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Industrial Development Policy

Through most of the 1950s, private investment primarily fueled industrial development while the government protected public order and fostered a climate suitable for economic growth. After Syria withdrew from a customs union with Lebanon in 1950, domestic manufacturing received considerable protection from competition by imports. The government also provided investment incentives through tax exemptions and cheap credit. Although data for the 1950s were sparse and of questionable reliability, they indicated that the growth rate of industrial production was about 12 percent a year between 1950 and 1958, substantially higher growth than for the economy as a whole. OT

Between 1958 and 1965, Syria experienced an almost complete reversal of development policy. The government assumed a greater role in economic planning, and by 1965 had nationalized most of the larger manufacturing concerns. Prior to nationalization in 1965, land reform, talk of socialism, and the 1961 nationalization decrees during the union with Egypt frightened private investors. In addition, the government was unable to implement the investments included in the First Five-Year Plan. Consequently, the rate of increase of value added by industry amounted to an annual average of 4 percent in constant prices between 1958 and 1965, although other factors, particularly a severe, prolonged drought (1958-61), contributed to the slower growth of industrial output.

Through the complete or partial nationalization of 108 large- and medium-sized enterprises, the state created the nucleus of the public industrial sector in January 1965. Thirty-seven firms were completely nationalized, and the other 71 firms were nationalized to an extent varying between 75 and 90 percent; however, these semipublic firms were fully nationalized in 1970, retroactive to 1965.

After nationalization, most public sector industry was located under the Ministry of Industry and organized under four broad holding companies called unions--specifically food, textiles, chemicals, and engineering unions. Separate ministries controlled the national electric power and petroleum companies. In the mid-1970s, the national petroleum company was divided into several separate companies responsible for such particular functions as exploration and production, transport and terminals, refining, and domestic sales and distribution.

After the 1965 nationalizations, the government dominated the economy and controlled most elements affecting industrial development, including planning, investments, foreign trade, pricing, and training. The planners avoided the temptation, succumbed to by many developing countries, of constructing large, expensive prestigious industrial projects that provided only small or distant returns. Most projects were geared to the size and needs of the Syrian economy. Development emphasized natural resources (essentially oil and phosphates for export), additional capacity for processing local materials (textiles, sugar refining, and cement), and import substitution (fertilizers, iron and steel, and consumer durables). In the late 1970s and the 1980s, however, observers questioned government priorities that resulted in creation of large industries relying on import substitution. An example of domestic questioning of the government's economic management occurred at the Eighth Baath Regional Congress in 1985. The issue of a planned sugar refinery- -a prominent symbol of public sector domination of an industrial sphere--generated significant debate. Critics challenged the wisdom of the project because the cost per kilogram of processed sugar would be several times the price of imported sugar. Completed in the late 1970s with a capacity of 1.6 million tons of sugar beet a year, the plant produced an average of only 500,000 tons of sugar per year from 1980 to 1983.

Since the late 1960s, economists generally have characterized Syrian public sector industry as inefficient, with underused capacity and high production costs. A number of factors contributed to inefficiency. For example, during the political instability of the 1960s, rapid turnover of key personnel and selection of high officials and managers on the basis of loyalty rather than qualifications contributed to inefficiency. Wide swings in agricultural output because of variation in rainfall was another factor. In addition, government pricing created distortions and even undermined the basis for judging efficiency; subsidies to plants were sometimes required because retail prices were kept low for consumers. Planning was also poor. For example, a US$100 million paper mill using straw for raw material went into production at Dayr az Zawr in 1979 but operated far below capacity, as officials realized that Syria barely produced enough straw to operate the mill. Furthermore, the cement works at Tartus were forced to cut production in half, falling from 5,000 to 2,500 tons a day in 1984, as a result of construction delays in the completion of a special unit to package the cement for export. However, the Eighth Baath Regional Congress in 1985 endorsed a series of measures to correct public sector mismanagement, upgrade administrative capabilities, and revitalize the industrial sector as a stimulator of economic growth.

The shortage of skilled workers and capable managers also plagued public sector manufacturing. Because of the nationalization drive and political instability of the 1960s, Syria experienced tremendous capital flight and a substantial exodus of administrators, engineers, plysicians, and other technically skilled professionals. The shortage of skilled labor intensified in the 1970s, as Syrian professionals found higher paying jobs and increased opportunities in the Persian Gulf states. In addition, many Syrians entered government service to gain experience and soon after went to work for private industries offering much higher salaries. Moreover, vocational training institutes could not keep pace with the needs of the economy. However, the shortage of skilled workers began to improve in the mid-1980s as Syrian workers came home to escape depressed economic conditions in the Gulf states and invested accumulated capital in new enterprises.

When Assad took control of the government in 1970, he introduced important modifications of economic policy. Although commitment to state socialism, central planning, and a large public sector remained firm, Assad liberalized controls and encouraged greater private sector industry. Encouragement to the private sector that extended to both domestic and foreign investors included decreased difficulty in obtaining construction permits and licenses for machinery imports plus various tax concessions. Although private investments in industry increased in the 1970s, domestic investors remained hesitant and foreign companies even more so, despite conclusion of bilateral investment guarantee agreements with the United States and some West European countries. Observers expected private investors gradually to increase their industrial activity if the government continued its liberalization policies.

The government attempted to introduce growth in the industrial sector by assuring the private sector a greater economic role. Between 1965 and 1970, the growth rate of the index of manufacturing (excluding extractive industries and public utilities) remained at 4 percent a year, revealing the largely static condition of manufacturing. The general index for all industrial production increased by 7.8 percent a year over the same period, reflecting the importance of the expansion of oil production after 1967.

Although the results of the government initiative to stimulate private sector investment after 1970 could not be distinguished in available data from a rise in public sector industrial growth, the index for the combined output of public and private manufacturing (excluding extractive industries and public power) showed remarkable improvement between 1970 and 1976, averaging 9 percent a year. The increase in 1976 alone was 17 percent. Increased production by manufacturing derived from public sector investments and reflected increasing government development expenditures since the mid-1960s. The increase also resulted from Syria's miniversion of the oil boom in 1974 and 1975, when industrial investments rose sharply as a result of increased aid from oil-rich Arab countries. Between 1980 and 1984, however, the general index for all industrial production increased only 6.8 percent a year, while the index for the combined output of public and private manufacturing grew at 13 percent per year.

In 1985 the government embarked on another liberalization campaign to encourage increased private sector investment in the productive sectors, as detailed in the Fifth and Sixth Five-Year development plans (see Development Planning , this ch.) Although the public sector continued to dominate the economy, the private sector's role grew in the 1980s, accounting for over 30 percent of GDP by 1984. The government hoped that its liberalization campaign would further boost the private sector's contribution to GDP in the 1990s. This hope was reflected in the final communique of the Eighth Baath Party Congress in January 1985, which recommended a more market-oriented approach to solving Syria's pressing economic problems. Accordingly, the government eased restrictions on the private sector and encouraged exports by establishing more competitive exchange rates for imports (see Banking and Monetary Policy, this ch.). The April 1985 reappointment of Muhammad al Imadi, architect of Syria's economic opening in the 1970s, as minister of the economy and foreign trade, confirmed the government's desire to proceed with its liberalization program. Imadi, who had served as chairman of the Kuwait-based Arab Fund for Economic and Social Development in the early 1980s, urged widespread economic reforms to improve Syria's economic performance through private sector initiatives and joint ventures between the state and private sector.

In September 1985 President Assad approved decree No. 356, which permitted importers, for the first time, to pay for raw materials, spare parts, and other industrial inputs with foreign currency earned through employment or investment outside the country. The severe foreign-exchange shortage of the 1980s, exacerbated by declining worker remittances from the Gulf states and shrinking oil revenues, frustrated industry's efforts to acquire much-needed raw materials and forced factories to shut down or significantly reduce production. The state's tight currency controls and restrictions on imports caused businesses to channel imports illegally into Syria via Lebanon and produced a drastic decrease in officially recorded imports in the 1980s. However, even the thriving "parallel economy" (or black market) did not meet industry's demands. The government continued the crackdown on smugglers, begun in 1984, and introduced reforms to decrease the time and capital expenditure required to obtain official import permits and letters of credit. Another major component of the government's mid-1980s liberalization drive involved an attempt to attract Arab and other foreign investment in Syria's tourism industry by offering a seven-year tax deferment and exemption from most foreign exchange and import restrictions.

Data as of April 1987

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