SYRIAN BANKING & FINANCIAL SERVICES CONFERENCE SPEECHES

 

Keynote Speech: Priorities for Economic Reform in Syria - Towards a politically viable strategy

Peter Young
Director
Adam Smith International

 

Introduction

Syria faces the necessity of implementing substantive economic reform if it is to address its stagnant economy and avoid future economic crisis and consequent instability.  Oil revenues, which have been sustaining an inefficient public sector and weak economic policies, are due to run out.  Other countries are powering ahead under the pressure of globalisation.  Syria has a number of critical advantages in that global competition – its smart and entrepreneurial people, a beautiful country with huge potential for tourism and a superb geographical location for business.  But Syria is not making proper use of these advantages. Syria’s population is expanding fast. In 10 year’s time Syria will have 8 million more people – that’s 4 new Damascuses.  These people will need jobs.

Thus standing still is not an option for Syria.  Continuing although declining support from oil revenues for the next few years allows Syria a short window of opportunity to undertake phased economic reform and avoid a crisis that would result in instability and potential economic and social breakdown. Deeper and faster economic reform is necessary if Syria is to avoid an economic crisis. Stronger commitment to reform and more forceful and faster action is needed.

A broad consensus exists that faster reform is required and many of the elements of such a reform programme have been identified at outline level. However, there is a need to produce a coherent, sequenced and timebound  reform programme that sets out a clear vision for reform over both the short, medium and longer term. 

Yet the question remains of how to design such a successful economic reform strategy in a country where many people are directly interested in sustaining the old economic approach because they believe it serves their own immediate interests.

In other words the key to success is to design and implement a politically viable as well as economically successful reform strategy.

Barriers to economic growth in Syria

Significant attempts have been made to reform the Syrian economy in the last few years and the situation is undoubtedly much better than it was 15 years ago. Nevertheless, a huge amount remains to be done.  Growth is currently slow (at some 2.2% GDP growth in 2005) and unemployment is high and growing, fed by strong population growth, with some 200,000 joining the labour force each year.  Revenue from oil sales, which currently account for some 50% of the budget, will recline sharply over the next 10 years as oil production declines.

International surveys have shown the investment climate in Syria to be extremely poor, with private sector companies suffocated by extensive rules, regulations, permits, licenses and other restrictions, and suffering unfair competition from State-owned enterprises (SOEs) and private enterprises granted special privileges. Unless the private sector is freed from these controls the growth that is essential to absorb unemployment will not occur. We need to privatize the private sector.

Here are some of the key investment climate problems:

The result of this very poor investment climate is extremely low productivity by international standards (much lower than India, Bangladesh and Egypt, for example).

The public sector itself is a major barrier to growth. It consumes resources that would otherwise be available to the more dynamic private sector. The subsidies that are directed towards it could be used instead to invest in Syria’s future. The large numbers of excess and unproductive staff, both within the SOEs and the public administration could instead being working to build a stronger Syria. The monopolies held by a number of these inefficient SOEs hold back the whole economy.

The Syrian civil service is also in urgent reed of reform, as it is currently unable to recruit and retain persons with the skills necessary to manage complex reforms. It is also heavily overmanned.

Reform to date
Reforms to date have been significant but insufficient.  They have tended to be hesitant and partial, and to take a very long time to design and implement.  The quality of new legislation is often poor, with out of date international models being used rather than international best practice. The quality of reform implementation has been very patchy and thus their effect has been diluted.

Financial sector reforms have been far-reaching and it is encouraging that private banks and insurance companies are now operational, and private moneychangers soon will be.  However there is perhaps undue emphasis on financial sector reform as the solution to Syria’s difficulties. An inefficient and uncompetitive financial sector is just one of the barriers to growth. Other initiatives, such as freezones and deregulation of the tourism sector are clearly helpful but do not provide a complete solution.

A stronger commitment to co-ordinated action across a much wider field of reforms is required, combined with much more effective implementation.

Towards a politically viable strategy
Many people in Syria have a vested interest in maintaining aspects of the status quo to serve their own short-term interests and preserve their positions. These include:

Of course it is the long-term interests of these groups that effective reform happens, as they would suffer too in a general economic collapse. However their short-term individual interests lead them to oppose reform.

A politically viable strategy should avoid short-terms threats to the position of these groups but instead try and convince them of the benefits to all of economic growth as opposed to economic collapse. After all if the cake gets bigger there will be more for everyone. Syrians will make more money out of an expanding competitive economy rather than a small monopolised one.

An outline reform programme
Syria should try and create a new economy within the old economy.  Once the new economy is large and strong enough, the old economy can be more easily dissolved and absorbed into the new one. Until and unless there are real jobs for people in the old economy to go to they will undoubtedly resist reform. Here are some proposals for a potential first phase of the reform programme:

It will be difficult to get all organisations in Syria to comply with new modern laws and regulations, so a modern set could be available to those who choose them on a voluntary basis.  For example, new employment, company law and accounting regimes could be created that companies could choose to adopt.

This would mean, for example, that companies could choose to hire new workers under a new employment code that permitted easy dismissal. This would not threaten the interests of existing workers.  Companies could choose to adopt a modern corporate form, and could choose to produce accounts to international standards, whereas old companies would not be forced to change. Other incentives could be given to adopt the new rules, such as exemptions from regulatory requirements.  Firms not choosing to adopt the new standards could be given a number of years to make the transition.

Small businesses should be exempted from large parts of the regulatory burden, and no longer require a wide range of permits and licenses. They could also exempted from many provisions of employment legislation. 

While privatization of the tens of poorly performing state-owned commercial companies would clearly be preferable, it is not essential for the success of economic reform in the early stages.  Attention should be focussed on those state enterprises whose inefficiency drags down the rest of the economy.  This means primarily the infrastructure enterprises such as telecommunications, ports and electricity. This will not be easy, but the rewards for the economy as a whole will be high.

Syria at present has the lowest internet penetration of any country in the region. An effective e-economic infrastructure is a critical component of any modern economy. This is best installed and run by competing private sector firms with the Government taking the role of regulator.  Creating effective independent regulatory institutions should be a high priority.

Public sector enterprises have monopolies or quasi monopolies in cement, sugar-refining, fertilizers, oil refining, mineral water, electricity and telecommunications, amongst others. These monopolies should be removed allowing others to challenge them, although this process will take time because of the levels of investment required.

While holding back from full privatization in the first phase of reform, SOEs should be converted to a modern corporate form and efforts made to improve their governance and efficiency. While this should not be expected to have any transformational effect on performance, it should at least introduce greater transparency and help prepare for the next phase of reform.

The percentage of students in tertiary education is the lowest in the region as is the percentage undertaking business studies. Skills such as knowledge of English will have much greater importance as Syria competes more on the global economy. Syria should encourage the development of modern privately run training facilities, possibly through a voucher programme, and should seek to modernise its under-funded public sector  training institutes .

Syria critically needs a cadre of highly capable technocratic civil servants to help implement the necessary economic reforms. It is doubtful whether the current public administration system can supply enough of those people and overall public administration reform is a difficult and time-consuming process that will experience substantive resistance. In order to support the reform process an elite senior executive service of more highly paid civil servants recruited and promoted strictly on merit could be introduced to help staff the key institutions and processes. This would supplement the senior levels of the current senior civil service which could then be reduced through attrition over time.

Such an elite group of technocrats will be required not only to drive the reform process but also to staff new modern regulatory bodies.

Analysis suggests that many new laws while well-intentioned fall short of international best practice and only partially address the problems they are intended to solve. Additional support should be given to legislators and policy-makers to understand and access international best practice. The reform apparatus at the centre should be strengthened and provided with greater access to high quality specialist advice. A comprehensive reform plan should be adopted as a national vision and responsibilities for allocating it clearly allocated.

Mrs Thatcher had a catchphrase that she repeated when arguing for reform in Britain – “there is no alternative.” The same is true in Syria, but all Syrian citizens need to be convinced of it and the reasons for the specific measures that are required.  A major and sustained reform communications effort should be launched from the centre to gain support for the comprehensive reformprogramme, once it is adopted.

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