Peak Fragility: Why The Middle East Is Doomed — by Ehsani - Syria Comment

Peak Fragility: Why The Middle East Is Doomed — by Ehsani

By Ehsani

The Mideast is doomed. Egypt alone needs to create 700,000 jobs every single year to absorb the new job seekers out of its 98 million population. A third of this population already live below the poverty line (482 Egyptian Pounds a month, which is less than $1 a day). The seeds of the vicious circle that the Mideast region finds itself in today were planted at least five decades ago. Excessive public spending without matching revenues was the catalyst for a faulty and dangerous incentive system that helped to balloon populations beyond control. A governance system that was ostensibly put in place to help the poor ended up being a built-in factory for poverty generation. Excessive subsidies helped misallocate resources and mask the true cost of living for households. Correlation between family size and income was lost.

Successive Mideast leaders are often referred to as evil dictators. I see them more as lousy economists and poor users of simple arithmetic, unable to utilize an excel spreadsheet to help demonstrate the simple, yet devastating power of compounding. Unless you are a Gulf-based monarchy enjoying the revenue stream from oil and gas that can postpone your day of reckoning, the numbers in nearly every single Arab country don’t add up.

It is important to note that excessive population growth is not the only issue here. Japan and many parts of Europe are suffering from too little population growth. The problem in Arab societies is lack of productivity stemming from weak private sector and overburdened, bankrupt public sector. As students of economics know, “Potential” Economic Growth of a country is derived by adding the growth rate of its labor force to the growth rate of the economy’s productivity. High labor force growth therefore ought to be a plus for the “Potential Growth.”

The Arab World’s problem is that it suffers from shockingly low levels of “productivity.” This may seem like a fancy word but the concept encapsulates everything that Arab economies and societies suffer from. Why does the Arab world have such low productivity? The answer lies in everything from the excessive size of the public sector to subsidies and overbearing regulatory systems that lead to corruption. As public sector liabilities grow, funding for education, healthcare, and infrastructure suffers.

Why is the size of the public sector—coupled with excessive subsidies—the problem? Because what starts as the noble cause of helping the poor ends up masking the true costs of increasing family size. Governments soon go broke. Services suffer. Anger rises. We know the drill now.

Population in Syria and the costs of raising a family

The average cost of raising a child until age 18 for a middle-income family in the U.S. is approximately $245,340 (or $304,480, adjusted for projected inflation). That is about $15,000 per child per year for a two-parent family with median annual income (college costs excluded).

Growing up in Syria, I can still recall the “Family Booklet.” The more dependents you had on that booklet, the greater was your allocation of subsidized rice, sugar, tea, edible oil, etc. Your home electricity was also subsidized. So was your diesel. Schooling? Free all the way. Not only were almost all your food staples and energy use subsidized, the Syrian state also used to give a prize (nishan) to women who gave birth to 12 children or more. Syria at that time had about 6 million people (and produced 300,000 barrels of oil a day and had plenty of water).

Without having to pay full price for bread, sugar, electricity, tea, fuel, or education (all the way to college) and with the state becoming by far the largest employer (job guaranteed), the Syrian population doubled every 22 years. Imagine the pressures on the state coffers.

There’s no need for much imagination as to how the Syrian state fared as its population doubled every 22 years while its oil reserves and production dropped by 50%. It was still expected to offer all those freebies to a populace that never once asked how the state was to pay for all this. Not only did Syrians never ask how their state could meet those obligations while their numbers doubled every 22 years, but the state itself never explained it. It is debatable that the state was even aware of the power of compounding and what effect it has in the outer years (50 years ahead).

As state finances (revenue minus expenses with little to no borrowing program) suffered, so did the services. Schools, hospitals, and municipal services became insufficiently funded. They were examples of Paul being robbed to pay Peter (subsidies & a losing public sector). As the state could not increase salaries alongside inflation, real wages and standards of living suffered. Even Mother Teresa would have had to accept a bribe if she had 5 kids and a salary of $150 a month.

Corruption is an inevitable by-product of a broken system

When the state can’t meet its built-in obligations, services suffer and corruption becomes rampant. The public’s anger grows, fingers start to point at anyone and everyone who is getting a bigger slice of the cake—and the cake is not growing anywhere near the number of mouths it needs to feed. In the end, governments that start off by offering more than they can sustainably afford in the long run end up being criticized and even toppled for seemingly not providing enough to a population that grew beyond the capacity of the system to handle.

When governments spend, they can fund their expenditures in three ways: 1) collect taxes; 2) borrow (assuming lenders are available); or 3) print money (assuming the central bank is not completely independent of the government). Without a sustainable tax base, it is unlikely that lenders will be willing to fund governments unless the latter are asked to pay unsustainably high interest rates. Similarly, printing money will soon lead to the debasing of the currency and rampant inflation.

What about collecting taxes?

Inscribed over the front door of the US tax office (IRS) are the words “Taxes are what we pay for a civilized society.” As someone once also said, “Countries that don’t have a properly observed tax regime usually fall into chaos and corruption.”

Growing up in Syria, avoiding taxes was akin to breathing. It had to be done. Often times, tax rates were impossibly high (the top marginal rate was once over 70%). Not paying taxes is not just the fault of citizens but also that of the government which needs to accurately calibrate those rates. Regardless of underlying factors behind poor tax collection, the fact is that the Syrian government was expected to provide services, run losing businesses (public sector), and offer generous subsidies without matching tax collection or borrowing. Something had to give, and it was the quality of services.

As spending increased with the rise of the population, government investment in schools, hospitals, roads, municipal services, civil servant salaries, and human capital suffered and even froze. The public had the right to complain but the public didn’t want to know how the government was funding itself. “When the children come, God will deliver their fortunes along with them”—this is what we grew up hearing from families whose incomes did not seem to support the number of children they had. People would laugh it off as a joke. Sadly, this was Syria’s ticking time bomb.

On my trip to Syria few months ago, a young gentleman at my hotel explained to me how he was finding it hard to resist the pressure from his extended family and friends to stop having children at 5 kids. His father had 11 kids. His brothers had 8-9 kids. Having only 5 kids himself was insulting to his manhood. Like most Arab countries, Syria’s peak fertility (average number of children per woman) occurred between 1975 and 1980. The world’s highest in that period was Yemen at 8.7. Syria ranked 9th in the world at 7.47. It was in the company of Senegal, Malawi, Niger, Kenya, Rwanda, Afghanistan, and Gaza.

Even by 2005-2010, Syria’s population growth rate was still among the top 10 in the world at 3.26%. It also had one of the world’s youngest populations with a median age of only 15.4 years (only 4.8% of the population was over the age of 60; these statistics are from the UN’s World Population tables).

Egypt did embark on a strong population control strategy

Over two decades and by early 2000, Egypt’s population growth rate dropped from 3.5% to 1.7%. Large billboards were used in rural areas. An expanded use of contraception programs was also effective. Sadly, success didn’t last, and by 2007, complacency had set in. Mubarak also started pushing back against international NGOs administrating the programs. Once he was overthrown and Morsi came in, all contraceptives were banned. Before long, the growth rate was back up to 2.55%, taking the country’s population to nearly 100 million.

While Egypt at least tried its hand with family planning, Syria never did. But this article is not about the merits or problems of population growth—it is about fiscal pressures and what this dynamic inflicts on state budgets in a world of high subsidies, excessive public spending and limited resources.

The Syrian government was either not fully aware of the unfolding dynamic or was aware but found it politically difficult to embark on a serious family planning program. Was the religious minority status of the leadership a factor in terms of trepidation as to how the majority religious establishment would react? Whatever the motivations or excuses were, the fact remains that no steps were taken to match the baked-in future population numbers with revenues or resources. The only way forward was to make cuts in government investment, freeze public salaries, and watch the quality of services decline.

Many have blamed the current Syrian leadership for a long list of governance shortfalls. No one (including Assad himself) can claim otherwise. What this long explanation seeks to highlight is that—at least empirically speaking—Bashar al-Assad inherited a near-impossible economic dilemma.

The Corrective Movement

Ironically, when Hafez al-Assad took over, he wrestled the Ba’ath party to the right as he fought off the more leftist wing that had initially taken power along with him. He immediately embarked on his “Corrective Movement.” I recall American cars being allowed in as imports (yellow Dodge taxis).

Older members of my family still refer to the period between 1970 and 1976 as Syria’s golden period. Merchants saw their businesses boom as foreign trade was relaxed and the Corrective Movement quickly became seen as a tilt to the right from an earlier ultra-leftist leaning. Regardless of your politics, Hafez al-Assad was a larger-than-life figure in modern Syrian politics. Soon after taking over, he powered forward in building a top-down centralized state (Syria was part of the Soviet camp during the Cold War) that would come to dominate Syria’s future.

Merely six years after Hafez took over, sporadic, anti-government assassinations became widespread. Syrians would later find their government at war with the Muslim Brotherhood, which culminated in Hama in 1982. This six-year battle between Islamists and Damascus left its mark on Syria’s DNA thereafter.

Having been a nearly existential crisis, the Syrian leadership abruptly reversed the trends of 1970-1976 (when it had opened the economy and relaxed international trade) and instead moved in almost exactly the opposite direction. The old eco-Corrective Movement was frozen. Security now reigned supreme.

Between 1982 and the year 2000 (when Bashar took over), the Syrian leadership spent most of its energies making sure the Islamists and Ikhwan (Muslim Brotherhood) movements would never see the light of day again. Being charged with belonging to Muslim Brotherhood received the death sentence by law. Add in the collapse of the Soviet union (Syria was a big victim of this significant moment), falling reserves and oil production, currency devaluation, restrictions on foreign exchange transfers using draconian laws, Syria’s economy took a beating just when its fertility was among the top 10 globally.

Fast forward to 2000…

The current President Assad took over in 2000. Yes, expectations and hopes were high both domestically and internationally. A very young population now had one of theirs. He had studied abroad. He was surely going to reverse directions both politically and economically. But from the start, Bashar’s main challenge was always going to be how to meet those high expectations. Political activists and thinkers quickly set up discussion gatherings to create a new political platform where they could start to participate in political life.

Economically speaking, there was now talk about allowing foreign banks to operate and even starting a stock market. Economic reforms of this type were always going to produce winners and losers. Those with capital made it big. They now owned banks, insurance companies, and hotels. And the losers? Losers were all those among the 7.4 kids per family born around 1980 to mothers with high fertility rates and fathers who did not have the income to support them. Those in rural areas fared worse. They were ill prepared and uneducated. The state was increasingly unable to support them.

The state in this period also never implemented a family planning campaign—after all, how would Islamists have reacted to an Alawi president trying to “reduce the numbers of the majority”? The state also never communicated to the public that the course the country was on was arithmetically untenable. The clock kept ticking. This is not to say that the state did not make mistakes. Old agrarian policies were by now resulting in over-exploitation of groundwater resources (again this was an inherited legacy). What was new was the 2007-2009 drought that was one of worst in recent memory.

What about corruption?

Corruption thrives in heavily bureaucratic centralized systems where civil servants suffer from frozen salaries and inflation rates that eat away at their real purchasing power. Without supplemental income, employees at all levels of the state apparatus can hardly survive. As the state can’t afford to raise salaries commensurate with inflation, employees at all levels are left to fend for themselves to make ends meet. The state knows it, the public knows it, and what you end up with is institutionalized corruption as inevitable consequence of a broken system.

For corruption at this level to be addressed, levels of public spending and liabilities have to fall dramatically. The size of government has to be smaller. The public sector has to slim down. Those left can now receive proper wages. Taxes must all get collected as the state gets a handle on finances.

What about corruption at highest levels? What about Rami Makhlouf? As we found out recently in Saudi, this problem is not restricted to Syria. This is not to say that Rami and the leadership did not make a huge mistake in occupying such visible positions in Syria’s economy. After years of complaints by both the business elites as well as average Syrians, it was decided that large projects are best shared by broader section of the country’s merchants and businessmen. This is when holding companies like “Cham Holdings” was set up to bid on large infrastructure deals. Mr. Makhlouf was, however, still the largest shareholder of such holding companies and this explains why the anger and resentment towards him and corruption in general never subsided.

What about Western political meddling?

The State Department had run a democracy promotion program since September 11, 2001 and many activists were supplied with media training and equipment to help them capitalize on the moment when it presented itself. March 2011 was that moment.

What about the political reforms that were expected after Assad’s arrival in 2000?

This was a classic case of high expectations clashing with reality on the ground and the system as a whole. What was seen as needed “reforms” to some was viewed as a dangerous slippery slope by others. Everything described above comprised the nasty cocktail mix that was waiting in the wings as events unfolded March 2011. Those who wanted more political participation included the poor, those from the rural areas, the Islamists, and the regional/Western adversaries of the Syrian leadership.

Assad may not have anticipated the tsunami early on, but by the summer and end of 2011, he had made up his mind. This was going to be a fight till the end where losing was not an option—the leadership would stop at nothing until victory had been ensured.

The Future

In conclusion, Assad inherited a number of intractable economic problems. This legacy was born out of years of governance challenges. How would one maintain a largely socialist structure while the population doubled every 22 years and revenues from the country’s natural resources were falling by nearly 50%?

When and if Syria’s war is over, a new chapter and contract must be inaugurated. The private sector must become the engine of growth. Regulations must be streamlined. Taxes must be cut to levels low enough to ensure a respectable collection rate. And one final proposition—an item for a wish list of sorts: Rather than financial handouts, Syria must ask for a 20-year grace period that would allow it to export to the rest of the world free of duties.

Sanctions also ought to be lifted. Investments in labor intensive industries must be encouraged to help employment. If and when the economy finds its footing, it is critical that women’s labor participation rises from the abysmal rates in the region. Studies conclusively show that increased female participation in the labor force is the single biggest factor behind population growth control.

Syria has no easy road ahead, but such measures may help alleviate the challenges that must eventually be faced and promote the recovery of the nation in its post-war future.

Perhaps as importantly as economics, Syrians will have to decide what it will mean to be Syrian. Decades of Arab nationalism saw the larger Arab world upheld as more important than Syrian identity. This war—and Syria’s relations with its Arab neighbors—may have convinced many Syrians (and perhaps the leadership itself) that the time has come for Syrians to forge a more independent Syrian identity that binds its citizens together apart from conceptions of a broader Arab culture.

__________________________________________________________

An earlier version of this article originally appeared here.

Comments (3)


Jasmine said:

Superb article.
IMHO Syrians have realised at last that being Syrian is far more important than being Arab.
I would like to add a big factor which has contributed to Syria’s fall:the migration of the well educated and university graduate to the west ,Syria has bled its clever sons and daughters instead of trying to keep them to contribute to the advancement and progress of the country.
The religious leaders have a big share of blame when they encouraged the simple population to be loyal to their religious believes more than their loyality to their country,they were identifying themselves by their religion first and their nationality second.
This what will happen when ignorance ,poverty, and hard religious attitude are driving the overpopulated country.
There is no quick fix,it is going to be a hard learning curve for all.
At least they are going to listen now and only Syrians living abroad can influence the change.

April 10th, 2018, 4:09 pm

 

Roland said:

I disagree with a couple of things here, Ehsani.

1. There is a lack of global and historical perspective in your demographics discussion. Today’s Arab world, including Syria, is witnessing a demographic transition which is actually more rapid than that which took place in Europe during that region’s modernization. The current high population growth rate is an artifact of past fertility and the resulting large cohorts of women of childbearing years. The fertility rate in Syria has plummeted by more than half during the past generation and is on pace to be sub-replacement in another generation.

2. Given the extent of war damage, it will be the public sector that will have to bear the brunt of renewal efforts. A high degree of central planning and financing will be absolutely necessary. The good news is that there is an abundance of finance capital worldwide which is looking for returns, and an abundance of capital goods looking for markets. Syria has the needs and a large young labour force. This would be a perfect match: finance from the developed countries, steel and tooling from China, Syrian labour. All that is needed is to bring the war to an end.

April 10th, 2018, 6:43 pm

 

Alif said:

First the war has to end. And the Syria that emerges from the wreckage will not be the Syria that existed before 2011. In addition to the conflicts between Syrian factions the country has become the shifting and overlapping frontline of an international power struggle involving two great military powers and their respective allies, as well as struggles between regional alliances split along sectarian lines.

When the (major) fighting stops, Syria will almost certainly be split into zones occupied by different factions and the armies of their international backers. Guerilla and asymmetrical warfare waged between these zones will likely be a grim reality for the foreseeable future. The welfare and wellbeing of Syrians is not the top concern, to say the least, of the occupying forces and the sponsors that are keeping the war going by arming, funding and supporting all sides in this conflict.

The economic proposals put forward in this piece presuppose postwar Syria will be a stable country united by nationality under a central government without the corruption, brutal repression, influence of foreign agitators and deep sectarian and class divisions that led to the war. In that sense they are more hypothetical than realistic and a product of either extreme optimism or wishful thinking.

April 12th, 2018, 1:27 am

 

Post a comment