Peace Economics

Why Syria must rein in unemployment, food prices, and corruption to ensure a stable future.

This background paper was created in preparation for the PeaceGame, a program co-hosted by Foreign Policy and the U.S. Institute of Peace on Dec. 9-10, 2013. For more information, please go to www.peace-game.com.

The Arab Spring rebellions in Tunisia, Libya, Egypt, and Syria raise a crucial question for analysts: Why did authoritarian or kleptocratic rulers lose control over their polities? For decades, these rulers were able to use a combination of repressive and redistributive policies in order to maintain social order. Why did that order break down?

While to date the answers to that question have largely focused on the rising power of internal opposition groups, like the Muslim Brotherhood, alongside the power of new social media to spur political mobilization, serious economic analysis of the underpinnings of these conflicts has been in somewhat shorter supply. Yet clearly, all these rebellions have some economic themes in common, including high levels of unemployment -- especially among the bulging youth population -- reduced levels of growth, falling productivity in the agriculture sector, and real or suppressed inflation. No matter the ultimate outcome of these rebellions, regimes throughout the Middle East and North Africa will need to confront the failures of their long-standing state-led and oil-fueled development model.

As a result of its ongoing civil war, Syria in particular is now faced with a dire social and economic environment. It is estimated that half of all Syrians now live in poverty, with 4.4 million in extreme poverty. Approximately 2.3 million jobs have been lost, affecting an additional 10 million dependents, and economic losses are estimated at between $60-$80 billion, or 40 percent of the country's GDP.

The current crisis has much to do with economic problems that predated the conflict -- namely, the fact that economic decisions made by the Syrian state over the past three decades reflected ineffective "social market" polices. The long-standing Baath party first ruled by President Hafez al-Assad and taken over in 2000 by his son, Bashar al-Assad, has operated mostly as a centrally planned economy, but one that operated mainly to the benefit of the minority Alawite elite. For a long while, an unwritten peace between the government and the people was kept so long as the government could engage in a sufficient level of redistribution to make the costs of rebellion higher than the benefits. However, when the economy faced shortfalls in some of crucial areas -- as it did with the 2006-2011 food shortages, when agricultural output declined -- the government could not maintain that social compact.

The Syrian government's failure to provide for the basic needs of its growing population helped spark the current revolt. In particular, increasing food and fuel prices on the one hand, coupled with rising unemployment on the other, led to an eroding sense of economic security. The Assad regime had staked its legitimacy and credibility on creating this security; its failure to do so has undermined its authority.

Post-conflict Syria will continue to face severe structural and economic challenges. The state-dominated economy will need to give way to the private sector, which has been stunted by the regime. High levels of unemployment and underemployment will need to be confronted, along with high prices for basic goods and services. In brief, Syria will require both economic transformation and economic reconstruction.

Getting to that point will involve addressing several critical issues:

Demography versus economy. Over the past few decades, the basic social contract of the Syrian state was to provide jobs and affordable food to its growing population. However, as population growth has outpaced economic growth (coupled with a drought causing unemployment and food prices to rise), this promise has not been sustainable. For instance, the rising population has been met with a reduction in social services like health care, and unemployment has risen from approximately 8 percent in 2010 to nearly 50 percent today. As a result of an enlarged public sector, educational investments have been relatively high (consistent with other oil-rich states). However, with few jobs available outside the state sector, this has created a growing problem of underemployment and resentment among the youth.

Drought and agriculture. Agricultural production and jobs have been a priority for Syrian economic and social policy. However, losses in this sector have culminated over the past decade and created a situation for economic hardship and conflict leading up to the March 2011 riots. Between 2006-2011, a five-and-a-half year drought that crippled 60 percent of agricultural land and up to 85 percent of livestock in some regions, caused food shortages and price hikes. The drought caused a wave of unemployment (an estimated 800,000 rural workers have lost their jobs in agriculture) and induced migration from rural to urban areas. Further, they caused a huge spike in food prices, and studies have linked sharp increases in food prices to civil unrest.

Compounding the situation, conflict has disrupted agriculture production in essential food items, such as wheat, barley, and vegetable produce, by 50 percent. However the drought in Syria was not random; scientists believe that climate change is largely responsible and a new reality for the region, as it's estimated that rain-fed crops will decline up to 57 percent by 2050.

Oil. With oil rents comprising of roughly 20 percent of GDP over the past decade, oil revenues have provided the funds for an enlarged government presence, crowding out private sector activities. The oil industry has nearly collapsed since 2011 -- production has fallen by 5 percent -- and the economy as a whole is expected to become a net importer of oil, perhaps as early as 2015. The recent decline is due to the seizure of oil wells by rebel groups, heightened transportation costs, and international sanctions banning trade. Moreover, EU and U.S. sanctions against oil exports are estimated to cost $400 million in losses each month.

Corruption. Since 2003, corruption in Syria is estimated to have grown significantly, as measured by the Corruptions Perceptions Index, rising from 49 to 81 on a scale of 100. Regime insiders, such as Assad family members and close friends, have benefited from the government's central control over the Syrian economy and judicial system, thanks in part to the awarding non-competitive contracts. For example, one businessman has had control over the telecommunications industry with Syriatel alongside prominent stakes in free-trade zones, banks, and other enterprises since Bashar al-Assad, who is his cousin, took over the regime.

In the face of these challenges, however, there are also critical opportunities.

Funding the opposition. Private donors, many based in Kuwait, Saudi Arabia, and other Gulf states, have helped fund and strengthen various opposition groups. These fundraising activities target Sunnis to help overturn the government from Shiite and Alawite sects, and the promise of creating a Sunni Islamist state in Syria is a major "selling point" among supporters. As a consequence of this robust fundraising, extremist sects may have gained relative strength against western strategic interests. It is important for the United States and its Western allies to take a careful look at financial flows into the opposition and how these may influence the internal balance of power.

Private enterprise. The social market regime in Syria has suffocated opportunities for small, middle-size, and other private business enterprises. For instance, since 1960, the government has nationalized major enterprises, and little credit has been available for those private sector firms that remained in business (this is the general pattern in many oil-producing states in the Middle East). To the extent that a private sector remained, it was largely controlled by a small group of people related to the Assad regime. Not surprisingly, the World Bank's "Ease of Doing Business" score for Syria is 147, well below the regional average of 107. Rebuilding the private sector will be a core task of the Syrian regime in future.

Trade and investment. Prior to 2011, Syria began adopting relatively more liberalized economic policies in line with IMF recommendations and its application to become a member of the World Trade Organization. Without a robust private sector, however, these policies had little effect on economic performance. Since the conflict, Syrian exports dropped from approximately $2 billion in 2011 to $95 million in 2013. Rebuilding trade and Syria's participation in the regional and global economies is a major task for post-war reconstruction.

Rebuild financial markets. Strengthening Syria's financial markets will provide the conditions for greater foreign investment, credit, controlling inflation, and debt financing. Such activities will not be possible without first strengthening the currency regime. Currently, $1 is worth 138 Syrian pounds, which reflects a highly devalued currency that has fallen heavily since 2011(nearly 75 percent). Several factors are responsible, such as decreased availability and consequently higher prices in food (an over 200 percent price increase), transportation (nearly 250 percent), and energy (more than 300 percent). In an attempt to keep its value, the Central Bank of Syria and the Syrian government banned the use of foreign currency or the exchange of Syrian pounds.

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On the economic front, the pathways to peace in Syria begin with restoring basic services and giving immediate attention and aid to humanitarian and refugee relief efforts. Recent efforts to unfreeze foreign bank accounts to supply food essentials to Syrians in need should be furthered. The new regime should support capacity-building and development programs for a variety of job areas, especially non-public-sector jobs.

Longer-term pathways that are critical for peace include reversing the Assad regime's economic policies, rebuilding infrastructure and institutions, and countering the war economy. Rebuilding the basics, such as roads, homes, and places for health care and education, are desperately needed. As a result of the war, it estimated that 3,000 schools servicing half of all students were damaged. Many health care and medical workers have become refugees and are unable to support the local needs. For instance, the ratio of doctors to patients has dropped by approximately 84 percent. The rebuilding of destroyed homes alone would cost at least $28 million in construction and energy costs.

Post-conflict, construction-led growth to rebuild Syria's depleted capital stock will be helpful, but this will require mobilizing foreign investment from a range of private- and public-sector actors. Along these lines, the United Nations Relief and Work Agency estimates that it will take 30 years for Syria to recover to 2010 pre-war levels.

Since 2011, a war economy has developed in Syria; to what extent this has shifted the control of economic resources remains unclear. To be sure, rebels have gained control of some cities and towns that produce oil and agricultural goods, which are sources for government revenue and employment. The shift in control has been a reason for "field burning" by government forces in rebel-controlled areas as a type of economic warfare. The war economy will also manifest itself in the high costs that the regime faces as it pays for its military from diminished coffers. The likely economic effects include a lack of jobs for the civilian population, a weak currency, an increasingly informal or black-market economy, and closed trade routes.

Escaping from this new economic structure will prove challenging, as those who have profited from illicit activities may not have a large interest in supporting a postwar reform process. The situation is comparable to that of Lebanon's civil war and the war economy it created. Because of the profits associated with the conflict, moving away from a war-time economy required offering a more profitable alternative to the various armed groups. This meant sharing and empowering militias and rebels to have a stake in post-conflict reconstruction, lest they act to undermine a fragile peace.

Mechanisms to make the shift from a war to a peace economy could include job creation; scaling back the public sector; investment support for non-oil, private-sector development; the rebuilding of social safety nets; and limiting direct subsidies.

Major players that have an economic interest in a peaceful Syria include neighboring Lebanon -- a major trading partner interested in regional stability and in the potential for this outcome to weaken Hezbollah. Saudi Arabia is also of interest; a more Sunni-tolerant government could be a major ally in dealings with Iran and can provide considerable financial support for post-conflict development. Other regional winners would include Israel and Turkey.

But most prominently, the average Syrian has the most to gain from a peaceful outcome.

Spencer Platt/Getty Images


Debate Lessons

From Sudan to Bosnia, what history can teach us about how to manage negotiations between the Syrian regime and opposition.

This background paper was created in preparation for the PeaceGame, a program co-hosted by Foreign Policy and the U.S. Institute of Peace on Dec. 9-10, 2013. For more information, please go to www.peace-game.com.

What can we learn from other peace processes that could help ease the negotiations in Geneva this January between the Syrian government and the country's fractured opposition? Many seasoned practitioners would argue that since no two conflicts are alike, it is dangerous to assume that what worked in managing one conflict will work in another. At the risk of proving the skeptics right, however, there are a few areas in which earlier conflicts might provide useful lessons for Geneva: identity issues, ripeness issues, and issues arising from the lack of cohesion among the opposition.

Identity issues. At first glance, the conflict in Syria seems to be over who has the authority to govern Syria and what the foundation for that authority is. During the early days of the conflict, the battle lines were set between an authoritarian government and "the street," resulting in a popular uprising against a dictatorial government. But these lines are not as clear today -- like many conflicts that preceded it, both in the region and around the world, Syria has become a conflict over legitimacy.

While removing President Bashar al-Assad remains the target of the opposition groups, the vision of the government that would replace the Assad regime differs greatly. If the next government were secular and democratic, would it be seen as legitimate among groups defined by their religious identity? If it were Islamic, would the liberal democracy promoters accept it as valid? Or would the various groups support only the government that represented their own culture, beliefs, and approach? In other words, has the Syrian conflict become an existential conflict -- one based on identity -- as well as a conflict over legitimacy?

If so, it is similar to many intractable conflicts that combined legitimacy and identity-based issues in a stubborn mix of conflict fuel, like Northern Ireland, Bosnia and the rest of the Balkans, and Sudan and South Sudan. Until they became crises, these conflicts developed without much outside intervention. When the internationals became involved, they dealt primarily with the legitimacy issues and left the identity-based issues to take care of themselves. While the violent conflicts in Northern Ireland, the Balkans, and Sudan and South Sudan have, for the most part, come to an end, the countries are still dealing with these consequences of this limited perspective.

As such, these conflicts offer a number of lessons: early action is important; late action requires a great deal of energy and resolve; once a conflict has aged into intractability, it is necessary to address identity-based issues lest the agreement over governance break down over sectarian or existential issues. Syria is a young conflict, but already shows characteristics of aging into intractability. Any attempt at resolution now should take into account both legitimacy and identity issues. Intractable conflicts become that way because new obstacles emerge that compound and aggravate the original ones, creating contradictory narratives and new layers of scar tissue.

What makes existential identity issues especially troublesome in the Syrian case is how they are linked to security dilemmas -- the fear that some groups are so strong that they threaten the viability of others or so weak that they cannot help to ward off threats. The common response to these dilemmas is to escalate both arms and capacity, in order to provide protection from increased security threats. But as one group escalates, its actions create a security dilemma for its neighbors, and soon they too are escalating to counteract the security threat they feel from the first group. Third party action, through helping the parties craft credible commitments, providing external guarantees, agreeing to cut off arms supplies, or aiding security sector reform, is essential in counteracting the escalatory effects of security dilemmas.

Ripeness issues. An important question that arises from previous conflicts is whether the parties to the conflict in are Syria ready to negotiate rather than continuing to fight. In other words, is the Syrian conflict ripe for resolution? Ripeness, according to I. William Zartman, professor emeritus at Johns Hopkins University, is the moment when conflict parties are ready to resolve their conflict. Without ripeness, conflicts can be managed, suppressed, or frozen, but they cannot be resolved. Moments of ripeness occur when there is a mutually hurting stalemate, when antagonists feel that, no matter how much the fighting escalates, they cannot overcome the other parties. But as conflicts in the Middle East, the Korea Peninsula, and Kashmir attest, stalemates can go on for a long time without producing resolution. Conflict parties also need a way out -- not just a solution, but a pathway to a future that is better than the current stalemate.

Ripeness only describes a moment when the parties are ready to negotiate, it does not guarantee success in those negotiations. It also rarely occurs spontaneously. Outsiders -- powerful states, the U.N., neighbors, regional organizations, NGOs -- often need to help conflict parties recognize their stalemates and ways out, using persuasive talk or the threat (or use) of force. Outsiders often have to put pressure on the process to keep negotiations going; they often have to help to build leadership and coherence within the conflict parties necessary to carry out negotiations and convince their constituents that they should accept the results.

With the recent escalation by the Syrian government and the reluctance of parties to come to Geneva, it is apparent that the Syrian conflict is far from ripe. The U.S. and other countries have tried to "ripen" the conflict through the dual threats of military force and the imposition of sanctions in an attempt to change the Syrian government's view of the costs and benefits of continuing to fight.

These tools have been effective, but there are also other tools that outsiders can employ. One of the most powerful is "borrowing" leverage from each other as the U.S. and Russia have done in their effort to get the Syrian sides to the negotiating table. This kind of diplomatic engagement needs to be nurtured, as Chester Crocker, professor at Georgetown and former State Department official, points out, not "to make nice," but to "open the door" to a possible agreement. In other words, engagement with erstwhile enemies or antagonists in pursuit of peacemaking is a deliberate move to increase leverage.

Crocker used this approach -- reaching out to his Russian counterparts -- to develop pressure on the parties as he negotiated the withdrawal of Cuban troops from Angola and the end to conflicts in southern Africa in the 1980s. Former Assistant Secretary of State Richard Solomon and his counterparts from China and Russia also borrowed leverage from each other to bring peace to Cambodia in the early 1990s. Borrowing leverage is not the same as forming an alliance. While it might be a real bonus if the engagement approach improves relations with former or current antagonists, the fundamental purpose of the engagement is to ripen a conflict.

Cohesion issues. A third challenge is defining which parties to deal with, particularly among a fractured opposition, as is the case in Syria now. The same problem can be found in the Belgrade-Kosovo conflict and the struggle between the government of the Philippines and the various break-away groups in Mindanao. It has also appeared, albeit in a somewhat different form, in the current Egyptian turmoil, as power passes back and forth between groups that firmly oppose the Mubarak regime but don't share a common platform, culture, or ideology.

In the Syrian case, this imbalance will affect negotiations. The government will present a single negotiating voice in the talks, while the fragmented opposition will find it hard to present a unified position. Unless the opposition groups are able to gather around a common set of goals and agree on a spokesperson, it will be very difficult for them to present a strong counterforce to the government's stance.

So how can third parties help to build unity among the opposition? Given time, outsiders can develop productive relationships not only with all of the opposition groups, but also with some of their sponsors -- at least those permitted by the Patriot Act and similar rulings by other countries and international organizations. Such talks, combined with pressure, might lead to the identification of common ground among opposition groups. This is similar to the strategy the U.S. took in pressuring the Bosniaks and the Croats to come together in an alliance, albeit an uneasy one, towards the end of the Bosnian war.

Outsiders could also engage in training and mentoring for the opposition parties on a one-by-one basis, hoping to talk each opposition fragment into recognizing the importance of a unified stand at the negotiating table. Third parties could also let the opposition parties fight it out until one or another emerged as the most powerful. Or they could side with one of the parties, providing arms and support to enable the recipient to defeat militarily all the other groups. Betting on one horse has worked in the past: President Hamid Karzai's ability to retain control over Afghanistan is in large part thanks to Western, largely American, support for his position. However, as the Karzai case suggests, these single-horse betting strategies also have their drawbacks if the horse refuses to run or proves hard to handle.

Whatever the strategy, the outsiders interested in managing the Syrian conflict should focus hard on bringing some kind of unity to the opposition parties. Without that, the negotiations could dissolve into a series of side agreements between the government and the various opposition groups, which would likely evaporate as soon as the negotiators returned to their increasingly radicalized communities.

Looking ahead, Geneva II does not have to produce a comprehensive agreement, but it does need to make progress on the framework provided by Geneva I. Without a sense of forward momentum, the talks may merely inflame the conflict, freeze positions, or provide an opportunity for all parties to be seen negotiating without obliging them to take difficult decisions. While the parties to the conflict and their supporters may be happy with one or all of these outcomes, they will make the next talks -- Geneva III -- even more difficult.