The Political Economy of Investment in Syria

Linda Matar

• Publisher: Palgrave Macmillan
• Year: 2016
• Print ISBN:
  9781349577323
  9781137397713
• eBook ISBN:
  9781137397720
• Topic: Politics & International Relations
• Subtopic: Development Economics
• Index: Politics & International Relations

Linda Matar examines Syria's failure to promote employment-generating investment prior to the uprising. Tackling the thorny issue of the inapplicability of modern investment theory to a developing country, she situates the analysis of investment in Syria in its historical context and examines the socioeconomic structure and political preconditions that set the course of capital accumulation. Matar argues that the class in charge of development, which oversaw the allocation of resources during the Hafiz and Bashar Assad regimes, precipitated a crisis of capital accumulation. Difficult-to-access data and information compiled from fieldwork reveal how neoliberal reforms failed to build productive capacity and instead enriched a few through short-term speculative and mercantile ventures. Productive investment in Syria prior to the uprising lurched downward, and the key related socio-economic variables followed. These deteriorating conditions contributed to the social explosion in 2011.Exploring the poor quality and quantity of investment, this study probes how the cant of the free market served as a veneer behind which the institutional decisions distorted income distribution in a way that would inevitably lead to collapse.

1

Introduction

1 The political economy of Syria before the uprising

The Syrian uprising began in March 2011, initially as a result of the domino effect of the Arab uprisings that were sweeping the region; later the conflict evolved into full civil war. Nevertheless, the causes of the unrest remain complex and multi-layered. In political-economic terms, the Syrian uprising can be traced back to the Hafiz Assad regime and to Assad’s implementation of macroeconomic strategies that gradually phased out the traditional social support systems, particularly in the countryside. More importantly, the class structure that oversaw the allocation of resources during the Hafiz and Bashar Assad regimes underwent a crucial change.¹ It began to allocate resources to the nonproductive sectors that generated wealth for a certain segment of society – the ruling elites, including officers in the army and security forces and their powerful business partners – rather than for the general public. This subsequently intensified social polarisation, the driver of social unrest. These points will be further elaborated throughout the book.

During the 1960s, Syria’s state-controlled economic structure took direct responsibility for initiating an autonomous and internally induced path to economic development. The state-led economy was characterised by public-sector dominance, administered prices, a system of multiple exchange rates, and import restrictions. Much effort went into expanding the public sector, amounting to more than 60 per cent of total investment or gross fixed capital formation (GFCF) in the 1960s and early 1970s (Hinnebusch, 2001a). The state’s strategy to induce import-substituting investment was aimed at creating a productive and independent national economy so as to avoid any chance of returning to the post-independence ancien régime.

At first, the state’s way of increasing public investment was to channel resources to sectors that secured social benefits and exhibited high potential for employment creation and growth (al-Hamsh, 2004 and Lawson, 1997). A second aim was to preserve the privileged role of the public sector in the real economy – less for economic than for political reasons – as Syria maintained its regional role as a ‘front-line’ state with regard to Israel (fieldwork interview with Issam Al-Zaim, 2007). Compared to today’s conditions, the Syrian population enjoyed high living standards, as GDP per capita at constant prices grew at an annual rate of 6 per cent during the 1970s (World Bank, 2014). It was also a time when basic necessities and food provision were subsidised by the state. This meant that the majority of Syrians was given access to basic health, education, and other public services.

This trend did not last long. During the Hafiz and Bashar Assad regimes, Syria gradually eased itself away from its state-controlled and state-interventionist past and gradually lifted state controls. In the tourism and agricultural sectors, a new form of private-public partnership or mixed-sector cooperation was initiated in the 1970s, laying the foundation for a piecemeal but tailored expansion of the market-driven economic order. Starting in the late 1980s, the Syrian economy underwent a gradual transformation from a state-controlled to a market-oriented economic structure as the regime cautiously embarked on a package of market-friendly reforms in general, and investment liberalisation in particular. Both were intended to kick-start private investment and boost overall GFCF.

The Hafiz Assad regime of 1970–2000 introduced phases of open-door economic policies known as infitah, which focused on investment liberalisation as part of the effort to give a greater role to the private sector and its activities. In 1991, the Assad regime promulgated the new Investment Law No. 10, the first reform measure that revived private-sector activities and permitted Syrian and foreign investors to invest in previously prohibited sectors (including the industrial sector). The main aim was to promote industrial types of investment. The Law was a salient qualitative change, because through it, the authorities were able to reverse the statist policies of the preceding period and reinstate private property ownership. Although the private sector was never abolished during the state-controlled economic period, its activities remained limited to commerce and trade. Nevertheless, it was effectively revived with the introduction of Law No. 10. The Law offered fiscal and financial privileges, which were costly to the Syrian government, in order to promote investment and boost GFCF.

Reform measures did not stop there; rather, they accelerated during the second Assad regime – the Bashar regime – in the post-2000 period. Two amendments to Law No. 10 were introduced in 2000 and 2007 with the aim of removing all state controls that were inhibiting private investment, both domestic and foreign. In 2007, Legislative Decree No. 8 (hereafter LD No. 8) abolished the restriction on land ownership and allowed investors to own the land on which their investment projects were carried out. Moreover, the Bretton Woods institutions – the World Bank and the International Monetary Fund (IMF) – got involved in the Syrian liberalisation process and advised the state on how to develop its economic reforms. Toward the end of 2007, the Syrian authorities, as counselled by the World Bank and the IMF, launched a programme to phase out subsidies on oil products in order to streamline budget expenditure. Fertiliser subsidies were also removed, exposing farmers to sudden increases in the cost of production, which in turn dampened food production and distorted the self-sufficient nature of the Syrian economy (see Section 3). The Syrian policy-makers were convinced of the then widely accepted idea that a free market would drive growth, and that, although there might be a short-term welfare setback, eventually the ‘trickle-down’ in the form of job creation and other economic opportunities would surely follow. However, as will be demonstrated later in the book, an examination of the social and economic conditions that prevailed during the Hafiz and Bashar Assad regimes reveals that developmental and welfare gains never materialised.

A preliminary examination of investment data, as shown in Section 6, shows that, on average, the investment rate during the 1990s and 2000s remained low and erratic following the spread of investment reforms. The investment rate could not reach the peak that it had attained in late 1970s. Moreover, there was no boost in manufacturing production despite the promulgation of market-friendly reforms (State Planning Commission, 2005). Hence the basic research question arises: Why did manufacturing investment not respond to the liberalisation measures that targeted private investment with attractive fiscal and financial incentives? Robinson (1964) argues that private investment reflects the inherent behaviour or expectations of capitalists, who aspire to accumulate more profit, driven primarily by their ‘animal spirits.’ However, in the presence of deep-seated institutional rigidities that have been shaped by regional and international changes and developments, how is investment determined in a country like Syria that is geo-strategically important in the Arab Near East?² More aptly, what were the basic determinants of investment during the 1960s? and from the 1990s onward, how did subsequent changes affect the investment pattern?

To answer these questions, research must situate the analysis of investment in Syria in its historical context and examine the socioeconomic structure and political preconditions that set the course of capital accumulation.³ This historical or political-economy approach intertwines the analysis of investment with human agency, identifying the politically empowered social force that pushed for investment liberalisation and took responsibility for the process of capital accumulation. The terms political economy and historical approach are used synonymously throughout this work. Such a holistic approach provides a more comprehensive analysis of investment throughout Syria’s different developmental phases.

Few authors address the study of investment determination in Syria. Each places the study in a certain analytical context. For instance, Bassam Haddad talks about the formal and informal economic networks that emerged following Syria’s economic liberalisation (Haddad, 2012). These networks took the form of a state-business coalition and became stronger in the 1980s and 1990s, because private investment activities undertaken within these networks had strong backing from the Syrian regime. Haddad argues that not only had these networks evolved and benefited from Syria’s social, economic, and political factors and processes, but that they also played a crucial role in influencing the form and the extent of economic reforms, particularly regulatory and fiscal policy change.

Volker Perthes provides a sectoral analysis of investment in Syria by highlighting both the industrial and commercial subsectors of the private sector. He points out that trade and commercial activities constituted the bulk of private-sector activities following economic liberalisation. Investment in the industrial sector did not improve because industry was ‘perceived as the more difficult way to profit’ (Perthes, 1992a: 215), especially when investors were facing the possibility of a regime change and confiscation of their resources – as happened during Syria’s nationalisation experience of the 1950s and 1960s.

Sylvia Polling talks about the potential private investment that could be kick-started – by local and Gulf investors – following the promulgation of Law No. 10 in 1991 (Polling, 1994). She addresses the Law, focuses on its main provisions and financial privileges, and mentions that the main rationale behind the Law was to attract ‘direct inward investment.’ However, Polling points out that investors might still be reluctant to undertake long-term commitments given, on the one hand, the political instability to which a country like Syria is subject to, and on the other, the contradictory and even conflicting laws in effect there.

Khalid Abdel-Nour highlights the challenges that domestic investment, especially industrial investment, had faced following the change in the investment climate from protectionism to competition. Abdel-Nour (2000) points out that Syrian industrialists had historically benefited from the Syrian Friendship Pact, the trade agreement between Syria and the USSR during the 1980s. These Syrian industrialists set up factories for the purpose of exporting low-quality goods – which could not compete with their higher-quality European equivalents – to the Soviet market. In this regard, Abdel-Nour (2000) points out that trade liberalisation and the lifting of state protection from local industry had exposed it to serious challenges, especially given that it had been protected from international competition by the Import-Substitution Industrialisation (ISI) policies enacted by the Ba’athist regime. Finally, Joseph Bahout (1994) discusses investment in the context of the Syrian ‘business community,’ which he defines as a hybrid group whose components had been shaped by various political and economical changes in the country during the past three decades.

The above-mentioned works of Abdel-Nour, Bahout, Perthes, and Polling are one-off article-contributions that analyse the development of the Syrian private sector and its subsectors following market liberalisation in the 1990s. Besides being outdated, they are merely descriptive and lack theoretical grounding in political-economic analysis and investment determination. Haddad’s work, however, is recent and examines aspects of the political economy of Syria, but unlike this book, his work is more political than economic.

Haddad’s work provides an analysis of relationships between the business community and the state apparatus and their articulation through formal and informal networks. Hence he describes network analysis as his conceptual framework. Haddad’s approach is particularly interesting because it ‘provides insights into and explanations of behaviour that are not readily available from an analysis of actors’ attributes such as class, community, positionality’ (Haddad, 2012: 172 ). Indeed, Haddad rightly observes that his way of approaching the topic enriches the class approach and complements it. Accordingly, this book follows the standard Marxian class approach and does not negate the facts revealed by observations concerning business networks. It does, however, situate theory in terms of its historical context. A class is a social relationship between agents, their forms of social organisation, and modes of appropriation in the process of self-reproduction and social reproduction. As a social relationship, rather than just an ensemble of people with a common relationship to social reproduction, a class is a process developing in real time, retaining or negating its symbolic characteristics and collective memory, and evolving by meeting the demands of the necessities it faces by making changes in its organisational forms. Hence, the changing business networks are shifts in the forms of organisation of the social classes that align themselves with the material requirements of appropriation. In the case of capitalism, the ruling class, whose purpose is to accumulate profits exponentially, will take whatever measures are necessary to address the changing dynamics of wealth-making under capitalism.

This book equates the dominant social class with the agency of history. But a social class need not necessarily be confined to national borders. Processes of production, exchange, and investment under capitalism cut across borders and so do classes. In this work, I focus mainly on the investment aspect of the class relationship in Syria. The work identifies the social class or class alliances that assumed the agency of investment through control of the means of production; determining the amount and type of investment during a specific historical period. The book also reveals how changes in the agency of investment gave shape to new investment patterns. Situating the study of investment within class-based and historically determined conditions – which incorporate economic, social, and political factors – sheds additional light on the subject matter and on the way investment analysis can be handled and understood in a developing economy like Syria – an economy in dire need of enhancing its economic resources.

The regional and international political conditions prevailing during the 1990s differed sharply from those of the 1960s and early 1970s, which influenced the formation of the different agencies directing investment. From the late 1980s, the fall of the ‘Soviet project’ and the dictates of the neoliberal paradigm led Syria to reorient itself towards the Western orbit. Such political preconditions encouraged the state capitalists or state bourgeoisie, who aimed to move out of the ‘state shell,’ to form a new class alliance with the private bourgeoisie. This alliance gave rise to a new agent of investment, which made use of the market-friendly reforms to engage in profitable private-sector investments. This new agent of investment consequently pushed for new patterns of investment activities that served private as opposed to social interests. This process and its consequences are the thrust of analysis in this book.

2 Data and methodology

The existing literature on Syria’s political economy is driven by ideological positions that sometimes sap the strength of the argument being posited. Moreover, data on Syria’s social and economic conditions is not only inconsistent, and at times, contradictory; but is also typically embellished to improve the regime’s image. One can interpret the variances between existing sources by how they assess the relevance of data and statistics regarding Syria’s national security. I, therefore, turned to the published and unpublished Arabic-language writings and analyses of Syri...

Table of contents

• Cover
• Title
• 1  Introduction
• 2  Review of the Theoretical Framework on Investment Decisions
• 3  Investment Promotion in Developing Countries
• 4  Class and State Capitalism in Syria
• 5  Investment Liberalisation during the Hafiz Assad Regime: Moving to a Freer Market
• 6  Economic Liberalisation as an Irreversible Trend during the Bashar Regime: The Socioeconomic Fuel of the Syrian Crisis
• 7  Conclusion: Difficult Exit from a Prolonged Conflict
• Notes
• Bibliography
• Index