Posted by Joshua on Thursday, January 21st, 2010
The real discussion that the Syrian Economic Team should be having
for Syria Comment, January 20, 2010
The recent firing of Mr. Tayseer al-Reddawi as head of the Syrian Planning commission is a reminder that the country’s economic leadership team is in the midst of an intense intellectual battle as the new 5-year plan looms.
While the differences in opinion between Mr. al-Reddawi and Mr. Dardari are interesting, the sad truth is that they don’t go to the heart of the discussion that the country’s economic planners should be having. For a true and meaningful debate to take place, the subject of privatization and subsidies should reign supreme.
In December 2009, Mr. Dardari was quoted as saying that “over the past years, economic reforms in Syria focused on trade liberalization, enabling and encouraging the private sector to play a greater role in the economic and social development of the country.” During the same interview, he concluded that “only market economy systems have the openness and the ability to adjust and cope with change, and we trust that Syria is up to this challenge.”
While Mr. Dardari has championed the market economy and has pushed for a larger role in the private sector, he has steered clear of any meaningful discussion of what to do with the state-owned sector.
To be sure, it is not easy to be on the Syrian economic leadership team. It is hard to achieve your goals when your hands are tied behind your back. The reformers are largely aware of what needs to be done on the economic front. They must realize that the public sector is in a dilapidated state and that the subsidies program is a huge burden on the state budget. This is what the Prime Minister himself said back in November:
“The subsidies cost the government SYP 720 billion over six years which could have gone to development. How many power stations, irrigation projects and roads could we have built with these funds, which went to people that don’t deserve them and who smuggled subsidized products illegally to neighboring countries? We also wonder about the size of the tax evasion as well as the size of corruption which could be bigger than the numbers mentioned above. We don’t need to borrow from abroad or to dip into our strategic reserves. What is required instead is an action plan which can be followed on the ground because we have what it takes to be on the forefront of economic challenges as we are in foreign policy. We must do the same economically.”
For Syria to match her admirable foreign policy exploits with her economic policy performance, a meaningful and immediate public policy debate must start regarding both subsidies and the state-owned enterprises.
Some 260 enterprises are run by government ministries. While the Baath party adopted the social market economic model in place of socialism back in 2005, the constitution still lists socialism as the country’s economic system. While the Syrian economy has been significantly reformed since Bashar al-Assad came to power in 2000, state-owned enterprises have been largely immune from the reform process. Government run businesses include manufacturing carpets, tires, glass, shoes, cement, beer, dairy products and bottled water. The private sector is permitted to compete with some government industries but not with others. For example, the government prohibits competition in cotton spinning, the filling of bottled water, or the brewing of beer. Beer can be imported from Lebanon or Turkey but it cannot be manufactured locally by the Syrian private sector. This makes no sense.
The vast majority of state-owned enterprises lose money. Last month, Finance Minister Hussein explained that “the government decided to write off SYP 507 billion in loans to various state-owned companies and that this write-off was the fifth since 2000.” It is important that these credit write-offs be included in the calculations of the profit and loss statements from these companies. Proclamations about the future profitability of public sector industries must be regarded with skepticism. The majority of these companies are so bloated and inefficient that it is impossible for them to compete in a free market. For years, attempts to reform the sector have been met with disappointment. These inefficiencies will not be eliminated in the future, despite government promises. The government sadly remains undeterred in its attempts to engineer a turnaround in the sector.
Syria’s New Water Bottling Plants
This week, the Minister of Industry inaugurated the opening of a new production line for the manufacture of plastic bottle tops. This factory will be the sole supplier to the four bottled water fillers that the government also owns. Syria’s bottling plants will no longer be permitted to purchase closures from private suppliers as they have done in the past. The new government factory is now a monopoly selling to another monopoly. Anyone care to guess what will happen to costs?
The private company that used to supply the tops to the four government run bottlers employs 18 people. Its manufacturing capacity is identical to the new government closure company; it runs four line. The government entity employs 270 workers for the same production capacity. The head of the new company boasts that the new addition will add close to $US 1 million in profits. This means that the profit per employee will be $3,844. Remember that this is a monopoly; it can charge what it wants. If the privately owned company employing only 18 people could charge the same price, it would turn a profit of $57,658 per employee, a 15 fold increase. The Syrian taxpayer would also not be assuming responsibility for paying the pensions of 270 Syrians for life. The Syrian people and the state coffers are being asked to underwrite the employment of an extra 252 people. A recent survey shows that the majority of citizens would like to work for the government because of the job security and pension benefits. Is there any wonder why? These are secure jobs that demand little work and provide benefits for life.
The new bottle cap factory cost 4.79 million euros — money which should have been spent on more productive investments. This example is not atypical. Billions have been spent on similar companies. Rarely has there been an economic rationale for doing so. Syria is not a wealthy country. It is not blessed with endless reserves of oil or natural gas that it can use to finance fake employment projects. The Syrian government employs something close to one out of every five wage earners in the country. It is time to start a real discussion about the merits and viability of the state-owned sector and how Syria can begin to transition away from it. This ought to stop being a taboo subject.
The private sector remains too weak to employ the vast number of laborers at the state-owned enterprises that would enter the job market if the public sector were disbanded rapidly. The economy is too weak as it is to employ the hordes of young Syrians without jobs. There are close to 250,000 that enter the labor force every year. In order to that reverse the rising unemployment the economy needs to grow at something like 7 or 8% a year. Even if the state-owned enterprises were to retrench by 50%, close to one million jobs need to be found to absorb the government sector employees. This is a formidable challenge. It explains why the government has been reluctant to privatize.
While inflation has been high, the price increases have not come from excessive real growth but from the freeing of many administrative prices and the lifting of some subsidies. The foreign exchange value of the pound has been very stable because it is linked to the SDR. As the banking system expands and lends more, it is essential that monetary policy become more expansionary to help promote growth. Inflation should not be the monetary committee’s main concern now. Instead, higher economic growth must be the goal.
Interest rates should be cut. Close to US$ 25 billion or 50% of GDP currently sits in bank deposits. The Syrian Pound is stable against the dollar; in fact, it has appreciated against it. There is room for interest rate cuts that would lower lending rates and make parking savings in bank deposits less attractive. These funds need to be invested in riskier projects that will generate employment. The government must also accept a possible weakening in the value of the Syrian currency as a result of the interest rate cuts. This will help to discourage imports, promote exports and fix the every increasing trade deficit. The central bank and the monetary policy committee must play a bigger role in promoting economic growth. They must employ every instrument at their disposal to promote sustainable economic growth at a level high enough to generate some 300,000 private sector jobs a year. The government must complement the expansive monetary policy with a continued commitment to lowering taxes (though they have already been slashed to 20% from a high of 68%). It must also continue to lower fees and untangle red tape in order to stimulate investment.
In sum, the government must embark on a shock-and-awe economic growth policy. It must generate so much growth that the private sector becomes a true and viable engine. In the meantime, it must start a public and open discussion about the bloated and unsustainable public sector; it must start to familiarize the public with the word, “privatization,” and explain how market forces work. Many countries have traveled this path. Some have been more successful than others. Syria can learn from the mistakes of its predecessors.
A Word on Subsidies:
Current subsidies put pressure on state coffers. Some estimates have put the tab at close to 19% of GDP or US$ 9.5 Billion. While it is true that many lower income families need these subsidies to survive, it is also true that those who don’t need the help enjoy the same subsidies. While the government has addressed this problem with the latest measures regarding fuel oil (mazot), the administrative demands of the program are extremely burdensome. The new 5-year plan must look at reducing most subsidies. Savings from these programs should go to increasing government worker salaries. Once the state starts reducing its assets through privatization, the remaining government workers need to enjoy a three fold increases in salaries if corruption is to be tackled meaningfully. Corruption is now inevitable. Government employees earning less than $300 a month cannot live honorably. Mother Theresa would also have succumbed to corruption had she had been a Syrian government employee living on $300 a month with 4 children. Once these salaries are tripled, the current need for a subsidies program would diminish. Rural poverty can only be overcome by economic growth.
During the previous discussion on American sanctions and how they impeded economic progress in the country, a number of commentators made the remark that changing the economic performance of Syria is a task that belongs to the Syrian government itself and not the U.S. and its foreign policy. This note seeks to address that point.