Syria -- ECONOMY

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Syria - The Economy

SINCE SYRIA BECAME independent in 1946, the economy has undergone widespread structural change. Although the presence of the Allied Forces during World War II stimulated commerce by providing markets for agriculture, textiles, and other locally manufactured goods, Syria lacked both the infrastructure and resources to promote economic prosperity. Agriculture controlled the country's economy and determined the pace of industrial expansion as large landowners channeled profits from agricultural exports into agroindustrial and related urban enterprises. Syria's predominantly rural population, working under land tenure and sharecropping arrangements, derived few benefits from the agriculturally induced economic growth of the 1950s. However, Syria's union with Egypt (1958-61) and the rise of the Baath Party as the major political force in the country in the 1960s, transformed Syria's economic orientation and development strategy.

By the mid-1960s, government-sponsored land reform and nationalization of major industries and foreign investments had confirmed the new socialist direction of Syria's economic policy. As the state assumed greater control over economic decisionmaking by adopting centralized planning and strictly regulating commercial transactions, Syria experienced a substantial loss of skilled workers, administrators, and their capital. Despite the political upheavals, which undermined the confidence of landowners, merchants, and industrialists, the state successfully implemented large-scale development projects to expand industry, agriculture, and infrastructure.

During the 1970s, Syria achieved high rates of economic growth. The dramatic rise of world oil prices from 1973 to 1974 led to increased production from domestic refineries. Moreover, higher prices for agricultural and oil exports, as well as the state's limited economic liberalization policy, encouraged growth. Also, Syria's economic boom was furthered by increased remittances from Syrians working in the oil-rich Arab states and higher levels of Arab and other foreign aid. By the end of the decade, the Syrian economy had shifted from its traditional agrarian base to an economy dominated by the service, industrial, and commercial sectors. Massive expenditures for development of irrigation, electricity, water, road building projects, and the expansion of health services and education to rural areas contributed to prosperity. However, the economy remained dependent on foreign aid and grants to finance the growing deficits both in the budget and in trade. Syria, as a front-line state in the Arab-Israeli conflict, was also vulnerable to the vagaries of Middle East politics, relying on Arab aid transfers and Soviet assistance to support mounting defense expenditures.

By the mid-1980s, the country's economic climate had shifted from prosperity to austerity. Syria's economic boom collapsed as a result of the rapid fall of world oil prices, lower export revenues, drought affecting agricultural production, and falling worker remittances. Also, Arab aid levels decreased because of economic retrenchment in the oil-producing states and Syrian support for Iran in the Iran-Iraq War. To restore the economy, the government sharply reduced spending, cut back imports, encouraged more private sector and foreign investment, and launched an anticorruption campaign against smugglers and blackmarket money changers. However, massive defense outlays continued to divert resources from productive investments.

By the late 1980s, spot shortages of basic commodities occurred frequently and industry operated far below capacity because of routine power outages. Foreign exchange reserves plummeted, the trade deficit widened, and real gross domestic product ( GDP) growth fell as economic difficulties compounded. Although the government instituted limited reforms to respond to the burgeoning crisis, Syria's pressing economic problems required a radically restructured economic policy to improve future economic performance.

<>Growth and Structure of the Economy
<>Labor
<>Role of the Government in the Economy
<>Agriculture
<>Industry
<>Foreign Trade
<>Banking and Monetary Policy

Syria

Syria - Growth and Structure of the Economy

At independence Syria had a relatively well developed economic base. Rapid economic growth began in the 1930s, accelerated in the 1940s, and lasted until the late 1950s. Growth was based primarily on the opening of new land to cultivation and financed largely by wealthy urban merchants, particularly from Aleppo. The new farms, which grew wheat, barley, and cotton as main crops, were large, using mechanization and irrigation as much as possible. Industry also expanded rapidly, stimulated by the needs of Allied Forces in the area during World War II and domestic shortages of goods. Most industries were small, consisting of powered flour mills, bakeries, laundries, and repair shops, but also including larger facilities, in particular textile mills.

In the mid-1950s, a group of economists from the World Bank concluded that the period of rapid growth based on private sector investment was ending. The slowdown occurred partly because the supply of new land that could easily be cultivated was nearly exhausted. Further expansion of arable land would require large public sector investments in irrigation, drainage, and reclamation. Large public sector investments were also needed in electric power, ports, and the transportation system. Thus, economic conditions required an expanded role for government at about the same time that socialist-oriented political leaders became more influential.

Only the waning portion of this period of rapid growth is reflected in contemporary official statistics because statistical services developed late and reliability of data was uncertain. Although statistics improved slowly over the years, problems remained in the late 1980s. Many economic measurements were best viewed as indicative rather than precise. Moreover, sharp yearly fluctuations in agricultural output caused by variations in rainfall further compounded economic analysis. Although agriculture's share in the economy had declined over the years, even in the late 1980s the wide swings in annual harvests had pronounced effects on such sectors as trade, transportation, finance, and industry.

Specific data concerning the growth of the economy extend back to 1953. Such data, measured by GDP at market prices in terms of constant 1963 prices, indicates that growth averaged 6.3 percent a year between 1953 and 1976. The period of rapid growth led by the agricultural and industrial sectors ended in 1957 because of a prolonged, 4-year drought that severely curtailed agricultural output. In the 1960s, land reform, nationalization of key industries, and the socialist transformation of the economy affected the pace and scope of economic development. Growth of the economy, measured by GDP at market prices in terms of constant 1980 prices, averaged 9.7 percent a year during the 1970s. Real growth peaked at 10.2 percent in 1981 but steadily declined from 3.2 percent in 1982 to -2.1 percent in 1984.

The pattern of growth by sectors was uneven. Between 1953 and 1976, the value of agricultural output (in constant 1963 prices) increased by only 3.2 percent a year, slower growth than in other sectors of the economy. In the late 1970s, the value of agricultural output (in constant 1980 prices) increased by an average of 9.3 percent a year, despite large weather-induced fluctuations in output. From 1981 to 1984, output fell each year, although 1985 levels surged to approximate 1983 yields.

Although agricultural output remained relatively fixed, industry and construction rapidly increased in the mid-1970s, stimulated in large part by the oil boom in the Persian Gulf states. Construction grew 16.3 percent a year during the 1970s, while output of the mining and manufacturing sectors increased 7.1 percent a year. In the early 1980s, average yearly growth in these sectors was 5.6 percent and 7.9 percent, respectively. The growth of electric power and the extractive industries, particularly crude oil and phosphates, aided industrial expansion.

The expansion of government services in the 1970s and 1980s helped sustain economic growth. In the 1970s, government services grew at an average of 12.4 percent, contributing 14.1 percent to GDP in 1976 and rising to 19.6 percent in 1984. State commitment to expanding the educational system, health care, and social services, to extending public sector enterprises as part of the nationalization program, to constructing new commercial, industrial, and residential facilities, and increasing defense expenditures contributed to this high rate of government service growth.

As a result of the varying sectoral growth rates, the economy gradually shifted from an agrarian-based structure prior to 1970 to an economy based on services and the commercial sector in the 1980s (See figure 1, Growth and Structure of GDP, 1980-85). In 1953, agriculture contributed nearly 40 percent of GDP compared to 30 percent in 1963 and approximately 20 percent in 1984 (at constant 1980 prices), according the World Bank figures. Official Syrian government sources placed agriculture's share of GDP at 16.5 percent in 1984. From 1953 to 1976, industry, including extractive industries and electric power, increased from about 10 to 22 percent of GDP. In 1984, industry contributed 15.1 percent of GDP. Construction, trade, and transportation retained approximately the same relative importance as they had had in the mid- 1970s. By 1976, government services contributed over onehalf of GDP. In 1984, the GDP share from government services increased to 61 percent, according to official Syrian statistics, while the World Bank ranked that sector's 1984 constribution at 57 percent.

Syria

Syria - Labor

Historically, agriculture was the most important source of employment in the economy. However, the share of the labor force engaged in agriculture declined significantly from 1965 to 1984. According to the World Bank, the percentage of the work force engaged in agriculture fell from 53 percent in 1965 to 48 percent in 1976 and to 30 percent in 1984 (See table Estimated Labor Force and Employment by Sector, 1970, 1975, 1983 in Appendix). Manufacturing, construction, trade, and services were the other major sources of employment, providing opportunities for advancement and economic security for unskilled workers migrating from underdeveloped rural areas to the larger cities. From 1965 to 1981, the industrial labor force expanded from 20 to 31 percent. The service sector continued to be the largest employer in the 1980s, employing about 35 percent of the labor force. The government, including public sector enterprises but excluding defense, employed 473,000 workers in 1983, about 21 percent of the employed labor force and 32 percent of nonfarm workers. These figures represented a substantial increase in the number of workers employed by the government--up from the 1975 figure of 280,000, which was about 16 percent of the work force. Although Syria did not guarantee all college graduate jobs, the government absorbed many new graduates into the state bureaucracy. Government organizations were thus overstaffed, reducing profitability and efficiency in public sector enterprises and causing bureaucratic delays. In addition, new graduates and unskilled workers frequently took jobs with the government to gain experience and training, but subsequently switched to higher paying jobs in the private sector. Moreover, surveys suggested that many government employees worked outside their area of expertise. Government workers also took second jobs in business and services to supplement their incomes.

The economy suffered a lack of skilled workers and trained professionals in a wide variety of fields. In 1983, professionals, technical staff, administrators, and managers made up only 10 percent of the work force, although their number was double the percentage in 1970. Both the shortage of skilled labor and the low wage policy in the public sector constrained the mid1970s investment boom. Skilled workers and professionals headed to the oil-rich, labor-poor states of the Arabian Peninsula for higher wages. Although the government adopted various measures to curtail the "brain drain" from both the public and private sectors, Syrians continued to migrate. In the 1980s, following the collapse of world oil prices and the subsequent economic downturn of the oil-producing states, many Syrian workers began returning home and their industrial management skills and expertise therefore became available to the state.

In the 1970s, planners and government organizations gave greater attention to increasing the skills of the labor force. Vocational schools and specialized training facilities, including one for administrators and managers, became more active, and new industrial plants and other projects often included job training by foreign suppliers. The government made greater efforts to identify and plan for the economy's manpower needs. As a result, public sector employees received wage increases, but it was not clear that the raises were sufficient to make public sector employment more attractive than private enterprise. How fast the level of the work force would rise and how the low level of skilled manpower would affect economic development were still uncertain.

Officially, unemployment remained a relatively minor problem into the 1980s. In 1983 registered unemployed totaled 5 percent. However, actual unemployment may have been higher because much of the population depended on seasonal agricultural employment. Many urban workers were also underemployed, further complicating employment statistics. United States government observers estimate that in 1984 unemployment may actually have reached 20 percent. Although government programs to stimulate cottage industry and local processing in rural areas helped provide additional income for seasonal workers, the dramatic increase in the number of beggars appearing in large cities in the mid-1980s indicated a sharp decline in the urban standard of living.

As of 1983 about 15 percent of nonfarm labor was unionized (222,203 members in 179 unions). Union membership was largest among government, construction, textile, and land transportation workers. The government encouraged and supported labor organizations but closely supervised their activities, restricted their political influence and economic power, and minimized labor disputes. Labor achieved a voice in management of public enterprises through the participation of workers' representatives in committees at each plant, but the managers headed the committees. In an effort to increase production and productivity, in the late 1970s public businesses established production councils consisting of the business manager and representatives of the Baath (Arab Socialist Resurrection) Party, the union, and plant workers.

Syria

Syria - Role of the Government in the Economy

During the rapid economic development preceding and following independence, government played a minor role. Expansion resulted primarily from private sector investment in agriculture and industry. Although the economy grew rapidly, benefits were not shared equally. Many people's incomes were very low, and most of the rural population lacked amenities; electricity, education, health care, and an adequate diet were available almost exclusively in cities and in a few towns. In the 1950s, disparities of income and social inequality contributed to the rise of political leaders favoring a much stronger economic role for the government, including some leaders who demanded state ownership of the means of production. Economic conditions, primarily the need for large investments in roads, ports, and irrigation, also required more active government participation.

Between 1958, after the union with Egypt, and 1965, a series of laws were enacted that resulted in progressive socialization of the economy. By 1961 the state had acquired control of the development of natural resources, and land reform measures had been introduced, although not effectively implemented. Also, a new economic plan that emphasized large public sector investments had been formulated and the banking system had been moved toward nationalization through what Syrians called "Arabization." In 1961, while Syria was still the junior partner with Egypt in the United Arab Republic, widespread nationalization was decreed, but Syria withdrew from the republic before completion of the nationalization measures. Not until March 1963 did the socialist transformation make headway.

Between 1963 and 1965, a socialist economy was erected, although some laws enacted later extended and refined the public sector. In 1963 agrarian reform stripped large landowners of their estates and much of their political power, provided some land to landless farmers, and improved conditions for farm tenants and sharecroppers. In 1963 commercial banking and insurance were completely nationalized, and in 1965 most large businesses were nationalized wholly or partially. By 1966 the public sector included development of natural resources, electric power, and water; the bulk of industrial plants, banking, and insurance; part of transportation; and most international commerce and domestic wholesale trade. In addition, the government was responsible for the bulk of investments, the flow of credit, and pricing for many commodities and services, including a substantial part of wages.

By 1986 the situation remained essentially unchanged. As a result of these earlier measures, the government dominated the economy--accounting for three-fifths of GDP--and exerted considerable influence over the private sector. However, President Hafiz al Assad had liberalized the structure somewhat to encourage more private sector activity and investment. For example, the government relaxed exchange controls and permitted private traders to import more goods, although over 100 of the most important foreign commodities were still exclusively imported by state trading organizations. In addition, the government established six free trade zones where local traders and manufacturers could import, process, and reexport commodities freely. Also, private investment (domestic and foreign) in portions of manufacturing and tourist facilities was encouraged through such measures as tax exemptions and cheap credit. The post-1970 measures were more a rationalization of the economy to promote greater private sector development than a dismantling of government controls and ownership. As a result of these measures, the private sector dominated agriculture and retail trade and was important in light industry--particularly fabrics and clothing-- and construction, transportation, and tourist facilities.

Cotton, the country's most important export before 1974, provided an extreme example of government involvement in the economy. Areas put into cotton cultivation were controlled by government licensing of individual farmers. A government bank supplied the credit, most of which went to cotton farmers; much of the credit was in kind, with the bank purchasing, storing, and distributing the approved seeds, fertilizers, and other items. Government organizations purchased and graded the cotton, operated the gins and spinning mills, and marketed the products internally and abroad. The government established the price for cotton at all stages and subsidized prices for such inputs as credits, seeds, fertilizers, and fuel to run the irrigation pumps.

The effect on Syria's economy of the socialist measures of the 1960s was significant. First, there was a substantial exodus of trained personnel and capital from the private sector, a trend that continued in the 1970s, although the exodus was of a smaller magnitude and occurred for different reasons. The other major consequence was a rapid expansion of government responsibilities, even though the government had few trained people, limited funds, and inadequate organization and procedures. The political instability of the 1960s and the small number of trained people in the country further hampered development of effective organizations. Government services, including defense, became the main growth sector of the economy in the 1960s as people were added to the payroll, but effective expansion was slow.

In the mid-1980s, observers characterized the government and its activities as inefficient and excessively bureaucratic. Much of the criticism was caused by the continuing shortage of trained and competent officials. Part of the criticism reflected continuing deficiencies in organizations and practices. Government organizations were still trying to catch up with the huge additional responsibilities that had been imposed on inexperienced government personnel. By 1986, budgetary procedures and financial controls had steadily improved, but they were not as good as the situation required or as officials desired. Proposals for evaluations and implementation of projects were deficient, but progress had been made, and the government sought advice and help from outside experts for more improvements.

When the socialist transformation was taking place in the 1960s, the rationale was to promote economic development for the benefit of all. Although some direct redistribution of income occurred, redistribution was effected largely by way of pricing, subsidies, and tenancy legislation rather than by taxation, although in 1986 data were insufficient for a conclusive opinion. Although growth afforded job opportunities at higher incomes, it had the negative effect of attracting even more workers to already crowded urban areas. However, economic development did provide gradual improvement of living standards; considerable investments were made in roads, ports, schools, irrigation, and the Euphrates (Tabaqah) Dam that would facilitate future growth. Nonetheless, the economic wrenching of the 1980s restrained development; incomes of most Syrians remained low by world standards, and substantial income gaps between various groups persisted.

Budget

With the progressive transfer of economic power from private enterprise to the state, public finance became a major economic determinant. Even though the government's fiscal responsibilities increased during the early 1960s, budgetary practices changed little until 1967, when legislation established a single, consolidated, and centralized annual budget that covered all spending units of the public sector. This budget was closely geared to development plans and complemented a reorganization of the banking system. Under the law each budgeted outlay was to be matched by the funds required to finance it.

The budget legislation was accompanied by a reorganization of the Ministry of Finance and of auditing and statistical services. An annual foreign exchange budget was instituted to preview probable foreign exchange receipts and expenditures, thus allowing the Ministry of Finance and the planning organization to anticipate the government's needs in foreign and local currencies.

The new law required that budget accounts be closed 30 days after the end of the fiscal year. Unused funds were to be returned to the treasury, although those already committed were to be place in special, segregated accounts in the treasury. This stopped the previous practice whereby transactions continued to be recorded on budget accounts for several years after the end of a fiscal year.

Since 1970, when the state introduced the consolidated budget, all expenditures and receipts of the ministries, the central public sector administrative agencies, the public sector economic enterprises, and the local, municipal, and religious administrative units have been combined into one budget. Expenditures and receipts of the ministries and central government administrative units were included in the general budget in full; other units were represented by inclusion of the net total surplus or deficit of their respective budgets. Economic units financed almost none of their own expansion. Instead they turned any surplus (profit) back to the government and received funds via budget expenditures for investments.

Although budgetary practices improved and the budget became a more useful tool for officials, published budget data in the late 1980s remained a difficult source from which to interpret developments in the economy. Expenditures and receipts continued to be published as proposals only. Actual expenditures and receipts were not available, although fragmentary data gave indications of shortfalls; moreover, the proposed budgets were balanced, and such important balancing items as proposed domestic borrowing and anticipated foreign aid were not clearly designated. Thus it was impossible to determine how effective the government was in implementing programs, whether deficits were incurred and, if so, their size, and how dependent the government was on external assistance. The uncertainties may have been intentional for security reasons.

The budget gave few clues about the extent of Syria's economic malaise in the mid-1980s. For example, it did not reflect the rapid depreciation of the Syrian pound, the steep rise in prices, the shortages of basic commodities, nor the acute foreign exchange crisis which compelled the government to reduce imports. However, budget data during the mid-1980s clearly depicted the mood of austerity underlying economic policy as well as the government's commitment to reducing expenditures. The 1986 budget revealed a major decrease in expenditure in real terms for the third consecutive year, as inflation--estimated at between 20 to 30 percent--negated the 2 percent increase in spending.

Defense spending towered above all other budgetary allocations in the 1980s. The cost of Syria's military presence in Lebanon since 1976, coupled with the government's desire to reach strategic parity with Israel, accounted for the level of spending. Defense spending averaged over 50 percent of current expenditures in the mid-1980s, accounting for about 30 percent of total spending.

Agricultural development also benefited from high allocations in the mid-1980s designed to counteract the governmental neglect of the 1970s. In 1985 allocations rose 22 percent above 1984 figures, amounting to 20 percent of total spending. In 1986 figures indicated a 5 percent investment increase for the agricultural sector.

Allocations for the mining industry (including petroleum) increased substantially in the 1986 investment budget. The 1986 allocations rose 46 percent above 1985 levels as government officials targeted increased petroleum and phosphate production and export in the Sixth Five-Year Plan.

However, budget deficits continued in the 1980s because of the rapid increase in defense expenditures and falling revenues from exports. The government financed the deficit through domestic borrowing and foreign aid. However, in the mid 1980s, budgeted foreign aid grants greatly exceeded actual disbursements by donors because of depressed economic conditions in the Arab oil-exporting states. Although Syria budgeted LS1.96 billion in foreign aid grants in 1986, the country expected to receive only about one-fifth of this figure and to incur a substantial budget deficit. However, the country's internal and external public debt remained moderate and did not impose an oppressive annual repayment burden.

Revenues

The growth rate of proposed government revenues (in current prices) averaged 14.3 percent a year between 1964 and 1970, 26 percent a year in the 1970s, and 8.3 percent a year from 1980 to 1985. Growth in government revenues in the 1970s reflected higher levels of foreign aid because of Syria's key role in inter-Arab politics and increased internal borrowing for development. Government receipts included part of expected foreign financial assistance as well as anticipated domestic borrowing. Actual receipts for various revenue headings were not available, but many economists believed that actual receipts were substantially less than those shown in proposed budgets. Proposed government revenues increased from LS1.2 billion in 1964 to LS2.8 billion in 1970, LS10.4 billion in 1975, LS1.2 billion in 1978 and LS43 billion in 1985.

Syrian revenues were a much higher ratio of GDP than in most countries of the world because budget receipts incorporated the funds, including foreign aid and internal borrowing, used for the bulk of the country's investments. In fact, Syrian revenue structure differed from that of most countries in a number of ways. Personal income taxes have traditionally been low, amounting to only LS550 million, or 1.3 percent of total revenues, in 1985. Reluctance to tax income stemmed from generally low incomes combined with high tax-collection costs. Furthermore, tax rates were low, with numerous exemptions for special interests, despite a 1982 law enacted to close loopholes for certain public sector ventures. Tax evasion also was common among all social classes. Business income taxes were relatively small as well, amounting to 10 percent (LS4.3 billion) of total revenues in 1985. Even so, this amount was a significant increase over the LS510 million (3 percent of total revenues) collected in 1977.

In addition, taxes on capital, real estate, and inheritance yielded small sums. In 1985, taxes on capital brought in LS50 million, real estate taxes produced LS400 million, and inheritance taxes LS40 million, equivalent to about 1 percent of the total. Direct taxes and duties totaled LS6.24 billion in 1985.

Because they were easy to collect, levies on production and consumption (including taxes on imports) were the primary form of taxation. Like many other developing countries, Syria relied on indirect taxes, which in 1985 amounted to LS4.16 billion, 10 percent of total revenues, equal to two-thirds the amount of direct taxes and duties. Customs duties and other fees on foreign trade, including duties on cotton exports, amounted to LS2 billion in 1985. Excise taxes on several commodities (e.g., cement, fuel, livestock, sugar, and salt) made up the remainder of indirect taxes.

Transfer of surpluses (after taxes and profits) from public sector enterprises served as the main source of domestic revenue. The share of these transfers (excluding foreign aid and internal credits) reached 32 percent in 1970, 50 percent in 1976, and 31 percent in 1985 (LS13.1 billion). In the 1960s, banking-financial and industrial public sector businesses together provided the bulk of the surpluses. In the 1970s, industrial concerns alone accounted for 75 percent of the surpluses transferred to the budget; this figure declined slightly to 70 percent in 1985. In the 1970s and 1980s, the government increasingly relied on the pricing of commodities and services rather than taxes to finance expenditures. In an effort to expand future budget revenues, officials intended to increase efficiency, productivity, and profits of public-sector business.

Foreign credits and grants and domestic borrowing also provided supplemental funding for key development projects. The 1984 budget projected LS1.9 billion in foreign loans and LS7.7 billion in "support funds" from Arab states. After 1982, grants in oil aid from Iran also significantly contributed to the growth of revenues. However, when external aid declined in the 1980s, domestic borrowing levels increased. Although the banking system provided most of the internal credits, reserves of public enterprises also provided some funds.

Until 1977,transit fees for crude oil pumped through international pipelines across Syrian territory were an important source of revenue. Pipeline payments, which averaged about 25 percent of total domestic revenues in the early 1970s, fell to zero in 1977. The pipeline reopened briefly in 1979, was shut down in the early stages of the Iran-Iraq War, and then reopened again in 1981 before Syria closed down the pipeline from Iraq in 1982 as a show of support for Iran in the Gulf war.

Expenditures

Proposed expenditures matched proposed revenues because budgets submitted for approval were balanced. However, actual expenditures usually fell considerably short of those planned, although the fragmentary data available in 1987 generally precluded measurement of the amount of difference. In the 1980s, budgets began including planned deficits, and investment spending repeatedly trailed allocations. Only 70 percent of Syria's 1984 investment budget of LS17.85 million was actually spent. Expenditures fell under two headings--the ordinary budget covering current (recurring) expenditures and the development (capital) budget. Beginning in the early 1960s, capital investments had become a much more important part of the budget. Development expenditures amounted to 42 percent of total expenditures in 1964, increased to 50 percent in 1970, and peaked at 64 percent in 1976. However, by 1980, development expenditures had fallen back to 50 percent and in 1985 fell to 45 percent of total expenditures. In the 1980s, normal proposed revenues (taxes, duties, fees, and surpluses of public sector enterprises) usually financed proposed current expenditures, with a small remainder to help with capital investments. Foreign aid and domestic borrowing financed the rest of the development budget.

Throughout the 1970s and 1980s, defense spending dominated current expenditures. Some observers maintained that in the 1970s defense spending accounted for approximately three-fifths of current expenditures, although such amounts were not reflected in official statistics. Offically, defense spending rose from LS675 million in 1970 to LS4.6 billion in 1978, increasing at an average rate of 27 percent a year during this period. In the 1985 budget, defense spending again accounted for the greatest portion of current expenditures. However, the LS13 billion 1985 defense budget reflected only a 9 percent rate of growth, slower than that in previous years. However, a related item, internal security expenditures, accounted for a further LS672 million in the 1985 budget. Most of the remainder of current expenditures covered operating expenses of ministries and agencies--largely personnel costs.

Identifiable payments on the public debt amounted to LS135 million in 1976 and 1977, less than 1 percent of total expenditures. The 1984 budget allocated LS1.8 billion to the public debt, equal to 7.6 percent of current expenditures.

Identifiable price subsidies amounted to LS600 million in 1977 and LS1.4 billion in 1985, accounting for 9 percent and 6 percent of current expenditures. Subsidies rose rapidly in the mid-1970s as a result of higher rates of internal and international inflation. The government attempted to keep meat, bread, coffee, sugar, diesel fuel (for irrigation pumps), and other essential items within reach of the poor; the subsidized prices for sugar and diesel fuel, for example, were about onequarter of the regular market price in the 1980s.

In the 1970s, the government demonstrated its commitment to economic development through sizable increases in the development budget by increasing investment expenditures an average of 26 percent a year. Although they increased substantially from LS1.4 billion in 1970 to LS14 billion in 1980, growth of investment expenditures slowed to just 6 percent a year in the 1980s.

Syria

Syria - Agriculture

Until the mid-1970s, agriculture had been Syria's primary economic activity. At independence in 1946, agriculture (including minor forestry and fishing) was the most important sector of the economy, and in the 1940s and early 1950s, agriculture was the fastest growing sector. Wealthy merchants from such urban centers as Aleppo invested in land development and irrigation. Rapid expansion of the cultivated area and increased output stimulated the rest of the economy. However, by the late 1950s, little land that could easily be brought under cultivation remained. During the 1960s, agricultural output stagnated because of political instability and land reform. Between 1953 and 1976, agriculture's contribution to GDP increased (in constant prices) by only 3.2 percent, approximately the rate of population growth. From 1976 to 1984 growth declined to 2 percent a year. Thus, agriculture's importance in the economy declined as other sectors grew more rapidly.

In 1981 (the year of the latest census), as in the 1970s, 53 percent of the population was still classified as rural, although movement to the cities continued to accelerate. However, in contrast to the 1970s, when 50 percent of the labor force was employed in agriculture, by 1983 agriculture employed only 30 percent of the labor force. Furthermore,by the mid-1980s, unprocessed farm products accounted for only 4 percent of exports, equivalent to 7 percent of nonpetroleum exports. Industry, commerce, and transportation still depended on farm produce and related agro-business, but agriculture's preeminent position had clearly eroded. By 1985 agriculture (including a little forestry and fishing) contributed only 16.5 percent to GDP, down from 22.1 percent in 1976.

By the mid-1980s, the Syrian government had taken measures to revitalize agriculture. The 1985 investment budget saw a sharp rise in allocations for agriculture, including land reclamation and irrigation. The government's renewed commitment to agricultural development in the 1980s, by expanding cultivation and extending irrigation, promised brighter prospects for Syrian agriculture in the 1990s.

Water Resources

Water is a scarce resource in Syria as it is throughout the Middle East, but Syria is more fortunate than many other countries. Sufficient rainfall supports cultivation in an arc from the southwest, near the border with Israel and Lebanon, extending northward to the Turkish border and eastward along that border to Iraq. The other main area of cultivation, although dependent on irrigation, is along the Euphrates River and its major tributaries.

Rainfall is highest along the Mediterranean coast and on the mountains just inland; Syria's limited forestry activities are concentrated in the higher elevations of these mountains. Rainfall diminishes sharply as one moves eastward of the mountains paralleling the coast and southward from the Turkish border. The arc of cultivation from the southwest (and east of the coastal mountains) to the northeast is largely semiarid, having as annual rainfall between 300 and 600 millimeters. Areas south and east of the arc receive less than 300 millimeters of rain annually, classifying the land as arid. Grass and coarse vegetation suitable for limited grazing grow in part of this arid belt, and the rest is desert of little agricultural value.

Rainfall is concentrated between October and May. Without irrigation, cropping is finished by summer, when the climate is very hot and dry. Moreover, the amount of rainfall and its timing varies considerably from year to year, making rain-fed farming extremely risky. When rains are late or inadequate, farmers do not even plant a crop. Successive years of drought are not uncommon and cause havoc not only for farmers but for the rest of the economy. In the mid-1980s, about two-thirds of agricultural output (plant and animal production) depended on rainfall.

Extension and improvement of irrigation systems could substantially raise agricultural output. For example, in 1985, because of the expansion of irrigation systems, Syria's agricultural output rose 10 percent above the drought-plagued yield of 1984. Yields from irrigated fields have been several times higher than from rain-fed fields, and many irrigated areas could grow more than a single crop a year. Development of irrigation systems, however, is both costly and time consuming.

Syria's major irrigation potential lies in the Euphrates River valley and its two major tributaries, the Balikh and Khabur (Nahr al Khabur) rivers in the northeast portion of the country. The Euphrates is the third largest river in the Middle East (after the Nile in Egypt and the Tigris in Iraq) and its headwaters rise in Turkey, where relatively heavy rainfall and snow pack provide runoff much of the year. The river flows southeastward across the arid Syrian plateau into Iraq, where it joins the Tigris River shortly before emptying into the Persian Gulf (see figure , ch. 2). In addition to Syria, both Turkey and Iraq use dams on the Euphrates for hydroelectric power, water control, storage, and irrigation. In the mid-1980s, about one- half of the annual Euphrates River flow was used by the three nations.

Syrians have long used the Euphrates for irrigation, but, because the major systems were destroyed centuries ago, they make only limited use of the river's flow. In the mid-1980s, the Euphrates River accounted for over 85 percent of the country's surface water resources, but its water was used for only about two-fifths (200,000 hectares) of the land then under irrigated cultivation. In 1984, about 44 percent of irrigated land still used water from wells. Several project studies were conducted after World War II, and, in the 1960s, the Soviet Union agreed to provide financial and technical assistance for the Thawra Dam (also called Euphrates or Tabaqah dam), a large hydroelectrical power station, and portions of the major Euphrates irrigation project.

The dam, located at Tabaqah, a short distance upriver from the town of Ar Raqqah, is earth fill, 60 meters high and four and one-half kilometers long. Construction began in 1968, and work was essentially completed by 1978. The Thawra Dam was closed in 1973, when Lake Assad, the artificial lake behind the dam, began filling. About 80 kilometers long, Lake Assad averages about 8 kilometers in width and holds nearly 12 billion cubic meters of water. The power plant has eight 100-megawatt turbines for power generation and transmission lines to Aleppo. Until 1983, the power station operated at 65 percent of capacity, generating 2,500 megawatts a year or about 45 percent of Syria's electricity. In 1986, the power station operated at only 30 to 40 percent of capacity because of the low water level in Lake Assad. Provisions were made, however, for future construction to raise the height of the dam, increase the capacity of Lake Assad by about 10 percent, and increase the number of turbines. In 1984, as a result of the disappointing performance of the dam, the government studied the possibility of building a second dam upstream from Tabaqah between Ash Shajarah, situated on the northern edge of Lake Assad, and Jarabulus, located near the Turkish border. The ultimate goal of the Euphrates irrigation project is to provide 640,000 cultivable hectares by the year 2000, in effect doubling the area of Syria's irrigated land in the mid-1970s. In 1978, observers believed that 20,000 to 30,000 hectares of land had been irrigated and that new housing, roads, and farms had been completed for the 8,000 farmers displaced by the creation of Lake Assad. In the early 1980s, Syrian officials had anticipated the completion of irrigation on about 50,000 to 100,000 hectares in the Euphrates basin, with about 20,000 hectares planned for completion each year after that. The Fourth Five-Year Plan actually called for irrigating an additional 240,000 hectares by the end of the plan. In 1984, however, Syrian government statistics revealed that only 60,000 hectares were actually being irrigated. Ten years after its inception, the Euphrates irrigation project irrigated only about 10 percent of its long-term goal.

A variety of complex, interrelated problems frustrated realization of targeted irrigation goals. Technical problems with gypsum subsoil, which caused irrigation canals to collapse, proved more troublesome than at first anticipated. Large cost overruns on some of the irrigation projects made them much more expensive than planned and created difficulties in financing additional projects. Moreover, these large irrigation projects required several years before returns on the investments began. There was also doubt about whether farmers could be attracted back from urban areas or enticed from more crowded agricultural areas to the sparsely populated Euphrates Valley. Another complication is that the Euphrates flow is insufficient for the irrigation needs of the three countries--Turkey, Iran, and Syria- -that share the river. In 1962, talks on allotment of Euphrates water began and continued sporadically throughout the 1970s and early 1980s, but acrimonious relations between Syria and Iraq hampered final agreements. In fact, in 1978 when Syria began filling Lake Assad and water to Iraq was greatly reduced, the two countries almost went to war. In addition, Turkey's use of Euphrates' waters for its Keban Dam assures that water levels in Lake Assad will remain low. This problem will undoubtedly continue into the 1990s, when Turkey completes construction of the Ataturk Dam.

By 1987, numerous Euphrates irrigation projects and additional irrigation projects throughout the country were proceeding, but what had been accomplished was not clear. Projects initiated in the 1980s included irrigation of 21,000 hectares in the Ar Raqqah area pilot project, 27,000 hectares reclaimed in the Euphrates middle-stage project, and about half of a 21,000-hectare plot reclaimed with Soviet assistance in the Meskanah region. There were also major irrigation schemes involving 130,000 hectares in the Meskanah, Al Ghab, and Aleppo plains project. In addition, Syria completed a small regulatory dam with three seventy-milliwatt turbines approximately twenty- five kilometers downstream from Tabaqah. In the mid-1980s, work continued on the Baath Dam, located twenty-seven kilometers from the Euphrates dam, and the Tishrin Dam on the Kabir ash Shamali River near Latakia evolved from the planning to implementation stage. The government also planned to construct as many as three dams on the Khabur River in northeast Syria and more effectively use the waters of the Yarmuk River in southwest Syria. Foreign contractors carried out most of these major development projects. The Soviets and Romanians were particularly active in irrigation schemes as part of their economic aid programs. French, British, Italian, and Japanese firms, the World Bank, and Saudi Arabian and Kuwaiti development assistance funds were deeply involved in financing and implementing these projects.

In the 1980s, there was good potential for expanding and refining irrigation in the western portion of Syria. The government obtained economical results using small impoundments that held winter runoffs to supplement rain-fed cultivation and to provide some summer irrigation. Small storage areas for water from wells and springs permitted additional irrigation. Farmers, however, had not yet turned to sprinkler systems or trickle irrigation, which would considerably reduce the amount of water needed for cultivation.

Land Use

The bulk of the country is arid, with little vegetation. In 1984, nearly 20 percent was classified as desert. Another 45 percent of the land was classified as steppe and pasture, although its grazing capacity was very limited--much like land in the American Southwest. Less than 3 percent of the land was forested, with only part of it commercially useful. Cultivatable land amounted to 33 percent of the total area. In 1984, 91.7 percent of the total cultivable area of 6.17 million hectares was cultivated.

Major expansion of the cultivated area occurred in the 1940s and 1950s. Much of the expansion was the result of investment by wealthy urban merchants, many of whom were from the country's religious minorities. Their innovations included large-scale use of farm machinery, pumps, and irrigation where possible, and differrent tenure arrangements for farm operators than were used in other parts of the country. But the efforts of the merchants of Aleppo and other commercial centers largely exhausted the potential for bringing new land under cultivation. The area of cultivation (6.9 million hectares) and land irrigated (760,000 hectares) peaked in 1963 and has been appreciably smaller since then. In 1984, aproximately 5.7 million hectares were under cultivation, with 618,000 irrigated.

Opinions differ as to the causes of the decline of cultivated and irrigated areas after 1963. Some observers say that marginal lands brought under cultivation proved uneconomical after a few years and were abandoned. Others claim that the merchantdevelopers used exploitive techniques that eventually reduced the productivity of the soil. Still other observers blame land-reform measures, which coincided with the decline of the cultivated and irrigated areas. Each view is probably somewhat valid.

In the future, expansion of the cultivated area will be slow and costly. Although the Euphrates irrigation projects will provide water to bring additional land under cultivation, growth will be partly offset by the loss of arable land to urban expansion, roads, and other facilities for a growing population. After the disappointing results of the Euphrates irrigation projects through the mid-1980s, the government began to develop rain-fed agriculture to offset potential setbacks in the Euphrates scheme. Drainage investments also will be required to maintain cultivation on some irrigated areas that currently suffer from waterlogging or excessive salinity.

Land Reform

The dynamism of the agricultural sector caused by the opening of new farmland in the north and northeast through investments of wealthy merchants worsened the situation for the poor and often landless rural population. In 1950 the first Syrian constitution placed a limit on the size of farmholdings, but the necessary implementing legislation was not passed until 1958, after the union of Syria and Egypt.

The 1958 agrarian reform laws were similar to those in Egypt and not only limited the size of landholdings but also provided sharecroppers and farm laborers with greater economic and legal security and a more equitable share of crops. The Agricultural Relations Law laid down principles to be observed in administering tenancy leases, protected tenants against arbitrary eviction, and reduced, under a fixed schedule, the share of crops taken by landlords. It also authorized agricultural laborers to organize unions and established commissions to review and fix minimum wages for agricultural workers.

However, by the time Syria withdrew from the merger with Egypt in 1961, opposition from large landowners, administrative difficulties, and severe crop failures during the prolonged 1958- 61 drought had effectively curtailed movement toward land reform. The conservative regime in power from 1961 until March 1963 blocked implementation of the land-reform program in practice by enacting a number of amendments to the original law that substantially raised the ceilings on ownership and opened loopholes.

Shortly after the Baath Party seized power in March 1963, Decree Law 88 of 1963 was promulgated, cancelling the actions of the previous regime and reinstating the original agrarian reform laws with important modifications. One of the most significant modifications was lowering the limit on the size of holdings and providing flexibility in accordance with the productivity of the land. The new ceilings on landownership were set at between 15 and 55 hectares on irrigated land and 80 and 300 hectares on rain-fed land, depending on the area and rainfall. Land in excess of the ceilings was to be expropriated within five years. The compensation payable to the former owners was fixed at ten times the average three-year rental value of the expropriated land, plus interest on the principal at the rate of 1.5 percent for forty years.

The expropriated land was to be redistributed to tenants, landless farmers, and farm laborers in holdings of up to a maximum of eight hectares of irrigated land or thirty to fortyfive hectares of rain-fed land per family. Beneficiaries of the redistribution program were required to form state-supervised cooperatives. The 1963 law reduced the price of redistributed land to the beneficiaries to the equivalent of one-fourth of the compensation for expropriation. The land recipients paid this amount in equal installments to their cooperatives over a twentyyear period to finance such cooperative activities as development, dispensaries, schools, and cultural centers.

By 1975 (the latest available data in early 1987) 1.4 million hectares (68,000 hectares of irrigated land) had been expropriated, primarily in the early years of the program. Distribution moved much more slowly. By 1975, redistributed land had amounted to 466,000 hectares (61,000 hectares of irrigated land) and undistributed land to 351,000 hectares. In addition, there were 254,000 hectares of land that had been allocated to cooperatives, ministries, and other organizations, and 330,000 hectares that were categorized as excluded and sold land. Although it was far from clear what the disposition was in the latter two categories, the statistical data gave the impression that land reform had not transformed the former numerous farm sharecroppers and laborers into landowners. This impression was supported by government data indicating that slightly more than 50,000 family heads (over 300,000 people) had received land under the reform program. In addition, at various times the government offered state farmland for sale to the landless on the same terms as expropriated land, but reported sales were relatively small; farmers apparently chose to lease the land.

Most observers credited land reform measures with liquidating concentration of very large estates and weakening political power of landowners. Some government data of uncertain coverage and reliability indicated that before land reform more than half of agricultural holdings consisted of one hundred hectares or more, but after reform such large holdings amounted to less than 1 percent. The same data showed that smallholdings (seven hectares or less) had increased from about one-eighth before land reform to just over one-half of total holdings after reform, and that 42 percent of holdings were between eight and twenty-five hectares. Other government statistics indicated that holdings of twentyfive hectares or less, representing 30 percent of all land under cultivation before 1959, represented 93 percent in 1975. A May 1980 Order in Council mandated additional expropriations and further reduced the size of agricultural holdings. Data from the 1970 census revealed that the average farmholding was about ten hectares, and that one-fifth of the rural population remained landless. Despite the Baath Party's commitment to land reform, the private sector controlled 74 percent of Syria's arable land in 1984.

Role of Government in Agriculture

Government involvement in agriculture was minimal prior to Syria's union with Egypt. Although state intervention in the agricultural sector increased following the union, the government avoided playing a direct role in cultivation. In 1984, private farmers tilled 74 percent of the cultivated land, cooperatives 25 percent, and public organizations (essentially state farms) 1 percent.

Government involvement arose indirectly from socialist transformation measures in various parts of the economy and directly from government efforts to fill the void in the countryside caused by land reform. As an example of the former, the Agricultural Cooperative Bank, a private bank established in the eighteenth century but inherited by the socialist regime, in the mid-1960s became the single source for direct production credits to farmers. The bank had limited funds and confined itself almost completely to short-term financing, the bulk of which went to cotton growers. Part of its lending was in kind--primarily seeds, pesticides, and fertilizers at subsidized prices. Although the bank appeared effective, there was insufficient credit through the 1960s and early 1970s for farmers who did not grow cotton and for long-term loans for such needs as machinery or capital improvements. In the mid-1970s, the flow of funds to the bank increased, thus allowing it to expand its lending to the agricultural sector. The bank became an important influence in shaping farmers' production decisions, particularly in cotton.

In the 1960s, government marketing organizations for the major agricultural commodities were established. The Cotton Marketing Organization, as noted, had a complete monopoly. Organizations for tobacco and sugar beets had purchasing monopolies, set the farm purchase prices, and supervised the processing and marketing of their respective commodities. An organization for grains set prices, purchased some of the farmers' surplus, and supervised the marketing of the remainder through private dealers. The government also set prices for several other agricultural commodities, most imports, and many consumer items.

Some economists attributed part of the stagnation in agriculture to the government's pricing of farm produce. Farm prices remained unchanged over long periods and by the 1970s and 1980s were quite low relative to world prices. Some smuggling out of farm products for sale in Turkey, Iraq, and Lebanon resulted as well as some black marketing in controlled commodities. Pricing also was not coordinated to achieve agricultural goals. Although the Ministry of Agriculture attempted to get farmers to increase wheat production, the government's desire to keep basic food costs low for urban consumers imposed low grain prices for farmers. The ministry also urged farmers to shift irrigated areas from cotton to wheat at the same time that the farm price of cotton was raised relative to that of wheat.

Aware of the problems, officials made efforts to improve pricing policy. By 1977 prices paid to farmers had risen substantially and favored grains and some industrial crops over cotton. In fact, the 1977 prices (when converted to dollars at the official exchange rate) paid to farmers for wheat, soybeans, and sugar beets were substantially higher (more than 100 percent for wheat) than the prices paid to American farmers for those products. In 1985 the government again raised procurement prices for a variety of crops. Prices for hard wheat rose by 9 percent, soft wheat by 14 percent, red lentils by 13 percent, white lentils by 18 percent, and barley by 22 percent from the preceding year.

When land reform was introduced, those receiving expropriated or government land were required to join farm cooperatives. Cooperatives were expected to furnish the organization, techniques, credit, and joint use of machinery to replace and expand the functions supplied by the landowners and managers of the large estates. Syrian farmers' individualism and aversion to cooperatives may explain their apparent preference for renting land from the government rather than buying the land and having to join a cooperative. Whether the cause was aversion by farmers or an inability by the government to organize and staff cooperatives, as some economists suggest, the cooperative movement grew slowly until the early 1970s, but accelerated thereafter. In 1976 there were 3,385 agricultural cooperatives with 256,000 members--more than double the number and membership in 1972. By 1984 there were 4,050 agricultural cooperatives with 440,347 members. Statistics do not distinguish between cooperatives for farmers receiving expropriated or government land and voluntary cooperatives of established landowners.

Officials expected cooperatives eventually to mitigate, if not eliminate, two serious agricultural problems. First, farmers tended to specialize in certain crops without practicing crop rotation. Second, substantial amounts of arable land were left fallow each year. In the 1970s, government extension workers and cooperatives strongly urged farmers to rotate cropping in a pattern that would maintain the fertility of the soil and avoid having cultivable fields left fallow. Cooperatives were also expected to facilitate the use of machinery after land reform reduced the average size of farms, partly by cooperative ownership of equipment and partly by pooling small plots into an economically sized bloc that would then be cultivated as a single unit in the cropping rotation. By 1986 it was not clear how much success cooperatives had achieved in crop rotation or mechanization, but statistics showed an accelerated use of farm equipment by the agricultural sector after the October 1973 War.

Cropping and Production

Because only about 16 percent of the cropped area was irrigated, the output of agriculture (both plant and animal) was heavily dependent on rainfall. The great variation in the amounts and timing of rainfall can immediately cause very substantial shifts in areas planted, yields, and production, but the effect on livestock is less predictable. When drought is unusually severe or prolonged, loss of animals may depress livestock production for several years. In 1984 crop production accounted for 72 percent of the value of agricultural output; livestock and animal products, 28 percent. Livestock alone, not counting products such as milk, wool, and eggs, were 11 percent of the total.

In 1984 crop production amounted to LS13.6 billion. The United States Department of Agriculture (USDA) valued Syrian 1985 production at US $1.1 billion. Grains contributed 15 percent to the value of total crop production in 1984, in contrast to 41 percent in 1974. Industrial crops remained 20 percent of the total. Fruits rose from 15 to 25 percent of the total, and vegetables rose from 16 to 35 percent. In 1984, grain continued to be planted on 66 percent of the cultivated land, consistent with the mid-1970s percentage.

Fluctuations in rainfall resulted in major variations in crop production throughout the 1980s. In 1980, wheat was planted on 1.4 million hectares, yielding 2.2 million tons--the largest wheat harvest since the early 1960s. In 1984, wheat planted on 1.1 million hectares produced only 1.1 million tons. In 1980 and 1984, barley was planted on 1.2 million hectares, but production fell from 1.6 million tons in 1980, the peak year, to 303,500 tons in 1984, revealing the impact of the drought on rain-dependent crops. In 1985 wheat and barley crops rebounded to 1.7 million tons and 740,000 tons, respectively. In 1984, Syria grew a record 60,000 tons of corn.

Earlier stagnation of agricultural output meant primarily stagnation of grain production. Instead of exporting wheat, in the 1980s Syria became a net importer. In 1985 Syria imported 1.4 million tons of wheat, worth more than LS800 million. In addition, cereal imports rose from LS368 million in 1982 to LS.1.6 billion in 1984, amounting to 56 percent of the LS2.85 billion bill for food imports that year.

During the 1970s and 1980s, the government encouraged greater grain production by providing improved high-yield seeds, raising prices paid to farmers, and urging shifts toward wheat growing on some irrigated land formerly planted in cotton. Its intent was to raise grain output at least to self-sufficiency to ease the pressure on the balance of payments. Beginning in the late 1970s, the government showed increased interest in improving rain-fed agriculture and acquired funding from the World Bank, International Fund for Agricultural Development, and the UN Development Program for a US$76.3 million project to expand food production and raise the standard of living in Dar'a and As Suwayda provinces. In addition, Syrian agriculture benefited from research projects undertaken by the International Center for Agricultural Research in the Dry Areas' (ICARDA) branch office located near Aleppo. ICARDA helped develop the Sham-1 durum wheat and Sham-2 bread wheat used by Syrian farmers in the mid-1980s and demonstrated through its research the positive effect of phosphate fertilizers on barley crops in dry areas, encouraging the government to consider a change in agricultural strategy.

In the 1980s, vegetables and fruits exhibited the fastest growth rates of the various crops, although they started from a low base. Urbanization and rising incomes spurred cultivation of these products, which were also generally exempt from official price control. Fruits and vegetables were grown primarily in the northwest and coastal plain in irrigated fields and where rainfall and groundwater were greatest. However, Syria lagged considerably behind Lebanon in cultivation of fruits and vegetables in similar terrain, and seasonal fruits were consistently smuggled in from Lebanon in the 1980s.

Syria has produced cotton since ancient times, and its cultivation increased in importance in the 1950s and 1960s. Until superceded by petroleum in 1974, cotton was Syria's most important industrial and cash crop, and the country's most important foreign exchange earner, accounting for about one-third of Syria's export earnings. In 1976 the country was the tenth largest cotton producer in the world and the fourth largest exporter. Almost all the cotton was grown on irrigated land, largely in the area northeast of Aleppo. Syrian cotton was medium staple, similar to cotton produced in other developing countries but of lower quality than the extra-long staple variety produced in Egypt. The cotton was handpicked, although mechanical pickers were tried in the 1970s in an attempt to hold down rising labor costs.

Cotton production (cotton lint) rose from 13,000 tons in 1949 to 180,000 tons in 1965. However, land reform and nationalization of the cotton gins precipitated a sharp decline in output in the next few years. Beginning in 1968 and during the 1970s annual lint production hovered around 150,000 tons. However, in 1983 and 1984, Syria enjoyed a record cotton crop of 523,418 tons, and the third highest yield in the world, estimated at 3 tons per hectare. To a large measure, this increase was attributable to the government's raising cotton procurement prices by 44 percent in 1981-82, and by another 20 percent in 1982-83.

Although the area under cotton cultivation has declined since the early 1960s, yields have increased as a result of improved varieties of seed and increasing amounts of fertilizer. The area planted dropped from over 250,000 hectares in the early 1960s to 140,000 hectares in 1980. In response to the jump in procurement prices by 1984, it increased to 178,000 hectares. As domestic consumption of cotton increased in the 1960s and 1970s, the government built several textile mills to gain the value added from exports of fabrics and clothes compared with exports of raw cotton. In the 1980s, cotton exports averaged 120,000 tons, ranging from a low of 72,800 tons to a record of 151,000 tons in 1983. Syria's seed cotton harvest was 462,000 tons in 1985, about 3 percent higher than in 1984. Aproximately 110,000 tons of the 1985 harvest were destined for export markets. Major foreign customers in 1985 included the Soviet Union (18,000 tons), Algeria (14,672 tons), Italy (13,813 tons), and Spain (10,655 tons).

The government's goal of expanding and diversifying food production created intense competition for irrigated land and encouraged the practice of double cropping. Because cotton did not lend itself to double cropping, the cultivated cotton area was declining in real terms. However, the area under cultivation and significance of other industrial crops substantially increased during the 1980s. For example, the government initiated policies designed to stimulate sugar beet cultivation to supply the sugar factories built in the 1970s and 1980s. The area under cultivation for sugar beets rose from 22,000 hectares in 1980 to 35,700 hectares in 1984, with sugar beet harvests totalling over 1 million tons in 1984. Syria, however, still imported LS287 million worth of sugar in 1984. USDA estimated that Syria would achieve tobacco self-sufficiency in 1985, with harvests of 12.3 million tons (dry weight) compared with 12.2 million tons in 1984. Although yields per hectare fell slightly in 1985, USDA expected imports to match exports. In 1984 Syria imported 559 tons of tobacco and exported 225 tons. Other important commercial crops included olives and tomatoes.

Syria

Syria - Industry

Manufacturing, other than that represented by traditional handicrafts, textiles, and animal-powered flour mills, is a postWorld War II addition to the Syrian economy. Requirements of Allied Forces stationed in Syria during the war and shortages of imported goods for local consumption stimulated industrial development, and wealthy merchants and landowners channeled resources into industrial expansion. Factories established in the 1950s and 1960s processed local agricultural goods and manufactured a wide range of light consumer products. Although the nationalization measures of the 1960s disrupted privately financed industrial expansion, in the 1970s the state embarked on a major industrial development program stressing heavy industry. Between 1953 and the mid-1970s, the growth rate of the industrial sector was 8.3 percent (in constant prices)--a major factor in the rise in incomes and in the improvment in standards of living. Manufacturing (including extractive industries and power generation) contributed 22.4 percent of GDP in 1976 but only about 13.4 percent in 1984 as the state committed scarce resources to completing existing projects rather than to initiating new ones. The public sector dominated the chemical, cement and other construction materials, engineering, sugar, food, and various textile-manufacturing industries. The private sector, stymied by government restrictions, concentrated on certain textiles, electrical and paper products, leather goods, and machinery.

Energy and Natural Resources

Although Syria's crude oil reserves were small and production minor by Arab and international standards, in the 1970s and 1980s petroleum extraction played a vital role in Syria's economy, generating much-needed foreign exchange. However, the size of Syria's proven crude oil reserves remained secret. In 1977 United States government figures placed Syria's proven oil reserves at 2.2 billion barrels. International sources estimated that Syria's crude oil reserves had fallen to 1.5 billion barrels by the end of 1983, indicating a life span of no more than twenty-years at 1984 production levels. Some publications listed substantially higher reserves (perhaps reflecting total rather than recoverable reserves) that appeared large in relation to Syrian production data in the 1980s.

Although Syria awarded its first oil concession to foreign firms in the 1930s, it did not emerge as an oil producer until the late 1960s. In 1956 an American company discovered oil at Qarah Shuk (Karachuk) in the northeast near the Iraqi border. In 1959 a West German firm discovered the Suwaydiyah field, located about fifteen kilometers south of the first oil discovery. The Syrian government nationalized the oil industry in 1964, and in the late 1960s the Syrian General Petroleum Company (SGPC),the national oil company, brought the two fields on stream with Soviet assistance. Although Suwaydiyah initially averaged 20,000 barrels per day (bpd) and Qarah Shuk produced 30,000 bpd, the oil from both fields carried American Petroleum Institute (API) quality ratings of 25.5 and 19, respectively. Both had high sulfur contents, confirming the poor quality of Syrian oil. Syria became an oil exporter in 1968 with the completion of a 663- kilometer pipeline to transport oil to a terminal at Tartus on the Mediterranean coast. Both the Qarah Shuk and Suwaydiyah fields continued to produce oil into the 1980s.

Oil exploration intensified in the 1970s. SGPC discovered the Rumaylan field, about ten kilometers southwest of Qarah Shuk, which had produced over thirty-nine million barrels of oil by mid-1984. Smaller fields also produced minor amounts of heavy crude in the 1970s. The Jubaysah field, located about 150 kilometers southwest of Qarah Shuk, came on stream in 1975. It had a 40.2 API crude oil rating but a 0.6 percent sulfur content, suggesting that Syria might look forward to discovering major quantities of light crude. In 1974 the government eased the way for the return of foreign contractors, granting a Romanian company a production-sharing concession. Western companies returned in 1977 when Pecten, a Shell subsidiary, won a 20,000- square-kilometer exploration concession in northcentral Syria. The Syrian American Oil Company and Samoco, a subsidiary of the American-based Coastal States Gas Corporation, won the 15,570- square-kilometer concession to exploit the resources of Dayr az Zawr Province in 1977. Deminex, a West German company, joined the group in 1979. In 1983, after Samoco dropped out, Deminex joined Pecten in an expanded concession of 21,800 square kilometers. Pecten held 31.25 percent, Royal Dutch Shell 31.25 percent, and Deminex the remaining 37.5 percent. Chevron, Pennzoil, and Marathon Oil also won exploration concessions in the 1980s. Marathon's two wells at Sharifah, nears Homs, produced promising results for gas exploitation from 1983 to 1985. Syria's state- owned oil company also continued exploration and drilling to bring the small, newly discovered Qayrik, Wahab, Sa'id, and As Safih fields on stream by the mid-1980s. The 1984 discovery of large quantities of light, sweet crude oil at the Pecten consortium's Thayim field near Dayr az Zawr gave a much-needed boost to the Syrian oil industry and economy. The Dayr az Zawr oil, ranked at API 36 with a low sulfur content, offered the prospect that Syria could cut by up to $200 million its own imports of light crude oil required for use in domestic refineries in the 1990s. Early production estimates confirmed an initial output of 50,000 bpd when the Thayim field came on stream in late 1986. In 1985 the Syrian General Petroleum Company and Pecten formed the Furat Oil Company to operate the concession with the state. In 1986 Czechoslovakia's Technoexport completed a ninety-two-kilometer spur line linking the Thayim field to the currently unused Iraqi-Syrian pipeline. Syrian government officials estimated that production levels at Dayr az Zawr would rise to 100,000 bpd in 1988.

Syria's oil production remained virtually static in the mid- 1980s. The IMF put production at 162,000 bpd for 1985. Excluding the new Dayr az Zawr discovery, however, Syria claimed production of approximately 170,000 bpd in 1985, blending one-third of its heavy sulfurous domestic crude with two-thirds imported light oil. Domestic consumption of oil products averaged around 190,000 bpd in the mid-1980s, with up to 120,000 bpd of this total coming from Iran in 1985. Oil contributed about 10 percent to Syria's GDP through the 1980s. Following the rapid rise of world oil prices in 1973, oil became Syria's chief source of foreign exchange. The value of Syria's oil exports rose from LS291 million in 1973 to LS1.6 billion in 1974 and almost doubled to LS2.6 billion in 1976, accounting for 63 percent of total exports. In 1979 the total export value of oil reached 68.9 percent before declining to 51.4 percent in 1982 and rising slightly to about 55 percent in 1984 and 1985. However, Syria's oil and petroleum products trade surplus of the late 1970s (and 1980) turned into a deficit in the 1980s. The 1980 surplus of LS2.42 billion fell to a deficit of LS767 million in 1984, making Syria's ability to boost domestic production and reduce oil imports an economic imperative of the 1990s.

Since 1982, when Syria closed its oil pipeline from Iraq and stopped purchasing Iraqi oil as a show of support for Iran in the Iran-Iraq War, Iran has supplied large quantities of oil to Syria on concessionary terms and as outright gifts. In 1984 Iran provided Syria with 6.4 million tons of oil, discounted by US$2.50 per barrel, and 1.6 million tons free, for a total of 8 million tons. In 1985 Iran supplied Syria with six-million tons of oil, including a one-million ton gift. However, Iran interrupted supplies in October 1985 because of Syria's estimated US$1.5-billion payment arrears and price disagreements. Syria turned briefly to Arab suppliers on the spot market, further depleting foreign exchange reserves, before Iran negotiated a new agreement with Syria in July 1986, guaranteeing the supply of 2.5 million tons of oil between October 1986 and March 1987.

Until oil prices jumped in the early 1970s, Syria earned more from the international pipelines that crossed its territory than from domestic oil production. In the early 1950s, the Tapline (Trans-Arabian Pipeline)--running from the oil fields in Saudi Arabia across Jordan and the southwest corner of Syria to a sea terminal on the Lebanese coast--was completed. Capacity was 25 million tons of crude oil a year. Syria earned small amounts of foreign exchange from transit fees (reportedly US$2.8 million in the mid-1970s) for the oil crossing the country via Tapline. Various interruptions of pipeline operations, escalating transit fees, and the reopening of the Suez Canal in June 1975 reduced use of Tapline in the 1970s. Pumping via Tapline was suspended in 1977, while Syria negotiated a new arrangement with Lebanon. In 1987 observers were pessimistic about the future uses of Tapline.

The larger and more important pipeline carried crude oil from the former Iraq Petroleum Company (IPC) fields across Syria via Homs, after which the pipeline branched, with one spur leading to Tripoli in Lebanon and the other spur leading to the Syrian terminal at Baniyas. The IPC pipeline (actually three separate lines) had a capacity of about 55 million tons a year in the 1970s. The pipeline began operation in the early 1950s, providing transit fees as well as the crude that was refined at the Homs refinery into products for Syrian consumption. In the 1960s, Syria frequently used its control at the pipeline for political leverage over Iraq, which depended on the pipeline across Syria until the late 1970s, when its pipeline through Turkey began operation.

Transit rates increased substantially after 1966. In the early 1970s, earnings from the pipelines were more important than direct taxes and one of the most important sources of budget revenue. These earnings peaked in 1974 at LS608 million and were estimated at LS575 million in the 1975 budget. In April 1976, however, Iraq cancelled the transit agreement because of price disputes and cut off oil supplies to Syria. Saudi Arabia supplied oil for the Homs refinery until February 1979, when Iraq and Syria negotiated a new agreement, setting transit fees at $0.35 per barrel compared to $0.45 when the pumping stopped. In 1979 Iraq pumped ten million tons of oil through the pipeline, approximately two-thirds less than the average amount pumped between 1971 and 1976. The outbreak of the Iran-Iraq War in September 1980 again interrupted pumping, but it put Syria in a stronger position vis-a-vis the pipeline, given Iraq's need for revenues to finance the war. Although pumping resumed in February 1981, Syria argued that the pipeline cost more to operate (US$31 million in 1981) than it brought in transit fees (US$25.7 million in 1981). In April 1982, after negotiating an agreement to purchase oil from Iran, Syria closed the pipeline to Iraqi petroleum exports.

By the mid-1980s, Syria had two domestic pipeline systems and two refineries. A crude oil line, with a capacity of fifteen million tons a year in 1977, led from the fields in the northeast to a sea terminal at Tartus, with a spur to the refinery at Homs. Three pipelines for refined products from Homs (each with a capacity of 350,000 tons a year) led to the major consumption centers of Damascus, Aleppo, and Latakia. In 1984 the Syrian Company for Oil and Transport (state-owned) carried 9.5 million tons of crude through its pipeline, up from 8.9 million tons in 1983. In 1979 the new Baniyas refinery was also connected to the domestic crude oil and products pipeline system.

The refinery at Homs was completed in 1959 and began processing Iraqi crude oil for local consumption. In 1977 the refinery's capacity stood at about 2.7 million tons, but after the sixth planned expansion in 1985, its capacity doubled to 5.4 million tons per year. The US$143-million project contracted to Czechoslovakia's Technoexport included the construction of a 480,000-ton-per-year hydrogenation unit, a 380,000-ton-per-year catalytic reformer, and two steam-and power-generating units. Four hundred Syrian workers received training in Czechoslovakia in 1985 in connection with the sixth expansion of the refinery. The seventh expansion of the refinery, scheduled to be completed in the late 1980s, involved the construction of a 100,000-ton- per-year base lube oil complex located at the Homs refinery. The Homs refinery used a blend of crude oil in the 1970s, mixing light Iraqi oil with heavy Syrian crude. Israeli bombing raids on Syria during the October 1973 War severely damaged the operating capacity of the Homs refinery, and the desulfurization unit was not fully repaired until 1976. After 1982 Syria used imported Iranian oil with domestic products at the Homs refinery. In 1985 it processed 5.064 million tons, up from 5.197 million tons in 1984.

The Baniyas refinery was completed in 1979 at a cost of LS1.1 billion. The refinery's maximum capacity was six million tons. In its first year of production, the refinery produced only 1.7 million tons, but this figure more than doubled in 1982 to 4.4 million tons. In 1984 and 1985, the refinery operated at 95 percent of capacity, refining approximately 5.7 million tons of crude oil for an annual production value of LS4 billion. Principal products included high octane and regular gasoline, butane gas, jet fuel, asphalt, and sulfur. The plant employed 2,250 workers in 1984, including 73 Romanian technicians--a sharp decline from the 450 Romanian technical advisers who assisted operations at the Baniyas refinery in 1982.

Syria's natural gas was discovered in conjunction with oil- exploration operations in the northeast part of the country. In 1984 proven gas reserves were estimated at 98.8 billion cubic meters with associated gas reserves of 33.3 billion cubic meters. Although into the 1980s most natural gas was flared, Syria began exporting small quantities of liquified petroleum gas (LPG) in late 1981. Marathon Oil made two promising gas discoveries in 1982 and 1985, finding a gas potential of 450 million cubic meters a day in 1982 at Sharif-2 and 400 million cubic meters a day at Ash Shair I. The economic viability of Marathon's gas discoveries combined with uncertain market forces to cloud future exploitation of these resources. In 1982 Syria awarded major contracts to Technoexport of Czechoslovakia to build a gas treatment plant at Jubaysah and a gas transmission line to Homs for use in the Homs ammonia-urea plant. France also began construction on a gas treatment plant at Rumaylan.

Phosphate was the country's other major mineral resource. The government claimed reserves of one billion tons. The first government-operated mine near Tadmur (Palmyra) began producing in 1971, and two others began operating in 1974. Syrian phospate was low grade (about 30 percent concentration) and high in moisture. Installation of a drying plant in one government-run mine in 1978 helped improve the quality and quantity of output. Production grew from 800,000 tons in 1978 to 1.5 million tons in 1984, but fell slightly to 1.3 million tons in 1985. Syria exported about two-thirds of its phosphate in the 1980s, largely to East European countries as part of barter arrangements concluded between the governments. Although Syrian government officials anticipated that output would triple by 1988 to five million tons and by 2000 equal the output of Morocco, the world's largest producer, production levels have remained well below projected targets. In 1981 Syria's giant triple super phosphate (TSP) plant, built by Romanian contractors at Homs, began production with a capacity of 450,000 tons of TSP, and 800,000 tons of phosphate and phosphoric acid. Syria's production of phosphatic fertilizer more than doubled from 1981 to 1984, rising from 68,333 tons to 191,176 tons.

The other products of the extraction industries were minor. Natural asphalt was extracted at a coastal site and in the central part of the country. In 1976 production amounted to 125,000 tons--a tremendous jump from the 31,000 or less produced in 1975; however, by 1984 production had declined to 52,000 tons. Pure rock salt deposits, totaling over 100 million tons, existed northwest of Dayr az Zawr. Expansion of the mine facilities in the early 1970s raised the potential capacity to over 250,000 tons a year, but production hovered around 50,000 tons through the mid-1970s. Production peaked at 102,000 tons in 1982, but fell back to 38,000 tons in 1984. In addition, construction materials (sand, gravel, stone, and gypsum) were mined in various parts of the country. In 1986 Syria signed an agreement with Turkey establishing joint ventures for mineral exploration, and Soviet and Polish scientific missions discovered sizable iron ore deposits near Az Zabadani and Tadmur. In late 1986, the government also announced the discovery of significant quantities of diamonds.

Electric Power

At independence, only a small part of the population in the larger urban centers had access to electricity, and per capita consumption ranked among the lowest in the world. Small separate, local companies owned by private domestic or foreign interests supplied electricity. During the 1950s, capacity increased, and production expanded by an average of 12.4 percent a year. Rapid expansion continued, and during the 1960s, the state began a national grid. In 1976 electric power generation amounted to 1,732 million kilowatt hours (KWH), an average annual increase of over 14 percent since 1966.

According to the Ministry of Electricity, electricity production rose from 3,720 million KWH in 1980 to 7,310 million KWH in 1984 and 7,589 million KWH in 1985. Annual production growth, however, fell from an average of 19 percent in 1980 to only 10 percent in 1984 and 1985. By 1986 electricity consumption outstripped production, forcing power cutbacks of four hours a day throughout the country. Industry consumed 52 percent of total electricy in 1984, but some factories reported operational capacity of only 60 percent because of power shortages. In May 1986, the People's Assembly debated the electricity crisis, urging renewed efforts to ration electricity consumption and to devise new projects to increase power generation and distribution. Although the electric-power industry was one of the fastest growing sectors of the economy in the 1960s and 1970s (Syria even exported electricity to Lebanon and Jordan in the late 1970s), the state's success in providing electricity to ever greater numbers of the population in a remarkably short time paradoxically precipitated the crisis.

Although the state nationalized electric power generation in 1951, the industry remained fragmented under local administration until a single national company emerged in 1965. In 1974 when the state created the Ministry of Electricity to supervise the development of the electric-power supply, the national electrical company became an agency of the ministry. By 1976 nearly all of the country's generating units were under the national electrical company and linked in a grid. At the end of 1984, the national system had an installed capacity of 2,834 megawatts compared with 1,779 megawatts in 1976. However, the 1980s witnessed a shocking and somewhat unanticipated decline in hydroelectric power production, the dominant source in the state's plan to increase electricity output. In 1979 hydroelectric power generated 73 percent of the country's electricity, up from 55.6 percent in 1975. Hydroelectric power accounted for 59 percent of installed nominal capacity in 1979. But by 1984 hydroelectric capacity produced only 820 megawatts (29 percent of total megawatts) and 1,928 million KWH of electricity or 26 percent of the total. Thermal capacity generated 2,014 megawatts, 71 percent of the total produced in 1984, and produced 5,382 million KWH of electricity, or 74 percent of the total.

The precipitous decline of hydroelectric-power generation resulted from technical and operational problems inherent in the Euphrates dam. In the mid-1980s, the dam's eight 100-megawatt turbines operated below capacity, often producing only one-third of projected output. The low level of water in Lake Assad, caused by poor rainfall and Turkey's use of the Euphrates waters for its Keban and Attaturk dams, also contributed to the difficulties. Although the Euphrates dam was the most important component in the state's plan to expand the national power system in the late 1960s and 1970s, it failed to produce the expected 80 percent of the country's electric power between 1977 and the early 1980s.

In the early 1980s, Syria implemented few new projects to meet the growing demand for energy, but it planned extensions of existing power stations to expand production and new projects for the end of the decade. The Baniyas station, completed in 1981 for US$140 million, anticipated a 2-turbine, 165-megawatt extension in the late 1980s. The Suwaydiyah power station also expected to benefit from a 150-megawatt extension and 4 new turbines. At the Muhradah power station, located west of Hamah and completed in 1979, a major extension totalling US$195 million and financed largely by Gulf development agencies was planned. The US$97 million Soviet-assisted Tishrin power plant (formerly known as Widan ar Rabih station) and another power station near Homs were under construction in the mid-1980s.

In addition, the government considered constructing a nuclear power plant with Soviet assistance. In mid-1983 Syria signed a protocol with the Soviet Union to conduct feasibility studies and select an appropriate location for the country's first reactor. Although Syrian and Soviet officials had originally intended that a 1,200-megawatt nuclear plant come on line in 1990, the project had advanced little beyond the design stage by the mid-1980s. Although nuclear energy promised a solution to Syria's pressing electricity shortage, the political and military obstacles to Syria's developing nuclear energy were formidable, especially in the wake of Israel's bombing of Iraq's nuclear reactor in 1981. As nuclear power became a more costly alternative energy source in the context of volatile Middle East politics, in the late 1980s the government explored the prospects for solar energy.

By 1978 a national grid linked nearly all of the country's generating units and most of the larger towns; distribution extended to rural areas only in the west around such major cities as Damascus and Aleppo. In 1970, based on a housing census, about 85 percent of the urban population had access to electricity but only about 10 percent of the rural population did. According to government statistics, 40 percent of the population remained without electricity in 1980. However, by the middle of the decade, almost all of the urban population had received electricity. Rural electrification projects, a top priority of the Ministry of Electricity in the 1970s, had also achieved widespread success. The government planned extending electricity to all villages with over 100 inhabitants by 1990. The number of villages receiving electricity grew from 424 prior to 1975 to 1,581 in 1979 and had reached 5,894 in 1984. In Ar Raqqah Province alone the number of electrified villages increased from 47 in the period from 1953 to 1979 to 405 in 1984, indicating the dramatic extension of electricity to rural areas. The number of subscribers in rural areas tripled between 1970 and 1984, increasing from 442,307 to 1,564,625.

Expanding electric power distribution and usage in the 1970s, sectoral mismanagement, lack of spare parts for power plants, technical impediments, and declining water levels in Lake Assad produced a mid-1980s electricity crisis. Syrian official statistics and Ministry of Electricity data projected that consumption, growing at an annual rate of 20 to 22 percent in the mid-1980s, would outstrip production until the mid-1990s. Syria could meet the surging demand for electricity in the mid-1980s only by producing 300 to 400 additional megawatts a year. However, with only one 25-megawatt unit at the Baath Dam scheduled to come on line in late 1986, ambiguous plans for 1987, a 320-megawatt increase projected for 1988, and a 400-megawatt increase expected when the Tishrin station began production in 1989, Ministry of Electricity plans fell far short of satisfying demand. The ministry's plans for the 1989-95 period projected a production increase to 2,970 megawatts to meet an anticipated demand ranging from 1,800 to 2,400 megawatts. The theoretical excess production, however, would barely meet the accumulated shortages of the mid-1980s. Electricity shortages, blackouts, power cuts, and rationing remained a prominent feature of Syrian life in the late 1980s, frustrating industrial development and impeding economic growth.

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. 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. 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.

Syria

Syria - Foreign Trade

Since the early 1950s, the value of imports has been close to double the value of exports. The two exhibited similar growth patterns, both growing slowly until the 1970s. Between 1951 and 1970, imports increased an average of 6.2 percent and exports 5.6 percent a year, and the trade balance slowly worsened. In the 1970s, the value of imports and exports increased much more rapidly. For example, the average rate of growth of imports increased 28 percent a year and exports increased 23 percent a year. In the 1980s, the trade imbalance widened further. Syria instituted austerity budgets to reduce imports drastically and to conserve foreign exchange. As a result, by the mid-1980s the trade deficit had declined from LS11.6 billion in 1981 to LS10.3 billion in 1983 and LS8.9 billion in 1984, still large but offering the hope of continued future reductions.

Imports

Syria experienced considerable growth in imports in the 1970s, fueled by the increased flow of foreign aid, the investment and construction boom that followed the October 1973 War, and the oil-price rise stemming from Organization of Petroleum Exporting Countries (OPEC) policies of the mid-1970s. Machinery and equipment emerged as the most rapidly growing import segment. Increased construction necessitated more imported semiprocessed goods, such as cement, iron and steel rods, and other raw materials. Private consumption also increased, requiring ever greater imports of sugar, cereals, dairy products, foodstuffs, pharmaceuticals, and other products.

Public sector trading firms imported most of these commodities. In 1976 public sector enterprises accounted for 72 percent of total imports. In 1984 public sector enterprises retained the lion's share of imports, accounting for about 79 percent of the total, excluding military materiel. In the 1980s, the government implemented a policy to curb public and private sector imports. The policy was part of the general austerity pervading economic planning and a way of maintaining rapidly depleting foreign-currency reserves. Because of the large volume of consumer goods and industrial inputs that entered Syria via the black market in the 1980s, official import statistics must be treated as rough indicators of actual import figures. Informed estimates placed the value of black market trade at about US$1 billion in 1985. Officially recorded imports fell from LS19.8 billion in 1981 to LS17.8 billion in 1983 and to LS16.2 billion in 1984. In February 1983, the government called for a partial suspension of industrial imports to ease balance of payments problems. Officially recorded private sector imports fell from LS2.1 billion in 1983 to LS1.3 billion in 1984, reflecting industry's increased resort to the black market, the impact of government austerity programs, and long waiting periods for import permits and letters of credit. In 1986 the government reformed letter- of-credit regulations to ease bureaucratic delays for private sector imports.

In the 1970s, Syria diversified its sources of imports. Western Europe became Syria's most important supplier, accounting for 49 percent of total imports in 1975 and 56 percent in 1976. By the 1980s, the direction of Syria's imports had changed drastically. Between 1980 and 1984, the European Economic Community's (EEC) share of exports to Syria fell sharply, ranging between only 25 to 32 percent of the total. Since 1982, Syria has experienced a tremendous increase in imports from Iran and Libya, largely in the form of oil shipments. The percentage of Syria's imports from Iran in 1983 was 26.1, but the figure fell to 22.7 percent in 1984 as a result of decreased shipments of Iranian oil. Imports from Libya climbed from LS37.6 million in 1983 to LS1.24 billion in 1984, or 75 percent of Syria's total imports from Arab states that year. The Federal Republic of Germany (West Germany), France, Italy, Japan, the German Democratic Republic (East Germany), and the Soviet Union were Syria's most important suppliers in 1984. Oil, machinery, transportation equipment, iron and steel, cereals, sugar, and produce were the main imports.

Exports

Syria's growing exports of crude oil and the sharp rise of world oil prices in 1973-1974 produced a steep increase in the value of exports in the 1970s. The value of petroleum exports rose from LS129 million in 1970 to LS2.7 billion in 1976, with crude oil exports alone increasing from LS291 million to LS1.6 billion from 1973 to 1974. In the 1980s, however, Syria experienced a steep decline in the value of exports because of falling world oil prices and reduced oil exports. Syrian statistics claim that the value of oil exports shrank from LS6.5 billion in 1980 to LS4.6 billion in 1984; other sources state that the drop was from LS5.2 billion to LS3.6 billion. Crude oil and oil products exported fell to 7.8 million tons in 1980, peaked at 8.1 million tons in 1982, and nosedived to 6.8 million tons in 1984. In 1980 exports totaled LS8.3 billion and fell to LS7.35 billion in 1984. The overall index in the volume of exports fell from 100 to 95 in 1983.

The value of cotton exports totaled LS310 million in 1970, LS664 million in 1980, and over LS1 billion in 1984, the record harvest year. The value of cotton exports in 1984 equaled 14.8 percent of Syria's total exports and 29.3 percent of nonpetroleum exports. In 1984, petroleum and cotton exports together accounted for 64 percent of the country's total exports. In 1985 the figures for cotton exports fell by nearly 30 percent, and the price of cotton on the world market dropped from US$1,800 a ton in 1984 to about US$1,400 a ton in 1985. Major buyers in the 1980s included the Soviet Union, Algeria, Italy, and Spain.

In addition to cotton and petroleum, Syria exported phosphates and small quantities of diverse goods. Phosphates generated LS106.3 million of export revenues in 1983. The 1981 to 1985 Five-Year Plan envisioned an increase in phosphate production to 5 million tons by 1985, generating LS580 million in export earnings. Targets fell far short of the goal but preliminary 1986 figures reflected a record increase in production. Export of textiles, chemicals, glassware, and a variety of agricultural products also earned small amounts of foreign exchange.

In the 1960s, Syria's major trading partners were East European states, but in the 1970s the direction of trade shifted to Western Europe, as the government pursued limited economic liberalization policies. In 1976 Western Europe (primarily the EEC) provided the main markets for Syrian exports, accounting for 57 percent. East European and Arab countries accounted for 25 and 11 percent of total exports, respectively.

In the 1980s, Syria experienced another shift in the direction of trade. Exports to Western Europe had risen to 61.6 percent by 1980 but fell to 35.7 percent in 1984. In 1980 the East European share of Syrian exports totaled only 16.1 percent but rose to 43.8 percent in 1984, clearly indicating the return to those markets. However, in contrast to the 1960s, when East European states served as the main export market for Syrian goods on a cash basis, in the 1980s much of Syria's East European trade occurred as countertrade or barter deals as a result of Syria's severe shortage of foreign exchange. In 1985 Syria concluded barter deals with Czechoslovakia and Yugoslavia, exporting phospates in exchange for engineering and construction equipment and industrial raw materials.

To boost trade, Syria also signed important treaties of friendship and cooperation with East European states in the 1980s. Syria renewed its 1980 treaty of friendship and cooperation with the Soviet Union in 1985 and signed a similar agreement with Bulgaria in May 1985. In 1984 the most important export markets were Romania (LS2 billion), Italy (LS1.4 billion), Soviet Union (LS838 million), France (LS877 million), Spain (LS240 million), Algeria (LS164 million) and Iran (LS164 million).

Syria

Syria - Banking and Monetary Policy

When first issued in 1920, the Syrian pound was linked to the French franc. At independence French-and British-owned banks dominated banking activity. The largest bank, the French-owned Bank of Syria and Lebanon, became the bank of currency issue and assumed other central-bank functions, in addition to its commercial operations. In 1947 Syria joined the International Monetary Fund (IMF) and established a par value of LS2.19 equivalent to US$1. In 1949 Syria broke the link to the franc.

The primary legislation establishing a central bank and control of the banking system was passed in 1953, but the Central Bank was not formed until 1956. Its functions included issuing notes, controlling the money supply, acting as fiscal agent for the government, and controlling credit and commercial banks. It was also to act as the country's development bank until specialized banks were established for various sectors. The Central Bank had considerable discretionary powers over the banking system but was itself responsible to and under the control of the Council on Money and Credit, a policy group of high-ranking officials.

The banking system has exhibited resilience in the wake of widespread political change since independence. Before independence, Syria was the junior partner in terms of banking facilities in a customs union with Lebanon. Dissolution of that relationship in 1950 stimulated the establishment of foreign banks, especially Arab, and expansion of some already operating there. After the 1956 Suez War, French and British banking interests were sequestered as enemy assets. In 1958 and after the union with Egypt, the state began to Arabize the commercial banking system and in 1961 implemented a policy of limited nationalization.

In 1966 the state achieved complete ownership of commercial banking by merging all existing commercial banks into a single consolidated Commercial Bank of Syria. In addition, the government created specialized banks to promote economic development. It extended the charter of the Agricultural Cooperative Bank from the preindependence period and established the Industrial Bank in 1959, the Real Estate Bank in April 1966, and the Popular Credit Bank in July 1966.

In 1986 the banking system consisted of those five banks in addition to the Central Bank. Legislation in 1966 largely limited each bank's lending to the sector in its title. All five banks could extend short- to long-term credit and accept deposits. The Commercial Bank was by far the largest and most active.

The total assets of the specialized banks reached LS44.9 billion at the end of 1984, and total deposits amounted to LS28 billion. The Commercial Bank of Syria, the largest of the five specialized banks, had assets of LS33.7 billion in over 40 branches in 1984. Deposits totaled LS19.3 billion in 1985. The specialized banks extended credits of LS26.1 billion in 1984. Banking authorities allocated credit primarily to commerce (51 percent), industry (27 percent), and construction (15 percent). The public sector received 75 percent of the credit.

The Council on Money and Credit established monetary policy and supervised banking, subject to review by a ministerial committee responsible for the whole economy. The general philosophy was that the banking system should be an agent of government economic policy. Direct controls were used more often than indirect ones; credit, for example, was regulated by setting limits for each sector and each bank.

Although the money supply increased rapidly, it consisted primarily of money in circulation. In the 1960s, demand deposits generally were less than one-third of the money supply and by the late 1960s about one-fifth. Banking activity increased in the 1970s, and currency in circulation slowly decreased from 77 percent of the money supply in 1970 to 61 percent in 1980 and 56 percent in 1984.

Bank accounts were predominantly demand deposits; use of time and savings accounts grew slowly. For example, in 1984 time and saving deposits were only 40 percent the size of demand deposits.

In fact, banking played a rather limited role in the economy. There were several possible reasons for the limited use of banks, including distrust of or unfamiliarity with banks, low incomes and limited savings, low interest on saving accounts, lack of more convenient branches, and, especially, the increased resort to the black market for currency transactions and imported goods in the mid-1970s.

Bank lending was mainly for short-term commercial transactions. Bank financing of trade was 53 percent of total lending in 1964, 67 percent in 1970, 79 percent in 1976, 46 percent in 1980, and 50 percent in 1984. The value of loans to the commercial sector nearly tripled from 1975 to 1984. Loans to other sectors of the economy, especially to industry and construction, diverted bank lending from commerce in the late 1970s. The value of loans to the industrial sector increased more than twenty-fold from 1975 to 1984, to become 27 percent of total lending. The value of construction loans grew seventeen-fold and agricultural loans tripled.

The sources of bank funds, largely borrowing from the Central Bank and demand deposits, contributed to the short-term nature of most lending. In general, the banks were undercapitalized. In the 1970s and 1980s, more medium-term loans and a few long-term loans (in agriculture and housing) were made. Long-term loans constituted 15 percent of agricultural loans and 71 percent of housing loans. Short-term commercial credits, however, increased faster. The Industrial Bank appeared to invest equity capital in both public and private plants instead of making long-term loans. Public sector enterprises received most bank lending, but the percentage fell from 84 percent in 1976 to 75 percent in 1984.

Monetary expansion in the 1960s largely resulted from financing government budget deficits. The growth of the economy, extension of the use of money, and government price controls minimized the impact of deficit financing on prices. Monetary expansion accelerated in the 1970s, particularly after 1972. The large inflows of foreign funds, plus the sharp increase in Syria's own oil revenues, facilitated rapid growth of government expenditures while building up government deposits with the banking system. A high rate of credit expansion, primarily to public sector enterprises, followed, and private sector borrowing also increased substantially. After 1976, the expansion of the money supply continued in tandem with the need to finance chronic budget deficits. The money supply grew 21.3 percent during the 1970s and 22.8 percent a year during the early 1980s, a rate much higher than the growth of GDP.

Monetary expansion, along with shortages of goods and labor, caused a period of high inflation. Inflation was also fueled by steep rises in world prices of imported commodities. The wholesale price index increased an average of 18.2 percent a year between 1972 and 1976; from 1977 to 1984, wholesale prices more than doubled. This period was Syria's miniboom--a smaller version of the high level of investment and construction activity, rapidly rising prices, shortages of goods and labor, and overtaxed storage and transportation facilities that characterized the nearby Arab and Iranian oil economies.

In addition to setting a great number of prices directly, the government controlled many more. Limited markups (generally between 5 and 10 percent) were applied to a wide range of commodities produced or imported by the private sector. Essential commodities were supplied at low, subsidized prices. When the price discrepancy of an item became too great, encouraging smuggling, the government rationed the amount that could be bought at subsidized prices. Rationed commodities included rice, sugar, and cottonseed oil. A person wanting more than the ration could buy as much as he wanted at the much higher open-market price.

The government's rationing policy directly contributed to black market growth in the early 1970s. The black market flourished during Syria's miniboom of the mid-1970s and substantially increased as the Syrian presence in Lebanon facilitated the transfer of consumer goods, raw materials, and industrial spare parts across the border. Frustrated by bureaucratic delays in obtaining import permits and letters of credit, the private sector increasingly turned to the underground economy to acquire essential imports. The public sector, also suffering from strict government control over imports and from shortages of foreign exchange, resorted to similar means to import spare parts for state-run factories. Observers estimated black-market trade at about US$1 billion per year in the mid- 1980s, almost one-quarter the size of officially recorded imports.

The black market in foreign exchange also played a more active role in the economy, as Syrians working abroad sought higher exchange rates for their currency. In mid-1986 Syrian pounds traded for about 30 to the dollar in contrast to official exchange rates of LS3.9 to the dollar.

Government responses to increased resort to the black market for imported goods and currency exchange varied. In 1984 and 1985, as part of its efforts to alleviate the foreign exchange crisis, the state launched a campaign against black-market money changing and currency smuggling. Syria decreed heavy sentences for black marketeering, including up to twenty-five years' imprisonment for currency smuggling and one-to five-year sentences for Syrians who failed to repatriate funds earned overseas from business inside Syria. Widespread but brief arrests of money changers signaled the government's intention to limit the black market, rather than eradicate it; in the late 1980s, the official economy still remained heavily dependent on underground transactions for foreign exchange. In addition, the government issued new regulations severely limiting the amount of foreign exchange allowed out of the country and requiring tourists to change US$100 upon entry.

In 1986 the Commercial Bank issued a new regulation to facilitate private sector imports through official channels and reduce black market activity. The regulation permitted any importer with an official import license and source of foreign currency to pay the Commercial Bank 105 percent of the total amount required in the letter of credit and receive a letter of credit immediately. The regulation was designed to reduce the waiting period for letters of credit, which had reached up to two years for some private sector firms in the mid-1980s. However, private businessmen initially reacted cautiously to the reform measure, fearing retribution from state tax collectors or the police by admitting they held large amounts of foreign currency outside the system.

In the 1980s, the government also revised exchange rates in an attempt to attract workers' remittances to official channels, make government rates more competitive with the black market, and stop the depreciation of the pound. In 1981 Syria reverted to a multitier exchange rate, in which the government established a "parallel" rate for private sector imports that floated against major international currencies. In 1986 the parallel rate was LS5.4 to US$1. The "official" rate of LS3.9 to US$1 remained in use for public sector imports. In 1982 the government established a "tourist" rate for Syrians working abroad; this rate was LS9.75 to US$1 in 1986. By 1986 many commercial activities were calculated at the "tourist" rate to encourage a return to official banking channels. In addition, government regulations instituted in 1984 permitted Syrians working abroad and foreigners doing business in Syria to maintain hard currency accounts of up to 75 percent of the value of agricultural and industrial imports. After September 1985, the government permitted resident Syrians to open hard currency, interest- bearing accounts at the Commercial Bank of Syria specifically to finance imports.

Syria