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Eliyahu Kanovsky is professor of economics and senior research associate at the BESA Center for Strategic Studies, both at Bar-Ilan University in Israel; he is currently Ludwig Jesselson Visiting Professor of Economics at Yeshiva University in New York.

During the quarter century that Hafiz al-Asad has ruled Syria, analysts of that country have had the luxury of paying relatively little attention to the economy. Asad has displayed great ability to cope with a deteriorating economy (as he did in the 1980s), to suppress domestic dissent, and to find foreign donors. As a British analysis puts it, "economic considerations are subordinated to political priorities, which remain, for the regime, the retention of power."1In Syria under Asad, Politics trumps economics.

But Damascus is abuzz with rumors about Asad's health and speculation about his successor. If a change at the top does take place, the new ruler is likely to be weaker than Asad and less likely to ignore economic problems to the extent Asad has. As economics becomes more central to Syrian domestic and foreign policy, political analysts of Syria will have to take much more into account the economic dimension.

In preparation for such a change, we consider three major aspects of the Syrian economy: its acute dependence on oil and oil-related revenues, the Lebanese connection, and military spending.

THE PRE-OIL ECONOMY

From about the time that the French government lost control of Syria in World War II until 1958, the Syrian economy was doing very well. Private enterprise predominated, agriculture and light industry led the economic expansion. Gross Domestic Product (GDP) rose annually by an average rate of 7-8 percent, or about 4-5 percent per capita, respectable numbers by any international standards. Private investment was dominant, with the government confining itself to providing basic infrastructural investments, education, tariff protection for industry, and other aid to the private sector.

Then came Syria's union with Egypt in the United Arab Republic (UAR) in 1958, the imposition of "Arab socialism," and economic stagnation. After the UAR's collapse in 1961, some socialist measures were reversed, but not for long; the leftist Ba`th party seized power in 1963 and greatly extended and expanded the socialist order. The results were catastrophic: the per capita growth rate between 1958 and 1968 was zero or negative, as incomes, employment, and productivity all suffered. On reaching power in November 1970, Hafiz al-Asad took some "corrective" measures, giving greater scope to private enterprise in some sectors, but made few changes in the basic socialist structure of the economy.

UP AND DOWN WITH OIL, 1968-1996

Oil has been a major element underlying the gyrations of the Syrian economy in the past thirty years. Since 1968, oil brought many important changes to the Syrian economy as four factors converged.

(1) In Syria itself, oil began to flow and exports strongly boosted Syria's total export earnings, thereby enhancing the availability of foreign exchange needed to finance imports of consumer and investment goods. Oil-export revenues have been Syria's prime earner of foreign exchange since the 1970s, and these have been crucial for financing imports essential for the economy. As the output of Syrian oil increased, the government could take advantage of much increased prices.

(2) Higher prices meant that Damascus won higher earnings from oil-transit dues. The pipeline from northern Iraq (built in the 1940s) passes through Syria, and transit dues provided the government, until the pipeline's closure in 1976,2 with a substantial source of foreign exchange. In the period 1970-73, at a time when Syria's commodity exports averaged only $248 million per annum, those dues averaged $97 million per annum, adding almost 40 percent to the country's foreign currency earnings from the export of commodities.

(3) The oil-price rise of 1973-74 so increased the revenues of Saudi Arabia, Kuwait, and other Arab exporters that they began giving substantial amounts in foreign aid to the poorer Arab states. Viewed as a "confrontation state" opposing the "Zionist enemy," Syria received the most aid of any Arab country: over $2 billion a year in the early 1980s. The Soviet Union, another beneficiary of high oil prices, offered civilian and military aid (long-term low-interest loans and arms at far below international prices).3

(4) Increasing numbers of Syrians found jobs in the Arab oil states as a voracious demand for foreign labor followed the massive influx of revenues that the Persian Gulf states received during the 1970s. Syrians working in the Persian Gulf saved large amounts to send home, boosting housing construction and other sectors of the Syrian economy. Living standards rose dramatically, helped by other economic stimuli, such as the completion of the Tabqa Dam in 1974 and phosphate production and exports in the early 1970s.

The economy experienced a sharp but short slowdown in the late 1970s, then the oil shock of 1979-1980 again raised oil prices, bringing in much higher oil-export earnings, far higher Arab aid, and greatly enhanced job opportunities in the Gulf states. Comparing annual revenues for 1978 and the early 1980s, oil-export earnings increased by over a billion dollars, as did Arab aid, while remittances increased by somewhat under a billion dollars. (These figures do not include unrecorded remittances sent through the black market, or held by Syrians abroad.) An increment of $3 billion in foreign exchange in an economy with a GDP of about $8 billion (in 1978) obviously had very wide repercussions.

In the Iraq-Iran War of 1980-88, Syria supported Iran by closing the Iraqi pipeline through its territory, and was compensated with large oil shipments from Iran. (Officially, most of these were long-term interest-free loans, but, in fact, they were effectively grants.) Iranian oil shipments permitted Damascus to increase its volume of oil exports at the high prices prevailing in the first half of the 1980s.

A plethora of foreign exchange permitted a very large increase not just in consumption but also in investment. Aside from housing, which remained in private hands, much of the money was put into the highly inefficient public sector, industry, and infrastructure. So poor were the results that industrial production (excluding oil) was no higher in 1982-87 than it had been in 1974-1981. Syrian non-oil exports remained puny, averaging $555 million per annum, just half of the oil exports. The failure significantly to expand non-oil exports reflected on the poor performance of industry and agriculture alike.

When world oil prices began to slide in 1981, aid from Arab states was curtailed and workers' remittances fell. After a positive balance of payments (the current account) in 1979 and 1980, eight consecutive years of deficits followed.4 In the mid-1980s, Damascus defaulted on its external debt. The authorities reacted by imposing ever greater restrictions on imports; the market reacted with a major growth in smuggling, especially from Lebanon and usually with the connivance of the Syrian forces stationed there.5

The recession in the 1980s was pervasive. A severe compression of imports affected the whole economy, which is dependent on imported goods machinery, equipment, spare parts, and raw materials for industry, agriculture, transportation, communications, construction, and other sectors. Official estimates show that the GDP per capita fell by 15 percent between 1982 and 1987, and living standards (measured by private consumption per capita corrected by the official consumer price index) fell by a disastrous 37 percent.

But then, during the late 1980s, foreign oil companies discovered large deposits of high-quality oil in Syria. Output rose from 160,000 barrels per day (bpd) in 1985 to 405,000 bpd in 1990, and 610,000 bpd in 1995.6 This expansion of oil production more than offset the cessation of Iranian oil shipments to Syria in 1988. In the 1990s, Syria's oil-export revenues averaged about $2 billion per annum, or roughly 60 percent of its total commodity exports. In 1995, for example, oil-export revenues were $2.4 billion, while all other commodity exports amounted to just $1.6 billion.7 While Syrian oil-export revenues are still puny compared to those of Saudi Arabia and other major exporters -- in 1996, it exported just 375,000 bpd in contrast to Saudi Arabia's exports of about 7 million bpd --oil, nonetheless, plays a very major role in the country's economic life.

Another major plus, temporary but important, were the grants to Syria rewarding the regime for joining the anti-Saddam Husayn coalition in the Kuwait war. The size of this reward is not clear: one unofficial source estimates it at $4 billion and another at nearly $5 billion.8 Much of this money was spent on arms purchases, mainly from Russia.

The authorities responded to these favorable changes by easing up on import controls. As a result, imports rose precipitously: averaging about $4 billion in 1980-85, they fell drastically to about $2 billion per annum in 1986-1990, and reached almost $5.2 billion in 1995.

THE CURRENT ECONOMIC SCENE

This good fortune was followed by a downturn, however, as current account deficits reappeared in 1993-95. Projections for 1997 indicate the deficits will grow from $607 million in 1993 to $1,150 million in 1997.9 Persistent and growing balance-of-payments deficits almost invariably signal future troubles -- mainly the compression of imports, which can seriously hamper investment and production, especially in industry. Balance-of-payments deficits have also caused the national external debt to grow. World Bank figures indicate that Syria's external debt at the end of 1994 was $20.6 billion, of which $6 billion represented arrears. Debt service (annual payments on principal and interest) in 1994 was supposed to be $1.5 billion but amounted to only $400 million. There was little change in 1995.10 In short, Syria has fallen behind in payments on its external debt, and arrears are accumulating. This failure to make payments means that further credits are hard to obtain, multiplying Syria's economic problems.

Countries defaulting on external debt usually call in the International Monetary Fund and the World Bank for help; but the Syrians have refused to take such steps. Their reasons are unclear: it might have to do with pride, but probably the decision makers find the current situation more to their liking. International institutions would almost certainly prescribe privatization in Syria, an unwelcome change that entails large-scale dismissals of redundant workers and an end to the practice of milking the public sector for private profit.

Since the end of the 1980s, Damascus has taken limited steps to liberalize the economy, opening up trade by the private sector and moving toward the unification of the exchange rate. But the most difficult economic reforms, including privatization, have not even been addressed. Further, no economic reforms have been instituted since the private investment law of 1990, and even those "have ground to a halt."11 For these reasons, "Syria's economic prospects are once more looking rather bleak."1[2 In all, the authorities are hardly addressing Syria's fundamental economic problems. "The economic system has become strongly centralized, characterized by public sector predominance (and inefficiency), administered prices, import compression, foreign exchange rationing ... [and] overvalued exchange rates."1[3

Large-scale foreign private investment or a repatriation of Syrian private capital that had fled the country could solve the problem of current account deficits, but these developments seem unlikely. Despite new laws favoring local and foreign private investment, such investment remains of limited importance. What private investment has taken place has been mostly by expatriates, and mostly in (short-term) commercial ventures rather than in (long-term) industry.

THE FUTURE OF SYRIAN OIL

Forecasting future oil discoveries always involves much guesswork but we do have some clear indications for Syria. Western oil companies operating in Syria are pessimistic about finding new large oil discoveries and many have either reduced their exploration efforts or even abandoned their concessions. The minister of oil lost his job in mid-1996, blamed for the "mass exodus" of the oil companies in recent years as well as charged with corrupt practices.1[4 These developments point to fewer new oil discoveries ahead1[5]and a likely decline in production. One periodical estimates that Syrian production peaked in 1995-96 and will soon decline.1[6 Shell predicts that "if no significant oil discoveries are made in the next few years, Syria could become a net oil importer by the year 2005."1[7]

The price of oil also spells trouble -- at least if this author's predictions are correct that the trend in long-term real oil prices will be downward. The prediction is based on a number of factors:1[8

* The demand for oil will continue to rise far less than real GDP, owing to continued improvements in energy efficiency and continued substitution of other sources of energy for oil, especially natural gas.

* New technologies have greatly increased the supply of oil and will probably continue to do so. Predictions in the 1970s anticipated declining world oil reserves; in fact, reserves have more than doubled since 1970.

* The precarious financial situation of Saudi Arabia and most of the other oil exporters forces them to export more oil.

* Oil exports from the former Soviet Union declined in the late 1980s but this trend has apparently been reversed since 1995.

* Iraq's oil reserves, second only to those of Saudi Arabia, will at some point come back in full force on the market. U.N. sanctions have been lessened to allow Baghdad to export about 600 thousand barrels per day, but that is still only a fraction of the nearly 3 million barrels per day Iraq exported before the Kuwait war. The country's potential on the international market remains great, especially when one considers that oil exports will be pushed to the limit to pay for rebuilding the country's shattered economy.

This gloomy outlook not only further lowers Syrian oil revenues but also implies that the once rich Arab Gulf states will be sending even less foreign aid to Syria and hiring fewer Syrian laborers.

As this rapid review indicates, fluctuations in the Syrian economy since the 1960s have been largely tied to oil. When oil prices shot up, or when Syria's own oil production rose rapidly, Syria's economy prospered. When they went down, the economy deteriorated. In the absence of far-reaching economic reform, this connection is likely to persevere into the future, and that spells trouble for Syria, for prospects for oil appear dim.

THE OCCUPATION OF LEBANON

A Syrian army of thirty-five to forty thousand soldiers has occupied Lebanon since shortly after that country's civil war began in 1975. One might think this force exacerbates Syria's already heavy military burden, but, in fact, the occupation appears to be a net gain to the Syrian economy. How so?

The army that came to make peace (among the various Lebanese factions) has dug in to make money.... Lebanese, rich and poor, Muslim and Christian, resent heavy-handed Syrians, whose thirty-five thousand troops and pervasive secret police control everything.... Syrian companies are building roads, renovating buildings, trucking freight, and supplying much of Lebanon's cement and electricity.... For Syrian workers Beirut is heaven, salaries are about double [those prevailing in Syria]. Before the civil war Syrians did manual labor in Lebanon. Now with the Lebanese government powerless Syrians are working in factories, ports, farms, and construction.... Lebanese Shiites and Palestinian refugees [in Lebanon] are especially hard hit by the influx of Syrian workers.

The report goes on to quote Lebanese merchants who say that "rackets run by Syria's army and secret police control thriving trades in vegetables, cigarettes, [and] clothing."19 In addition, there is much smuggling from Lebanon into Syria and what Lebanese merchants call the "Syrian component," having to make payments to Syrian army officers.

The economic benefits for Syria, direct and indirect, from its occupation of Lebanon include jobs for a half million to one million Syrians in Lebanon. Even the lower estimate implies relatively well-paying jobs for about one-seventh of the Syrian labor force, a far greater number than before the Syrian occupation. Reconstruction in Lebanon since around 1990 has greatly stimulated the economy and increased the country's attractiveness to Syrian businessmen. Syrian occupation and control gives the Syrian businessmen an advantage in obtaining building contracts, supply contracts, and so forth. Remittances sent home by Syrian workers to their families are estimated at $1-3 billion dollars annually. To put this number into perspective, the higher estimate exceeds Syria's oil-export earnings in 1995.

This foreign exchange finances the large-scale illegal imports smuggled into Syria with the connivance of the Syrian army. Not surprisingly, Syrian army personnel are reported to seek appointments in Lebanon, which can be quite lucrative to them. Officially, trade between Syria and Lebanon has been recorded as $90 million per annum in recent years. Unofficially, it is estimated that, including smuggling, trade is ten times that figure.20 Lebanon is the source of many of the consumer goods sold in Syria, and Syrian industry is often dependent on goods smuggled into Syria as necessary inputs for production.21The Syrian army is also involved in the lucrative Lebanese drug trade. An unpublished report of the U.S. Drug Enforcement Agency details a close liaison between the Syrian forces in Lebanon and drug dealers in the Bekaa Valley (the center of the drug trade) and most of the ports from which narcotics are shipped.22

For Israel-Syria peace negotiations, this situation implies that Damascus would probably resist Israeli demands for a Syrian withdrawal from Lebanon concurrent with Israel's withdrawal from its "security zone" along the Lebanese border, or even in return for its withdrawal from the Golan Heights. The Asad regime might prefer a nonbelligerency pact in which Israel implicitly sanctions Syria's continued occupation of most of Lebanon in return for a continuation of the status quo on the Golan Heights.

MILITARY EXPENDITURES

Should Syria and Israel conclude a peace agreement, what are the prospects for a significant reduction in Syria's military outlays? Not good. In part, strong military forces are needed in an autocratic regime such as Asad's to protect the state from internal dissent and possible rebellion. That Asad is a member of the `Alawi sect, which constitutes about one-eighth of the population, makes a strong army all the more necessary.

Foreign relations also point to high military spending. There are tensions with Turkey concerning many issues, especially the Euphrates River waters and suspected Syrian support of the Kurdish Worker's Party of Kurdistan (Partiya Karkerana Kurdistan, or PKK) rebellion in Turkey. The military agreements between Israel and Turkey further increase the prospects of sustained Syrian military spending. In addition, relations with Iraq are bitter, and Syria's already poor relations with Jordan have deteriorated as Amman recently accused Damascus of backing saboteurs bent on destabilizing the kingdom, and of illegally reducing the flow of water to Jordan from the Yarmuk River.23

A full-fledged and credible peace treaty with Israel would hardly lead to less spending, as the Egyptian and Jordanian precedents suggest. Israel has significantly reduced its military expenditures since its 1979 peace treaty with Egypt, but Egypt has not. Instead, Cairo maintains about the same size army, and its equipment, now mainly from the United States, is more sophisticated and expensive. (Indeed, thanks to U.S. aid, Americans have paid for most of Egypt's new military equipment since 1979.) Likewise, King Husayn requested increased U.S. military as well as civilian aid upon signing his country's peace agreement with Israel in 1994. In short, the era of beating swords into plowshares has not yet arrived in the Middle East, and Syria is not likely to inaugurate it.

If the regime in Syria believes that it must, in any case, maintain strong armed forces to cope with possible external enemies -- aside from Israel -- and its internal opponents, it has little motivation to conclude a peace treaty with Israel. A new regime might view things differently.

CONCLUSION

Syria's economy is likely to enter -- or perhaps already has entered -- a difficult period. How does a deteriorating economy affect Syria's internal politics and relations with the outside world?

As concerns foreign relations, economic problems have little impact so long as Asad remains in power. Over the longer run, however, a persistent recession would probably have a significant impact. Economic weakness is likely to reduce Syria's position in confronting Turkey in its disputes over water and the PKK insurgency. With respect to Lebanon, a weak Syrian economy strengthens its desire and determination to continue the occupation, with the jobs and income it provides for Syrians. A new regime might be more flexible and economic troubles might have a greater influence on its policies than they do at present.

1 Economist Intelligence Unit (hereafter EIU), Country Report-Syira, no. 3, 1996, p.6.
2 The pipeline was reopened in 1979, then closed by Damascus in 1982 as a consequence of its hostile relations with Iraq
3 We have few reliable figures about the value of Soviet bloc aid. Unofficial sources estimate that Syria received $11-15 billion in arms in the decade 1974-1983. EIU, Quarterly Economic Review-Syria, no. 1, 1984, pp.3-14; and no. 3, 1984, p. 13; The Middle East, July 1989, pp. 34-35; and The New York Times, July 24, 1989. In 1983 alone, Syrian arms imports (mostly from the Soviet Union) amounted to an estimated $3.5 billion. This number then dropped precipitously, to 1.1 billion in 1989 and $220 million in 1993. U.S. Arms Control and Disarmament Agency, World Military Expenditures and Arms Transfers (Washington, D.C., various issues). The rapid decline in Syrian arms acquisitions after 1993 seemingly reflects the weakening of the Soviet Union and its inability to provide arms shipments to Syria on a concessionary basis; it probably also reflects Syria's economic problems. Since the dissolution of the Soviet Union in 1991, Russia has continued to sell arms at discounted prices, but now on a cash basis. Patrick Clawson and A. Volpin review this as of 1993 in :The Economics of Soviet Arms Transfers to Middle East Governments," Iranian Journal of International Affairs, no. 1, 1993, pp. 72-86; this is still to be the case, for the Russians are desperate for hard cash, and offer major discounts to any and all buyers.
4 Unless otherwise stated, the data are from the Central Bank of Syria, Quarterly Bulletin (various issues); and the International Monetary Fund, International Financial Statistics (various issues). The deficits were yet higher than official figures indicate, for arms imports went unreported.
5 The Economist, Nov. 7, 1987, p. 66
6 BP Statistical Review of World Energy, 1996 p. 7.
7 EIU, Country Report-Syria, no. 2, 1996 p. 8.
8 F. Zallio, "Structural Economic Adjustment in the Middle East," The International Spectator, July-Sept. 1995, pp. 92-95; and Forbes, July 31, 1995, p. 83.
9 EIU, Country Report-Syria, no. 3, 1996 pp. 3,9.
10 Ibid., p. 16.
11 EIU, Country Report-Syria, no. 2, 1996, p.6.
12 Middle East Economic Digest, Special Report-Syria, Sept. 29, 1995, pp. 10-11.
13 Zallio, "Structural Economic Adjustment in the Middle East," pp. 92-96.
14 EIU, Country Report-Syria, no. 3, 1996, p. 14.
15 Ibid., p.6.
16 Arab Oil and Gas Journal, Jan. 1, 1996.
17 MEED, July 19, 1996, p. 26.
18 For fuller arguments, see Eliyahu Kanovsky, OPEC Ascendant: Another Case of Crying Wolf (Washington, D.C.: The Washington Institute for Near East Policy, 1990); and idem., "The Woeful State of Saudi Finances," in Patrick Clawson, ed., Energy and National Security in the 21st Century (Washington, D.C.: National Defense University, 1998).
19 The Wall Street Journal, July 19, 1995.
20 The Wall Street Journal, Apr. 17, 1996.
21 Ibid.
22 The Economist, Sept. 30, 1989, p. 38: and Forbes, July 31, 1995, p. 83.
23 EIU, Country Report-Syria, no. 3, 1996, pp. 5-13.