laws that severely restrict foreign exchange operations and which had been in place for over 17 years. These laws dating back to 1986 were passed to address a currency crisis and a strong devaluation of the Syrian pound - refer to 'Background' report above - placed a ban on all foreign exchange transactions, the breach of which entailed harsh punishment including jail sentences issued by economic security courts.
The new provisions outlined in decree N°33 says that the detention, transaction and trade of foreign exchange as well as of precious metals and of all other means of payment will now fall under the current and future regulations set by the Ministry of Economy and Foreign Trade (Article 1 of the Law), while breaches of the law will be settled by the normal civil courts. This should provide increased incentives toward increasing confidence in Syria's financial and banking system and favour foreign investment. Indeed, the government formally expressed the hope that the new decree would remove one of the principal obstacles to investment in Syria. Correspondingly, offenders engaged in money laundering and other trafficking operations that typically constitute the black market now risk greater fines and jail sentences if caught. It is interesting to note that the law is designed to appeal to European and especially American concerns. Indeed, the offences that may be prosecuted in terms of the 'money laundering' include: drug trafficking, organized crime, terrorism, weapons trafficking, and significantly, trafficking in weapons of mass destruction, as well as embezzlement of public and private funds and forgery. The government has also shown its willingness to promote a greater degree of private participation in the economy by announcing that a number of companies in the food and beverages sector were now opened for a 'partnership' with the private sector. It should be noted that privatization is still a concept and a term loaded with controversy. Syrian critics of this policy have often noted the problems that occurred in Eastern Europe and the Soviet Union when these divested themselves in a less than transparent manner after the fall of communism, and often to 'apparatchik' former communist party members themselves. As Syria moves toward greater economic liberalization it will be crucial that the government not be seen to favour the Alawite and Baathist elite at the expense of the former Sunni industrialist and land-owning class. The interplay of this ethnic problem in the Syrian political and economic structure will be significant in assessing the effects and success of the reforms.
The future of private engagement in the economy therefore comes down to a question of credibility. The experience of the Soviet bloc is well known and it might be very dangerous politically to pursue that course, while the Baathists' very political legitimacy rests with their ability to provide social services and employment for a growing population. The state still employed over 50% of the population in 2001 and the timing of any sale of important industrial assets will have to coincide with a healthy balance of accounts that will enable the state to absorb the shock of a shift to a more mixed economy. Meanwhile, Syria is concentrating on gradually introducing the institutions to favor the growth of an eventual private sector, even if its future remains uncertain.
In November it was announced that Syria will introduce a stock exchange in 2004. The Economy Minister Ghassan al-Rifai appears to be very keen on its success and plans to oversee the establishment of appropriate banking laws, regulations and a review of monetary policy to avoid the outcome of what he termed a 'stillborn' Bourse. Draft legislation to replace outdated corporate and commerce laws have already been issued and are ideally set to be approved during the course of 2004. This follows the 2003 introduction of a private banking sector. It has been slow to start, but the new laws aiming to promote a greater degree of private initiative should start to have their intended effects by the end of 2004. Some optimism in this regard is that Syria has been able to attract some interest from the Malaysian auto maker Proton to set up a vehicle assembly plant in Syria, which represents the car maker's largest market in the Middle East. The evolution of the banking sector, financial regulations and investment in industry will be some of the key indicators to monitor in Syria in 2004.
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