Economic Development in Syria

Crawling towards a Market Economy

Syria would have to liberalise its economy swiftly in order to avert collapse. But the reformists are hampered by the rusty structures left behind by 40 years of socialism. Gabriela M. Keller reports

Advertisement for Syriatel in Damascus (photo: Larissa Bender)
Experts fear that the speed of economic reforms is not enough to brace Syria for globalisation

​​The masses move sluggishly through the souk in the Old Quarter of Damascus. Business has been done in this dense maze of narrow streets for centuries and the market remains an important hub of the Syrian economy to this day.

"Import, export; it has all become much, much easier. If I order something in China today, it will be here in the shop in twelve days," says a dealer who sells 3,000 types of textile borders from Syria, Europe, and the Far East in his little 3-square-metre shop from where he also supplies businesses in Jordan.

That being said, the dealer, who wishes to remain anonymous, explains that there are embargoes on some goods, while on others the duties are so high that it is not worth importing them. This, he continues, is evidence of that fact that Syria has not got a free economy. "We dealers are waiting and hoping for further reforms."

If statements made by the president are anything to go by, the liberalisation of the market is on the way. After 40 years of socialism, Bashar al-Assad announced last year that the economy would be transformed into a market economy. It goes without saying that the intention is that the political order will remain unchanged.

Privileges for the upper class

Syria's economy is controlled by a few powerful families. These clans have access to major orders, monopolies, lucrative licenses and are not, therefore, interested in reforms. Moreover, state patronage has proved a reliable way of safeguarding power. As long as the upper class retains its privileges, it will support the regime.

Moreover, ever since Syria was put under pressure from abroad two years ago, al-Assad has emphasised on several occasions that "security" is now the country's top priority. In short, any opening up that could pose a threat to the stability of the regime will be put on the back burner.

According to an expert from diplomatic circles, this is first and foremost a political move. However, the same expert admits that in terms of the economy "the reforms have almost come to a complete standstill."

Meanwhile, the economy is teetering on the brink of collapse. "Unemployment lies at 20 per cent," says Madian Ali, a professor of economics. "We urgently need to solve this problem." After all, 300,000 young people join the labour market every year.

The speed of reform is insufficient

"What we need is a strong private sector," says economic advisor and former World Bank economist Nabil Sukkar. "The portion of the gross domestic product generated by the private sector has increased from 40 to 60 per cent over the past 20 years, but it is not enough."

In order to give entrepreneurs room to manoeuvre, some duties and taxes have been reduced, trade embargoes have been lifted, and investment laws made more flexible.

The first private banks and insurance companies have started business and there are even plans to set up a stock exchange in Syria in 2007. Thanks to these moves, the economy has already grown by an estimated 2.9 per cent in 2005 as opposed to an average growth figure of 1.8 percent in the years 1999 to 2004.

However, experts fear that the speed of reforms is not enough to brace Syria for globalisation. "Our most important sectors are the textile industry and agricultural products," says Sukkar, "but we have to improve the quality of our goods in order to be competitive on the international market."

Meanwhile the state is pumping funds into the country's ramshackle public sector, military, and bloated bureaucracy. While the income from oil is still covering costs, reserves are slowly running out: Syria could be a net importer by the year 2010.

"If we were to be rational about our subsidies and could get a grip on corruption, we could invest in promising sectors of industry," explains Madian Ali. "But at the moment, we are dependent on funds from outside." The only problem is, investments are non-existent: the United States has imposed sanctions, and corruption and the insecure legal system act as a deterrent to western entrepreneurs.

Association Agreement on hold

"In Syria, politics is afraid of taking a risk," criticises Frank Hesske, head of the EU Commission's delegation to Damascus. "This means that it is very hard to push through comprehensive reforms."

This is why trade with the EU, which is currently worth € 6 billion per annum, remains weak. The fact of the matter is that a planned Association Agreement between Syria and the EU should have strengthened the bond between the two. However, the agreements have been on hold for two years. The EU backed off when Syria was criticised for its role in the Lebanon.

The war in the Lebanon this summer brought about a change. "We have found that Syria is a decisive partner," says Hesske. "This is why we are considering how to move Syria towards a more constructive policy."

Economic aid could provide the required incentive. Moreover, the country has much to offer in terms of its location: "It is a market with enormous purchasing power and it is strategically important in terms of its location in the Middle East."

Initial direct investment in the West

The French company Bel Cheese, which produces such well known brands as "The Laughing Cow" and "Kiri", has recognised these advantages: Bel Cheese opened a factory near Damascus in 2005 – the first example of direct western investment in the country.

"We grabbed the opportunity of establishing ourselves on what you could call a completely untouched market," says project manager Antoine Hanna. "I conducted a study for Bel Cheese back in 1997. At that time, Syria was not ready."

Now, on the other hand, Syria would appear to be ready, even though numerous practical hurdles still exist: "It took us a year to get an Internet connection here," says Hanna.

Nevertheless, business is progressing well. He goes on to say that the company plans to supply the entire region from its base in Syria in the future. "And that is a market with 300 million customers."

Gabriela M. Keller

© 2006

Translated from the German by Aingeal Flanagan

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