Journal Essay

Syria and the Financial Crisis: Prospects for Reform?

Shana Marshall

Summer 2009, Volume XVI, Number 2

Ms. Marshall is a Ph.D. Candidate in international relations and comparative politics at the University of Maryland. Her work has appeared in Political Studies and Foreign Policy in Focus. Research for this article was conducted under a grant from the Smith Richardson Foundation.

Periodically since 2001, the Syrian regime of Bashar al-Asad has faced critical junctures that temporarily disrupt normal operations but eventually settle into a new equilibrium. The regime has weathered a series of tempests: the Damascus Spring and the subsequent crackdown on its participants; the assassination of Lebanese Prime Minister Rafiq Hariri; assassinations and alleged suicides of high-level regime offi cials; a breakdown in relations with Egypt and Saudi Arabia; the withdrawal from Lebanon; the tide of refugees from the war in Iraq; and, not least, the “low-hanging fruit” argument for regime change that circulated during the Bush administration. In contrast to these previous challenges, the global financial meltdown is shaping up to be less of a crisis for the Syrian regime and more of an opportunity. In a subtle shift of fortunes, we see the president’s formerly beleaguered “technocrats” gaining support for stronger economic reforms, while regime “hardliners” are adopting increasingly liberal rhetoric. Ironically, the economic crisis may actually help marshal the political will necessary to undertake more significant economic reforms while also moderating some Baath party ideologues whose mantras of resistance and isolation seem outdated in an era of such extraordinary U.S. financial decline and the increasing power of regional blocs in the developing world.

Bashar’s early days were marked by cabinet shakeups that seemed to indicate a reformist course. The president’s 2001 appointments replaced nearly every economic official in the cabinet, including many ministers who had been there for decades.1 But a subsequent series of reversals aimed at stifling the radical agenda reflected both the influence of old-guard regime profiteers, who feared the loss of personal economic spoils, and internal fears that a revitalized domestic opposition would destabilize the novice regime. International pressure followed a similar trajectory, with traditional allies such as France vesting significant political capital in the new president, only to be disappointed by the slow pace of reforms. France’s cooperation with the United States in drafting UN Resolution 1559, demanding the withdrawal of foreign troops from Lebanon, signified the attitude of even Syria’s most steadfast supporters: rhetoric and legislation are not enough if economic and political realities on the ground remain essentially unchanged.

The financial crisis, at least temporarily, seems to have forced the pendulum back in the direction of reform. Today the regime hardliners are increasingly indistinguishable in their rhetoric from Bashar’s hand-picked reformists, and nearly all are speaking with one voice about economic policies that were previously off limits. But what makes this crisis different? Perhaps it is the U.S. origins of the crisis and the relative immunity of the Middle East. Those countries linked most closely to the Untied States — that is, Egypt and the member states of the Gulf Cooperation Council (GCC) — are suffering substantial losses from their exposure to global financial markets. However, the countries of the Levant and North Africa are not feeling the pinch quite so much. Their banks are not suffering from liquidity problems, and their real-estate markets were never so grossly inflated.

International condemnation of the U.S. model of unregulated capitalism has given countries like Syria a brief respite. The formerly isolated state is stepping into the leadership vacuum (along with Qatar and other regional actors) left by U.S. allies Egypt and Saudi Arabia, states that many believe to have failed in their diplomatic attempts to solve the region’s biggest problems. This is why Damascus was able to open a stock exchange in March during the thick of global financial hysteria. All key players are convinced that economic change is necessary and long overdue, and Syria’s leadership is finally feeling relief from the pressure of U.S.-enforced isolation. Instead of existential arguments over the stock exchange, current debates focus on how best to ensure the transparency and accountability that critics of the U.S. system said prevented investors from understanding the risks hidden in their portfolios. In this way, Damascus and other “closed” economies can both be vindicated in their criticism of capitalism and at the same time introduce its elements into their own economies.


Mohammad al-Hussein, whose original addition to the cabinet and subsequent promotions were widely understood as a nod to Baath party ideologues, is probably the most conservative cabinet member with an economic portfolio. In late September, just as the financial crisis was blossoming into an economic pandemic, Hussein suggested in the government paper Al-Thawra that Syria was among the least affected by the financial crisis. Its own unique form of capitalism allowed the state to “restrict channels through which this crisis could enter Syria,” notably financial institutions, financial markets, investments, foreign-currency holdings and international trade.2 Hussein concluded with the usual reference to the benefits of “gradual” reform. The Arab dailies responded with such visceral criticism (some even questioning the need for a finance minister in a country with no financial markets and minimal foreign investment)3 that Hussein seems to be shifting his tactics, offering more prudent assessments of economic conditions and the major structural reforms necessary to fi x them.4

The rumors of deep divisions that marked the tenure he shared with Ghassan Rifai (former deputy president of the World Bank and former Syrian minister of the economy) and Mohammad Attrash (a graduate of the London School of Economics, who formerly served as finance minister) are also evaporating. He and Abdullah Dardari, a former UNDP adviser and current Syrian deputy prime minister for economic affairs, are at least reading from the same book, if not the same page.5

The obstructionism that characterized the relations between the economic ministers in earlier cabinets seems also to have abated, along with the delay tactics for which the hardliners are famous. At one point, Dardari was so frustrated by Hussein’s persistent delays in opening the stock exchange that he insisted it would be open before the end of the year “even if it means trading on a chalk board.” And indeed, the exchange opened only two months behind schedule, something that may not have been possible under different economic circumstances.6 It is unlikely that Hussein and other hardliners can keep up the fight against subsequent reforms, such as the introduction of the VAT (valueadded tax) and the rationalization of state subsidies, as long as they kept up the fight against the bourse.

Hussein’s increasingly realistic assessments of the economic situation are a double-edged sword: they earn him the esteem of business people and international agencies, but they also highlight the urgency of reform. This may indicate that securing economic growth trumps the continued support of regime cronies and the old guard. Dismissals on charges of corruption (such as the one that kicked out customs chief Hassan Makhlouf last February) may signal the streamlining of patronage politics that the regime is willing to initiate in its struggle to achieve economic reform and growth.


The climate in Syria has reached a tipping point on economic reform; even the hardline socialists are coming to grips. The rhetoric that surrounded the Asian financial crisis about the “merits” of Syria’s socialist economy, which that insulated the population from fi nancial contamination, is not flying this time around. The continued growth of the “tiger economies” and the stagnation of Syria’s own economy have rendered such justifi cations hollow. Of course, Syria’s real economic vulnerabilities have little in common with the crises in other countries. Despite the rhetoric of market reforms, corporatization and rationalization emanating from the technocrats in Bashar’s cabinet, change has been incredibly slow. As a consequence, investment from both foreign and domestic sources has remained low. According to the Central Bank, Syria’s businesses receive only 7 percent of all lending from the Syrian banking sector.7 This represents a serious constraint on investment and growth but reflects the pattern of financial circulation in the Middle East.

The region’s history of nationalizations and expensive conflicts means that investors in the Middle East are especially risk averse. This is the reason so many NGOs have popped up in the region to encourage the principles of entrepreneurship.8 Unlike in other developing regions such as Africa, where capital is scarce, the Middle East is awash with it. Here is perhaps where the disaster of the global financial markets is crystallized. Banks in the United States lent out too much money to unsound sources, many of them poor and middle-class Americans who defaulted on home mortgages. Syrian banks have done the opposite, not only at the expense of overall development but perhaps also as part of an effort to stifle the growth of an independent class that has not yet been integrated into the regime’s vast network of supporters. The expansion of lending may have important political ramifi cations that would necessitate the creation of political institutions to absorb this new class. Thus far, the regime has not been very adept at incorporating new interests, and this may put the brakes on such fundamental reforms.


One former regional fi nance minister has criticized the dominance of commercial and speculative investment for helping to perpetuate the constellation of power in the region that has allowed authoritarian regimes to endure for decades.9 In this context, the absence of small and medium enterprises (SMEs) is quite consequential. It is particularly this type of investment that might facilitate the growth of a politically independent class of business people, something the Syrian regime arguably seeks to limit (as does nearly every other authoritarian regime). But the important role of such investment means that SMEs have also become a major focal point of reform programs supported by international financial institutions and of successive regional meetings including the January 2009 Arab Economic Summit in Kuwait. Despite the rhetoric and donor funding, however, SMEs remain scarce. Between the street-level microenterprises and high-end real estate, tourism and transportation development, there is a veritable vacuum of mid-range investment activity.

Although the Commercial Bank of Syria (its largest state-owned bank) was officially charged in February 2009 with increasing loans for small business startups, the climate of corruption is likely to deter many would-be entrepreneurs. This change is yet another example of Syria’s hollow reform process, one which fundamentally alters legislation but whose enforcement often falls victim to political realities. Authoritarian regimes are loath to cede any dominance of the economy when their very survival depends on the control of the principal sources of patronage, and the newly privatized fi nancial system in Syria is certainly one of the largest sources. It is unlikely that genuine implementation of legislation to prioritize SME financing would receive a warm welcome within the regime hierarchy. Banks and their often well-connected shareholders prefer to finance projects with large short-term profits, such as the high-end tourism projects and residential “compounds” that are popping up throughout the state.

But the emergence of a middle class of business people is prevented by more than just risk-averse lenders. In Syria, domestic investments by those not well-connected to the regime must stay “below the radar,” remaining small in order to avoid political interference. This ensures that the only sources of capital operating in Syria are those most likely to be affected by the global financial crisis: big investors from outside who are powerful enough to shrug off demands by regime cronies for payoffs. Even smaller businesses can be dogged by bribe-seeking “price checkers” (tamween), who are officially charged with browsing local shops to guard against price gouging but are more often in search of kickbacks. This vast network of bureaucrats who owe their livelihoods to the current system certainly presents an obstacle to reform. Most ordinary Syrians outside the public sector, however, believe corruption to be at such high levels that “business as usual” is becoming an increasingly unsustainable political position.

Certain banking “reforms” have exacerbated even the low levels of investment and domestic entrepreneurship. Changes to the law in the past year actually increased Syria’s minimum paid-in capital for start-ups by 33 percent, making it more difficult for entrepreneurs to get loans.10 Although the international community has warmed toward Bashar’s regime, and the long-overdue European Union (EU) Association Agreement should boost investment after the EU ratifies it at midyear, foreign businessmen visiting Syria to stake out investment opportunities are still relatively rare. The 16-year high in U.S.Syrian trade reported in 2008 and the long-awaited approval for the sale of spare parts from Boeing that will get several of Syrian Air’s 747 fleet back in the air are largely cosmetic victories. They belie incredibly low levels of foreign investment, predicted to fall even further in 2009 to just $700 million.11

A delegation of French businessmen looking for investment partnerships visited Syria in December, and delegations from several other European nations have since made their own trips.12 However, a previous round of such exchanges saw the Syrian ambassador to France, Elias al-Najma, outed in a Lebanese newspaper for warning French businessmen against investing in partnerships with sons of prominent Syrian politicians. He claimed their enterprises either lacked sound economic foundations or were outright illegal.13 These sons are still alleged to dominate the private economy,14 and it is likely that this incident will weigh heavily on the minds of potential French investors, even if regime rhetoric maintains its current liberal tone.

There are, however, some indicators of change that may signal the success of reform efforts and the improving fortunes of their political champions. For instance, Syria’s overall ranking on the World Bank/International Finance Corporation’s “Doing Business” Index climbed to 137 out of 181 countries surveyed, up from from 145 one year ago.15 Improvements included streamlining the processes for opening a new business (for which it ranked 124 globally), purchasing property (71) and overall trade (111). No doubt the improvement in trade is partially due to the lifting of restrictions on imports, although this seems to have benefi ted Damascus’s high-end consumers more than other socioeconomic groups. This may in itself signal the regime’s attempts to reach out to this long-ignored potential supply of political supporters.

The process for opening businesses may also have been streamlined, but most likely this was possible because many would-be small-business owners do not even attempt to initiate the process. And although the purchase of real estate may be easier, construction has remained a difficult enterprise, as has contract enforcement and access to credit.16 Because construction is one of the primary drivers of growth in transitioning economies, and because contract enforcement can be a proxy measurement of the effectiveness and independence of the legal system, these are both worrisome findings.

Corruption is widely recognized by both Syrian officials and donor agencies as the root of these problems, but no Syrian minister, technocrat or other, will admit that this corruption might reach into the president’s innermost circle. Although official government reviews show that corruption is endemic and that resistance to change and a lack of training exacerbate these problems,17 programs for reform never reach very high into the ranks of government. The president’s brother-inlaw Rami Makhlouf, widely known as “Mr. Ten Percent” because he is estimated to control business interests that amount to roughly 10 percent of Syrian GDP, has become a lightening rod for criticism of the regime’s nepotism and corruption. Yet this is only mentioned by Western observers, former ministers in exile and the Syrian opposition abroad. Recent efforts, including an EU partnership program for reform begun in 2003, have been disappointing.18 In Transparency International’s 2008 Corruption Perception Index, Syria continued its downward spiral, reaching an all-time low of 147 out of 180 countries surveyed, down from 138 in 2007 and 93 in 2006.19

A common refrain from both Syrians and foreigners who have spent significant time in the country is that the corruption that used to be concealed is now carried out in full view and is considered a fact of life. One Syrian economist has linked these developments to the transition from a socialist to a market economy. This has empowered a mafia-like group of regime supporters with significant economic assets.20 Whether these elements are mostly hangers-on from the old guard who were able to use the significant assets they had amassed over the decades to enter into the nascent private sector, or whether they are new allies of the young president and his family, is difficult to say. Regardless of their political affiliations, the nouveau riche have become a source of significant animosity in a country where displays of wealth were virtually unknown in recent memory. They are sure to become a flash-point for future political struggles within the regime.

Whether the regime can replace important old-guard constituencies with new ones based in the free market will strongly influence the reform trajectory and who wins out in cabinet battles. Trade-liberalization measures have hit Syrian industry hard, as manufacturers that used to enjoy protection in the form of import restrictions are now exposed to the discipline of the international market and a fl ood of goods from China and India. Recently, tariffs between Arab trading partners have been eliminated,21 exposing Syrian businesses to competition from Gulf-based enterprises (or exports from Asia that are relabeled in the Gulf to avoid tariffs) and from increased Turkish exports as relations between Syria and its northern neighbor have warmed. A recent sign of this was the collapse of Kouefati, Aleppo’s largest textile-manufacturing firm. This case was made even more shocking by the clandestine flight of the prominent family that owned and operated the business, and the potential billion Syrian pounds ($200 million) in bad loans they left behind.22 Not surprisingly, the government followed the collapse by announcing that it would close down many industrial plants and lease the land for the development of tourism,23 a sector largely controlled by supporters of the new president.

This reality still does not reflect a neat division between old-guard and free-market supporters, however, since many of the loans given to these manufacturing firms are from the state’s new private banks. This is a sign that fi nancial privatization does not guarantee appropriate oversight mechanisms and that loans are probably still being made on the basis of political affi liations and bureaucratic whim. The banks may be private, but many regime cronies own substantial shares in them and are able to dictate some banking operations. The reforms necessary to prevent such problems — mainly monitoring and accountability — are tough to implement, and an independent judiciary able to prosecute violations of banking law is nonexistent.

Trade publications on Syria emphasize the proliferation of private banks, private insurance companies, brokerage fi rms and foreign-exchange businesses. However, every Syrian knows that the majority of these are controlled either by Gulf investors or wealthy members of the president’s innercircle. Business culture refl ects the deep divide within Syrian society between those close to the president and the rest. Many business people are torn between praising the regime for the actions it has taken (comparing the Syrian experience positively to the shock therapy implemented in Russia and Egypt) and resigning themselves to the corruption and ineffectiveness they will have to face for some time to come.

These troublesome trends refl ect the reality that the regime’s reformers are still not in the free and clear, and that even the most modernizing of ministers may not be able (or willing) to confront the real sources of economic stagnation. Many of them may have been handpicked by the president because of their desire to implement change, but the president himself and his inner circle are implicated in much of the corrupt economic activity. And although rhetoric from the cabinet ministers may have converged to a certain degree, the content of ministry reports still often reflects the ideological divide: conservative ministers downplay the need for change, while their more liberal counterparts publish reports that condemn the past three decades of state economic policy.24

The continuing focus of some ministers on joint public-private ventures (largely blamed for empowering the state business elite who control the economy and stifle change) also demonstrates their desire to maintain the alliance with the business community that has thus far kept them in office. Cabinet ministers realize that the private sector is a crucial source of revenue, but its role continues to be restricted to export industries and a few large conglomerates owned by regime cronies. If the private sector were given real latitude in the Syrian economy, it could cash in on all the fi nancial resources the old bourgeoisie have spirited away into Lebanese banks and other “safe” places. However, this would also mean the devolution of political power that regime supporters are loath to allow, no matter the economic condition of the country.


Domestic prospects for reform aside, the climate for improved relations between Syria and the United States seems to have blossomed almost overnight. Although it is tempting to view this as a watershed, a more historical view reveals peaks and valleys rather than a sharp post-Obama incline. A quotation from the Atlantic Monthly is very apt:


Though the American media occupy themselves with Asad’s current shift toward moderation—Syria’s participation in the peace talks, its more civilized attitude toward Syrian Jews, and its seeming abstinence from anti-Western terrorism—the question remains: Given Syria’s history up to this moment, do any of these policy changes really matter?25


There is nothing very striking about this commentary, except that it is from 1993 and refers not to Bashar but to his father, Hafez. His economic reforms in the early ’90s and participation in the 1991 Madrid Conference, the 1993 Oslo Accords and the 1996 Wye River talks began Syria’s long, slow emergence from international isolation. Although peace efforts were derailed when Hafez grew ill and the Israelis became nervous about who would secure the reins of power in the coming transition, the prospects for peace remain alive, looking better with each crisis weathered by the young president, since the most important characteristic in a negotiating partner is staying power.

Improving relations between the United States and Syria would be relatively simple, especially since Syria has made concrete concessions that proponents of engagement can point to: intelligence cooperation in the wake of 9/11, a withdrawal of Syrian troops from Lebanon, and an avoidance of international incidents in the wake of the Israeli attack on an alleged Syrian nuclear reactor and the cross-border raid launched by U.S. troops operating in Iraq in 2008. U.S. economic sanctions would also be relatively easy to repeal, since most companies that want to operate in Syria, including Cargill, Coca Cola and General Motors have found a way around the regulations, and trade between the two countries continues to increase.

It would seem crucial for the United States to grasp this opportunity with Syria. Scholars have demonstrated that periods of economic turmoil may hold the key to political transitions, suggesting that economic shocks and growth volatility play central roles in what has become known as the “Arab democracy deficit.” Theory suggests that economic shocks are exacerbated by social cleavages and inadequate conflict-management mechanisms in the region, which then magnify the destructive capacity of the shocks themselves.26 Syria’s economy has certainly suffered from instability: its respectable growth rate was halted by the worst drought in recent memory, the influx of millions of refugees and the end of its days as a net oil exporter, all within the previous few years. Although, admittedly, Syria has suffered less from the economic crisis, its remittances, aid and investment have taken serious hits, and regime conservatives are scurrying to make sure they end up on the right side of whatever new reality emerges.

It may be that reforms will become easier once the executive branch is not consumed with placating conservative Baath party elements. It is important that the international community be ready when this vacuum emerges and intensifies its funding and support for joint efforts aimed at political liberalization. Democracies, so goes the argument, are more capable of handling the economic vagaries that tend to exacerbate conflicts among social groups. Thus, the more representative the Syrian regime becomes, the better for all the region’s players. This relationship suggests that exploiting the turmoil wrought by the global financial crisis offers an opportunity to do more than make executives accountable for poor performance and ensure the transparent management of sovereign wealth funds. It may play a crucial role in bringing democracy to the last frontier of enduring authoritarianism.


1 “Middle East: Syria: Cabinet Shakeup Focuses on Economy,” The New York Times, December 14, 2001, Accessed on March 30, 2009.


2 Al Thawra, September 22, 2008.

3 Tariq Alhomayed, “What’s the Point of a Finance Ministry?” Al Sharq Al Awsat, September 23, 2008, ?section=2&id=14156.

4 Hussein recently characterized 2009 as a “very difficult year” for the Syrian economy, reversing his earlier course that focused on rising growth rates forecast by previous IMF reports. See “Syrian Economy Faces ‘Very Difficult Year,’” Daily Star, 10&categ_id=3& article_id=99228. Accessed March 1, 2009.

5 Hussein continues to downplay bad news. In a 2008 interview with Forward Magazine, he dismissed IMF estimates of 15 percent inflation for 2008, instead focusing on earlier IMF estimates that quoted a much lower number. In the face of mounting criticism of the disconnect between the government’s official numbers and observed reality, Hussein has adopted a more pragmatic approach, conceding that 2009 will be a “very difficult year” for most sectors of the Syrian economy. See note 4.

6 “Maybe This Time for the Damascus Stock Exchange,” Forward Magazine, September 2008. Plans for a stock market in Damascus actually date back to 2006. Its opening was delayed several times by claims of insufficient technology and a lack of human resources necessary for operating the exchange.

7 Jihad Yazigi, “Banking Sector Growth Slows Down,” The Syria Report Newsletter, November 10, 2008, Available through subscription only.

8 Productive investments, in contrast to speculative and commercial ones, are the most likely to suffer, due to loss of infrastructure and brain drain, during periods of instability and conflict. For an example from Lebanon during the civil war, see Fawwaz Traboulsi, “The War Order: 1983-1990.”

9 Interview by the author, November 26, 2008.

10 Doing Business in the Arab World in 2009: Comparing Regulation in 20 Economies (World Bank and the International Finance Corporation, 2008), DB2009_ArabWorld.pdf. Accessed on January 30, 2009.

11 “U.S.-Syrian Trade Hits 16-year High,” Syria Today, March 2009, Issue No. 47. 585:us-syrian-trade-hits-16-yearhigh&catid=32:business-news&Itemid=45. Accessed March 30, 2009. See also, “Syria Launches Long-Awaited Stock Exchange As Part of Moves to Liberalize Economy,” Agence France Presse (AFP), March 11,2009.


12 Jihad Yazigi, “French Delegation to Seek Business Deals in Syria,” The Syria Report Newsletter, December 1, 2008, Available through subscription only.

13 Al Nahar, January 30, 1997. Cited in Eyal Zisser and Paul Rivlin, Syria: Domestic Political Stress and Globalization, Data and Analysis Series (Moshe Dayan Center, 1999), p. 9.

14 Bassam Haddad, “The Formation and Development of Economic Networks in Syria,” In Networks of Privilege in the Middle East: The Politics of Economic Reform Revisited, Steven Heydemann ed. (Palgrave Macmillan, 2004).

15 Doing Business Index: 2009 (International Finance Corporation, 2009),

16 Doing Business in the Arab World in 2009: Comparing Regulation in 20 Economies, op.cit.

17 Obaida Hamad, “Taming the Beast,” Syria Today, November 11, 2008.

18 Ibid.

19 2008 Corruption Perception Index, Transparency International, news_room/in_focus/2008/cpi2008. Accessed on September 23, 2008.

20 “Corruption in Syria on the Rise,” Institute for War and Peace Reporting, October 18, 2008, Accessed on October 30, 2008.

21 The Arab Free Trade Area agreement was signed in 1998, with a ten-year schedule for full implementation, making it fully operational by 2008. The language of the original agreement can be found at 3?id_article=2309.

22 Jihad Yazigi, “Kouefati Goes Bankrupt,” The Syria Report Newsletter, October 20, 2008, Available through subscription only.

23 Jihad Yazigi, “Government to Close Down Industrial Plants and Lease Land to Develop Tourism Projects,”The Syria Report Newsletter, October 27, 2008, Available through subscription only.

24 Dardari, in interviews with Western media, has conceded that state figures for unemployment and other indicators are off by a figure of roughly 50 percent. Hussein is likely to defend more conservative estimates. See Stephen Starr, “Syria’s Economy Stumbling in the Right Direction,” Middle East Times, March 25, 2009, economy_stumbling_in_the_right_direction/2994/. See also Adnan Abdulrazzaq, “Hussein: Syria Suffers from Diminishing Revenues,” Forward Magazine, May 29, 2008, http://www.fwmagazine .com/content/hussein-syria-suffers-diminishing-revenues. Accessed April 1, 2009.

25 Robert D. Kaplan, “Syria’s Identity Crisis,” Atlantic Monthly, February 1993.

26 Ibrahim Elbadawi and Samir Makdisi, “Democracy and Development in the Arab World,” Lecture and Working Paper Series No. 2 (American University of Beirut Institute of Financial Economics, 2005).