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Syria Industrial Development Policy
Through most of the 1950s, private investment primarily
fueled industrial development while the government protected
public order and fostered a climate suitable for economic growth.
After Syria withdrew from a customs union with Lebanon in 1950,
domestic manufacturing received considerable protection from
competition by imports. The government also provided investment
incentives through tax exemptions and cheap credit. Although data
for the 1950s were sparse and of questionable reliability, they
indicated that the growth rate of industrial production was about
12 percent a year between 1950 and 1958, substantially higher
growth than for the economy as a whole. OT
Between 1958 and 1965, Syria experienced an almost complete
reversal of development policy. The government assumed a greater
role in economic planning, and by 1965 had nationalized most of
the larger manufacturing concerns. Prior to nationalization in
1965, land reform, talk of socialism, and the 1961
nationalization decrees during the union with Egypt frightened
private investors. In addition, the government was unable to
implement the investments included in the First Five-Year Plan.
Consequently, the rate of increase of value added by industry
amounted to an annual average of 4 percent in constant prices
between 1958 and 1965, although other factors, particularly a
severe, prolonged drought (1958-61), contributed to the slower
growth of industrial output.
Through the complete or partial nationalization of 108 large-
and medium-sized enterprises, the state created the nucleus of
the public industrial sector in January 1965. Thirty-seven firms
were completely nationalized, and the other 71 firms were
nationalized to an extent varying between 75 and 90 percent;
however, these semipublic firms were fully nationalized in 1970,
retroactive to 1965.
After nationalization, most public sector industry was
located under the Ministry of Industry and organized under four
broad holding companies called unions--specifically food,
textiles, chemicals, and engineering unions. Separate ministries
controlled the national electric power and petroleum companies.
In the mid-1970s, the national petroleum company was divided into
several separate companies responsible for such particular
functions as exploration and production, transport and terminals,
refining, and domestic sales and distribution.
After the 1965 nationalizations, the government dominated the
economy and controlled most elements affecting industrial
development, including planning, investments, foreign trade,
pricing, and training. The planners avoided the temptation,
succumbed to by many developing countries, of constructing large,
expensive prestigious industrial projects that provided only
small or distant returns. Most projects were geared to the size
and needs of the Syrian economy. Development emphasized natural
resources (essentially oil and phosphates for export), additional
capacity for processing local materials (textiles, sugar
refining, and cement), and import substitution (fertilizers, iron
and steel, and consumer durables). In the late 1970s and the
1980s, however, observers questioned government priorities that
resulted in creation of large industries relying on import
substitution. An example of domestic questioning of the
government's economic management occurred at the Eighth Baath
Regional Congress in 1985. The issue of a planned sugar refinery-
-a prominent symbol of public sector domination of an industrial
sphere--generated significant debate. Critics challenged the
wisdom of the project because the cost per kilogram of processed
sugar would be several times the price of imported sugar.
Completed in the late 1970s with a capacity of 1.6 million tons
of sugar beet a year, the plant produced an average of only
500,000 tons of sugar per year from 1980 to 1983.
Since the late 1960s, economists generally have characterized
Syrian public sector industry as inefficient, with underused
capacity and high production costs. A number of factors
contributed to inefficiency. For example, during the political
instability of the 1960s, rapid turnover of key personnel and
selection of high officials and managers on the basis of loyalty
rather than qualifications contributed to inefficiency. Wide
swings in agricultural output because of variation in rainfall
was another factor. In addition, government pricing created
distortions and even undermined the basis for judging efficiency;
subsidies to plants were sometimes required because retail prices
were kept low for consumers. Planning was also poor. For example,
a US$100 million paper mill using straw for raw material went
into production at Dayr az Zawr in 1979 but operated far below
capacity, as officials realized that Syria barely produced enough
straw to operate the mill. Furthermore, the cement works at
Tartus were forced to cut production in half, falling from 5,000
to 2,500 tons a day in 1984, as a result of construction delays
in the completion of a special unit to package the cement for
export. However, the Eighth Baath Regional Congress in 1985
endorsed a series of measures to correct public sector
mismanagement, upgrade administrative capabilities, and
revitalize the industrial sector as a stimulator of economic
growth.
The shortage of skilled workers and capable managers also
plagued public sector manufacturing. Because of the
nationalization drive and political instability of the 1960s,
Syria experienced tremendous capital flight and a substantial
exodus of administrators, engineers, plysicians, and other
technically skilled professionals. The shortage of skilled labor
intensified in the 1970s, as Syrian professionals found higher
paying jobs and increased opportunities in the Persian Gulf
states. In addition, many Syrians entered government service to
gain experience and soon after went to work for private
industries offering much higher salaries. Moreover, vocational
training institutes could not keep pace with the needs of the
economy. However, the shortage of skilled workers began to
improve in the mid-1980s as Syrian workers came home to escape
depressed economic conditions in the Gulf states and invested
accumulated capital in new enterprises.
When Assad took control of the government in 1970, he
introduced important modifications of economic policy. Although
commitment to state socialism, central planning, and a large
public sector remained firm, Assad liberalized controls and
encouraged greater private sector industry. Encouragement to the
private sector that extended to both domestic and foreign
investors included decreased difficulty in obtaining construction
permits and licenses for machinery imports plus various tax
concessions. Although private investments in industry increased
in the 1970s, domestic investors remained hesitant and foreign
companies even more so, despite conclusion of bilateral
investment guarantee agreements with the United States and some
West European countries. Observers expected private investors
gradually to increase their industrial activity if the government
continued its liberalization policies.
The government attempted to introduce growth in the
industrial sector by assuring the private sector a greater
economic role. Between 1965 and 1970, the growth rate of the
index of manufacturing (excluding extractive industries and
public utilities) remained at 4 percent a year, revealing the
largely static condition of manufacturing. The general index for
all industrial production increased by 7.8 percent a year over
the same period, reflecting the importance of the expansion of
oil production after 1967.
Although the results of the government initiative to
stimulate private sector investment after 1970 could not be
distinguished in available data from a rise in public sector
industrial growth, the index for the combined output of public
and private manufacturing (excluding extractive industries and
public power) showed remarkable improvement between 1970 and
1976, averaging 9 percent a year. The increase in 1976 alone was
17 percent. Increased production by manufacturing derived from
public sector investments and reflected increasing government
development expenditures since the mid-1960s. The increase also
resulted from Syria's miniversion of the oil boom in 1974 and
1975, when industrial investments rose sharply as a result of
increased aid from oil-rich Arab countries. Between 1980 and
1984, however, the general index for all industrial production
increased only 6.8 percent a year, while the index for the
combined output of public and private manufacturing grew at 13
percent per year.
In 1985 the government embarked on another liberalization
campaign to encourage increased private sector investment in the
productive sectors, as detailed in the Fifth and Sixth Five-Year
development plans
(see Development Planning
, this ch.)
Although the public sector continued to dominate the economy, the
private sector's role grew in the 1980s, accounting for over 30
percent of GDP by 1984. The government hoped that its
liberalization campaign would further boost the private sector's
contribution to GDP in the 1990s. This hope was reflected in the
final communique of the Eighth Baath Party Congress in January
1985, which recommended a more market-oriented approach to
solving Syria's pressing economic problems. Accordingly, the
government eased restrictions on the private sector and
encouraged exports by establishing more competitive exchange
rates for imports
(see
Banking and Monetary Policy, this ch.).
The April 1985 reappointment of Muhammad al Imadi, architect of
Syria's economic opening in the 1970s, as minister of the economy
and foreign trade, confirmed the government's desire to proceed
with its liberalization program. Imadi, who had served as
chairman of the Kuwait-based Arab Fund for Economic and Social
Development in the early 1980s, urged widespread economic reforms
to improve Syria's economic performance through private sector
initiatives and joint ventures between the state and private
sector.
In September 1985 President Assad approved decree No. 356,
which permitted importers, for the first time, to pay for raw
materials, spare parts, and other industrial inputs with foreign
currency earned through employment or investment outside the
country. The severe foreign-exchange shortage of the 1980s,
exacerbated by declining worker remittances from the Gulf states
and shrinking oil revenues, frustrated industry's efforts to
acquire much-needed raw materials and forced factories to shut
down or significantly reduce production. The state's tight
currency controls and restrictions on imports caused businesses
to channel imports illegally into Syria via Lebanon and produced
a drastic decrease in officially recorded imports in the 1980s.
However, even the thriving "parallel economy" (or black market)
did not meet industry's demands. The government continued the
crackdown on smugglers, begun in 1984, and introduced reforms to
decrease the time and capital expenditure required to obtain
official import permits and letters of credit. Another major
component of the government's mid-1980s liberalization drive
involved an attempt to attract Arab and other foreign investment
in Syria's tourism industry by offering a seven-year tax
deferment and exemption from most foreign exchange and import
restrictions.
Data as of April 1987
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