Posted by Joshua on Monday, October 18th, 2010
The Sin in Syria is Low Wages
for Syria Comment
October 17, 2010
My motivation for writing this essay is to offer a counter argument to an article that I read this morning by a fellow Syrian who lashed out at the Syrian private sector. The article is by Abu Fares, “The Syrian Private Sector: A Socioeconomic Farce,” which was posted on his website. As regular readers of Syria Comment know, I have consistently and forcefully sided with the economic reform process in Syria.
Indeed, my only lament is that it is too little too late. I believe that the process has not been fast enough or radical enough. I am fully aware that my support for the reform process is not shared by a significant number of Syrians. This is not surprising. Change will produce new winners and losers. In this short essay, I will first list the winners and losers of the socialist era. I will then explain how the reform process has caught most Syrians off guard and unprepared for the changes that they must face. The failure of many Syrians to understand what needs to be fixed in order to assure the next generation a better life is causing many to blame the reform process and the private sector for the growing poverty and income disparity in our country. It has also brought growing anger at those leading and benefiting from the change.
The winners of the pre-reform system
The socialist experiment that dates back to the 1960’s was launched by confiscating private property, nationalizing industries and giving the state a dominant role in the economy. Moreover, the nationalist fever as well as the geopolitical considerations of the period demanded a policy of self-sufficiency and import substitution when it comes to production and the raw materials needed for this output. It was not difficult to see who the winners were likely to be in this system.
The growth of the public sector meant that the state would be the destination of first choice for young Syrians who did not necessarily have the education or skills that may have been required by a none-state employer. Since these public sector jobs were secure till retirement, it was not difficult to see how government jobs multiplied to exceed two million in number over the past three decades. The way these jobs were allocated usually had little to do with merit or qualifications. Indeed, they were largely dolled out by senior party and government officials for personal gain and to buy loyalty from underlings. Stories of of the occasional kickback paid to secure a key government job quickly gave way to persistent rumors of how nepotism and the selling of state position had become institutionalized over time.
The goal of staying independent and self-sufficient also produced its own winners. For almost forty years, the most coveted trophy of local manufacturers was to secure “himaye watanniye” or protection from imports for their products. The allure of this trophy also meant a huge source of income to senior party and government officials. Local manufacturers were more than happy to pay. One of my close friends was smart enough to start producing ketchup over 20 years ago. His business plan was simple. Pay whatever it takes to obtain the himaye wataniye for his product. Once he did, he flew to Germany (China was not in the game then) and bought the cheapest and most primitive production line available. A few months later, he had the Syrian market largely to himself. Imports of ketchup were not permitted. The Syrian consumer had little choice but to buy this third-rate product enriching my lucky (or smart) relative for close to a decade.
The local manufacturers not only benefited from a monopolistic business environment but also from ridiculously subsidized and cheap heating fuel (mazot), electricity and water. For decades, they enjoyed nearly free inputs for their production and no competition. If this were not enough, they sent their children to state schools and universities for free and paid almost no taxes.
Who were the losers of this system?
The vast resources that were used to subsidize the public sector could have been spent on infrastructure, health care, and export incentives. The average Syrian citizen has paid a very heavy price in the form of run down services and national infrastructure. What is more, Syria has few of the vigorous state institutions and private corporations that would have grown up in a properly competitive system with some measure of quality control and accountability.
The education system has also suffered. Rather than offering totally free education that has become unsustainable and cannot keep up with quality necessary for today’s demanding market, the state should be means-testing students and asking the wealthy to pay something. If not for elementary education and high school, at least for university.
Other obvious losers are Syrian consumers who have been forced to buy inferior local products for decades. They have subsidized local manufacturers, which are today uncompetitive for the most part and will soon collapse if they have not already been driven into bankruptcy. University graduates in anything other than the schools of medicine and engineering were also losers.
Allow me to relate a personal story to make an important point. When I decided to study Economics in the UK in the late 1970’s, most of my parents’ friends and relatives were bewildered. “Why would you spend this much money on your son to study Economics?” they were often asked. What would he do with this degree? Will he Work as a teller at the local commercial bank of Syria when he returns? What would be his salary? Would it not make more sense if he simply joined his father’s business form now and saved you the money? Interestingly, all Syrian students of that era had to obtain what was referred to at the time as “taleb taht al-ishraf” or student under government supervision. With strict currency control in place, it was impossible for my parents to pay for my tuition unless I qualified. But, it was impossible to qualify as a student of Economics. You had to do either Engineering or medicine to obtain the government approval. Given that computer engineering was a new subject at the time, I enrolled myself in that department for one course and used a letter from the university that I was indeed taking part in their “engineering” school. The trick worked. I proceeded to earn my Economics degree and then my MBA from an Ivy League school in the U.S. When I arrived at the latter institution, I was greeted by the admission officer this way:
“Welcome, you are the first Syrian we have had here since 1964”. These words still ring in my ear some 27 years later. My relatives were correct though. There was nothing for me to do with my new degree in Syria.
The reform process:
I will spare the readers the history of the reform process or the geopolitical events that may have led to the possible delay in its implementation. What is important is that the train has departed the station. Reform began with the introduction of the private bank law back in 2003-2004.
The system of himaye wattaniye was slowly dismantled. Local manufacturers are no longer able to sell inferior products as quasi-monopolies. They now needed to compete with relentless regional producers who are mostly exempt from import duties thanks to the Arab free trade agreement. The recent opening to Turkey has added a new formidable competitor. The same can be said about imports from China. In sum, the local Syrian manufacturing base is now facing an onslaught that it is ill-prepared to face following years of protection and underinvestment. If this was not enough, government officials must have used their excel spreadsheets to figure out that the existing level of subsidies cannot possibly continue. The reduction and streamlining of some of these subsidies has dealt a further blow to the profitability of local producers.
The growth of the public sector has slowed down as government jobs have largely disappeared. The state sector has endured a hiring freeze for a number of years. Who is hiring now? Who are the winners in the new system? What are we to make of recent reports detailing the “incredible” and “shocking” salaries of the senior executives of the country’s new private banks?
These questions and more were posed by Abu Fares in his article, “The Syrian Private Sector: A Socioeconomic Farce”. Reading his post this morning inspired me to write this article.
To be sure, Abu Fares’ article makes for entertaining reading. It is hard to disagree with his negative portrayal of the current income disparity in Syria. However, his story is akin to taking a snapshot of a movie without watching its start, middle or end. What is noteworthy is that while Abu Fares lashes out against the rich, both the nouveau and old money, he conveniently omits any discussion of why the poor make a measly monthly salary of SYP 11,000 (US$ 234). Central to his article is the following question that he poses to his readers:
“Who in the hell gets paid a salary of $42,000 a month in Syria? While the average accountant’s monthly salary is $400 in the private sector, some accountants are making $20,000 and up”?
Since he did not attempt to answer his own question, I thought that I would give it a shot:
Those making a salary of $42,000 a month or $504,000 a year are the general managers of the country’s private banks. Is this an excessive salary? No. The compensation system of such banks is decided on by an independent board and the institution’s human resource department. Had any of the boards been able to recruit their managers for $4200 instead of $42,000, they would have gladly done so. The truth is that they cannot.
Syrian universities cannot produce qualified bank executives that can manage $1 billion balance sheets. Indeed, Syrian universities cannot even produce English speaking graduates that can take basic starting jobs at financial institutions. As a result, the boards of these banks have had to recruit their top managers from abroad. The only way such qualified individuals would choose to leave their existing jobs and come to Syria, which is under economic sanctions and presents them with a difficult and insecure working environment is if they are paid competitively. While Abufares and most Syrians may think $42,000 is outrageous, they are misinformed. Were they aware of the salaries earned by senior bankers in the rest of the world, they would not be shocked. Syria is slowly becoming part of the global economy again and that is good news. It is going to cause Syrians more than a few shocks.
To look at the problem in a different way, we should not be shocked at the bank manager who earns $42,000 a month but the accountant who goes home with only $400 at the end of the month and must face his family. It is not the Four Seasons hotel and its prices that should dismay us but the fact that Damascus only has one 5-star hotel. Dubai has over 70. Similarly, it is not the $170,000 Beemer that should make us angry but the fact that so many Syrians must still ride “battered micro-buses with 9 sweaty (and stinking) passengers” who live below the poverty line.
Syria is slowly taking its place in the global market place. Rather than venting against the reformers and the private sector, people must direct their anger at the socialist planners whose ill-advised past policies had held back their country’s infrastructure, education, heath care, competitiveness, productivity, incomes and standards of living for way too long.
The days of getting an eternal government job by making a call to a senior party operative are over. The days of being employed in the public sector without a high school degree are gone. The times of stuffing consumers with inferior products by banning imports have disappeared. In order to get off that smelly bus you now need to learn English, have computer skills, learn credit analysis, and be proficient in new computer software, advertising, marketing and commercial law.
While on the subject, the Syrian public would do better to cease its attacks on Mr. Dardari and the reformers. Better that they embrace the changes underway and get on the train. The President would not have kept Mr. Dardari in this job had he not agreed and supported the spirit of the process underway. No reform process is perfect. I, for one, think that it has been, if anything, too slow. I wish the word “socialism” would be dropped from the constitution. I also wish that we would stop pretending to be half-pregnant with terms like “social market economy”.
I would be ecstatic if the government stopped supporting its 250 losing businesses and embark on a privatization drive. I wish Mr. Dardari would further reduce the subsidies (eliminate all that goes to the wealthy by means testing) and use the savings to spend money on education and export incentives. The reformers must also better articulate their message to the public by explaining the merits of the reform process and how the old system cannot possibly continue. They must show through a simple excel sheet analysis that state coffers will be drained if bread, fuel, sugar, electricity, rice and tea subsidies plus free education keep on being dolled out at the present pace. There is no free lunch. The more you spend on subsidies and inefficient businesses, the less you can spend on education, health care, infrastructure and export promotion.
The money to fund all these programs will have to come from somewhere. Printing money will be the last resort. As for the high price of real estate, reforms must address the speed of the “tanzeem” otherwise known as the process by which more land becomes zoned and prepared for residential use. In sum, while we all may have own criticisms of the process, the public must be made to unite around the fact that the general thrust of the reform policy is sound, appropriate and necessary.
It is time for the Syrian public to realize that rather than criticizing the new Syria, they must lament the old Syria which could not keep its promise of growth, higher incomes and rising standards of living. The days of quitting school and opening a “dekkane” or store and expecting to thrive and grow wealthy are over. It is now Carrefour, the new malls and international brands, Lafarge, the banks and the new expected leasing companies that will become the employers of choice for Syria’s youth. Syria needs to start graduating MBA’s and not only engineers and doctors. The best and brightest of the country ought to start to entertain thinking about careers in advertising, banking, leasing, commercial law and private equity and not just medicine. The $42,000 a month ought to work as an incentive rather than a source of frustration and anger.
The cancer of corruption
While Abufares and the Syrian public have the right to wonder about income disparities, they should direct some of their anger and frustration at Syria’s past economic mismanagement rather than present reforms. The vast majority of Syrians who eek out an existence on pitiful salaries should not be seen as the norm. The most disturbing feature of the so-called socialist system has been the culture of corruption that it has created for us – a culture that will be very difficult to undo. The pitiful civil servant salaries have institutionalized official corruption to levels that are difficult to fathom.
The best example of such corruption can be seen in the scandal that has recently come to light in Aleppo in the area of real estate cooperatives. This article details the cancer that now plagues city officials. They abuse an archaic system far removed from the functioning of free markets to enrich their pockets and those of mid-level government officials to the tune of hundreds of millions. This cost is born by the average citizen. I encourage readers to go through the comments section of the article in order to understand the depth and seriousness of the problem. The prime minister has recently convened a meeting of his ministers to discuss the runaway prices of real estate and what to do about it. Regrettably, we are unlikely to see concrete actions taken to address this issue any time soon. It is disturbing to see the government paralyzed as it has watched the prices of real estate soar to stratospheric heights over the past 5 years. It has offered no explanation or solution. There is a lot that can and should be done. Untaxed empty apartments dot the country. Speculation in land is a national pastime. Tanzeem takes decades and the list goes on.
The bank executive making $43,000 a month is subject to a 20% income tax. Bank profits are subject to 25% corporate income tax. Given that such income earners are subject to international standards of auditing and reporting, they are some of the few Syrians who pay their tax bills in full. The problem of not paying taxes lies outside the publicly listed companies. Not a single family owned business in Syria decided to list on the new stock exchange. This was a telling fact. Large family businesses in Syria pay an effective tax rate of something around 4% it is believed. The government keeps making noise about changing this fact and cracking down of tax cheats. They threaten hefty fines for none compliance but thus far they have done nothing. What is more disturbing is that the owners of such businesses send their children to university for free. They receive subsidized items just like those making $300 a month.
A way forward
1- The government must use tax policy to increase the opportunity cost of holding on to unused and none primary residential units. It must also use tax policy to slow land speculation. The fact that the Tanzeem moves at a snail’s pace means that new residential developments take decades to bring to the market.
2- For a country that has such expensive subsidies in place and a large unprofitable public sector that sucks up state resources, every unit of tax revenue is critical to bridge the funding gap. That the richest people in the country can get away with paying 4% in tax is shameful. But, wouldn’t you do it if you could? Is it possible for the government to enforce compliance to the above two suggestions when it pays its employees $300-400 a month? When a $400 a month employee shows up on the doorstep of a business tycoon that has a huge tax liability, what are the chances of ethics and honesty winning out over temptation and the desire to fatten one’s income? We all know the answer to this rhetorical question. This brings us to the third and most important suggestion for a way forward.
3- Syria will never put its economic house in order unless it makes a clean break from socialism. Introducing vague German economic terminology and saying that we are now a “social market economy” is not enough. For a country with such limited financial resources, our government has no business being in the business of making shoes, cloths, tires, bottled water, beer and 244 other constantly losing establishments. Every manager in charge of these inefficient businesses sees his job as a license to steal and plunder. All the money wasted in salaries and balancing the losses at year end is money that was stolen from one Syrian to pay another. In this case, the robbed Syrian is everyone who has no connections in the government or the Party. Those robbed include every hospital, university, school and road that has been starved for the lack of investment. The answer to Syria’s many problems is privatization. It is a taboo subject that the government is not educating its people about.
I am sure that my recommendation to privatize will elicit a number of passionate responses explaining how this cannot be done and accusing me of being heartless be of the many employees who will lose their jobs. Nonsense is my answer. The new buyers of these businesses will also need to employ people and will not rely on robots. They will most likely make a profit which will allow them to grow and invest further in the business. This will add to economic growth and end up employing more accountants, lawyers, advertising professionals etc. Once the government stops having to close the hole at these 250 businesses, it will have the funds to pay its tax collectors three or four times their current salaries. Once this is done, it will then be able to announce a strict and enforceable tax compliance drive. A well paid tax collector who accepts a bribe can be dealt with severely and publicly. The same goes for the business person offering the bribe.
Abu Fares should not attack the Syrian private sector, the senior bank executives, the ostentatious BMW drivers, or those sipping coffee at the Four-Seasons. He would do better to save his anger for the old economic habits that have squandered close to $15 billion on uneconomic irrigation projects that were carried out with no regard to return on capital criterion. He must lash out at a the corrupt and inefficient public sector that has wasted billions of scarce Dollars on uneconomic projects that has drained the state coffers of critical funding that could have gone to improve education, health care and infrastructure. That we can still stick our heads in the sand and think that these issues will somehow get solved with time is a travesty. The government must streamline and shed its vast wasteful assets. The government must address the rising cost of real estate and punish those who neglect to pay their taxes. It is high time that Syria adopted sound public policies and taxed people according to their earnings. The reform process is bound to cause much pain and offend our sense of fairness and equality, but their is no alternative. Syrians have unfairly been denied the opportunity to compete in the international marketplace and enjoy its fruits for too long.
Global Voices: Syria: Gap in Private Sector Salaries Disturbing
By Yazan Badran
“Officially disclosed salaries in the Syrian private sector range from the minimum full-time wage of $125 to $42,000 a month”, Abu Fares lashes out on the Syrian private sector, and the disturbing imbalance in the wages it …