The Economics of the Syrian Crisis
Written by Ethan Kapstein and Amanda Mayoral, US Institute of Peace
The Arab Spring revolutions raise a crucial question for analysts: How did authoritarian or kleptocratic rulers lose control over their polities? For decades, rulers were able to use a combination of repressive and redistributive policies in order to maintain social order. How did that order break down? This blog offers insights into how this transpired in the case of Syria and what needs to happen to ensure a sustainable peace in country.
The current crisis has much to do with economic problems that predated the conflict - namely, the fact that economic decisions made by the Syrian state over the past three decades reflected ineffective “social market” polices. The long-standing Ba’ath party regime has operated mostly as a centrally planned economy, functioning primarily for the benefit of the minority Alawite elite. Until the revolution, an unwritten peace existed between the government and the people, and was kept so long as the government engaged in a sufficient level of redistribution, in effect making the costs of rebellion higher than the benefits.
The Syrian government’s failure to provide for the basic needs of its growing population helped spark the current revolt. In particular, increasing food and fuel prices, coupled with rising unemployment, led to an eroding sense of economic security. The Assad regime had staked its legitimacy and credibility on creating a climate economic security; the regime’s failure to do so undermined its authority.
As a result of ongoing civil war, Syria in particular is now faced with a dire social and economic environment. It is estimated that half of all Syrians now live in poverty, with 4.4 million in extreme poverty. Approximately 2.3 million jobs have been lost, affecting an additional 10 million dependents, and economic losses are estimated at between $60-$80 billion, or 40 percent of the country’s GDP. Key challenges in the Syrian economy include high levels of unemployment - especially among youth - reduced rates of growth, falling productivity in the agriculture sector, and real or suppressed inflation.
Creating a stable and peaceful Syria will require both economic transformation and economic reconstruction, and getting to that point will involve addressing several critical challenges:
• Demography versus Economy: Population growth has outpaced economic growth (coupled with a drought causing unemployment and food prices to rise), making the social contract between the government and the people unsustainable.
• Agriculture: Between 2006 and 2011, a five-and-a-half year drought crippled 60 percent of agricultural land and up to 85 percent of livestock in some regions, resulting in food shortages and price hikes. The drought caused a wave of unemployment -an estimated 800,000 rural agricultural workers lost their jobs, and induced migration from rural to urban areas.
• Oil: The recent decline in the profitability of the Syrian oil industry, due to the seizure of oil wells by rebel groups, heightened transportation costs, and international sanctions banning trade, has caused the industry to nearly collapse. Moreover, EU and U.S. sanctions against oil exports are estimated to cost $400 million in losses each month.
• Corruption: Since 2003, corruption in Syria is estimated to have almost doubled as measured by the Corruptions Perceptions Index, rising from 49 to 81 on a scale of 100. Regime insiders, such as Assad family members and close friends, have benefited from the government’s central control over the Syrian economy and judicial system, thanks in part to the awarding of non-competitive contracts.
• Private Enterprise: The social market regime in Syria has suffocated opportunities for small, middle-size, and other private business enterprises. For instance, since 1960, the government has nationalized major enterprises, and little credit has been available for those private sector firms that remained in business. Rebuilding the private sector will be a core task of the Syrian regime in future.
• Trade and Investment: Since the conflict, Syrian exports dropped from approximately $2 billion in 2011 to $95 million in 2013. Rebuilding trade and Syria’s participation in the regional and global economies is a major task for post-war reconstruction.
• Financial Markets: Strengthening Syria’s financial markets will provide the conditions for greater foreign investment, credit, controlling inflation, and debt financing. Such activities will not be possible without first strengthening the currency regime. Currently, $1 is worth 138 Syrian pounds, which reflects a 75 percent devaluation since 2011.
Following the conclusion of the civil war, a new regime in Syria will need to begin with restoring basic services and giving immediate attention and aid to humanitarian and refugee relief efforts. Recent efforts to unfreeze foreign bank accounts to supply food essentials to Syrians in need should be furthered. The new regime should support capacity-building and development programs for a variety of job areas, especially non-public-sector jobs.
Longer-term actions that are critical for peace include reversing the Assad regime’s economic policies, rebuilding infrastructure and institutions, and countering the war economy. Rebuilding the basics, such as roads, homes, and places for health care and education, is essential. As a result of the war, it is estimated that schools servicing half of all students were damaged. Many health care and medical workers have become refugees and are unable to support the local needs. Rebuilding the destroyed homes alone would cost at least 28 million in construction and energy costs. The devastation from a war is, as a rule of thumb, expected take 7-10 years to rebuild on average in terms of economic and humanitarian conditions. Further, the United Nations Relief and Work Agency estimates that at any rate of reconstruction, it will take at least 30 years for Syria to recover to 2010 pre-war levels.
To what extent the war economy has shifted the control of economic resources remains unclear. To be sure, rebels have gained control of some cities and towns that produce oil and agricultural goods, which are sources for government revenue and employment. The shift in control has been a reason for “field burning” by government forces in rebel-controlled areas as a means to deny the rebel forces legitimate income. The war economy will also manifest itself in the high costs that the regime faces as it pays for its military from diminished coffers. The likely economic effects include a lack of jobs for the civilian population, a weak currency, an increasingly informal or black-market economy, and closed trade routes. Using the Lebanese Civil War as an example, there were significant profits associated with continuing the conflict, and so moving away from a war-time economy required offering a more profitable alternative to the various armed groups. This meant sharing and empowering militias and rebels to have a stake in post-conflict reconstruction, lest they act to undermine a fragile peace.
Mechanisms to make the shift from a war to a peace economy could include job creation; scaling back the public sector; investment support for non-oil, private-sector development; the rebuilding of social safety nets; and limiting direct subsidies.
Major players that have an economic interest in a peaceful Syria include neighboring Lebanon -- a major trading partner interested in regional stability and in the potential for this outcome to weaken Hezbollah. Saudi Arabia is also of interest; a more Sunni-tolerant government could be a major ally in dealings with Iran and can provide considerable financial support for post-conflict development. Other regional winners would include Israel and Turkey.
But most prominently, the average Syrian has the most to gain from a peaceful outcome.
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