Posted by Joshua on Friday, August 21st, 2009
The Syrian Public Sector, Corruption, Taxation, and Government Services”
Syria Comment, August 21, 2009
I have made it a habit to write about my observations following every summer trip to Syria. As usual, I spent most of my time in the city of Aleppo. It is always hard to write something new or informative about a country that most of us seem to love and follow very closely.
I will again spare the readers any mention of geopolitics. I will instead focus on the issue of the size of the public sector, corruption, bribery, taxation and the provision of basic government services. As I will detail below, I think that the above set of issues are highly interrelated.
Bribery is a way of life in Syria.
Though Syria is no exception, one cannot but be struck by how widespread bribery is at every facet of life in the country. Bribery is used to get ahead in securing basic government services. It is used to gain a preferential treatment in the armed services. It is used to get government loans. It is used to lower import duties at customs. It is used to wave traffic violations. It is used at passport issuing offices. Indeed, one is hard pressed to think of a single place where it cannot be used.
That bribery is so widespread should not come as a surprise to anyone. Most visitors to Syria and other developing countries have experienced this phenomena first hand.
But why is bribery so widespread and why does the government seem powerless to stop it?
During the 1950’s and 1960’s, General Motors (GM) and the United Auto Workers (UAW) established a pattern of agreeing to ever-better wages and benefits. The auto company never imagined that these agreements will one day crush the company as the burden of paying for these benefits took an ever increasing share of the company’s revenues and profits. Its retiree health-care burden alone was equivalent to more than double its market capitalization by September 2007. Two years later, the company of course went bankrupt.
The Baath party commitments to its citizens since the mid 1960’s are not too dissimilar to those made by GM to its employees. What seemed like reasonable and honorable commitments some 40 years ago can grow into a monster that few could have predicted when those commitments were initially made.
As the Baath party embarked on supporting a policy of large public enterprises and expansive subsidies, few envisioned that the country’s population will double every 22 years. Few also wanted to admit that governments cannot run businesses profitably and that the public sector will suffer steady losses that will drain the state’s treasury for eternity.
The state is fully aware that it pays its employees inadequately and that even mother Theresa would accept a bribe were she a Syrian government functionary. Based on my own research, most public sector employees and civil servants make between SYP 7,000 and SYP 16,000 a month ($150-$345 range). The majority of these workers also happen to be less well educated and have large families. Having at least four children or more is common. A median salary of $250 per month therefore needs to support a total of six family members on average. Due to religious reasons and lack of both education and skills, most wives cannot support the family income. The majority of these people rent their homes for an average of $130 a month. This leaves $120 for six people to live on for a month. Even with the generous subsidies program in place, this is nearly impossible to do. Even if this family decides to live on falafel sandwiches for breakfast, lunch and dinner, it will be broke before the month ends. The head of the household must look for other means to augment his miserly income. Most work second jobs. Most also accept bribes from private citizens.
Again based on my own estimate, a more appropriate salary level is close to three times the present levels. However, the government does not have the financial resources to increase salaries by 300%. Upon retirement, state employees earn 75% of their base salaries till they die. Such a proposed salary jump will cause a massive drain on budget for years to come.
While salaries have been increased steadily over the years, they remain far below the required levels given the recent jump in prices. Real purchasing power has fallen despite rising salaries.
The government cannot raise salaries more because the size of the public sector is too big.
There are reportedly close to 2 million people on government payrolls. Tripling the median salary of the average employee means that the state needs to find an extra $ 1 billion a month in revenues.
Instead of doing that, the government has implicitly decided to keep things the way they are and to let citizens pay state employees directly through a widespread bribery system to which it turns a blind eye in most cases.
While the state coffers save $1 billion a month by restricting salaries, they lose many more billions by turning a blind eye to corruption.
Lost revenues from import duties and real estate taxes:
For years, importers have avoided paying duties on their products. Government employees assigned to customs have made huge sums of money turning a blind eye to banned imports or to the true value of the worth or legal imports. Bill of lading documents are often forged. Containers are not inspected by customs officials for a price.
Most of this has taken place because some of the government’s import duties have been outrageously high. This has enticed large importers to agree to pay the severely underpaid custom officials vast sums to turn a blind eye. Most have happily obliged. The state coffers suffered. Government income is being diverted directly into the pockets of badly paid officials.
Another area where the state has suffered from a severe revenue shortage concerns real estate. This is due to the way in which the government values residential and commercial real estate for tax purposes.
A close friend of mine just bought an apartment for his son for SYP 11 million. When it came to paying taxes on it, the government valued the property at SYP 350,000. Given the massive rise in real estate values across the country for the past decade, think of the opportunity cost and the missed tax revenues that the state could have collected following the boom in real estate values. Instead, government employees see no problem assigning real estate values that would have existed in 1960 before they tax most properties.
When it comes to the above issue of real estate taxes, the immediate solution is for the government to outsource the valuation of real estate to a private company that would help it assign real market values to real estate so that they can be taxed appropriately. Information on how much taxes each household pays should be made public. Any citizen should be allowed to find out what his neighbor pays in taxes. This will eliminate any chance that the private assessors are being bribed themselves. This initiative is likely to have two major advantages. It will bring in an enormous amount of much needed revenues. It will also make it less advantageous for the public to park their money in real estate now that it will be taxed more appropriately. The freed up funds will be redirected to investments in more productive sectors that may help employment and so on. This recommended real-estate tax collection must be geared towards the wealthy and less towards the poor. House values below say SYP 2 million will be exempt from the new valuation system.
While on the issue of housing, it is critical that the municipalities accelerate their plans to make more land available for residential use. This is referred locally as land that is included in the “tanzeem”. Currently, large areas of land directly across from city parameters cannot be used by developers to create new housing units and alleviate the pressures on house prices. The government simply does not have the resources to bring the basic services of water and electricity to these new locations. This results in empty “agricultural” lots right outside key city centers. Faster development of such land and their inclusion in the “tanzeem” will likely ease the price pressures inside the city parameters and make housing more affordable to more citizens.
When it comes to import duties, the government must streamline the process and lower those duties to levels that make it less pressing for the importer to cheat. Some items are still taxed at 75% of their value. This is giving a license to the importer to use the power of bribery to avoid the abnormally high duties. Again state coffers end up as the loser.
As to the appropriate level of salaries that can check the widespread use of bribery, the government must start to shed state assets and embark on privatizing the none-essential industries first. Only when the size of the public sector is brought down to a more manageable level can the state afford to pay its employees an appropriate level of compensation. Also, only when state employees are paid close to triple their current salaries can the government credibly prosecute those that accept bribes after the new salary adjustment.
Like most people in developing countries, Syrians seem to smoke a lot. A pack of cigarettes sells for around $1. In contrast, they top $9 in places like New York. Taxing Syrian smokers more seems to make sense till you find out that most tobacco products in the country are smuggled (the duty free is available too). In order to cut down on smoking, a presidential decree was ordered that prohibits smoking in public buildings. Sadly, this law is not being followed. Not so much by the citizens but by the government employees themselves. During numerous visits to government buildings, I was struck by how many state employees were smoking while they had the note describing the Presidential decree right above their heads. For the record, a recent study in Iraq found that smoking kills an average of 55 citizens a day. The Iraqi government banned smoking in public buildings and announced that violators will face stiff fines of as much as $4300. Given that the price of a pack in Iraq is as little as 25 cents, the new fine will be the equivalent of paying for 17,200 packs of cigarettes. It will be interesting to monitor how this law gets implemented.
While the word has a dirty connotation in a socialist driven ideology, its economic merits are indisputable. The Syrian state has no business running a tire, beer or glass manufacturing business. Contrary to what most officials promise, most state industries will continue to lose money for ever. This red ink is putting a massive strain on the budget. Such monies could have gone to improving education, healthcare and infrastructure. Putting our heads in the sand and sticking to a losing economic order is no solution. The monster of corruption and failing state services was created by party officials who espoused socialism. They originally believed socialism would serve the poor. Instead, the exact opposite has happened. The wealthy and well connected got richer at the expense of the poor. Indeed, Syria’s so-called socialist system has benefited the wealthy and powerful far more than capitalism did.
Most that resist privatization do so because they worry about the millions of state workers who will suddenly become unemployed if the public sector is dismantled. But the price of maintaining the million or so superfluous government employees is the impoverishment of many more Syrians who receive inadequate government services, such as electricity, education, and healthcare. Defenders of socialism also seem to think that the economy is static, and those that may get laid off will not be hired by a private sector that is likely to fill the void once the state privatizes.
The only real solution for Syria’s failing state services is that the country’s leadership supports a deliberate, thoughtful and transparent approach to privatization. One industry must be chosen to serve as a pilot project. The state may even decide to ask the new buyers to keep the current employees on its books for say 10 years (the state will receive less price of course).
Why not start with beer? While the state makes both Al-shareq and Barada brands, I don’t recall anyone buying these products. Instead, imported Lebanese, Turkish and European brands seem to be the preferred choice. Why shouldn’t the state put up the beer making business for sale to the private sector after it creates a privatization commission that will be tasked with this pilot project? If successful, the initiative can spread to more industries. Perhaps biscuits and tires can be next.
A Final Word on Education:
During a private meeting with the head of one of the country’s new private banks, I asked if he was finding it difficult to recruit qualified employees. The bank manager replied with a sigh that it was indeed difficult. He explained what a struggle it was to find university economics graduates who know what a balance sheet or an income statement is. As a result, most banks have lowered their requirements, employing new people simply because they speak English proficiently. As it turns out, finding good English speakers is no small challenge. Syrian students in elementary school spend one hour a day learning a foreign language. This is in direct contrast to their Lebanese counterparts who end up speaking two foreign languages fluently by high school. Syrian students are at a major disadvantage when it comes to competing in today’s market place.
Reforming the Syrian education system must become a priority for the country’s leadership. Instilling strong Arab nationalistic sentiment and having an education system that teaches a number of subjects in English or French must not be seen as mutually exclusive. A sixth grader needs to spend more time learning English and French than memorizing the key figures who fought the battle of Qadisiya in 637. Syria must grasp the bull by the horns. The Syrian economy and government services have real ailments that will get worse as the country liberalizes. Big medicine is needed.