The Collapsing Syrian Economy

by:steven plaut

Does the Syrian economy permit it to maintain its existing military might, gain new skills, and acquire new means to threaten its neighbors? Or is it in decline? Much economic evidence, ranging from living conditions to macroeconomic data, suggest that Syria is heading in the same southward direction, in a manner very similar to that of the Soviet bloc a decade ago, and for roughly the same reasonsSyria, a central actor in many of the Middle East’s dramas, is having economic troubles that are as consequential as they are unnoted. President Hafiz al-Asad has so adeptly ruled his small country for nearly three decades that Middle East analysts by and large ignore his economy. Yet gravity and physics also apply in Syria, and an understanding of this basic factor is crucial to understand Syrian politics and society. It is also essential for anticipating future Syrian behavior, both domestically and in relation to such countries as Turkey, Lebanon, and Israel

A Terminal Case of Syrian Totalitarianism

Syria is one of the last surviving communist countries—communist not formally1 but in its economic structure. The Ba‘th Party plays a role similar to that of the Communist Party in the Soviet Union and Syria’s economy resembles that of Russia before perestroika and glasnost. Its economy is centrally planned, rigid, backward, impoverished, and dilapidated. An all-powerful central planning bureaucracy fixes prices and owns the bulk of industry in the country. As in the Soviet Union, Syria operates under five-year plans that are often formulated two or three years into the plan’s five years. Also similar is the fact that the military-political elite ultimately operates the Syrian planning apparatus. The International Monetary Fund (IMF) says that Syria has the worst array of controls to dismantle of any Mediterranean economy.2 The central government controls resources, operates large governmental monopolies, serves as the main employer (40 percent of the labor force), controls all of the imports and exports of the country, owns all banks and insurance companies, regulates every financial and most commercial transactions, owns all big industry and much of the small industry, controls ordinary wholesale and retail trade, and controls agricultural markets. The Economist Intelligence Unit describes Syria’s financial services as “poor, unsophisticated and a serious obstacle to economic development,” and reports that most Syrian businessmen use banks in Lebanon and Cyprus to do business.3 Nationalized manufacturing continues to be mismanaged and money-losing, with gross over-employment and featherbedding. According to one estimate, in the year 1983 alone, nationalized manufacturers lost 2 billion Syrian pounds.4

Syrian economic communism differs from that of the former Soviet countries in only a few aspects, the most important of which is that the Syrian elite has not nationalized and violently collectivized agriculture, thereby avoiding the mass famines of Soviet experience. This reticence probably results from the ‘Alawi elite fearing the results of antagonizing the Muslim peasants who regard them with deep suspicion in any case; it may also have to do with the concentration of ‘Alawis themselves in agriculture and the reluctance of the ruling elite to impose collectivization on its own people (much as Soviet Georgia remained the least collectivized Soviet republic under Stalin)

Also important is that the Soviet-style regimes were imposed on countries technologically far more advanced than Syria. The Soviet Union after World War II had large numbers of engineers and technicians in its population; in the rest of Eastern Europe, communism was imposed on countries that had large industrial bases before World War II. Syria, in contrast, has a population with Third World levels of technical skill and education (where the country has yet to open its first business school),5 making it more comparable to Cuba or Cambodia than to the European communist nations

This said, Syria has successfully outlasted the Soviet regimes in Europe, and it has done so mainly because it has benefited from two bits of luck—hydrocarbons and Lebanon. Syria has become a modestly large producer of petroleum, with oil exports providing 70 percent of export earnings. Without these, Syria could not have survived economically intact to this point. But petroleum luck can only carry the country so far;6 its output has already peaked and is now declining, its oil-field equipment is deteriorating due to foreign exchange problems, and its refinery capacity is shrinking. As domestic use of petroleum increases, the Syrian production is ever more being consumed; the World Bank estimates that in the foreseeable future (by 2020) Syria will become a net oil importer.7

The drop in oil prices in recent years has hurt the Syrian economy in at least two ways.8 First, petroleum produces the bulk of Syria’s earnings and these have plummeted along with oil prices and now also with dropping production. The average price Syria gets for a barrel of its oil dropped 35 percent in 1998 alone, to $12.75.9 Syrian petroleum production peaked in Syria in 1995 at about 580,000 barrels per day and has been diminishing since. The purchasing power of Syrian exports in international markets dropped by 50 percent between 1990 and 1995. Falling oil prices hurt a second way, too, in so far as the Syrian balance of payments depends on remittances from Syrians working in oil-exporting countries. Private remittances to Syria were $901 million in 1979 but $375 million by 1990. Transfer payments received by Syria have been running at about $600 million per year, almost all of them private transfers remitted by Syrian workers employed overseas.10 Aid and loans to Syria from Gulf countries also obviously depend on the state of the world petroleum market. (Syria is thought to have received $2.2-2.6 billion in aid in the early 1990s— mainly from Kuwait and the Saudis—for its role in the Kuwait war.)11

The other piece of economic luck has been Lebanon. The Syrian army’s Soviet-style gobbling up of Lebanon, with a level of economic production (the gross domestic product, or GDP) four times greater than Syria on a per capita basis, bought a brief economic reprieve. To an extent, Lebanon plays a role for Syria such as Hong Kong does for communist China, serving as the steam valve releasing pent-up economic pressures at home, allowing entrepreneurs to bypass central planners and socialist bureaucracy.12 Lebanon offers unregulated markets and trade that is largely free; it also serves as the arena of employment for a million Syrians, about a fifth of the entire Syrian labor force. Indeed, with an the unemployment rate in Syria estimated at 12-15 percent, and underemployment probably worse, the Lebanese economy offers the only alternative to starvation for many Syrian families

But Lebanon, too, may turn out to be but a fleeting shot of economic Viagra for a Syria well on the route to impotence. First, Syrian control in Lebanon has been tightening, and if this continues, the Lebanese goose will start laying fewer golden eggs. Second, Lebanon is also experiencing economic deterioration, having stagnated for several years with growth rates below population growth rates. The real growth rate for the Lebanese economy in 1998 was a fourth of what it was in 1994.13 This results in part from decades of civil war and then military occupation, but is also a purely economic problem. The current account deficit of Lebanon’s balance of payments (approximately the excess of its imports over its exports) has been running at the incredible level of 35 percent of Lebanon’s GDP, one of the largest such black holes in the world. Lebanon’s external debts tripled between 1994 and 1998. The government fiscal deficit has been running at between 17 percent (1998) and 26 percent (1997) of GDP, magnificently illustrating the economic doctrine of the “curse of the twin deficits” familiar to many in the West.14 The government’s internal debts have also been rising so rapidly that the country has been going deeper into hock (at a pace relative to its GDP) at one of the fastest rates in the world, and these debts are larger than Lebanon’s GDP. An international debt rating company downgraded Lebanon’s governmental debt in mid-1999 to BB-,15 making it a form of junk bonds

Syria faces the same dilemma confronted by the European communist regimes before their collapse. This includes a large and growing illegal “parallel economy.”16 While economic survival requires large-scale liberalization, privatization, deregulation, and opening of the country to foreign investment and influence, such reforms mean dismantling totalitarian rule. The Internet makes this dilemma even more acute. Despite its periodic trumpeting of new programs of infitah (economic openness), and the sponsorship of Bashshar al-Asad, the president’s son and heir-apparent, the regime has not allowed any serious moves in this direction; at this time, access to the Internet is strictly controlled by the government to no more than 1,000 carefully selected individuals—and even they are subject to censorship.17 The infitah programs consist of cosmetic reforms reminiscent of Lenin’s New Economic Policy (NEP) (restricted to such things as allowing Western companies to open hotels in Damascus); Asad’s idea of privatization is the private sector setting up joint small projects in partnership with the government—with the regime always in control

Living Conditions in Syria

How the average Syrian lives gives a fairly accurate picture of the country’s level of development. A variety of sources paint a picture of a country where living conditions are comparable to those in the lower reaches of the Third World

If the health statistics published by the Syrian government are to be believed (and there are reasons to think they paint an overly rosy picture), the health situation in Syria is fair relative to much of the developing world. Life expectancy is in the upper 60s, which is below the industrialized countries, but above most of the Third World (about 66 for males and 69 for women, although some sources, including the World Health Organization, put it a bit lower.)18 For Israel it is 75 for males and 79 for females. Infant mortality is about 33-45 per thousand, depending on the source, about the same as Turkey. (In Israel it is 8.) Child mortality through age five is 47 for males, 33 for females, resembling the rates in poorest Africa.19

Indications of medical infrastructure reveal how underdeveloped Syria is. The proportion of babies who are born in any sort of health facility is only 37 percent, one of the lowest rates in the world outside sub-Saharan Africa.20 (For many less developed countries, the proportion is over 90 percent.) Syria’s rate is behind that of Kenya and Burkino Faso, but a bit better than Uganda’s. Only 33 percent of mothers have any medical care during pregnancy, and only 61 percent have care during delivery. The proportion of infants receiving antenatal health care is only 13 percent, again one of the lowest outside Africa.21 Maternal mortality rates (in child delivery) are 180 per 100,000 in Syria (compared with 7 per 100,000 for Israel)

The World Health Organization puts the number of hospital beds at one bed per 832 Syrians,22 or about the same as in Bhutan; Botswana has twice as many. (The comparable number in Israel is one per 165.) The same source gives the number of physicians as one per 1,221 Syrians, comparable to the lower ranges of the Third World. (In Israel the number is one per 206 people.) Syria has just 10 nurses, 3 pharmacists and 3 dentists per 10,000 people. The distribution of health facilities is highly inequitable, with some areas having almost none.23 Recall that life expectancy and morbidity rates appeared fairly good in the Soviet Union before it collapsed; this was then followed by one of the most rapid peacetime declines in health since the great plagues

Food production has fluctuated sharply, together with the vagaries of Syria’s central planning system and the weather. Droughts are frequent and severe. A drought in the winter of 1998-99 is thought to have resulted in a disastrous harvest and food shortages. In 1996-97, food output dropped 11 percent in a single year.24 Despite a balance of payments crisis, the government had to import barley (for the first time in history).25 Official statistics state that per capita crop production dropped about 20 percent between 1986 and 1993. Per capita livestock production fluctuates but the trend line has been steady since 1996. The trend in per capita cereal production also seems steady.26

This said, there are indications that Syria will find it increasingly difficult to feed itself, in part due to growing ecological disaster. Only about 28 percent of Syria’s land area is used for farming. The Food and Agriculture Organization reports that while population is growing at 3-3.5 percent per year, arable farmland dropped by 14 percent nation-wide in Syria between 1980 and 1996, probably due to urbanization. Syria also lost 11 percent of its forested area between 1990 and 1995. Inflation in food prices has been severe in Syria, with reported food prices rising by a factor of about three between 1987 and 1994. This was higher than the Syrian official estimate of general price inflation, and even it understates the true dimensions of food inflation and shortages, because many prices used to compute food inflation are artificial

As an indication of the level of agriculture technology, in all of Syria in 1997 there were 160 milking machines and 4,923 harvesters. True, the country had 87,000 tractors but even impoverished Cuba (with a population about two thirds that of Syria) had 78,000. Only about 20 percent of farmland is irrigated,27 a very small portion, and 99 percent of all farmed land is dependent upon winter rains, this in a country with rainless summers and frequent droughts. Food imports have been growing, rising from $725 million in 1990 to $980 million in 1994 (down a bit to $845 in 1996, probably due to foreign exchange shortages).28 The World Health Organization estimates that 28 percent of Syrian children suffer from stunted growth largely due to malnutrition, with 16 percent suffering moderate stunting and 12 percent severe stunting.29

The portion of the labor force engaged in Syrian agriculture has remained about steady at 30 percent for many years, indicating a sharp slowdown in industrialization

In other areas of life, Syria is an underdeveloped Third World backwater. There are eight newspapers in Syria with a total daily diffusion of 261,000 as of 1994, or about 18 per 1,000 people.30 These numbers put Syria at the same level as Yemen and a bit behind Botswana. (The comparable number for Israel is 281.) Syrian non-daily newspapers have a circulation of 4 per 1,000 people, and magazines are 13 per 1,000. Syria imports $600,000 worth of books a year; Israel imports $19 million.31 Syrians consume 117 metric tons of newsprint per year per 1000 and 884 metric tons of other printed material, both down by three-quarters compared to Syria in 1980. The comparable numbers for Israel are 27.7 million tons of newsprint and 29.3 million metric tons of other printed materials.32 In Syria there are 69 radio receivers per thousand people as of 1998, resembling the rate in Indonesia; in Israel there were 210. There were 69 televisions in Syria per 1000 people, 291 in Israel.33 In 1994 there were 5,000 fax machines in all of Syria; by comparison, there were 140,000 in Israel.34 Syria had 6.3 telephones per 100 people in 1995, the same level as Tonga and a bit below Uzbekistan or Kyrgyzstan or Micronesia. (Israel had 41.8.)35

Interruptions in water supplies, even in the capital city, are reported to be common, especially in the summer. Twenty-two percent of rural Syrians have unsafe drinking water; there is adequate sewer infrastructure for only 75 percent of urban Syrians, and 35 percent of rural.36 Electricity consumption per capita is 1,144 kilowatts per year (as of 1995), well within the lower range of the Third World.37 (With a bit over a third of Syria’s population, Israel uses twice as much electricity.) Electricity supply is faulty, with long blackouts continuing for hours quite common, especially in rural areas. Electricity production is about the same as in Cameroon, half that of ex-Soviet Georgia, and less than production in either Guatemala or Armenia

There were 166,500 private cars in Syria in 1995, a bit less than Malta (with a population of 345,000) and about the same as Moldova.38 That works out to a per capita ownership lower than in Zimbabwe. By comparison, Israel has 1.1 million cars.39 Forty percent of cars now in use in Syria were manufactured before 1980.40 With just 224,000 commercial vehicles (as of 1995), Syria also has fewer of these than Israel, despite its much larger population. Of the 40,480 kilometers of highway in the country, 31,170 or about three-quarters are unpaved as of 1997. Only 866 kilometers are expressways.41 Of the 104 airports in the country, more than three-quarters (or 80) of them have unpaved runways.42 Rail passenger service in Syria has all but collapsed, dropping by 62 percent between 1991 and 1995, probably due to deteriorating capital equipment. Rail freight has also dropped by 18 percent. The civil aviation sector in Syria as measured by passenger miles is just slightly larger than the same in Namibia or Zimbabwe or Kazakhstan

Illiteracy is still widespread in Syria. UNESCO places total male illiteracy at 10.2 percent, rising to 17.3 percent in rural areas. But others put it far higher: the United Nations Educational, Scientific, and Cultural Organization (ECOSOC) for Western Asia puts it at 29 percent.43 For females the illiteracy rates are estimated by UNESCO at 30.7 percent nationally with 39.4 percent in rural areas. For women over 65 the illiteracy rate approaches 100 percent. Half the women in the 20-24 age group nationwide are illiterate.44 The Statistical, Economic and Social Research and Training Center for Islamic Countries (SESRTCIC) database for Islamic countries puts the overall illiteracy rate in Syria at 32 percent for the entire population (1992). The comparable illiteracy rate in Zimbabwe is estimated at 15 percent

School attendance in Syria is spotty and short; UNESCO estimates the average Syrian spends 9.3 years in school, just above Lesotho. The student-teacher ratio in Syrian elementary schools is 24:1, compared with 16:1 in Israel. In secondary schools, the student-teacher ratio is almost three times Israel’s.45 The number of college-educated Syrians per 100,000 population is 1,559 for males and females combined, 1,814 per 100,000 for males only. These figures are in the same ballpark as Azerbaijan and Mexico, and slightly ahead of Mongolia.46

All the libraries in Syria combined held an estimated 150,000 books as of 1992, about the same number as in my (admittedly well-endowed) high school library in Philadelphia. Of these, a total of 10,000 books are in college libraries. (The comparable figure for Israel is eleven million.) The entire college library system of Syria consisted in 1993 of 250 meters of bookshelf (about the same as in a small Barnes and Noble branch store). By comparison, Romania’s books take up 309,000 meters. All of Syria imports about $600,000 worth of books a year, about the same as Senegal or Mauritius

In science, Syria has yet to get started. Syrians applied for a total of 55 patents in 1995, behind Guatemala an El Salvador, about the same as Botswana.47 The comparable number in Israel was 4,425. Emigration of skilled Syrians and technicians is thought to be considerable.48

How Big Is the Syrian Economy

Ultimately the ability of the Syrian regime to survive, compete and to maintain its military machine depends on its ability to produce; the size of Syria’s economic output has economic, political and strategic importance

Syrian government figures put GDP in the ballpark of a trillion Syrian pounds (S£). What this means is difficult to say, and for two reasons: the Syrian government, to put things diplomatically, uses creative and non-standard methods of measurement, to the point that the statistical abstract and other official materials should be catalogued on the fiction shelves of libraries.49 Second, it is not clear how to translate that one trillion pound number into something meaningful, such as a dollar equivalent. Currency conversion is so difficult because there is a world of difference between the official Syrian exchange rate, at S£11.225 to the dollar, and the actual value of the Syrian pound. This 11.225 number has no meaning at all, but results from an arbitrary whim of the Syrian regime, which could have set the number at any value whatsoever. Even the Syrian government recognizes that the 11.225 number is meaningless (virtually no actual transactions between Syrian currency and dollars take place at that rate) and uses a variety of other exchange rates: 26.6 Syrian pounds per dollar is the “blended rate” used by the United Nations and diplomatic missions; 42.0 is the “neighboring country rate” that applies to most state enterprise imports; 48.0-52.0 is the offshore rate.50 Revealingly, official Syrian government publications routinely rely on the neighboring country rate

The best indication of what the Syrian pound is worth comes from the black market exchange rate for the Syrian currency in Beirut, where it goes for about 55 to the dollar,51 and even that may understate the true value or market-clearing exchange rate for Syrian currency

Most analysts and outside observers have long replaced the 11.225 conversion rate with a higher number—but not all. The International Monetary Fund prints the official rate on its charts, apparently as a courtesy to Damascus. Curiously, the Central Intelligence Agency (CIA) does likewise (in its Factbook and on its web site). Using the 11.225 rate finds the Syria GDP valued at a gargantuan $106 billion (slightly larger than Israel’s) and a mind-boggling level of per capita income of $6,600. With an average Syrian family consisting of seven souls, this translates into a level of $45,000 per household, making Syria a veritable Xanadu. However, the CIA is off by a factor of at least five and possibly ten.52 This is true to form; the CIA in the 1980s made similar errors in its evaluation of the Soviet Union, and in part for the same reason—taking Soviet economic data at face value. It was one of the last groups of people on earth to recognize the implosion of Soviet communism and is on track to do the same for Syria

Other analysts are more awake to reality. The Washington Post puts Syria’s per capita GDP at less than Egypt’s, which is around $700 per year.53 The World Health Organization puts it at $696-785. The Economist Intelligence Unit puts Syria’s GDP per capita at $837 in 1999 and predicts it will drop to $775 in the year 2000. The SESRTCIC database puts it at about $1,250. At the high end, the U.N. Economic and Social Commission for Western Asia puts it at $1,289. A U.S. congressional delegation in April 1999 found that the GDP had dropped significantly after 1995, from $1,050 per capita to $900, with a 4 percent real decline in 1995 alone. After visiting Syria, it reported on the growing signs of an economic collapse in that country. In any case, the true value is nothing even close to the CIA’s estimate and is only a tiny fraction of Israel’s, possibly even behind Egypt’s; Syria’s is an underdeveloped impoverished Third World economy

Two final facts: First, Syrian wages are distributed in a highly inequitable way, with the median wage (as opposed to the mean or average, which is much higher) below $100 a month.54 Second, one authoritative source, The Economist Intelligence Unit, estimates that Syria’s GDP underwent a real decline of 1.5 percent in 1998 (which translates into a decline in per capita GDP of 5-6 percent when population growth of about 3.5 percent per year is factored in) and it expects negative growth to continue.55

Foreign Investment

The regime’s policy of insisting that Syrian enterprises convert hard currency into Syrian pounds at the official rate goes far to explain the lack of foreign investment; it amounts to a confiscation of some 80 percent of the foreign-exchange value. These realities explain why the new investment law passed with great fanfare in 1991, “Law Number 10 for the Encouragement of Investment,” has had such poor results, for it still required foreign enterprises to convert 25 percent (instead of the previous 50 percent) of their foreign earnings to the government at these confiscatory rates. (It would be as if the United States forced exporters to sell British pounds to the U.S. Treasury at 10 cents per pound.) This means that 20 percent of export revenues are effectively gobbled up by the government right off the top, before deducting other costs and taxes. And at the time of this reform, the gap between the official exchange rate and the Beirut black market rate widened, meaning that the levels of confiscation of export earnings probably did not change very much after this reform was introduced. This also explains why export earnings are unlikely to spurt any time soon

The new law also allows the creation of joint stock corporations for the first time since they were banned altogether and totally nationalized by the Ba‘th in its early days. Syrians overseas can now invest in Syria, as can overseas Arabs (investments by non-Arabs are discouraged in the law and are more thoroughly controlled)

Very few investors have jumped on Asad’s investment welcome wagon. (Much of the manufacturing and industry in Syria is crony capitalism, enterprises run by Asad’s kinsmen and close colleagues.) Every investor in industry needs governmental approval to build a factory or undertake any investment project. A Higher Council of Investment (headed by the prime minister) must approve all investments. Business taxes until 1991 were generally 90 percent of income or higher;56 thus, total effective taxes on exports would be well over 100 percent (unless they get special breaks, for example, by having crony connections)

Western investments have been almost entirely in the oil sector, with a trickle into tourism. The government has—a bit desperately—announced with great fanfare a plan to promote international tourism to Syria. A few new hotels have been constructed, including a Damascus franchise of Le Meridien Hotels. But Club Med has not responded to Asad’s call, and the jet set inexplicably refuses to swap the Riviera beaches for those of Latakia. Even though tourism has risen a bit, due mainly to Gulf Arabs, tourist spending has dropped.57

Balance of payments data for Syria may be a bit more reliable than GDP data, as they need to be crossed in theory with data coming from other countries. But here, too, the numbers are suspect. It is doubtful that data on military purchases and sales are included in the tables, and surely the notorious Syrian traffic in illegal drugs is missing. Other parts of the data are also suspect. Eliyahu Kanovsky reports that Syrian data on imports from and exports to Russia are inconsistent with Russian data on the same things. Imports to Syria from Russia were put at 77-85 percent (they vary by year)—higher according to the Soviets than according to Syria. Similar discrepancies for Syrian trade with Egypt can also be found.58

Syria’s export pickings have been getting slimmer. In 1986 the balance of payments went into one of its deepest crises when GDP dropped by 5 percent in real terms and Syrian foreign exchange reserves fell to $357 million (about one month’s imports). In September of 1986, Law No. 24 was passed with severe penalties for illegal foreign exchange dealings. New import restrictions were also imposed. The balance of payments has been “in crisis” ever since

Official statistics have recent Syrian price inflation in the upper teens per year, but there are reasons to suspect true inflation is far higher.59 The Syrian money supply grew by 30 percent in 1998 alone, indicating a hyperactive money printing press.60 Many foods are rationed and many prices set artificially by the state (which calls this “social pricing”). Taxes in Syria cover only part of the fiscal budget, the proportion officially varying from 46 percent in 1980 to 85 percent in 1998, with the remainder covered by the monetary printing press. The internal debt of the government has grown rapidly, increasing by 32 percent per year on average between 1975 and 1983. What the actual underlying inflation has been, what prices would be if controls were lifted, is anyone’s guess

Foreign Debts

The Economist Intelligence Unit correctly characterizes Syria as “severely indebted,”61 for the country’s outstanding foreign debts amount to approximately $22 billion, and are growing at about $1.0-1.5 billion a year. The bulk of these debts are in default, in particular the debts to Russia, thought to be about $10 billion. Much delinquent Syrian debt is owed to Germany (the heir to East Germany); that Syria is in default on this debt has precluded any lending to it by the European Investment Bank, which otherwise would be a potentially major source of funds. The current debt level is equal to about five and a half years worth of Syrian export earnings; just paying the interest service on this sum of money would take up perhaps a third of Syria’s export earnings. Syria has been shut out of all international banking and financial markets and must conduct virtually all of its trade on a cash-on-the-barrel head basis. Russia and others refuse to sell Syria goods except on a cash basis without trade credits; only a few Arab states are willing to lend cash

Given the large size of Syrian households, these debts translate into an outstanding foreign debt burden of about $11,000 per Syrian family. For a family in the West this would not be particularly onerous, but in a country where per capita consumption is probably below $600 per year and median consumption far lower, this constitutes an extremely severe handicap. These debts may in fact be twice as large as Syria’s GDP when the true value of the pound is taken into consideration

Syria’s debts to banks in the developed world62 are about $480 million as of late 1998. Most other debts (besides the huge ones to Russia) take the form of trade credits, with under $100 million in loans outstanding from multilateral agencies such as the World Bank and IMF (which have for years refused to do business with Syria). Syria was tossed a few scraps by the Arab, European, and Japanese for standing by Kuwait and the West against Iraq during the Kuwait war ($2-2.5 billion may not sound like scraps, but it is about a week’s worth of production for Israel)

The high level of debts is accompanied by capital flight, as Syrians protect their savings from a ravenous regime by stashing them overseas. No official numbers are available but one indicator may be the “errors and omissions” item in the Syrian balance of payments statistics. Such an item in balance of payments tables captures movements of foreign exchange not picked up or reported elsewhere; macroeconomists conjecture that this item signals people smuggling their savings overseas. According to the United Nations Statistical Yearbook, the unexplained foreign exchange flow for Syria in 1995 (the latest year with U.N. data) was an outflow of $1.4 billion, over a third of the country’s entire foreign exchange earnings that year.63 In 1994 the similar number was just under $1 billion.64 The Economist Intelligence Unit put this at $173 million in 1996 and $186 million in 1998.65 Between 1992 and 1997, Syrian borrowings appearing in its balance of payments summed to about $7 billion; it lost foreign exchange assets over the same period in the amount of $4.7 billion.66


Even if the Syrian economy were in fine shape, the country would still have deep troubles. It is a totalitarian state. Its dictator is sick and old, and there are serious doubts as to the ability of his son and anointed-heir to continue his legacy. The ruling class consists mainly of a small and despised ethnic minority (the ‘Alawis). It is a pariah country due to the extensive involvement in terrorism and drugs trading. It is on poor terms with all of its neighbors (except the one it occupies). Its Russian-supplied military equipment is rusting even as it becomes increasingly obsolete. It is backward technologically and has yet to introduce credit cards, cellular phones, or a stock market.67

This picture becomes truly devastating when economic yeast is added to the dough. The Syrian economy is an impoverished, underdeveloped, dilapidated mess, where Syrians enjoy lifestyles in many ways similar to or below those in the least developed parts of the planet. “Deterioration is evident everywhere,” says a congressman who recently visited the country. “When I went from Syria to Jordan, I felt like I was going from Nigeria to Switzerland.”68 If Syrian currency were traded on any world market, George Soros would be shorting it. Syria is a technological backwater, a country largely enjoying pre-industrial standards of health, education, and consumption. It has begun to implode to the point that even a state-controlled paper called the prospects for the economy gloomy.69 The only way to avoid the continuation of this implosion is through wholesale liberalization of markets and society, but Asad and his junta know that steps in this direction are likely to consign him, his family, and his entire ‘Alawi community to the dustbin of history


The impoverishment and lack of development not only hold the potential for increasing Syrian political instability, but they also seriously constrain the ability of the regime to acquire armaments and make serious trouble abroad. Various sources report a decline of morale in the Syrian military, resulting at least in part from the fact that it operates aging Soviet-era equipment that often are missing spare parts. A Syria suffering diminished agricultural capacity and greater dependence on water flowing from Turkey may be a Syria less willing to risk provoking its neighbor to the north. An economically weak Syria may be one that is less prone to a variety of forms of misbehavior in Lebanon, vis-à-vis Iraq, and beyond. And economically-induced behavior modification may be possible, perhaps along the lines of 1990-91, when the prospect of aid helped induce Syria to cooperate with the allies against Iraq. More generally, economic vulnerability makes Syria potentially more susceptible to economic pressures and sanctions, including those coming from the United States, Europe, and Turkey.

A Syria whose economy is contracting may be one that can be deterred by an Israel willing to engage it in an economic race, or—more specifically—an arms race. This has the clear implication that Israel need not hurriedly accommodate Syria. If anything, it should sit back and await Syria’s collapse to proceed, for the economic situation is getting worse with time. As with the Soviet Union, there is every reason to believe that Syria can be defeated economically, without military confrontation. It can simply be allowed to collapse under its own economic dead weight. Its collapse can be accelerated by imposing additional economic burdens upon it, much as the Cold War’s arms competition under Reagan and Bush did to the Soviet Union

Oddly, the international consensus on Syria reaches quite the opposite conclusion, worried as it is that if Israel does not reach a deal soon with Syria, a unique chance may be missed. For example, after meeting with Syria’s President Hafiz al-Asad in June, former Secretary of State James A. Baker III declared that “there is, indeed, a window of opportunity now” and he warned that it was unclear how long the opportunity would remain, an allusion to the fact that Asad is elderly and sickly.70 The director of Israeli Military Intelligence, Maj. Gen. Amos Malka, visited Washington and told senior administration officials that Asad wants a peace treaty with Israel to assure a smooth transition to power for his son Bashshar. In Israel itself, every major contender for prime minister in the elections of May 1999, and most of the competing parties seeking parliamentary representation, ran on platforms stressing their plans for reaching a quick accommodation with Syria. They promised when elected to seek an accord with Syria that would allow full Israeli redeployment out of Lebanon, followed by rapid progress on a settlement about the Golan Heights. And, indeed, among the very first statements by Israel’s new prime minister, Ehud Barak, was a commitment to accelerate progress on the Syrian track, widely believed to mean a return of the entire Golan Heights to Syria. By July 1999, Barak and Asad were sending messages to one another that were sounding nearly affectionate.71

But a rush by Israel to reach agreement with Asad makes about as much sense as the United States rushing in 1989 to reach agreements with the Soviet Union. If anything, the present is probably the very worst time strategically to strike a deal with Syria because with each passing year Syria will be less capable of feeding and arming itself, and more susceptible to outside economic threats and pressures from the West. Israel should now be in the business not of making concessions to Damascus but of imposing additional economic burdens on it by strengthening Israel’s military position. Western states can help this by imposing economic sanctions. Together, this could lead to a collapse of the totalitarian regime in Syria, and that in turn would redraw the strategic map of the Middle East, most likely in a direction that would benefit Syrians, Turks, Jordanians, Israelis, and everyone else

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